Mergers and Acquisitions

Prof.
Aparna
Kanchan
A strategy where two or more companies agree

to combine their operations with mutual
consent
Buying entity is called the Merged or
Surviving Entity and the one merging with it
is called Merging Entity.
Under merger one company survives and the
other loses its corporate existence and the
Surviving Entity acquires all the assets and
liabilities of the merging company and may
either retain its identity or get re-christened.
Laws in India use the term 'amalgamation' for
Amalgamation as the merger of one or more

companies with another or the merger of two or
more companies to form a new company, in such
a way that all assets and liabilities of
The
amalgamating companies become assets and
liabilities
of the amalgamated company and
shareholders not less than nine-tenths in value of
the shares in the amalgamating company or
companies become shareholders of the
amalgamated company
Merger through Absorption:

Is a combination of two or more companies
into an 'existing company
Here all companies except one lose their identity
For Example:
Absorption of Tata Fertilizers Ltd (TFL) by Tata Chemicals Ltd

(TCL). TCL, an acquiring company / buyer, survived after
merger while TFL, an acquired company / seller, ceased to
exist. TFL transferred its assets, liabilities and shares to TCL.
Merger through
Consolidation:
Is a combination of two or more companies into
a 'new company
Here all companies are legally dissolved and a
new entity is created.
Acquired company transfers its assets, liabilities,
and shares to the acquiring company for cash or
exchange of shares
For Example:
Merger of Hindustan Computers Ltd, Hindustan Instruments
Ltd, Indian Software Company Ltd and Indian Reprographics
Ltd into an entirely new company called HCL Ltd.
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Amalgamation means an amalgamation

pursuant to the provisions of the Companies
Act, 1956 or any other statute, which may be
applicable to companies
Amalgamation in the nature of merger is an

amalgamation
All the assets and liabilities of the transferor

company become, after amalgamation, the assets
and liabilities of the transferee company
Shareholders holding not less than 90% of the
face value of the equity shares of the transferor
company become equity
shareholders of the
transferee
company
by
virtue
of
the
amalgamation
The above to exclude the equity shares already
held
therein,
immediately
before
the
amalgamation, by the transferee company or its
subsidiaries or their nominees
The consideration is discharged by the transferee

company wholly by the issue of equity shares in
the transferee company
Cash may be paid in respect of fractional shares,
if any
The business of the transferor company is
intended to be carried on by the transferee
company after amalgamation
No
adjustment is intended to be made to the book

values of
the assets and liabilities of the
transferor company when they are incorporated
Merger movements often occur when the economy

experiences sustained high rates of growth as it
reflects favourable business prospects
The movements coincide with developments in the
business environment
Often result in efficient resource allocation,

reallocation
processes and efficient resource utilization
The waves occur when firms respond to new

investment and profit opportunities arising out of
changes in economic conditions and technological
innovations
..
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In each of the waves mistakes have been repeated

and failures
have been common
Unlike in the past, M & A have become a global

phenomenon
and are no longer restricted to the US
A new trend being observed is the rise of emerging

market acquirer.
Research shows that merger waves result from a

combination of economic, regulatory, and
technological shocks (Mark Mitchell
and
J. H.
Dr.Rajinder S.
Aurora
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10
Economic shocks deal with economic expansion

that motivates companys to expand in order to
meet the ever growing demand
Regulatory shocks occur when regulatory

barriers are
eliminated paving the way for corporate
communication
Technological shocks represent changes in

technology that not only change the existing
industries but also create new ones.
Dr.Rajinder S. Aurora
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Occurred after the Great Depression of 1883
Peaked between 1898 and 1902 and ended in

1904.
Professor Ralph Nelsons study Industries

affected were primary metals, food products,
petroleum, products, chemicals, transportation
equipment, fabricated metal products, machinery
and bituminous coal
Wave saw horizontal mergers and industry

consolidations resulting in near monopolistic
market structures.
Giants born during this wave included J.P

