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AGENDA
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1. ACQUIRER
2. TARGET
3. CASE : ARCELOR MITTAL MERGER
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1. MAJOR FACTORS
2. REASONS FOR FAILURE AT DIFFERENT STAGE
3. CASE : DAIMLER CHRYSLER MERGER
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Strategic management is an ongoing process that evaluates and
controls the business and the industries in which the company is
involved; assesses its competitors and sets goals and strategies to meet
all existing and potential competitors; and then reassesses each
strategy annually or quarterly [i.e. regularly] to determine how it has
been implemented and whether it has succeeded or needs replacement
by a new strategy to meet changed circumstances, new technology, new
competitors, a new economic environment., or a new social, financial, or
political environment.µ (Lamb, 1984:ix)

Strategic management is the art and science of formulating,


implementing and evaluating cross-functional decisions that will enable
an organization to achieve its objectives. Strategic management,
therefore, combines the activities of the various functional areas of a
business to achieve organizational objectives.
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1. Integration process
2. Due Diligence
3. Organizational dynamics created by M&A
4. Organizing, involving coordinating task force
5. Honest communication
6. Retaining key people
7. Structure and staffing decision
8. Merger measurement
9. Cultural integration
10. Human capital Integration and HR functions
11. Merger repair
12. Recommendation for success
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i. Motives
ii. Threats
iii. Impact of mergers
iv. Steps in Mergers
v. Stages of Mergers
   
: Growth and diversification
: Synergy

: Fund raising

: Increased managerial skill/technology

: Tax consideration

: Increased ownership liquidity

: Defense against takeovers


II. THREATS OF MERGERS..
: Monopolizing of industry
: Cost cutting through Lay-offs
: Poor synergy realization
: Induces complexity, duplication of people,
processes and technology
: There are various aspects which if not managed
carefully during a merger can become major
pitfalls, for example, issues of managing
Intellectual Property, human resources
encompassing cultural diversity and
perspectives, technology platforms, supply chain
management, product/service delivery channels,
etc.
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- layoffs
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- clash of egos
- variation in culture
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a) (#)*+,,$(,
-most affected, they are harmed by the same degree to which
target firm shareholders benefitted
b-(!#$!(,
-benefitted the most
-acquiring company usually pays a little excess than it what
should
   
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Each stage is very critical from the point of


view of a merger.
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1. .$!#$: Both firms gather
information about the uncertain synergy gains of
merging. Information can be shared or kept
private.
2. $!#$: Managers of both firms decide
unilaterally (and sequentially) whether to merge.
Only when both firms agree to merge there is a
post-merger stage.
3. !. $!#$: The two units of the new
firm decide unilaterally and simultaneously
whether to do an integration effort.


V Literally means persistent application to one·s work.
V Detailed investigation process by an investor for the target
company business.
V Influence decisions like direction of investment, choosing of
investment partner, disclosures etc
V Persons involved : professional advisors,
financial/legal/operational professionals
V Areas of due diligence :
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Examining the target company·s historical,
current and prospective operating results, can be
worked out from following sources
1. Audited financial statements.
2. Unaudited financial information
3. Financial information with stock exchanges
and regulators regulation(SEBI)
4. Tax returns
5. Cash Flow Statements
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Involves the practices of addressing certain fundamental
legal issues which include good compliance practices as per
the Company·s Act, SEBI Act, Income Tax Act and other
corporate legislations. Can be done from following sources:
1. Memorandum of Association
2. Target company·s Prospectus
3. Documents filled with Registrar of companies
4. Tax returns and compliance service
5. Environmental law Compliance
6. Lending agreements , Covenants and borrowing
powers
7. Compliance with any special industry legislation
8. Labor agreements ,compensations
9. Pending litigation
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Includes investigating the target·s IPRs, its
productions, its sales and marketing effort, its
HR and other operational issues. They can be
taken by analyzing information from:
1. Newspaper and magazines reports ABOUT
THE TARGET
2. Information with trade association
chambers and regulatory bodies
3. Company journal, brochure & websites
4. Inputs from market, market experts,
suppliers & customers
5. Interviewing the employees, ex-employer etc


