MERGERS AND ACQUISITIONS

MERGERS
A merger refers to a combination of two or more companies into a company. It may involve absorption or consolidation. In an absorption, one company acquires another company. Eg. ASHOK LEYLAND LIMITED absorbed DUCTRON CASTINGS LIMITED. In consolidation, two or more companies combine to form a new company. Eg. HINDUSTAN COMPUTERS LIMITED,HINDUSTAN INSTRUMENTS LIMITED combined to form HCL LIMITED.

ACQUISITION
Acquisition is the process through which one company takes over the controlling interest of another company. Acquisition includes obtaining supplies or services by contract or purchase order with appropriated or nonappropriated funds, for the use of Federal agencies through purchase or lease. Eg
Google's largest acquisition as of March 2008 is the purchase of Double-click which is an advertising company.

TAKEOVER
A takeover generally involves the acquisition of a certain block of equity capital of a company which enables the acquirer to exercise control over the affairs of the company. Eg CHHABRIAS:INDIAWORLD,RELIANCE:I PCL,TATAS:VSNL.

DIFFERENCE:
Merger = two companies come together "permanently" for mutual gains or to reduce competition Acquisition = one company buys another company which may or may not be doing well Takeover = same like "acquisition", but generally a company buys another company which is not doing well or has gone bankrupt.

Economy of scope Economy of scale Increased revenue or market share Cross-selling Synergy Resource transfer Growth Taxation Technology sharing

This refers to the fact that the combined company can often reduce its fixed costs by removing duplicate departments or operations, lowering the costs of the company relative to the same revenue stream, thus increasing profit margins.

The common sources of economies of scale are purchasing managerial financial Marketing Technological Eg -Bpl with birla-tata-at&t

This assumes that the buyer will be absorbing a major competitor and thus increase its market power (by capturing increased market share) to set prices. Eg :
Hp-compaq merger

For example, a bank merging with a stock broker could then sell its banking products to the stock broker's customers, while the broker can sign up the bank's customers for brokerage accounts. Or, a manufacturer can acquire and sell complementary products.
Eg : Voltas International Ltd Voltas Ltd Merger

Corporate synergy occurs when corporations interact congruently. A corporate synergy refers to a financial benefit that a corporation expects to realize when it merges with or acquires another corporation. There are two distinct types of corporate synergies:

Revenue synergy Management synergy

A revenue synergy refers to the opportunity of a combined corporate entity to generate more revenue than its two predecessor stand alone companies would be able to generate. For example, if company A sells product X through its sales force, company B sells product Y, and company A decides to buy company B then the new company could use each sales person to sell products X and Y thereby increasing the revenue that each sales person generates for the company.

Synergy in terms of management and in relation to team working refers to the combined effort of individuals as participants of the team. Positive or negative synergy can exist. The condition that exists when the organization's parts interact to produce a joint effect that is greater than the sum of the parts acting alone.

This is designed to smooth the earnings results of a company, which over the long term smoothens the stock price of a company, giving conservative investors more confidence in investing in the company. However, this does not always deliver value to shareholders

Resources are unevenly distributed across firms and the interaction of target and acquiring firm resources can create value through either overcoming information asymmetry or by combining scarce resources.

Taxation: A profitable company can buy a loss maker to use the target's loss as their advantage by reducing their tax liability. In the United States and many other countries, rules are in place to limit the ability of profitable companies to "shop" for loss making companies, limiting the tax motive of an acquiring company.

1. Reliance infratel and GTL merger

This deal would help reduce Rcoms debt which has shot up following the 3G auctions.

2. RIL-RPL merger: $1.68 billion

Trying to have a common source for purchase of raw materials, consumables and other stores because that brings down the cost to a great extent and gives them a bargaining power with the supplier.

Merger through absorption Merger through consolidation

An absorption is a combination of two or more companies into an existing company. Example : absorption of Tata Fertilisers Ltd (TFL) BY Tata Chemicals Ltd (TCL)

A consolidation is a combination of two or more companies into a new company. Example : amalgamation of Hindustan Computers Ltd, Hindustan Instruments Ltd, Indian Software Company Ltd and Indian Reprographics Ltd in 1986 to an entirely new company called HCL Ltd.

HORIZONTAL MERGERS : Also referred to as a horizontal

integration, this kind of merger takes place between entities engaged in competing businesses which are at the same stage of the industrial process.2 A horizontal merger takes a company a step closer towards monopoly by eliminating a competitor and establishing a stronger presence in the market. The other benefits of this form of merger are the advantages of economies of scale and economies of scope.

