MERGERS, ACQUISITIONS AND

CORPORATE RESTRUCTURING
MBA

MARCH 2, 2020
AYUSH GOEL
Table of Contents
MERGER ............................................................................................................................................... 2
ACQUISITION....................................................................................................................................... 3
HISTORY OF MERGERS AND ACQUISITIONS............................................................................................ 4
TYPES OF MERGERS AND ACQUISITIONS ................................................................................................ 8
OTHER FORMS OF CORPORATE RESTRUCTURING ................................................................................ 10
OBJECTIVES OF MERGERS AND ACQUSITIONS ..................................................................................... 11
MOTIVES FOR MERGERS AND ACQUISITIONS ...................................................................................... 12
10 Major Change Forces Contributing Merger activity......................................................................... 14
Disadvantages: Following are the some difficulties ............................................................................. 15
Major Challenges to Merger Success .................................................................................................... 16
WHY MERGER FAILS .............................................................................................................................. 17
Mergers Strategy Growth ..................................................................................................................... 18
MERGER
Merger is said to occur when two or more companies combine into one company. Merger is defined as
a ‘transaction involving two or more companies in the exchange of securities and only one company
survives’.

When the shareholders of more than one company, usually two, decide to pool resources of the
companies under a common entity it is called ‘merger’. If as a result of a merger, a new company comes
into existence it is called as ‘amalgamation’. The merger of Bank of Punjab and Centurion Bank resulting
in formation of Centurion Bank of Punjab; or merger of Indian Rayon Ltd, Indo Gulf
Fertilizers Limited (IGFL) and Birla Global Finance Limited (BGFL) to form a new entity called Aditya
Birla Nuvo is an example of amalgamation.

As a result of a merger, one company survives and others lose their independent entity, it is called
‘absorption’. The merger of Global Trust Bank Limited (GTB) with Oriental Bank of Commerce (OBC)
is an example of absorption. After the merger, the identity of GTB is lost. But the OBC retains its identity.
The phrase mergers and acquisitions (abbreviated M&A) refers to the aspect of Corporate Strategy,
Corporate Finance and Management dealing with the buying, selling and combining of different
Companies that can aid, finance, or help a growing company in a given industry to grow rapidly without
having to create another business entity.

• In Business or in Economics a Merger is a combination of two Companies into one larger company.

• Such actions are commonly voluntary and involve Stock Swap or cash payment to the target. Stock
swap is often used as it allows the shareholders of the two companies to share the risk involved in the
deal

• A merger can resemble a Takeover but result in a new company name (often combining the names
of the original companies) and in new Branding; in some cases, terming the combination a “Merger"
rather than an acquisition is done purely for political or marketing reasons.

• In the pure sense of the term, a Merger happens when two firms, often of about the same size, agree
to go forward as a single new company rather than remain separately owned and operated. This kind
of action is more precisely referred to as a “Merger of equals." Both companies' stocks are surrendered
and new company stock is issued in its place. For example, both Daimler-Benz and Chrysler ceased to
exist when the two firms merged, and a new company, DaimlerChrysler, was created.
ACQUISITION
Acquisition is an act of acquiring effective control by a company over the assets (purchase of assets
either by lump sum consideration or by item-wise consideration) or management (purchase of
stocks/shares or gaining control over Board) of another company without combining their businesses
physically. Generally a company acquires effective control over the target company by acquiring
majority shares of that company. However, effective control may be exercised with a less than majority
shareholding, usually ranging between 10 percent and 40 percent because the remaining shareholders,
scattered and ill organized, are not likely to challenge the control of the acquirer. Takeover is considered
as a form of acquisition. Takeover is a business strategy of acquiring control over the management of
target company either directly or indirectly.

When one company takes over another and clearly established itself as the new owner, the purchase
is called an Acquisition. From a legal point of view, the Target company ceases to exist, the buyer
"swallows" the business and the buyer's stock continues to be traded.

• In practice, however, actual mergers of equals don't happen very often. Usually, one company will buy
another and, as part of the deal's terms, simply allow the acquired firm to proclaim that the action is a
merger of equals, even if it's technically an Acquisition. Being bought out often carries negative
connotations, therefore, by describing the deal as a merger, deal makers and top managers try to make
the takeover more palatable.

• A purchase deal will also be called a merger when both CEOs agree that joining together is in the best
interest of both of their companies. But when the deal is unfriendly and is hostile, i.e. the Target
Company does not want to be purchased, then it regarded as Acquisition.

• Whether a purchase is considered a Merger or an Acquisition really depends on whether the purchase
is friendly or hostile and how it is announced. In other words, the real difference lies in how the purchase
is communicated to and received by the target company's board of directors, employees and
shareholders.
HISTORY OF MERGERS AND ACQUISITIONS
The development of mergers & acquisitions (M&A) is not an invention of recent times. The first
appearance of M&A in a high frequency evolved at the end of the 19th century. Since then, cyclic waves
are observed with different waves emerging due to radical different strategic motivations. The following
table draws out the timeline of M&A development and clarifies strategic motivations underlying each
wave.

The activity in mergers and acquisitions in the past century shows a clustering pattern. The clustering
pattern is characterized as a wave and they occur in burst interspersed with relative inactivity. When
we discuss these merger waves, economics usually refer to 6 specific waves starting from 1890. The
length and start of each wave is not specific, but the end of each wave usually falls with a major war or
the beginning of a recession/crisis. Furthermore, the first and second wave was only relevant for the
US market, while the other waves had more geographical dispersion.
Especially in wave five, where besides US, UK and continental Europe, Asia also had a significantly
increased M&A market.

A general conclusive theory about the M&A waves is not available yet, although there seems to be
industry-specific factors that trigger the waves because different industries experience increased M&A
activity at different times. The following table shows the summary of the Mergers and Acquisitions
waves.

WAVE - 1: 1897-1904

The first wave followed after a period of economic expansion, and an important characteristic was the
simultaneous consolidation of manufacturers within one industry. This within industry consolidation led
to horizontal consolidation of major industries and created the first “giants” in the oil, mining and steel
industries, among others. Furthermore, the horizontal mergers led to the creation of monopolies.

The first wave was also characterized by “friendly” deals and by cash financing. Having said this, we
still do not know why the merger wave started in the first place.

In the first place, laws on incorporations were evolving and were implemented more rigorously at the
end of the nineteenth century. Before proper legislation, entrepreneurs had an unlimited liability on their
assets which means that growth of your company also means greater exposure and greater risk.
Improvement of laws on incorporations led to limited liability for entrepreneurs. Furthermore,
economic expansion and the development of the modern capital market, i.e. the improvement of the
New York Stock exchange, also boosted the number of mergers because capital needed to acquire, or
merge, became more accessible. The end of the first wave came due to a more rigorous enactment of
the new antitrust laws, e.g. the Sherman Antitrust Act. Besides this, the stock market crashed around
1905 which resulted in a period of economic stagnation. Furthermore, the beginning or threat of the
First World War is also pointed as a cause of the end of the first identified wave, also known as the
“Great Merger Wave”.