  

There are 2 ways of conducting Due Diligence :
1. Data room method : large amount of data is presented
to interested party to study it

2. Questionnaire method: a questionnaire is put to


target company and on the basis further one to one
negotiations are done
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1. Corporate documents of the Company and
Subsidiary
2. Issue of Shares
3. Material Contracts and Agreements
4. Litigation
5. Employees and related inormation
6. Immovable property
7. Taxation
8. Insurance and liability
9. Joint venture and collaboration agreement
10. Government regulations-
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1. Aggressive financial targets
2. Short timeliness
3. Culture clashes
4. Politics and positions
5. Restructuring & re-engineering
6. Communication issues
7. Employee motivation
8. Question about where to downsize
9. Retention of key personnel

   1M
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: Define clear leadership goals
: Extensive communication

: Tough decisions

: Focus on customers

: Manage resistance at every level


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: Effective communication is made a priority
: All messages linked to strategic objective of the
integration effort
: Honest communication

: Proactive emphasis than reactive one

: Messages should be consistent and repeated

: Mechanism for two way feedback


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: Identify key people
: Understand what motivates them

: Why people stay- job content, level of


responsibility , company culture, salary
: Why people leave- low growth potential

: Lack of challenge, lack of autonomy, work


environment issues, salary issues etc.
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: Always a difficult one, politically and emotionally
charged, so some general principles to follow:
1. Begin with due decision analysis of HR
2. Act quick- the sooner, the better
3. Communicate openly about staffing
decisions
4. Train hiring managers on steps of
responsible selection procedure
5. Catch and correct mistakes
6. Start development and team building
process asap
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: eeping a track of whether moving in right
direction on realizing the goals of deal
: Identify the potential
hot spotsµ before they flare
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: Ensuring a smooth flow of information

: Involving more people in integration process

: Sending message about the new company·s


culture
: !$#!,#+3#!,#
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: !$#!,#+: whether the overall
integration approach is accomplishing its mission
of leading organisations through change?
: #!,##+: tracking any potential
merger related impact on day-to-day business-
sales, safety, consumers
± O M 

X )#')+!+#+: are the
business and management processes being
effectively redesigned and implemented?
X ,#),##+:Are we achieving the deal
synergies? ²eg classroom training, emailed
synergy kit.

Integration measured through:


1. Automated feedback channel- emails, confidential toll-
free hotlines and bulletin boards on a website
2. Targeted telephone surveys
9 CULTURAL INTEGRATION
Most integration initiatives fall short of reaching their
goals during implementation stage and follow-up.
: Organization culture comprises of : rules and policies, goals
and measures , rewards and recognition, staffing &
selection, Training & development, Ceremonies and event,
Leadership behavior, communication, physical
environment .
: The company should
1. recruit and promote service oriented candidates,
2. train the workforce in techniques of service
3. Set goals that are based on service
4. Reward an recognize people for higher level of service
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: HR contribute strategically to enterprise wide
integration between manufacturing, finance,
R&D and marketing and sales
: Support business group transition activities like
staffing& selection etc
: Integrate $#,#!,and process
OO   M
You closed the deal over 2 years ago, but
organisation is still not operating as one
company. Merger repair refers to post deal
integration.
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1. Service is suffering
2. Customers are confused and defecting
3. Performance targets have not been achieved
4. Stock prices falling
5. ey integration activities are behind
schedule
6. Analysts comments
7. The organisation cannot handle additional
acquisition
8. ey executives and employees are leaving
and many more.
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V Conduct due diligence analyses in financial and human
capital related areas
V Determine require/desired degree of integration
V Speedy(not reckless) decisions
V Gain the support and commitment from senior managers
V Clearly defined approach of integration
V Select highly respectable and capable integration leader
V Dedicated capable people for the integration core team and
task force
V Use best practices
V Set measurable goals and objectives
V Continuous communication and feed back
 