VERTICAL MERGERS : Vertical mergers refer to the combination of

two entities at different stages of the industrial or production process. For example, the merger of a company engaged in the construction business with a company engaged in production of brick or steel would lead to vertical integration. Companies stand to gain on account of lower transaction costs and synchronization of demand and supply. Moreover, vertical integration helps a company move towards greater independence and self-sufficiency. The downside of a vertical merger involves large investments in technology in order to compete effectively.

There are three varieties: backward (upstream) vertical, forward (downstream) vertical, and balanced (both upstream and downstream) vertical merger. A company exhibits backward vertical integration when it controls subsidiaries that produce some of the inputs used in the production of its products. For example, an automobile company may own a tire company, a glass company, and a metal company. Control of these three subsidiaries is intended to create a stable supply of inputs and ensure a consistent quality in their final product. It was the main business approach of Ford and other car companies in the 1920s, who sought to minimize costs by centralizing the production of cars and car parts. A company tends toward forward vertical integration when it controls distribution centers and retailers where its products are sold. Balanced vertical integration means a firm controls all of these components, from raw materials to final delivery.

CONGENERIC MERGERS : These are mergers between entities

engaged in the same general industry and somewhat interrelated, but having no common customer-supplier relationship. A company uses this type of merger in order to use the resulting ability to use the same sales and distribution channels to reach the customers of both businesses.

CONGLOMERATE MERGERS : A conglomerate merger is a merger

between two entities in unrelated industries. The principal reason for a conglomerate merger is utilization of financial resources, enlargement of debt capacity, and increase in the value of outstanding shares by increased leverage and earnings per share, and by lowering the average cost of capital.4 A merger with a diverse business also helps the company to foray into varied businesses without having to incur large start-up costs normally associated with a new business.

CASH MERGER : In a typical merger, the merged entity combines

the assets of the two companies and grants the shareholders of each original company shares in the new company based on the relative valuations of the two original companies. However, in the case of a cash merger, also known as a cash-out merger, the shareholders of one entity receive cash in place of shares in the merged entity. This is a common practice in cases where the shareholders of one of the merging entities do not want to be a part of the merged entity.

TRIANGULAR MERGER : A triangular merger is often resorted to for

regulatory and tax reasons. As the name suggests, it is a tripartite arrangement in which the target merges with a subsidiary of the acquirer. Based on which entity is the survivor after such merger, a triangular merger may be forward (when the target merges into the subsidiary and the subsidiary survives), or reverse (when the subsidiary merges into the target and the target survives).

ACQUISITIONS. An acquisition or takeover is the purchase by one company of controlling interest in the share capital, or all or substantially all of the assets and/or liabilities, of another company. A takeover may be friendly or hostile, depending on the offeror companys approach, and may be effected through agreements between the offeror and the majority shareholders, purchase of shares from the open market, or by making an offer for acquisition of the offerees shares to the entire body of shareholders. FRIENDLY TAKEOVER. Also commonly referred to as negotiated takeover, a friendly takeover involves an acquisition of the target company through negotiations between the existing promoters and prospective investors. This kind of takeover is resorted to further some common objectives of both the parties. HOSTILE TAKEOVER. A hostile takeover can happen by way of any of the following actions: if the board rejects the offer, but the bidder continues to pursue it or the bidder makes the offer without informing the board beforehand.

LEVERAGED BUYOUTS. These are a form of takeovers where the acquisition is funded by borrowed money. Often the assets of the target company are used as collateral for the loan. This is a common structure when acquirers wish to make large acquisitions without having to commit too much capital, and hope to make the acquired business service the debt so raised. BAILOUT TAKEOVERS. Another form of takeover is a bail out takeover in which a profit making company acquires a sick company. This kind of takeover is usually pursuant to a scheme of reconstruction/rehabilitation with the approval of lender banks/financial institutions. One of the primary motives for a profit making company to acquire a sick/loss making company would be to set off of the losses of the sick company against the profits of the acquirer, thereby reducing the tax payable by the acquirer. This would be true in the case of a merger between such companies as well.

Acquisitions may be by way of acquisition of shares of the target, or acquisition of assets and liabilities of the target. In the latter case it is usual for the business of the target to be acquired by the acquirer on a going concern basis, i.e. without attributing specific values to each asset / liability, but by arriving at a valuation for the business as a whole (in the context of the ITA, such an acquisition is referred to as a slump sale An acquirer may also acquire a target by other contractual means without the acquisition of shares, such as agreements providing the acquirer with voting rights or board rights. It is also possible for an acquirer to acquire a greater degree of control in the target than what would be associated with the acquirers stake in the target, e.g., the acquirer may hold 26% of the shares of the target but may enjoy disproportionate voting rights, management rights or veto rights in the target.