WAVE - 2: 1916-1929

The second merger wave started in the 1910s, where the primary focus of merger activity was in the
food, paper, printing and iron industry but the wave was significantly smaller in magnitude than the first
wave. Where the first wave exceeded more than 15% of the total assets in the US market, the second
wave had in impact of less than 10%. The second wave followed after the First World War in times of
economic recovery and increasing concerns about monopoly power. As opposed to the first wave, this
wave characterizes itself as a creator of oligopolies.

At the end of the wave, industries were no longer dominated by one large corporation, but rather by two
or more. Especially small companies, which “survived” the previous wave, were active on the M&A
market. The objective of these companies was to gain economies of scale so that they were better
equipped against the power of the previous monopolist. Logic behind the emergence of the oligopolies
is that the merged companies of the previous wave were faced with restricted resources due to the
previous crisis and greater enforcement of antitrust laws; especially the Sherman’s act.

Similar to the first wave was the “friendly” character of the deals, but the prevalent source of financing
switched from cash to equity. The end of the second merger wave was caused by the market crash of
1929 which started the “Great Depression” which led to a world-wide depression in the following years.

WAVE – 3: 1965-1969

Due to the “Great Depression” and the following Second World War, the activity on the M&A market
slowed down significantly. The new wave started only in the 1950’s and coincided with further
restrictions which needed to prevent anticompetitive mergers and acquisitions. This resulted in the
development of a new business organization. Mergers in the first and second wave usually involved
horizontal (wave 1) or vertical (wave 2) integration, but the third wave gave rise to the concept of
diversification. Similar to the second wave was that equity was the dominant source of financing.

The method of diversification led to the rise of conglomerates, which are large corporations that consists
of numerous businesses not necessarily related. Example of a conglomerate is General Electric, which
has interest in a vast number of businesses including healthcare, transportation and energy.
Diversification can be a method to reduce the cash flow volatility through reduction in the exposure to
industry specific risk. The conglomerate will be less vulnerable to shocks in one industry because it
generates income in different, maybe unrelated, industries so that loss of income in one industry can
be offset by other industries. Due to conglomerate creation, growth opportunities in unrelated
businesses can be exploited. Finally, a conglomerate will create its own internal capital market which is
especially useful when outside capital is expensive.

Whether the third wave began due to the stricter enactment of antitrust laws which led to increased
diversification and “empire” building is still up for debate. Clear is that in the third wave the percentage
of corporations active in unrelated business increased from 9% to 21% among the Fortune 500
companies, which suggest that diversification plays a key role in the third wave. The third merger wave
slowed down and the end of the 1970s and collapsed completely in 1981 when there was an economic
recession due to a significant oil crisis.

WAVE – 4: 1984-1989

The fourth merger wave started in the 80s, and was quite different then its previous one. Foremost, the
bids were usually hostile which meant that the bids did not have the target’s management approval.
Second, the size of the target was also significantly larger than in the previous wave. Furthermore, the
dominant source of financing shifted from equity to debt and cash financing.
According to Ravens craft (1987) the beginning of the wave could have been a bargain hunt taken place
in a depressed stock market, where the conglomerates of the previous wave divested their divisions.
Sudi Sudarsanam (2003) states that in the fourth wave divestitures constituted about 20-40% of the
M&A activity. Apparently there was a simultaneously expansion and downsizing of businesses, where
the expanding corporations made use of the divestitures to increase their competitive position.

Schleifer and Vishny (1991) view the new merger wave as one that is characterized by “bust-up”
takeovers, where large parts of the target were divested after acquiring. Besides these bust-ups, the
concept of leveraged buy-out (LBO) emerged. In a LBO, the firms’ own management uses large
amounts of outside debt to acquire the company. After acquisition, large fractions of the assets are sold
as was the case with the bust-up takeovers.

The fourth wave started to eliminate the inefficiencies that were created by the conglomerate mergers
in the third merger wave. Morck, Schleifer and Vishny (1990) show that in the 1980s a bid on a target
firm, which is competing in the same industry, has a positive relationship with stock market return for
the shareholders of the bidding firm. For bids on unrelated targets the opposite holds. This indicated
that the market had a negative attitude towards unrelated diversification, a strategy appreciated in the
third merger wave.
After 1989 M&A activity gradually slowed down and yet another stock market crash led to the end of
the wave.

WAVE - 5: 1992-2000

The 1990s was a decade of great economic prospect. The financial markets were booming and a
globalization process was developing. The merger activity also boomed in continental Europe where it
almost equaled the US market. Due to globalization the number of cross border acquisitions increased
significantly. In order to keep up with the economic growth and the global opportunities, organizations
searched outside their domestic borders to find a target company. Growth was an important driver for
merger activity. Corporations wanted to participate in the globalization of the economy. This created
some “mega” deals that were unthinkable before this wave. Some major mergers were: Citibank and
Travelers, Chrysler and Daimler Benz and Exxon and Mobil.

The fifth wave started due to technological innovations, i.e. information technology, and a refocus of
corporations on their core competences to gain competitive advantage. This resource-based view leads
to a better focus to gain a sustainable competitive advantage through the best use of their resources
and capabilities.
The nature of the merger was prevalent friendly, and the dominant source of financing was equity.
The end of the wave was once again caused by an economic recession. The beginning of the new
millennium started with the burst of the internet bubble, causing global stock markets to crash.

WAVE - 6: 2003 - 2007

The Sixth Wave saw the introduction of globalization, as established corporate companies emphasized
the need to create a multi-national reach. Private Equity boomed as shareholders looked to spread
ownership of their companies between themselves, day-to-day management and institutional investors.

At the time when the sixth merger wave started, interest rates were low after the recession in the
economy. The interest rates were kept low even though the economy was starting to recover, and as a
result it gave a major boost to the private equity business. Like the fifth wave, companies financed
mergers through the use of equity and a new wave was triggered.

On the other hand, Martynova and Renneboog (2005) claim that the reason why the merger wave
occurred was mainly due to the delay of transactions after the 9/11 terrorists attack in the US. At that
time there was a highly unsecure market and investments were withhold. As the market began to return
to normal and the uncertainty vanished, investments exploded and triggered a new wave. UK and the
EU have the same characteristics of their merger waves during this period. Thus it was a relatively
short, but nonetheless intense merger wave. It came to a rapid end when the subprime crisis started in
2007.

Seventh Wave

In the context of finance, there is little interest in the history of M&A, and it is likely that many errors that
occurred in earlier periods will reoccur. Understanding history can help us identify the proximity to a
new wave of M&A. In 2014, optimism seems to be returning to the market, and the value of mergers
and acquisitions globally reached 1.75 trillion U.S. dollars in the first six months of the year, an increase
of 75% over the same period last year and the largest volume of transactions since 2007. What is
observed is that the business environment after the 2008 crisis, characterized by risk aversion and a
focus on organic growth by firms, is dissipating.

It is true that we are living in a more volatile era in terms of market growth, but companies are beginning
to understand that this volatile world is the new standard; after all, there will always be wars and
countries with difficulty to honour their sovereign debt payments. In such an environment, it may not be
possible to rely only on organic growth and cost cutting to deliver consistent financial results.
Managers seem to once again believe that it is easier to buy growth than build it.
TYPES OF MERGERS AND ACQUISITIONS
When two or more companies dealing in similar lines of activity combine together then horizontal M&A
takes place. The merger of Tata Oils Mills Company Ltd. (TOMCO) with Hindustan Lever Ltd. (HLL) is
a horizontal merger.