Morgans U. S. Steel, DuPont Inc.,
Standard
Oil,
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Aurora
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General Electric, Eastman Kodak, American
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Sherman Act
enacted to control
creation of such
monopolies yet mergers continued
Reasons responsible for the growing number
of M & As were:
Unwillingness of U.S. Supreme Court to literally interpret the

anti monopoly provisions of the Sherman Act
Some States relaxed Corporation Laws that enabled
companies to secure capital, create stock in other
companies and expand their operations unabated
Development of U.S transportation system facilitated
expansion of markets
Expansion of the firms resulted in economies of scale in
production and distribution and resulted in greater efficiency
A few takeover battles saw judges and

elected officials being bribed to violate legal
provisions.
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Known as Period of Merging for Oligopoly

Saw consolidation of several industries and
growth of oligopolistic industry structure
Wave produced fewer monopolies, more
oligopolies
and many vertical mergers
Period also saw mergers between many unrelated
industries creating first large-scale
conglomerates.
Period saw disproportionate number of mergers in
primary metals, petroleum products, food
products, chemicals and transportation
equipment
Corporations born during this wave General
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Motors, IBM, John Deere and Union
Carbide
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Radio as a medium of advertising became popular

Era of merchandising and product differentiation
started
The Public Utility Holding Company Act, 1935

empowered the SEC to regulate corporate structure
and voting rights
Wave ended with the stock market crash on October

29, 1929 the largest single day drop
Companies stopped focusing on expansion and
sought merely to
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Decade saw large companies taking over smaller

firms with
the motive of getting tax relief
Firms encouraged to sell businesses to outsiders

since the estate taxes were very high and it was
very expensive selling businesses within the
family
Mergers did not result in concentration of

economic power since most of them held very
insignificant portion of the industrial assets
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Known as Conglomerate merger period
Saw intensive merger activity backed by booming

economies
Unusual element of this period was - smaller

firms targeted larger companies for acquisition
Mergers resulted in diversified conglomerates
Prominent conglomerates born were Long-TemcoVought (LTV), Litton Industries and ITT
Many small firms moving into areas outside their

core business
activities
Legal environment made expansion
tougher
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Celler-Kefauver Act passed to prevent or prohibit the

anticompetitive acquisition of a firms assets
Made horizontal and vertical mergers tougher

resulting in
formation of conglomerates for expansion
Wave continued until 1968 when Litton Industries

announced that its quarterly earnings had declined
first time in fourteen years
Market turned sour to conglomerates and the selling
pressure on stock prices increased
Anti-trust lobby was hell bent upon preventing
mergers for they believed they are anti competitive
and result in abuse of monopoly power.
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Tax Reform Act passed in 1969 to curb manipulative

accounting practices that created paper earnings
that would temporarily support stock prices
Curb on financing acquisitions through debt by
stating that bonds would be treated as common
stock for the purpose of EPS computations
nullifying increase in earnings on paper
Conglomerates also became unpopular for:
Was observed that buyers often overpaid for diverse

companies purchased
Companies often moved away from specialization resulting in
deteriorating performances
For Example: Revlons core cosmetics business suffered
when they ventured into health care
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Known as era of Hostile

Takeovers
Saw a dramatic decline in the number of mergers
Decade saw some trendsetting events such as:
A change in the acceptable takeover behaviour

Hostile takeover of major established companies started
For Example:
INCO (International Nickel Companys) attempt to takeover ESB,

the largest battery maker
United Technologies bid for Otis Elevator
Colt Industries attempt of hostile takeover move of Garlock
Industries
Sanctioning of aggressive advances by investment Banks

Investment Bankers started offering consultancy services in
anti-takeover
defences
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Known as Wave of
Megamergers
Hostile takeovers increased dramatically
Large firms became acquisition targets
Mergers seen in oil and gas industry,

drugs, medical equipments, banking and
petroleum industry.
Leading megamergers included:
Chevron and Gulf Oil