Here are the top 10 acquisitions made by Indian companies worldwide: Acquirer
Tata Steel Hindalco Videocon Dr. Reddys Labs Target Company Corus Group plc Novelis Country targeted UK Canada Deal value ($ Industry ml) 12,000 5,982 729 597 565 500 324 293 290 239 Steel Steel Electronics Pharmaceutical Energy Oil and Gas Pharmaceutical Steel Electronics Telecom

Daewoo Korea Electronics Corp.

Betapharm

Germany

Suzlon Energy Hansen Group Belgium HPCL

Kenya Petroleum Kenya Refinery Ltd.

Ranbaxy Labs Terapia SA Tata Steel Videocon VSNL Natsteel Thomson SA Teleglobe

Romania Singapore France

Canada

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IT INCLUDES; Joint ventures Strategic alliances Equity partnership Licensing Franchising alliance Net work alliance

Its a independent legal entity in which two or more separate organizations participate.

Its like joint ventures which results in the creation of a separate legal entity.

Equity partnership;

Which involves one party taking a minority equity stake in the other party.

Licensing:
Licensing specific technology,product,process . 2. Licensing a trade mark etc.
1.

Here a firm may grant rights to sell goods and services to multiple licenses operating in different geographical locations.

Net work alliances

Its like a web. Where it interconnects alliances among companies.

Sharing risks and resources. 2. Access to new markets. 3. Cost reduction. 4. Favourable regulatory treatment
1.

CORPORATE FAILURE

INTRODUCTION
The major issue arising in the present times, for both management academics and practitioners, relates to the principles which determine corporate successes and failures that is why some organization prosper and grow while other collapse. The often unexpected collapse of large companies during the early 1990 s and more recently in 2002 has lead analysts to look for ways of predicting company failure. Corporate failures are common in competitive business environment where market discipline ensures the survival of fittest. Moreover, mismanagement also leads to corporate failure. Predicting corporate failure is based on the premise that there are identifiable patterns or symptoms consistent for all failed firms.

DEFINITION
A set of corporate governance which fails to fulfill the required expectations is termed as corporate failure According to Altman (1993), there is no unique definition of corporate failure. Corporate failure refers to companies ceasing operations following its inability to make profit or bring in enough revenue to cover its expenses. This can occur as a result of poor management skills, inability to compete or even insufficient marketing.

SYMPTOMS
There are three classic symptoms of corporate failure. These are namely: Low profitability High gearing Low liquidity

SYMPTOMS
Frequent Requests of Delay or default in Payment to Suppliers Irregularity in bank Account Delay or default in Payment to Banks Frequent Requests for Credit Decline in Capacity Utilization Low Turnover of Assets Poor Maintenance of P & Machinery Inability to take trade discount Irregularity in bank Account

SYMPTOMS
Extension Of Accounting Period Misrepresentation in Fin. Statements Inability to take trade discount Credit Decline In price of Shares & Debenture Excessive Manpower Turnover Extension Of Accounting Period Misrepresentation in Fin. statements Decline In price of Shares & Debenture

Can you recall few Corporate failure?

Corporate

failure

Why ENRON failed?

Corporate

failure

Poor Corporate Governance Poor Internal Control Mislead Market Creditworthiness Financial Stability

CAUSES OF CORPORATE FAILURE

Technological causes

Traditional methods of doing work have been turned upside down by the development of new technology. If within an industry, there is failure to exploit information technology and new production technology, the firms can face serious problems and ultimately fail.

Working capital problems Organizations also face liquidity problems when they are in financial distress. Poor liquidity becomes apparent through the changes in the working capital of the organization as they have insufficient funds to manage their daily expenses.

MISMANAGEMENT

Inadequate internal management control or lack of managerial skills and experience is the cause of the majority of company failures. Some managers may lack strategic capability that is to recognize strengths, weaknesses, opportunities and threats of a given business environment. These poor managers tend to take decisions, which may have bad consequences afterwards.

Economic distress

A turndown in an economy can lead to corporate failures across a number of businesses. The level of activity will be reduced, thus affecting negatively the performance of firms in several industries. This cannot be avoided by businesses. The recent economic crisis in the USA led to many cases of corporate failures. One of them is the insurance AIG insurance company. It is facing serious problems and it might close its door in the near future.