A vertical M&A is one in which the company expands backwards by M&A with a company supplying
raw materials or expands forward in the direction of the ultimate consumer. The vertical M&A will bring
the companies of same industry together who are involved in different stages of production, process or
operation.
Vertical M&A may take the form of forward or backward M&A. The merger of Reliance Petrochemicals
Limited (RPCL) with Reliance Industries Limited (RIL) is a vertical merger with backward linkage as far
as RIL is concerned and the merger of Cement manufacturing company with civil construction company
is also a vertical merger with forward linkage.

Market-extension merger involve two companies that sell the same products in different markets.

Product-extension merger involve two companies selling different but related products in the same
market.

Accretive mergers are those in which an acquiring company's earnings per share (EPS) increase. An
alternative way of calculating this is if a company with a high price to earnings ratio ( P/E) acquires one
with a low P/E & Dilutive mergers are the opposite of above, whereby a company's EPS decreases.
The company will be one with a low P/E acquiring one with a high P/E.

Conglomerate M&A involves the integration of companies entirely involved in a different set of
activities, products or services. The merger of Mohta Steel Industries with Vardhaman Spinning Mills
Limited is a conglomerate M&A. When the management of acquiring and target companies mutually
and willingly agrees for takeover, it is called friendly M&A. The acquisition of the controlling interest
(45%) of Universal Luggage Mfg. by Blow Plast and Ranbaxy by Daiichi Sankyo was a friendly M&A.

There are two types of mergers that are distinguished by how the merger is financed. Each has certain
implications for the companies involved and for investors:

A) Purchase Mergers - As the name suggests, this kind of merger occurs when one company purchases
another. The purchase is made with cash or through the issue of some kind of debt instrument; the sale
is taxable.

Acquiring companies often prefer this type of merger because it can provide them with a tax benefit.
Acquired assets can be written-up to the actual purchase price, and the difference between the book
value and the purchase price of the assets can depreciate annually, reducing taxes payable by the
acquiring company.

B) Consolidation Mergers - With this merger, a brand new company is formed and both companies are
bought and combined under the new entity. The tax terms are the same as those of a purchase merger
• In some of the merger deals, a company can buy another company with cash, stock or a combination
of the two.
In smaller deals, one company acquires all the assets of another company. Company X buys all of
Company Y's assets for cash, which means that Company Y will have only cash (and debt, if they had
debt before). Thus, Company Y becomes merely a shell and will eventually liquidate or enter another
area of business.

When the acquisition is ‘forced’ or against the wish of the target management, it is called hostile M&A.
Hostile M&A takes the form of tender offer wherein the offer to buy the shares by the acquiring
company will be made directly to the target shareholders without the consent of the target management.
The takeover of Shaw Wallace, Dunlop, Mather & Platt and Hindustan Dorr Oliver by Chhabrias and
the takeover of Ashok Leyland by Hindujas are the examples of hostile M&A.

Bailout M&As are resorted to bailout the sick companies, to allow the company for rehabilitation as per
the schemes approved by the financial institutions.

Strategic M&A involves operating synergies, i.e., two companies are more profitable combined than
separate.

In financial M&A, the bidder usually believes that the price of the company’s stock is less than the
value of company’s assets.

Reverse M&A is the merger of a large (financially sound/ profit-making) company with a small
(financially weak/ loss-making) company.
Reverse merger is an another type of acquisition is a deal that enables a private company to get
publicly-listed in a relatively short time period. A reverse merger occurs when a private company that
has strong prospects and is eager to raise financing buys a publicly listed shell company, usually one
with no business and limited assets. The private company reverse merges into a “Shell” public
company, and together they become an entirely new public corporation with tradable shares.

Downstream M&A is the merger of a parent company with its own subsidiary.

Upstream M&A is the merger of a subsidiary company with its own parent company.

Defacto M&A has economic effect of merger as per legal provisions, but is entered in the form of
acquisition of assets.

Cash M&A occurs when certain shareholders accept cash for their shares, while other shareholders
receive shares in the surviving company.

Short-Term M&A takes place when a parent company acquires the total voting power in a subsidiary.
OTHER FORMS OF CORPORATE RESTRUCTURING

Amalgamation:

Amalgamation is an arrangement where two or more companies consolidate their business to form a
new firm, or become a subsidiary of any one of the company. For practical purposes, the terms
amalgamation and merger are used interchangeably. However, there is a slight difference. Merger
involves the fusion of two or more companies into a single company where the identity of some of the
companies gets dissolved. On the other hand, amalgamation involves dissolving the entities of
amalgamating companies and forming a new company having a separate legal entity.

Normally, there are two types of amalgamations. The first one is similar to a merger where all the assets
and liabilities, and shareholders of the amalgamating companies are combined together. The
accounting treatment is done using the pooling of interests method. It involves laying down a standard
accounting policy for all the companies and then adding their relevant accounting figures like capital
reserve, machinery, etc. to arrive at revised figures.

The second type of amalgamation involves acquisition of one company by another company. In this,
the shareholders of the acquired company may not have the same equity rights as earlier, or the
business of the acquired company may be discontinued. This is like a purchase of a business. The
accounting treatment is done using a purchase method. It involves recording assets and liabilities at
their existing values or revaluating them on the basis of their fair values at the time of
amalgamation.

Consolidation:
In a consolidation, an entirely new firm is created, and the two previous entities cease to exist.
Consolidated financial statements are prepared under the assumption that two or more corporate
entities are in actuality only one.
The consolidated statements are prepared by combining the account balances of the individual firms
after certain adjusting and eliminating entries are made.

Joint Venture:
Two or more businesses joining together under a contractual agreement to conduct a specific business
enterprise with both parties sharing profits and losses. The venture is for one specific project only, rather
than for a continuing business relationship as in a strategic alliance.

Strategic Alliance:
A partnership with another business in which you combine efforts in a business effort involving anything
from getting a better price for goods by buying in bulk together to seeking business together with each
of you providing part of the product. The basic idea behind alliances is to minimize risk while maximizing
your leverage.

Partnership:
A business in which two or more individuals who carry on a continuing business for profit as co-owners.
Legally, a partnership is regarded as a group of individuals rather than as a single entity, although each
of the partners file their share of the profits on their individual tax returns.
OBJECTIVES OF MERGERS AND ACQUSITIONS
Financial Objectives

 Economy of scale: 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.
 Economy of scope: This refers to the efficiencies primarily associated with demand-side changes,
such as increasing or decreasing the scope of marketing and distribution, of different types of products.
 Increased revenue or market share: 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.
 Cross-selling: For example, a bank buying 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.
 Synergy: For example, managerial economies such as the increased opportunity of managerial
specialization. Another example is purchasing economies due to increased order size and associated
bulk-buying discounts.
 Taxation: A profitable company can buy a loss maker to use the target's loss as their advantage by
reducing their tax liability. In India 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.
 Geographical or other diversification: 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  Resource transfer: resources are unevenly distributed across firms (Barney, 1991) and
the interaction of target and acquiring firm resources can create value through either overcoming
information asymmetry or by combining scarce resources.
 Vertical integration: Vertical integration occurs when an upstream and downstream firm merges (or
one acquires the other). There are several reasons for this to occur. One reason is to internalize an
externality problem. A common example of such an externality is double marginalization. Double
marginalization occurs when both the upstream and downstream firms have monopoly power and each
firm reduces output from the competitive level to the monopoly level, creating two deadweight losses.
Following a merger, the vertically integrated firm can collect one deadweight loss by setting the
downstream firm's output to the competitive level. This increases profits and consumer surplus. A
merger that creates a vertically integrated firm can be profitable.
 Hiring: some companies use acquisitions as an alternative to the normal hiring process. This is
especially common when the target is a small private company oris in the startup phase. In this case,
the acquiring company simply hires ("acquhires") the staff of the target private company, thereby
acquiring its talent (if that is its main asset and appeal). The target private company simply dissolves
and little legal issues are involved.
 Absorption of similar businesses under single management: similar portfolio invested by two
different mutual funds namely united money market fund and united growth and income fund, caused
the management to absorb united money market fund into united growth and income fund.
 Access to hidden or nonperforming assets (land, real estate).