Philip Morris and Kraft
Texaco and Getty Oil
DuPont and Conoco
British Petroleum and Standard Oil of Ohio
U.S. Steel and Marathon Oil
Kohlberg Kravis and Beatrice
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Concept of Corporate Raider made its

appearance
Corporate Raiders / Company Breaker are

investors who engage in the act of directed or
orchestrating a hostile takeover of a company
Often goes after a corporation, with an eye on

selling off the assets of the company as a means
of generating huge profits
Investment Bankers played aggressive role in

pursuing for M
& yielded huge risk-free
income
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Offensive and Defensive strategies
became
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Megadeals often financed with large amounts of

debt. For
Example: Leveraged Buyouts
Conflicts between The Federal and State

Governments increased as State Governments
started passing anti- takeover legislations at the
behest of local companies which was seen by
Federal Government as infringement of interstate
commerce
Deals motivated by Non U.S. companies that

desired to expand into larger and more stable U.S
market.
Different sectors responded to deregulation

differently. For
Example:
of
Dr.Rajinder S.Response
Aurora
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broadcasting sector quicker than air transport
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Period saw a major economic transition such as

increase in aggregate demand, longest post-war
expansion of companies and rise in stock market
values
Phase saw large megamergers happening, few
hostile deals and more strategic mergers
Fad of financing merger deals through debt also
got eroded and increased use of equity financing
noticed.
Roll ups became popular i.e. fragmented
industries consolidated through large scale
acquisition of companies
Dr.Rajinder
S. Aurora as funeral
Trend very common in industries
such
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Prominent consolidated
Office Products
USA
companies:
Floral USA
Fortress Group
US Delivery Systems
Coach USA
Comforts Systems USA
Privatization of State owned enterprises seen
Concept of Emerging Market Bidders evolved
Companies built through acquisition of private

businesses and consolidation of relatively
smaller competitors in emerging markets
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Examples:
Mittal takeover of Arcelor
Dubai based Ports World takeover of Peninsular
and Oriental Navigation Company
Tata Steel takeover of Corus Group
European nations started erecting barriers to
impede takeover
of national champions.
Examples:
Merger of Suez SA and Gaz De France SA by the French

Government to fend away Italian utility Enel SpA;
Spain enforced a new law to prevent German E.On AGs
takeover bid of
Spanish utility Endesa SA
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Traditional View
Focussed on
competition
Often resulted in
horizontal mergers
and created a
condition of
monopolistic
competition
Basic motivation
was survival in the
market through growth
generally achieved
through mergers and
acquisitions.
Motto was
make them like us
and the selection of
the target was based
Modern View
Vehicle to
change the control of
the firms assets
Process of
allocation and
reallocation of
resources by firms in
response to changes
in the economic
conditions and
technological
innovations of the
market.
Tool of gaining
competitive
advantage and a
strategy for attaining
Dr.Rajinder growth.
S. Aurora
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Focus on
Horizontal
Two
companies that are in direct competition and sharing
Merger
the same product lines and markets combine

Based on the assumption that it will provide synergy and
allow enhanced cost efficiencies to the new business.
Examples of Synergistic Benefits: staff reduction and
reductions in related costs, economies of scale,
opportunity to acquire technologies unique to the target
company and increased market reach and industry
visibility.
For Examples: Daimler Benz and Chrysler, Glaxo
Wellcome Plc. and SmithKline Beecham Plc., Exxon and
Mobil, Volkswagen and Rolls Royce and Lamborghini,
Ford and Volvo and so on.
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Result in creating large entities that can cause