M
O M)*+, :
a) If negotiations go successful- move on with
implementation step for friendly merger.
b) But if negotiations are not successful- Hostile
takeovers, Tender offers, Dawn Raid
#$!:
a) If happy with the deal , accept the offer OR
b) Negotiate the terms of Deal or
c) If the target finds the valuation to be very low
or if there is some unconscionable flaw in the
deal then they may reject the deal ,then
dangers of hostile takeover arise.
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1. 1!,#"
This is an unfriendly
takeover attempt by a
company or raider that is
strongly resisted by the
management and the
board of directors of the
target firm. These types of
takeovers are usually bad
news, affecting employee
morale at the targeted
firm, which can quickly
turn to animosity against
the acquiring firm
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: '((:An offer to
purchase some or all of
shareholders' shares in a
corporation. The price
offered is usually at a
premium to the market
price. Tender offers may be
friendly or unfriendly.
Securities and Exchange
Commission laws require
any corporation or
individual acquiring 5% of
a company to disclose
information to the SEC,
the target company and
the exchange
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This measure discourages an unwanted takeover by offering lucrative benefits
to the current top executives, who may lose their job if their company is taken
over by another firm. Benefits written into the executives· contracts include
items such as stock options, bonuses, liberal severance pay and so on. Golden
parachutes can be worth millions of dollars and can cost the acquiring firm a
lot of money and therefore act as a strong deterrent to proceeding with their
takeover bid.

&#!5Any one of a number of measures taken by a company to


fend off an unwanted or hostile takeover attempt. In many cases, a company
will make special amendments to its charter or bylaws that become active
only when a takeover attempt is announced or presented to shareholders with
the goal of making the takeover less attractive or profitable to the acquisitive
firm.
% "#$')#,!#,6#!,: Payment of large debt
financed dividend. This strategy increases the firms financial
leverage, thereby deterring takeover attempt.

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This is a tactic by which the target company issues a large
number of bonds that come with the guarantee that they will be
redeemed at a higher price if the company is taken over. Why is
it called macaroni defense? Because if a company is in danger,
the redemption price of the bonds expands, kind of like
macaroni in a pot! This is a highly useful tactic, but the target
company must be careful it doesn't issue so much debt that it
cannot make the interest payments.

Ë  ,5Here, management threatens that in the event of


a takeover, the management team will resign at the same time
en masse. This is especially useful if they are a good
management team; losing them could seriously harm the
company and make the bidder think twice
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This is a company (the
good guyµ) that gallops in to make
a friendly takeover offer to a target company that is facing
a hostile takeover from another party (a
black knightµ).
The white knight offers the target firm a way out with a
friendly takeover.

O ))&'#!& ,)5An anti-takeover strategy that


a firm undertakes by liquidating its valuable and desired
assets and assuming liabilities in an effort to make the
proposed takeover unattractive to the acquiring firm.
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X Arcelor Management: The management believed that Arcelor itself


would have been doing the acquisitions and not the other way around.
The management was extremely hostile to Mittal Steel·s bid from the
beginning. Arcelor repeatedly played the patriotic card in order for
shareholders to reject the bid. +the CEO of Arcelor
dismissed Mittal Steel as a
company of Indiansµ and unworthy of
taking over a European company. (all this despite the fact that most
industry analysts and investment banks pointing out that the deal
was in Arcelor¶s best interests)