Other Objectives
 Diversification: While this may hedge a company against a downturn in an individual industry it fails
to deliver value, since it is possible for individual shareholders to achieve the same hedge by diversifying
their portfolios at a much lower cost than those associated with a merger.
 Manager's hubris: manager's overconfidence about expected synergies from M&A which results in
overpayment for the target company.
 Empire-building: Managers have larger companies to manage and hence more power.
 Manager's compensation: In the past, certain executive management teams had their payout based
on the total amount of profit of the company, instead of the profit per share, which would give the team
a perverse incentive to buy companies to increase the total profit while decreasing the profit per share
(which hurts the owners of the company, the shareholders).
 Customer satisfaction: Sometimes companies suggest they are merging to better serve their
customers.

MOTIVES FOR MERGERS AND ACQUISITIONS

Companies make mergers and acquisitions for a long list of reasons. Most of these reasons are good,
in that the motivation for the transaction is to maximize shareholder value. Theoretically, companies
should pursue a merger or an acquisition only if it creates value—that is, if the value of the acquirer and
the target is greater if they operate as a single entity than as separate ones. Put another way, a merger
or acquisition is justified if synergies are associated with the transaction. Synergies can take three
forms: operating, financial, or managerial.

Operating Synergies arise from the combination of the acquirer and target’s operations. A first type of
operating synergies is revenue enhancement. It includes gaining pricing power in a particular market or
being able to increase sales volume by accessing new markets— for example, by leveraging one
company’s sales force or distribution network, or by selling one company’s products to the other
company’s customers. A second type of operating synergies is cost reduction. As mentioned earlier,
many companies view M&As as a way to reach a critical size and, consequently, be able to benefit from
economies of scale with lower production costs. An acquisition might also generate cost savings in
advertising, marketing, or research and development. Revenue enhancement and cost reduction are
more likely in cases of horizontal integration and can also play a role in vertical integration.

Financial Synergies come from lower financing costs. Big companies usually have access to a wider
and cheaper pool of funds than small companies. One rationale for the third wave of M&As was that
diversifying into unrelated businesses enabled companies to reduce risk and, therefore, increase their
debt capacity and lower their before tax cost of financing. The risk reduction benefit is compounded by
the beneficial tax treatment of debt relative to equity. Thus, the more debt a company has in its capital
structure, the lower its cost of financing, net of taxes. History has shown, however, that companies tend
to overestimate the risk reduction and tax benefits associated with M&As. Although financial synergies
are a source of value, particularly in the case of leveraged transactions such as LBOs, they should not
be the only motivation for a merger or acquisition.

Managerial Synergies arise when a high-performing management team replaces a poor-performing

one. One advantage of acquisitions is that they give the acquirer the opportunity to remove incompetent
managers, which could improve the target’s performance.
Unfortunately, not all M&As are motivated by the goal of creating shareholder value. Research has
shown that some managers look after their own self-interest instead of shareholders’. They might use
M&As to build empires and diversify their human capital, even if little or no value is associated with the
merger or the acquisition. Managers also sometimes suffer from hubris; they are overconfident in their
ability to negotiate a good deal for their shareholders and then run the combined entity. Thus, they tend
to overpay for their acquisitions. Last, some managers go through an acquisition spree to deliver growth
and earnings targets, even if the acquisitions are not strategically sound or have a negative effect on
the company’s profitability and ability to create shareholder value.
Advantages of Mergers and Acquisitions

 The most common reason for firms to enter into merger and acquisition is to merge their power and
control over the markets.
 Another advantage is Synergy that is the magic power that allow for increased value efficiencies of
the new entity and it takes the shape of returns enrichment and cost savings.
 Economies of scale is formed by sharing the resources and services. Union of 2 firm's leads in overall
cost reduction giving a competitive advantage, that is feasible as a result of raised buying power and
longer production runs.
 Decrease of risk using innovative techniques of managing financial risk.
 To become competitive, firms have to be compelled to be peak of technological developments and
their dealing applications. By M&A of a small business with unique technologies, a large company will
retain or grow a competitive edge.
 The biggest advantage is tax benefits. Financial advantages might instigate mergers and corporations
will fully build use of tax- shields, increase monetary leverage and utilize alternative tax benefits
 Staff reductions - Mergers tend to mean job losses. Mostly from reducing the number of staff members
from accounting, marketing and other departments. Job cuts will also include the former CEO, who
typically leaves with a compensation package.
 Economies of scale - Yes, size matters. A bigger company placing the orders can save more on costs.
Mergers also translate into improved purchasing power to buy equipment or office supplies - when
placing larger orders, companies have a greater ability to negotiate prices with their suppliers.
 Acquiring new technology - To stay competitive, companies need to stay on top of technological
developments and their business applications. By buying a smaller company with unique technologies,
a large company can maintain or develop a competitive edge.
 Improved market reach and industry visibility - A merge may expand two companies' marketing and
distribution, giving them new sales opportunities. Because of improved financial standing, Bigger firms
have an easier time raising capital than smaller ones.
 Overcome the Entry barriers: M & A is one of the way for smooth market entry, as good will of another
company and the brand gets transferred to new entities without initial hiccups. These costly barriers to
entry otherwise would make “Start-ups” economically unattractive. e.g. “Belgian Fortis’ acquisition of
American Banker’s Insurance Group”
 Eliminating the Cost of new product Development. Buying established business reduces risk of start-
up ventures. e.g. “Watson Pharmaceuticals’ acquisition of Thera Tech”
Lower risk compared to developing new products.
Increased feasibility and speed of Diversification. This is a quick way to move into businesses when
firm currently lacks experience and depth in industry. e.g. “CNET’s acquisition of “mySimon”.
Acquisition is intended to avoid excessive competition and improve competitive balance of the industry
and thereby Increased Market Power and allowing market entry in a timely fashion. Firms use
acquisition to restrict its dependence on a single or a few products or markets. e.g. “ British Petroleum’s
acquisition of U.S. Amoco.; Kraft Food’s acquisition of Boca Burger.; “General Electric’s acquisition of
NBC.