ripple effects in the sector and sometimes
throughout the economy as are perceived as
anti-competitive
Provide the new entity an unfair competitive
advantage
over its competitors
Regulatory authorities grant permission but
impose ex ante obligations on the merged
entity, where the merger would otherwise be
perceived as anti competitive.
For Example: In both the US and Europe,
National Regulatory Authorities impose
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conditions on a merger perceived
as anti
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Vertical Merger:
Mergers of non-competing companies where

one's product is a necessary component or
complement of the other's
Typified by one firm engaged in different

aspects of production say, growing raw materials,
manufacturing, transporting, marketing, and/or
retailing.
Can achieve pro-competitive efficiency

benefits such as lower transaction costs, lead to
synergistic improvements in design, production
and distribution of the final output product and
enhance competition
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Market-extension
Mergermerger:
between two companies that sell the same
products in different markets.
Product-extension merger:
Occurs when two companies selling different but related

products in the same market merge together
Merger designed to increase the type/range of products
that a
company sells in a particular market
Forward integration:
One where the target firm is involved in the next stages

of production / operation
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Backward
One
where the target company is involved in the
Integration:
previous stages of production / operation.

For Example: A manufacturer of a product merges his
firm with the provider of the raw materials. By
eliminating the provider of raw materials, the
manufacturer can achieve collusion in the upstream
market.
Balanced integration:
One where the company sets up subsidiaries that both

supply them
with inputs and distribute their outputs
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For
Example:
Usha Martin and Usha Beltron
Time Warner Inc. and Turner Corporation

Silicon Graphics Inc.'s and Alias Research Inc. and
Wavefront Technologies Inc.
Apple and Intel
Reliance Industries and Reliance Petrochemicals Limited
Tata Industrial Finance Ltd. and Tata Finance
HUL and TOMCO
Torrent Group and Ahmedabad Electric Company and
Surat Electric Company and so on
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Viewed as anti-competitive for they can rob the

supply
business from its competition.
For example: If a firm has been receiving
material from two separate firms and the
receiving firm decides to acquire both the firms,
the merger could cause the surviving firms
competitors to go out of business
Are designed to evade pricing regulations
For example: When regulation seeks to constrain
the market power of a natural monopoly, the
monopolist may have incentives to integrate
vertically into unregulated markets in order to
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extract the monopoly gains denied
to them in the
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The US Supreme Court:

One in which there is no economic relationships
between
the acquiring and the
acquired firm
Involve firms that are in different or unrelated

business activity
Preferred by firms that plan to increase their

product lines
Control
a range of activities in various industries

that require
different skills in the specific
managerial functions of research,
applied
engineering, production, marketing,
and so on.
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Attained mainly by external acquisition and

mergers and is not generally possible through
internal development
Are also called concentric mergers
Firms operating in different geographic locations
also prefer conglomerate mergers
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Examples
News
Corporation
include:
Sony
Time Warner
Walt Disney
Company
Aditya Birla Group
Berkshire
Hathaway
General Motors
Mahindra Group
Motorola
Tata Group
Hyundai
Mitsubishi
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Pure Conglomerate:
Involve firms that have nothing in common
Mixed Conglomerates:
Involve firms that are looking for product
extensions or market extensions
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Financial Conglomerates:
Are active in providing funds to every

segment
the
operations and
are the of
ultimate
financial risk
takers
Not only assume financial responsibility and
control but also play a major role in all the
operating decisions
Focus mainly on:
Improving risk-return ratio

Reducing business related risk
Improving the quality of general and functional
managerial
performanceDr.Rajinder S. Aurora
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Managerial Conglomerates:
Focus on providing managerial counseling
and interaction on decisions with the motive of
increasing potential for improving performance
Come into play when two firms of unequal

managerial competence combine
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Concentric Companies:
Is one where there is a carry-over of specific
management functions or any complementarities
in relative strengths between management
functions.
Is the primary difference between

managerial conglomerate and concentric
company, i.e. the distinction between respective
general and specific management functions
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Contribute to aggregate increase in economic