OVER-EXPANSION AND DIVERSIFICATION

Research has shown that dominant CEO is driven by the ultimate need to succeed for their own personal benefits. They neglect the objective set for the company and work for their self-interest. They want to achieve rapid growth of the company to increase their status and pay level. They may do so by acquisition and expansion.

FRAUD BY MANAGEMENT

Management fraud is another factor responsible for corporate collapse. Ambitious managers may be influenced by personal greed. They manipulate financial statements and accounting reports. Managers are only interested in their pay checks and would make large increase in executive pay despite the fact that the company is facing poor financial situation. Dishonest managers will attempt to tamper and falsify business records in order to fool shareholders about the true financial situation of the company.

POORLY STRUCTURED BOARD

Board of Directors is handpicked by CEO to be docile and they are encouraged by executive pay and generous benefits. These directors often lack the necessary competence and may not control business matters properly. These directors are often intimated by dominant CEO and do not have any say in decision making. Example Enron and WorldCom where poorly structured board was a contributor towards their failure.

Financial distress
Firms that become financially distressed are found to be under- performing relative to the other companies in their industry. Corporate failure is a process rooted in the management defects, resulting in poor decisions, leading to financial deterioration and finally corporate collapse. Financial distresses include the following reasons also low and declining profitability, investment Appraisal, Research and Development and technical insolvency amongst others.

When Organization Fail due to

Bankruptcy Lose Market Share Slow Low Profits Losses for Long periods

Reasons for Corporate failure

Labour Strike

Failure Of Major Product

Bad Investment

Corporate
External Factors

failure

Competition Change In Govt. Regulations Scarcity Of Inputs New technology Shift In Consumers Preference etc

Corporate

failure
Internal Factors

Managerial Incompetence Structural Rigidity Lack Of Leadership etc

Corporate
Managerial Incompetence

failure

Production Improper Location Wrong Technology Uneconomic Plant Size Unsuitable P & Machinery Inadequate R&D Poor Maintenance

Corporate

failure
Marketing

Inaccurate Demand Projections Improper Product Mix Wrong Product Positioning Irrational Price Structure Inadequate Sales Promotion High Distribution Costs Poor Customer Service

Corporate

failure
Finance
Wrong Capital Structure Bad Investment Decisions Weak Budgetary Control Inadequate MIS Poor Mgt. Of Receivables Bad Cash Management Strained Relations with Capital Suppliers Improper Tax Planning

Corporate

failure
Personnel
Ineffective Leadership Bad Labor Relations Inadequate Human Relations Over Staffing Weak Employee Commitment Irrational Compensation Structure

WAYS TO HANDLE CORPORATE FAILURE

SEEK APPROPRIATE COMPENSATION OR RISK SHARE ARRANGEMENTS
RISE TO THE CHALLENGE NEVER BECOME COMPLACENT

LEARN FROM THE EXPERIENCES OF OTHERS BECOME MORE EFFICIENT IMPROVE LINES OF COMMUNICATION

Preventing corporate failures

It is a fact that some companies perform well and that some underperform and some fails. In many, if not most cases, these companies are led by executives that are quite experienced. Below are some recommendations that can help to reduce the risk of failures of organisations: Appointment of non-executive directors The non-executive directors will bring their special expertise and knowledge on strategies, innovative ideas and business planning of the organization. They will monitor the work of the executive management and will help to resolve situations where conflict of interest arises. Overall, the non-executive directors will act as a Cross Check.

 Audit committees Very often, there is occurrence of fraud in management and financial reporting. The presence of the audit committees will help to resolve this problem. Audit committees have the potential to reduce the occurrence of fraud by creating an environment where there is both discipline and control. Development of environment learning mechanism
Some organizations fail because they lose touch with their environment. Therefore, to counter this problem, there is a need to develop the environmental learning mechanism. Through it, new information can be brought on continuous basis. This is mainly done by carrying customer-feedback surveys. In this way, the organisation can realign itself with the new needs and challenges.

Focus on research and development

Organizations can generate new knowledge by investing and focusing more on research and development. Thus, there will be more ideas how to make the products much better than that of their competitors.

Conclusion

It can be deducted that a director has a big responsibility that he has to assume the recommendations mentioned above can help directors to reduce corporate failure, provided that the directors abide. Proper planning also is critical to the success of a business.

PRESENTED BY GROUP 5
y ROLL NO y5 y 15 y 25 y 35 y 45 y 55 y ROLL NO y6 y 16 y 26 y 36 y 46 y 56