10 Major Change Forces Contributing Merger activity

1. The pace of Technology has accelerated.
2. The costs of communication and Transportation have greatly reduced.
3. Hence markets have become international in scope.
4. The forms, sources and intensity of competition have expanded.
5. New Industries have emerged.
6. While regulations have increased in some areas, generally more deregulations have taken place in
other industries.
7. Favourable economic and financial environments have persisted from 1982 to 1990 and from 1992
to 2000.
8. Within a general environment of strong economic growth, problems have developed in individual
economics and industries.
9. Inequalities in income and wealth have been widening.
10. Valuation relationships and equity returns for most of 1990s have risen to levels significantly above
long-term historical patterns.
Disadvantages: Following are the some difficulties
Loss of experienced workers aside from workers in leadership positions. This kind of loss inevitably
involves loss of business understand and on the other hand that will be worrying to exchange or will
exclusively get replaced at nice value.

As a result of M&A, employees of the small merging firm may require exhaustive re-skilling.

Company will face major difficulties thanks to frictions and internal competition that may occur among
the staff of the united companies. There is conjointly risk of getting surplus employees in some
departments.

Merging two firms that are doing similar activities may mean duplication and over capability within
the company that may need retrenchments.

Increase in costs might result if the right management of modification and also the implementation of
the merger and acquisition dealing are delayed.

The uncertainty with respect to the approval of the merger by proper assurances.

In many events, the return of the share of the company that caused buyouts of other company was
less than the return of the sector as a whole.

The merger and acquisition (M&A) reduces flexibility. If a rival makes revolution and may currently
market vital resources those are of superior quality, shift is tough. The change expense is majorly the
distinction between the particular merger worth and also the merchandising value of the firm that can
be of larger distinction.

Problems of M & A
• Integration Difficulties: Differing financial and control systems can make integration of firms difficult.
e.g. “Intel’s acquisition of DEC’s semiconductor division.
• Inadequate Evaluation of Target: Competitive bid causes acquirer to overpay for firm. e.g. “Marks
and Spencer’s acquisition of Brooks Brothers”
• Large or Extraordinary Debt : Costly debt can create onerous burden on cash outflows. e.g. “Agrbio
Tech’s acquisition of dozens of small seed firms”
• Inability to Achieve Synergy: Justifying acquisitions can increase estimate of expected benefits. e.g.
“ Quaker Oats and Snapple”
• Overly Diversified: Acquirer doesn’t have expertise required to manage unrelated businesses. e.g.
“GE prior to selling businesses and refocusing”
• Managers Overly Focused on Acquisitions: Managers may fail to objectively assess the value of
outcomes achieved through the firm’s acquisition strategy. e.g. “Ford and Jaguar”
• Too Large: Large business bureaucracy reduces innovation and flexibility.
Major Challenges to Merger Success

Look into Three important areas : Due Diligence, Cultural Factors & Implementation.

Due Diligence:
1. Check all legal Aspects including pension funding, environmental problems, product liabilities etc.
2. Check all business & management considerations involving examining accounting records,
maintenance & quality equipments, possibility of cost controls, potentiality of product
improvements,
3. Management relationship with its employees, gaps in managerial capabilities, how these
management systems will fit together, need to hire or fire managers, etc.
4. Ensure that acquired unit is worth more as a part of the acquiring firm than being left alone or with
any other firm.

Cultural Factors
Check organisation’s values, traditions, norms, beliefs and behaviour patterns.
Check formal statements available, but observe informal relationships and networks.
Check management’s operating style. The firm must be consistent in its formal statements of values
and kinds of actions that are rewarded.
Check need of proactive employee training for growth through Merger.
Check cultural factors in addition to products, plant & equipments.
Check how the organisation has handled cultural factors in the

Implementation
1. Implementation starts as condition for thinking about M & A.
2. The firm must have implemented all aspects of efficient operations before it can effectively combine
organisations.
3. The acquiring firm must have shareholder value orientation with strategies and organisational
structures compatible to multiple business units.
4. Mergers should further Corporate strategy, strengthening weaknesses, filling gaps, developing new
growth opportunities and extending capabilities.
5. Integration leadership with management leadership qualities, experience with external constituencies
and credibility with the various integration participants.
6. Provide early, frequent & clear integration messages. Lack of communications causes distress.
Ensure quick integration.
WHY MERGER FAILS
The main reasons for mergers failure are “autonomy, self-interest, culture clash” all included or lies in
leadership. At both implementation and negotiation stages, mergers fail due to failure of leadership.
Lack of leadership qualities of managers may cause mergers and acquisitions a failure. Leadership is,
thus a crucial management task in strategic restructuring.
The following are the reasons for failure of mergers:
 Mergers fail in providing economies of scale.
 Un-utilization or minimum utilization of staff and working hours.
 The inability to appeal country-wide and regionally to refunders.
 Personal desires
 Desire towards authority but not to responsibility.
 Desire towards to control and commanding/directing the subordinates.
- The people, who are having the negative views on mergers.
- The negative believes of the partners and the people in the society.
- Inefficient and inactive person of a leader or director in merged firm.
- The inability of preparing national policy issues, which are interested by the members
in the merged firm.
- The inability of the leader in bridging the cultures within the merged organization.
- Lack of leadership qualities of merged organizations’ directors and partners.

In addition to the above, many mergers fail, which may be broadly classified into the following “seven
sins”, which seem to be committed too often by those making acquisitions:
1. Paying too much.
2. Assuming a boom market won’t crash.
3. Leaping before looking.
4. Straying too far afield.
5. Swallowing something too big.
6. Marrying disparate corporate cultures.
7. Counting on key managers staying.
Mergers Strategy Growth
To survive in the world of cut-throat competition, companies must sell their products in the global
market. It is necessary to come up with new strategies to win more customers. Effective strategic
management requires strategic estimation, planning, application and review/control.

The path for strategic management is activated by compulsions like modern developments in the
societal and economic theory and the recent changes in the form of business, apart from the economic
context.
Areas of Strategic Compulsions
Here is a list of some compulsions that a global business might have to face −
 E-commerce and Internet Culture− Expansion of internet and information technology made
the business move towards e-commerce. Online shopping /Selling and Advertising are
important issues. These factors compel the businesses to go modern.
 Hyperactive Competition− Businesses now are hyper-competitive which compel them to draw
a competitive strategy that includes general competitive intelligence to win the market share.
 Diversification− Uncertainty and operational risks have increased in the current global
markets. Companies now need to protect themselves by diversifying their products and
operations. Businesses now are compelled to focus on more than one business, or get
specialized in one business.
 Active Pressure Groups− Contemporary pressure groups direct businesses to be more
ethical in their operations. Most of the multinationals are now spending a good deal to address
their Corporate Social Responsibility (CSR).

Standardization Vs Differentiation
Standardization and differentiation are the two sides of globalization. By standardization, we mean to
show the global representation, while differentiation looks upon local competitiveness. The following
figure depicts how standardization differs from differentiation.