power and possible non-economic effects
resulting from an increase in the general
economic concentration
Critics also fear that economic concentration
would lead to corresponding aggression in
political power by fewer but more powerful
conglomerate firms, placing major decisions,
both political and economic, in the hands of few
individuals or firms that have direct
accountability to the general public
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Accretive implies value creation
Occur when a company with a high price to

earnings ratio purchases a company with a low
price to earnings ratio.
Helps acquiring company to increases its EPS
Happens because the merger results in

operational and financial synergies and gives
boost to the earnings of the acquiring company.
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Dilutive implies destruction or dilution
One where the EPS of the acquiring company

tends to fall post merger resulting in decline in
the share prices too
Decline due to the market forces presuming the

merger would destroy value and would not
result in synergies post merger.
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An attempt made by one firm to gain a majority

interest in
another firm
Firm attempting to gain a majority interest is

called the
acquiring firm and the other firm is called the
target firm
Acquiring firm pays for the net assets, goodwill,

and brand name of the company bought.
Dr.Rajinder S.seek
Aurora
Actions through which companies
to
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Acquisitions may
lead to:
A subsequent merger
Establishment of a parent- subsidiary relationship
A strategy of breaking up the target firm and disposing
of part or all its assets
Conversion of the target firm into a private firm.
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Too few targets
Inappropriate
targets
Lack of creativity
Lack of forward
planning
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Increase the number of targets

Do not chase the one everyone else is bidding
for
Compare the targets concurrently to choose the
right and the best target.
Buy firms with assets that meet the current
needs to build
competitiveness
Provide adequate financial resources not be
forego targets
Identify targets that are more likely to lead to
easy
integration and building synergies
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Assets Purchase
Acquiring firm purchases specific

identifiable assets of the business
Assets perceived as having potential to

add value to the acquiring company
May also assume specified liabilities

perceived as having potential to add value
to the acquiring company
Help the acquiring company to reduce

the risk of taking on unknown liabilities such
as sellers contracts, employees, etc.
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Is keen on mode as they can acquire the

assets at a
comparatively lower price.
Potentially reduces future capital gains

tax upon a sale of the assets.
Increases the future depreciation

expense, thereby
reducing income tax.
Dr.Rajinder S.
Aurora
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5
0
Has to bear capital gains tax on difference

between bases in assets sold and
purchase price allocated to such assets
which could be substantial if assets are
heavily depreciated
If the target company desires to use the
proceeds of the asset sale for paying
dividend to the stockholders, dividend
would be subject to an additional tax, thus
increasing the burden on the target
company
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Requires purchase agreement to allocate

purchase price
among specific list of assets
Acquiring company must be assured that all
necessary assets are listed
Closing the deal is comparatively difficult as:
For titled assets such as vehicles and
property transferring, the ownership title of
each asset becomes a tedious task.
Consent of the shareholders is required for
each transfer.
If the entire business is being sold, each
employee must be terminated
and re-hired
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by the acquirer. This can create
a lot of
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The acquirer purchases the entire

outstanding equity
of the target company
Acquirer purchases the entire company

and all assets and liabilities of the business
that come with it
Stock purchase does not cause any

disruption in the
operations which can continue as usual.
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Closings are simplified
Fewer contract consents and very little

paper work is required to transfer specific
assets.
All employees and employee benefits are

transferred
with the stock sale.
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Only incurs capital gain on difference between

basis in stock sold, which is not subject to
depreciation, and purchase price for stock.
No dividend has to be paid to distribute the
proceeds of sale to stockholders and therefore
double taxation can be avoided.
Not required to tackle any issues relating to

winding up of
the company after closing.
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Cannot pick and choose assets and liabilities.