X The French government (despite not being a shareholder) was against


the deal because of worries over its 28000 Arcelor employees. Despite
repeated assurances from Mittal that the deal would not lead to
layoffs the government of France was never convinced. The
government of Luxembourg (a stakeholder) was against the deal as
well for a variety of reasons. The European Union approved of the
Mittal-Arcelor deal.
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  THE INDIAN
GOVERNMENT
: Most Indians were of the opinion that the deal
was not getting pushed through because of
Lakshmi Mittal·s Indian nationality. The Indian
government raised the issue at several forums
especially through commerce minister amal
Nath. It was also alleged that India had
threatened not to ratify a taxation accord with
Luxembourg due to the latter·s opposition to the
deal.
: The irony is that LN Mittal himself felt that
there was no case of
racismµ here as Mittal Steel
was a European company and
 an Indian
one.
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X The deal was finally clinched when the
shareholders of Arcelor agreed to Mittal Steel·s
offer ending the transaction that had dragged on
for months.
X Mittal had to however considerably !!&
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counteract the Arcelor- Severstal merger, Mittal
had to raise its valuation of Arcelor to $32.9
billion. The Mittal family holds 43 percent of the
combined group. The combined company holds 10
percent of the global market for steel. The
consolidation phase is well and truly underway .
WOR OUT INFERENCE ONÈ.
1. Strategy adopted by Arcelor
2. Strategy adopted by Mittal.
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X Tender offer
X Poison pill
X Dawn raid Saturday night special
X Golden parachute
X Greenmail
X Macaroni defense
X People pill
X Sand bag
X white knight
X Hostile takeover
X Antitrust
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O The Human Factor &


2 The Cultural ´MisfitV
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HUMAN REmOURCE IN M&A

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REASONS FOR FAILURE AT DIFFERENT
STAGES OF MERGER(SUMMED UP)
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1. Lack of research
2. Incomplete and Inadequate Due
Diligence
3. Excessive premium
4. Size Issues
5. Striving for Bigness
6. Faulty evaluation
7. Merger between Equals
8. Mergers between Lame Ducks

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1. Lack of Proper Communication
2. Diversification
3. Diverging from Core Activity
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1. Poor Cultural/organisation Fits
2. Ego Clash
3. Failure of Leadership Role.
4. Poorly Managed Integration
5. Inadequate Attention to People Issues
6. Loss of Identity
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X In 1926, the merger of two German automobile manufacturers
Benz & Co. and Daimler Motor Company formed Stuttgart-based,
German company Daimler-Benz. Its Mercedes cars were arguably
the best example of German quality and engineering.

X In 1998, Daimler-Benz and U.S. based Chrysler Corporation, two


leading global car manufacturers, agreed to combine their
businesses in what was perceived to be a 'merger of equals'.
Jurgen Schrempp, CEO of Daimler-Benz and Robert Eaton,
Chairman and CEO of Chrysler Corporation met to discuss the
possible merger.

X The merged entity ranked third (after GM and Ford) in the world
in terms of revenues, market capitalization and earnings, and
fifth (after GM, Ford, Toyota and Volkswagen) in the number of
units (passenger-cars and commercial vehicles combined) sold.
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X In May 2006, after a decade of disappointing results, Daimler finally sold


Chrysler to private equity firm Cerberus Capital for £3.74 billion.

X The Daimler Chrysler merger proved to be a costly mistake for both the
companies. Daimler was driven to despair, and to a loss, by its merger
with Chrysler. In 2006, the merged group reported a loss of 12 million
euros.

X The good results this quarter have come after selling the Chrysler
division in the U.S. and cutting jobs at Mercedes-Benz Cars.

X Without Chrysler, Daimler reported profits of 1.7 billion euros (£1.3


billion) for the fourth quarter and a net profit of 4 billion euros for the
year (3.8 billion euros in 2006). Sales rose to 99.4 billion euros ($144.98
billion) from 99.2 billion euros, with 2.1 million automobiles sold globally.
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INFERENCESÈ
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X Daimler-Benz attempted to run Chrysler USA
operations in the same way as it would run its
German operations.

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'),,.#,$ On the other hand3!&>#'
&encouraged )#!,",!.

X While Chrysler represented American adaptability


and valued efficiency and equal empowerment
Daimler-Benz valued a more traditional respect for
hierarchy and centralized decision-making.
 
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