Strategic Options
Strategic Options include a set of strategies that helps a company in achieving its organizational goals.
It is important to do a SWOT analysis of the internal environment and also the external environment to
get the a list of possible strategic alternatives.
A business can’t run on gut feeling and hence, strategic options are indispensable tools for every
international business manager. The following diagram shows the very basic options to choose –
whether to go global or act local while improving the business in a holistic manner.
Factors that Affect Strategic Options
There are many factors that need to be taken care of while choosing the best possible strategic options.
The most influential ones are the following −
 External Constraints− The survival and prosperity of a business firm is fully dependent on
interaction and communication with the elements that are intrinsic to the business. It includes
the owners, customers, suppliers, competitors, government, and the stakeholders of the
community.
 Intra-organizational Forces− The big decisions of a company are often influenced by the
power-play among various interest groups. The strategic decision-making processes are no
exception. It depends on the strategic choices made by the lower Management and top notch
strategic management people.
 Values and Preferences towards Risk− Values play a very important role, It has been
observed hat the successful managers have a more pragmatic, interactive and dynamic
progressive and achievement seeking values. The risk takers in the high-growth less-stable
markets prefer to be the pioneers or innovators. They seek an early entry into new, untapped
markets.
 Impact of Past Strategies− A strategy made earlier may affect the current strategy too. Past
strategies are the starting point of building up a new strategies
 Time Constraints− There may be deadlines to be met. There may be a period of commitment,
which would require a company to take immediate action.
 Information Constraints− The choice of a strategy depends heavily on the availability of
information. A company can deal with uncertainty and risks depending on the availability of
information at its disposal. Lesser the amount of information, greater the probability of risks.
 Competitor’s Risk− It is important to weigh the strategic choices the competitors may have. A
competitor who adopts a counter-strategy must be taken into account by the management. The
likelihood of a competitor’s strength to react and its probable impact will influence the strategic
choices.
Corporate Takeover Defense
1. Stock repurchase
Stock repurchase (aka self-tender offer) is a purchase by the target of its own-issued shares from its
shareholders. This is an effective defense that successfully passed such prominent antitakeover
defense cases as Unitrin and Unocal v. Mesa Petroleum Co.

2. Poison pill
Poison pill (aka shareholder rights plan) is a distribution to the target’s shareholders of the rights to
purchase shares of the target or the merging acquirer at a substantially reduced price.
What triggers an execution of these rights is an acquisition by an acquirer of certain percentage of the
target’s shareholding. If exercised, these rights can considerably dilute the acquirer’s shareholding in
the target and thus can deter a takeover. The poison pill is one of the most powerful defenses against
hostile takeovers. The pills can be flip-in, flip-over, dead hand, and slow/no hand.
 Flip-in poison pill can be “chewable,” which means that the shareholders may force a pill
redemption by a vote within a certain timeframe if the tender offer is an all-cash offer for all of
the target’s shares. The poison pill can also provide for a window of redemption. That is a period
within which the management can redeem the pill. This window hence determines the moment
when the management’s right to redeem terminates.
 “Dead hand” pill creates continuing directors. These are current target’s directors who are the
only ones that can redeem the pill once an acquirer threatens to acquire the target. While the
earlier court decisions restricted use of dead hand and no hand pills, the more recent decisions
uphold such pills.
 “No hand” (aka “slow hand”) pill prohibits redemption of the pill within a certain period of time,
for example six months.

3. Staggered board
Staggered board is a board in which only a certain number of directors, usually one third, is reelected
annually. It is a powerful antitakeover defense, which might be stronger than is commonly recognized.
For the reason of being too strong and reducing returns to the target’s shareholders, the latter happened
to resist this type of defense.

4. Shark repellants
Shark repellants are certain provisions in the target’s charter or bylaws deterring an acquirer’s
desirability of a hostile takeover. This defense typically involves a supermajority vote requirement
regarding a merger of the target with its majority shareholder. This defense also includes other takeover
deterrent provisions in the target’s certificate of incorporation or bylaws.

5. Golden parachutes
Golden parachutes are additional compensations to the target’s top management in the case of
termination of its employment following a successful hostile acquisition. Since these compensations
decrease the target’s assets, this defense reduces the amount the acquirer is willing to pay for the
target’s shares. This defense may thus harm shareholders. It, however, effectively deters hostile
takeovers.

6. Greenmail
Greenmail is a buyout by the target of its own shares from the hostile acquirer with a premium over the
market price, which results in the acquirer’s agreement not to pursue obtaining control of the target in
the near future. The taxation of greenmail used to present a considerable obstacle for this defense. the
statute may require a shareholder approval of repurchase of a certain amount of shares at premium.

7. Standstill agreement
Standstill agreement is an undertaking by the acquirer not to acquire any more shares of the target
within certain period of time. A standstill agreement is an additional defense that usually accompanies
the greenmail described above.
8. Leveraged recapitalization
Leveraged recapitalization (aka corporate restructuring) is a series of transactions designed to affect
the equity and debt structure of a corporation. Recapitalization usually involves such transactions as (i)
sale of assets, (ii) issuance of debt, and (iii) distribution of dividends.

9. Leveraged buyout
Leveraged buyout is a purchase of the target by the management with the use of debt financing. This
defense burdens the target with the debt. In such a case, the management becomes a bidder and
competes with a hostile acquirer for control over the target.

10. Crown jewels

Crown jewels are options under which a favored party can buy a key part of the target at a price that
may be less than its market value.

11. Scorched earth

A company's management can deliberately increase its debt as a defensive strategy to deter corporate
raiders. The goal is to create concern regarding the company's ability to make repayment after the
acquisition is completed. The risk, of course, is that any large debt obligation could negatively impact
the company's financial statements. If this happens, then shareholders could be left bearing the brunt
of this strategy as stock prices drop. For this reason, increasing debt is generally seen as a strategy
that in the short term helps the company avert a takeover, but over time could hurt shareholders

12. Lockups
Lockups are defensive mechanisms in friendly mergers and acquisitions designed to deter hostile bids.
The lockups include (i) no-shop covenant, (ii) termination/bust-up fee, (iii) option to buy a subsidiary,
(iv) expense reimbursement etc.

13. Pacman
Pacman is a target’s tender offer for the acquirer’s shares.

14. White knight

A white knight strategy enables a company's management to thwart a hostile bidder by selling the
company to a bidder they find more friendly. The company sees the friendly bidder as a strategic
partner, one who will likely keep the current management in place and who will provide shareholders
with a better price for their shares.
In general, a white knight defense is seen as beneficial to shareholders, particularly when management
has exhausted all other options to avoid a takeover. However, exceptions to this are when the merger
price is low or when the combined value and performance of the two companies fails to achieve the
anticipated financial benefit.

15. White squire

White squire is giving by the target to a friendly party of a certain ownership in the target. This defense
is effective against acquisition by the hostile party of a complete control over the target by “freezing out”
of minority shareholders.

16. Change of control provisions

Change of control provisions is target’s contractual arrangements with third parties that burden the
target in the case of a change in its control.

17. “Just say no”

On top of all, the “just say no” approach is a board’s development and implementation of a long-term
corporate strategy which enables the board simply to reject a proposal of any potential acquirer who
would fail to prove that his acquisition strategy matches that of the target
Reverse Mergers
Reverse mergers are typically through a simpler, shorter, and less expensive process than that of a
conventional initial public offering (IPO), in which private companies hire an investment bank to
underwrite and issue shares of the new soon-to-be public entity. They are also commonly referred to
as reverse takeovers or reverse IPOs.