Also it has to inherit everything, including
unknown liabilities such as sellers contracts,
employees, etc.
The tax basis in the assets purchased does not

get stepped
up.
Potential of larger capital gains tax on a future

sale of heavily depreciated assets although
lower depreciation provision reduces the tax
liability.
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Threats
Unfriendly legal
framework
Takeover threat
Changes in
Technology
Changes in
customer taste
and preferences
Strength
Increased market
share
Access to better
technology
Increased profits
Acquiring stock at
minimal price
Reduction in debt
Opportunity to
acquire end-to-end
Weaknes
solutions
ses
Competitive
Style
of
management
advantage
Aggressive trade union
Creation of monopoly
Integration difficulties
Absence of skilled
manpower
Increasing costs
Opportuniti
es
Expansion
opportunities
Better
capital
raising
ability
Self reliance
Tax
concessions
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Generates long generic list of subelements
Tool is more descriptive and less analytical
Sub elements are just listed and not

prioritized
Tool used only as an instrument of

planning and not implementation
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Stars:
Companies that are high growth where the company holds
a high share.
Likely to generate adequate cash and always be selfsustaining.
Need to put in a lot of efforts in protecting their enviable
positions, protect profit margins and increase turnover to
derive cost related economies
Acquirer should try to identify such divisions in the market
and if possible
acquire them at all costs
If such a division is already owned the growth strategy
needs to be aggressive and entity should invest
aggressively in research and development and expand the
product portfolio.
For Example: When BMW boughtDr.Rajinder
Rover,
experts thought
S. Aurora
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its products would help the German
Auto maker reach new 59
Cash Cows:
Business can be used to support other business
units Cash Cows are divisions that hold a high
share in mature markets but do not have much
growth potential left. On account of the high
market share such divisions are able to generate
adequate profits which can be used to fund
divisions classified as Stars or Question Marks.
If an entity owns such divisions its strategy

should be to defend and maintain their position in
the market so that the division can be milked.
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Question
Entities
with low share but a very high potential for
Marks:
growth as it is operating in fast-growing markets
Need a lot of cash to exploit the growth opportunities

available in the
market
Generic strategy for such a division is that of high-risk
If the entity is able to generate cash through the cash
cows divisions, the same should be invested
aggressively in Question marks. If the entity is unable to
generate cash then this division should be divested as
sustaining the division with its present
low share is
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difficult.
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Dogs:
Businesses that have a very small share in the market
and have a very low growth potential i.e. they do not
hold much future economic promise and are on the
verge of dying. Investing in such divisions reflects a
narrow view of the business having no future except high
risk.
Are cash traps and can only eat into the profits of the
company.
Acquirer should avoid acquiring such companies as they
would not add any value and would result increased
losses and turn out to be a bad buy decision.
If the company owns any such unit or division it is better
to divest such a division as soon as possible or else it
S. Aurora
would keep accumulating losses Dr.Rajinder
and affect
the overall
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Critics have criticised the BCG Matrix on the

grounds that it is relatively narrow in its
approach and is overly simple.
GE matrix developed to address this criticism
Also known as GE Business Screen
Is a portfolio management technique that focuses

on
industry attractiveness and competitive position
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Two factors are further divided into 3 categories,

making it a
3 x 3 matrix
Cells then used to classify the business units into

winners, losers, question marks, average
businesses and profit producers.
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Winner
Question Mark
Winner
WinnerAverage Business
Profit Producers
Good
Losers
Losers
Losers
Low
Medium
Competitive Position
Market Share
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Include:
Market growth
Market size
Competitive intensity and
Capital requirements.
When factors are assessed collectively it

implies that greater the market growth, the
larger the market, the lesser the capital
requirements and less the competitive
intensity, the more attractive the industry will
be.
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Other determinants of an organizations

competitive position
market share in an industry include:
technological know-how
product quality
service network
price competitiveness and
operating costs.
A business with a larger market share,

technological know- how, high product
quality, a quality service network,
competitive prices and low operating enjoy a
favourable competitive position in the
market.
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The matrix suggests