Aside from filing the regulatory paperwork and helping authorities review the deal, the bank also helps
to establish interest in the stock and provide advice on appropriate initial pricing. The traditional IPO
necessarily combines the go-public process with the capital-raising function. A reverse merger
separates these two functions, making it an attractive strategic option for corporate managers and
investors alike.

Advantages of Reverse Mergers

A Simplified Process
Reverse mergers allow a private company to become public without raising capital, which considerably
simplifies the process. While conventional IPOs can take months to materialize, reverse mergers can
take only a few weeks to complete.

Minimizes Risk
Undergoing the conventional IPO process does not guarantee that the company will ultimately go public.
If stock market conditions become unfavorable to the proposed offering, the deal may be canceled, and
all of those hours will have become a wasted effort. Pursuing a reverse merger minimizes this risk.

Less Dependent on Market Conditions

As the reverse merger is solely a mechanism to convert a private company into a public entity, the
process is less dependent on market conditions. Since a reverse merger functions solely as a
conversion mechanism, market conditions have little bearing on the offering. Rather, the process is
undertaken in order to attempt to realize the benefits of being a public entity.

Benefits of a Public Company

The original investors gain the ability to liquidate their holdings, providing a convenient exit alternative
to having the company buy back their shares. The company has greater access to capital markets, as
management now has the option of issuing additional stock through secondary offerings. If stockholders
possess warrants—giving them the right to purchase additional stock at a pre-determined price—the
exercise of these options provides additional capital infusion into the company.

Disadvantages of a Reverse Merger

Due Diligence Required

Appropriate due diligence should be conducted, and transparent disclosure should be expected (from
both parties).
Investors of the public shell should also conduct reasonable diligence on the private company, including
its management, investors, operations, financials, and possible pending liabilities (i.e., litigation,
environmental problems, safety hazards, and labor issues).

Risk Stock Will Be Dumped

If the public shell's investors sell significant portions of their shares right after the merger, this can
materially and negatively affect the stock price. To reduce or eliminate the risk that the stock will be
dumped, clauses can be incorporated into a merger agreement, designating required holding periods.

No Demand for Shares Post Merger

There may be a lack of operational and financial scale. Thus, they may not attract analyst coverage
from Wall Street. After the reverse merger is consummated, the original investors may find out that
there is no demand for their shares. Reverse mergers do not replace sound fundamentals. For a
company's shares to be attractive to prospective investors, the company itself should be attractive
operationally and financially.

Regulatory and Compliance Burden

A potentially significant setback when a private company goes public is that managers are often
inexperienced in the additional regulatory and compliance requirements of being a publicly-traded
company. These burdens (and costs in terms of time and money) can prove significant, and the initial
effort to comply with additional regulations can result in a stagnant and underperforming company if
managers devote much more time to administrative concerns than to running the business.

DEMERGER
A demerger is typically a situation where in an organization splits its assets, mostly by pooling up the
assets it is splitting out under a subsidiary holding company in order to later redistribute the shares of
the new company to the already existing stakeholders of the parent organization.
Demerger is an act of splitting off a part of an existing company to become a new company, which
operates completely separate from the original company. Shareholders of the original company are
usually given an equivalent stake of ownership in the new company. The entity that emerges has its
own board of directors and, if listed on a stock exchange, have separate listings. It does not result in a
purchase or sale transaction but is just a division of an existing entity, the demerged company.
Demerger is essentially a scheme of arrangement under Section 391 to 394 of the Companies Act,
1956 requiring approval by majority of shareholders holding shares representing three-fourths value in
meeting convened for the purpose, and sanction of High Court. Demerger is also called as a corporate
divorce. Sometimes demerger is the result of merger failure. Demerger can called as opposite of merger
because in merger two companies come together whereas in demerger undertaking of a company gets
separated into separate identity.

Rationale of Demerger:
1. Improve valuation:-In case of Dabur, demerger was done to create a global presence for Dabur’s
pharmaceuticals business and provide focus to maximize penetration in global markets. The FMCG
business including personal care, health care also benefited from this move as it lead to better and
more efficient management of its resources and facilitated more accurate benchmarking with industry
which leads to improvement in valuation of both businesses.

2. Focus on core business: - Demerger helps to separate less recognized investment out of core
business. The company can then focuses on core business and exploit the benefits of core
competencies to the maximum extent and utilize surplus cash in productive way. E.g. Demerger of
cement business of Larsen & Toubro Ltd into Ultra tech cement co ltd (Aditya Birla group co.) which
enabled L&T to become a focused engineering company.

3. Attract investors:- Demerger of company can attract specific institutional investors having interest in
particular sectors. E.g. retail company Pantaloon was attracting only retail investors. By spinning off a
private equity fund Kshitij, it attracted a different set of investors.

4. Family settlement:- Split among family members can be a reason for demerger. E.g. Demerger of
Reliance Industries Ltd in which the business was divided between two brothers as in Shri Anil
Dhirubhai Ambani would lead financial services, power and telecom businesses and Shri Mukesh
Dhirubhai Ambani would continue to lead the other businesses including petrochemicals, oil and gas
exploration and production, refining and other businesses comprising the remaining undertaking.
BUYBACK
A buyback, also known as a share repurchase, is when a company buys its own outstanding shares to
reduce the number of shares available on the open market. Companies buy back shares for a number
of reasons, such as to increase the value of remaining shares available by reducing the supply or to
prevent other shareholders from taking a controlling stake.

A buyback allows companies to invest in themselves. Reducing the number of shares outstanding on
the market increases the proportion of shares owned by investors. A company may feel its shares are
undervalued and do a buyback to provide investors with a return. And because the company is bullish
on its current operations, a buyback also boosts the proportion of earnings that a share is allocated.
This will raise the stock price if the same price-to-earnings (P/E) ratio is maintained.
The share repurchase reduces the number of existing shares, making each worth a greater percentage
of the corporation. The stock’s EPS thus increases while the price-to-earnings ratio (P/E) decreases or
the stock price increases. A share repurchase demonstrates to investors that the business has sufficient
cash set aside for emergencies and a low probability of economic troubles.
Another reason for a buyback is for compensation purposes. Companies often award their employees
and management with stock rewards and stock options. To make due on rewards and options,
companies buy back shares and issue them to employees and management. This helps avoid the
dilution of existing shareholders.

Because share buybacks are carried out using a firm's retained earnings, the net economic effect to
investors would be the same as if those retained earnings were paid out as shareholder dividends.
How Companies Perform a Buyback
Buybacks are carried out in two ways:
1. Shareholders might be presented with a tender offer, where they have the option to submit, or
tender, all or a portion of their shares within a given time frame at a premium to the current
market price. This premium compensates investors for tendering their shares rather than
holding onto them.
2. Companies buy back shares on the open market over an extended period of time and may
even have an outlined share repurchase program that purchases shares at certain times or at
regular intervals.
Strategic Alliances
A strategic alliance (also see strategic partnership) is an agreement between two or more parties to
pursue a set of agreed upon objectives needed while remaining independent organizations. A strategic
alliance will usually fall short of a legal partnership entity, agency, or corporate affiliate relationship.
Typically, two companies form a strategic alliance when each possesses one or more business assets
or have expertise that will help the other by enhancing their businesses. Strategic alliances can develop
in outsourcing relationships where the parties desire to achieve long-term win-win benefits and
innovation based on mutually desired outcomes.