Acquirer
should invest in winners and questions marks
that:
where the industry attractiveness and competitive

position are both favourable;
Maintain the market position of average businesses and
profit producers where industry attractiveness and
competitive position is average and
Sell losers, in case it owns any.
For Example:
Unilever undertook a major exercise of assessing its
business portfolio and based on the results decided to
sell off several speciality chemical units that were not
contributing to the firms profitability. The resources
generated through such divestitures
were
Dr.Rajinder
S. Auroraused to
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acquire related businesses like Ben and Jerry,
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Based on the logic that a corporate strategy

should be able to counter the opportunities and
threats prevailing in the organizations external
environment.
Especially true in case of the competitive
strategy which the argument states should be
based on the understanding of industry
structures and the way they change.
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Supplier concentration
Importance of volume to supplier
Differentiation of inputs
Impact of inputs on cost
differentiation
Switching costs of firms in the
industry
Presence of substitute inputs
Threat of Forward integration
Cost relative to total purchases in
industry
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Switching costs
Buyer inclination to substitute
Price performance trade-off of
substitutes
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Bargaining leverage
Buyer volume
Buyer information
Brand identity
Price sensitivity
Threat of backward
integration
Product differentiation
Buyer concentration vs
industry
Substitutes available
Buyers incentives
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Absolute cost
advantage
Proprietary learning
curve
Access to inputs
Switching costs
Government policy
Economies of Scale
Capital requirements
Brand identity
Access to distribution
Expected retaliation
Proprietary products
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73
Exit barriers
Industry
concentration
Fixed costs/value
added
Industry growth
Intermittent
overcapacity
Product differences
Switching costs
Brand identity
Diversity of rivals
Corporate stakes
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74
Model should be used at the industry level and is

not designed to be used at the industry group or
industry sector level.
Firms that compete in a single industry should at
least try
and develop one of the five forces for themselves.
Fundamental issue for a diversified company is
selection of industries in which the company
should compete.
Critical issue while targeting companies for
mergers,
acquisitions and diversification.
Thorough analysis of elements required to be
done and only thereafter the rsaurora@gmail.com
company should
75
Both mergers and acquisitions involve one

or multiple
companies purchasing all or part of another
company.a merger and an
Main distinction between
acquisition is how
they are financed.
When a company takes over another company
and establishes itself as a new entity the process
is called acquisition. Here the target company
ceases to exist while the buyer company
continues.
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Merger is a process where two entities

agree to move forward as a single entity
as against remaining separately owned
and operated entities.
Mergers are typically more expensive
than acquisitions, with the parties
incurring higher legal costs.
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77
The stock of the acquiring company continues to

be traded in an acquisition, while in case of a
merger the stocks of both the entities are
surrendered and the stocks of the new company
are issued in its place.
One entity buys another and allows the acquired
firm to proclaim that the action is merger and
not acquisition. This is done to ward off the
negativity often associated with acquisition.
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78
A merger does not require cash.

A merger may be accomplished tax-free for both parties.
A merger lets the target company realize the appreciation
potential of the merged entity, instead of being limited to
sales proceeds.
A merger allows the shareholders of smaller entities to own a
smaller piece of a larger pie, increasing their overall net
worth.
A merger of a privately held company into a publicly held
company allows the target company shareholders to receive
a public companys stock.
A merger allows the acquirer to avoid many of the costly and
time- consuming aspects of asset purchases, such as the
assignment of leases and bulk-sales notifications.
Merger is of considerable importance when there are minority
stockholders. The transaction becomes effective and
dissenting shareholders are obligedDr.Rajinder
to go
along once the
S. Aurora
buyer obtains the required number rsaurora@gmail.com
of votes in support of the
79
Synergy
Operating synergy
Financial synergy
Examples:
When HUL acquired Lakme, it helped them to enter the
cosmetics market through an established brand.
When Glaxo and Smithkline Beecham merged, they not only
gained market share but also eliminated competition
between each other.
Tata tea acquired Tetley to leverage Tetleys international
marketing strengths.
Acquiring new technology:
For example: Mergers amongst logistics companies

an airline cargo
such as a land transport entity with
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company
80
Improved
For
example, European Media Group Bertelsmann,
profitability
Pearson, etc. have driven their growth by expanding into

US through M & A.
Acquiring a Competence:
For example: Similarly IBM merged with Daksh for

acquiring competencies that the latter possessed.
Entry into new markets
For example: The merger of Orange, Hutch and Vodafone

was carried
out to achieve this objective.
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81
Access to funds
Company finds it difficult to access

funds from the capital market.
Deprives the company to pursue its

growth objectives effectively.
So merger pursued
For example: TDPL merged with Sun

Pharma since
TDPL did not have funds to launch new
products.
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82
Tax
benefits
For
example:
Ashok
Leyland
Information
Technology (ALIT)
was acquired by Hinduja
Finance, a group company, so that it could set off
the accumulated losses in ALITs books against its
profits.
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83
Identifying value drivers in

M & As
Value created through M & A = Increase

in synergy
minus Decrease in premium
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84
Increasing synergy
Decreasing the premium
Managerial skills
Boosting marginal revenue
Lowering total costs
Reducing marginal Costs through

operating synergy
Reduction in beta
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85

Mergers and Acquisitions

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Mergers and Acquisitions

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Prof.

A strategy where two or more companies agree

Amalgamation as the merger of one or more

Merger through Absorption:

Here all companies except one lose their identity

Absorption of Tata Fertilizers Ltd (TFL) by Tata Chemicals Ltd

Amalgamation means an amalgamation

Amalgamation in the nature of merger is an

All the assets and liabilities of the transferor

The consideration is discharged by the transferee

adjustment is intended to be made to the book

Merger movements often occur when the economy

Often result in efficient resource allocation,

The waves occur when firms respond to new

In each of the waves mistakes have been repeated

Unlike in the past, M & A have become a global

A new trend being observed is the rise of emerging

Research shows that merger waves result from a

Economic shocks deal with economic expansion

Regulatory shocks occur when regulatory

Technological shocks represent changes in

Occurred after the Great Depression of 1883

Peaked between 1898 and 1902 and ended in

Professor Ralph Nelsons study Industries

Wave saw horizontal mergers and industry

Giants born during this wave included J.P

Unwillingness of U.S. Supreme Court to literally interpret the

A few takeover battles saw judges and

Known as Period of Merging for Oligopoly

Radio as a medium of advertising became popular

The Public Utility Holding Company Act, 1935

Wave ended with the stock market crash on October

Companies stopped focusing on expansion and

Decade saw large companies taking over smaller

Firms encouraged to sell businesses to outsiders

Mergers did not result in concentration of

Known as Conglomerate merger period

Saw intensive merger activity backed by booming

Unusual element of this period was - smaller

Mergers resulted in diversified conglomerates

Many small firms moving into areas outside their

Celler-Kefauver Act passed to prevent or prohibit the

Made horizontal and vertical mergers tougher

Wave continued until 1968 when Litton Industries

Tax Reform Act passed in 1969 to curb manipulative

Was observed that buyers often overpaid for diverse

Known as era of Hostile

Decade saw some trendsetting events such as:

A change in the acceptable takeover behaviour

INCO (International Nickel Companys) attempt to takeover ESB,

Sanctioning of aggressive advances by investment Banks

Large firms became acquisition targets

Mergers seen in oil and gas industry,

Leading megamergers included:

Chevron and Gulf Oil

Concept of Corporate Raider made its

Corporate Raiders / Company Breaker are

Often goes after a corporation, with an eye on

Investment Bankers played aggressive role in

Megadeals often financed with large amounts of

Conflicts between The Federal and State

Deals motivated by Non U.S. companies that

Different sectors responded to deregulation

Period saw a major economic transition such as