This form of cooperation lies between mergers and acquisitions and organic growth. Strategic alliances
occur when two or more organizations join together to pursue mutual benefits.

Partners may provide the strategic alliance with resources such as products, distribution channels,
manufacturing capability, project funding, capital equipment, knowledge, expertise, or intellectual
property. The alliance is a cooperation or collaboration which aims for a synergy where each partner
hopes that the benefits from the alliance will be greater than those from individual efforts. The alliance
often involves technology transfer (access to knowledge and expertise), economic specialization,
shared expenses and shared risk.

Some types of strategic alliances include:

 Horizontal strategic alliances, which are formed by firms that are active in the same business area.
That means that the partners in the alliance used to be competitors and work together In order to
improve their position in the market and improve market power compared to other competitors.
Research &Development collaborations of enterprises in high-tech markets are typical Horizontal
Alliances. Raue & Wieland (2015) describe the example of horizontal alliances between logistics
service providers. They argue that such companies can benefit twofold from such an alliance. On
the one hand, they can "access tangible resources which are directly exploitable". This includes
extending common transportation networks, their warehouse infrastructure and the ability to provide
more complex service packages by combining resources. On the other hand, they can "access
intangible resources, which are not directly exploitable". This includes know-how and information
and, in turn, innovativeness.

 Vertical strategic alliances, which describe the collaboration between a company and its upstream
and downstream partners in the Supply Chain, that means a partnership between a company its
suppliers and distributors. Vertical Alliances aim at intensifying and improving these relationships
and to enlarge the company's network to be able to offer lower prices. Especially suppliers get
involved in product design and distribution decisions. An example would be the close relation
between car manufacturers and their suppliers.

 Intersectional alliances are partnerships where the involved firms are neither connected by a
vertical chain, nor work in the same business area, which means that they normally would not get
in touch with each other and have totally different markets and know-how.

 Joint ventures, in which two or more companies decide to form a new company. This new company
is then a separate legal entity. The forming companies invest equity and resources in general, like
know-how. These new firms can be formed for a finite time, like for a certain project or for a lasting
long-term business relationship, while control, revenues and risks are shared according to their
capital contribution.

 Equity alliances, which are formed when one company acquires equity stake of another company
and vice versa. These shareholdings make the company stakeholders and shareholders of each
other. The acquired share of a company is a minor equity share, so that decision power remains at
the respective companies. This is also called cross-shareholding and leads to complex network
structures, especially when several companies are involved. Companies which are connected this
 way share profits and common goals, which leads to the fact that the will to competition between
these firms is reduced. In addition this makes take-overs by other companies more difficult.

 Non-equity strategic alliances, which cover a wide field of possible cooperation between
companies. This can range from close relations between customer and supplier, to outsourcing of
certain corporate tasks or licensing, to vast networks in R&D. This cooperation can either be an
informal alliance which is not contractually designated, which appears mostly among smaller
enterprises, or the alliance can be set by a contract.

Michael Porter and Mark Fuller draw a distinction among types of strategic alliances according to their
purposes:
 Technology development alliances, which are alliances with the purpose of improvement in
technology and know-how, for example consolidated Research & Development departments,
agreements about simultaneous engineering, technology commercialization agreements as well as
licensing or joint development agreements.
 Operations and logistics alliances, where partners either share the costs of implementing new
manufacturing or production facilities, or utilize already existing infrastructure in foreign countries
owned by a local company.
 Marketing, sales and service strategic alliances, in which companies take advantage of the existing
marketing and distribution infrastructure of another enterprise in a foreign market to distribute its
own products to provide easier access to these markets.
 Multiple activity alliance, which connect several of the described types of alliances. Marketing
alliances most often operate as single country alliances, international enterprises use several
alliances in each country and technology and development alliances are usually multi-country
alliances. These different types and characters can be combined in a multiple activity alliance.

Further kinds of strategic alliances include:

 Cartels: Big companies can cooperate unofficially, to control production and/or prices within a
certain market segment or business area and constrain their competition
 Franchising: a franchiser gives the right to use a brand-name and corporate concept to a
franchisee who has to pay a fixed amount of money. The franchiser keeps the control over pricing,
marketing and corporate decisions in general.
 Licensing: A company pays for the right to use another companies´ technology or production
processes.
 Industry standard groups: These are groups of normally large enterprises, that try to enforce
technical standards according to their own production processes.
 Outsourcing: Production steps that do not belong to the core competencies of a firm are likely to
be outsourced, which means that another company is paid to accomplish these tasks.
 Affiliate marketing: a web-based distribution method where one partner provides the possibility of
selling products via its sales channels in exchange of a beforehand defined provision.

Advantages

 Shared risk: The partnerships allow the involved companies to offset their market exposure.
Strategic Alliances probably work best if the companies´ portfolio complement each other, but do
not directly compete.
 Shared knowledge: Sharing skills (distribution, marketing, management), brands, market
knowledge, technical know-how and assets leads to synergistic effects, which result in pool of
resources which is more valuable than the separated single resources in the particular company.
 Opportunities for growth: Using the partner's distribution networks in combination with taking
advantage of a good brand image can help a company to grow faster than it would on its own. The
organic growth of a company might often not be sufficient enough to satisfy the strategic
requirements of a company, that means that a firm often cannot grow and extend itself fast enough
without expertise and support from partners
 Speed to market: Speed to market is an essential success factor In nowadays competitive markets
and the right partner can help to distinctly improve this.
 Complexity: As complexity increases, it is more and more difficult to manage all requirements and
challenges a company has to face, so pooling of expertise and knowledge can help to best serve
customers.
 Innovation: The parties in an alliance can jointly determine their mutual desired outcomes and craft
a collaborative contract that features incentives designed to spur investments in innovation.
 Costs: Partnerships can help to lower costs, especially in non-profit areas like research &
development.
 Access to resources: Partners in a Strategic Alliance can help each other by giving access to
resources, (personnel, finances, technology) which enable the partner to produce its products in a
higher quality or more cost efficient way.
 Access to target markets: Sometimes, collaboration with a local partner is the only way to enter
a specific market. Especially developing countries want to avoid that their resources are exploited,
which makes it hard for foreign companies to enter these markets alone.
 Economies of scale: When companies pool their resources and enable each other to access
manufacturing capabilities, economies of scale can be achieved. Cooperating with appropriate
strategies also allows smaller enterprises to work together and to compete against large
competitors.

Disadvantages

 Sharing: In a strategic alliance the partners must share resources and profits and often skills and
know-how. This can be critical if business secrets are included in this knowledge. Agreements can
protect these secrets but the partner might not be willing to stick to such an agreement.
 Creating a competitor: The partner in a strategic alliance might become a competitor one day, if
it profited enough from the alliance and grew enough to end the partnership and then is able to
operate on its own in the same market segment.
 Opportunity costs: Focusing and committing is necessary to run a Strategic Alliance successfully
but might discourage from taking other opportunities, which might be beneficial as well.
 Uneven alliances: When the decision powers are distributed unevenly, the weaker partner might
be forced to act according to the will of the more powerful partner(s), even if he or she is actually
not willing to do so.
 Foreign confiscation: If a company is engaged in a foreign country, there is the risk that the
government of this country might try to seize this local business so that the domestic company can
have all the market on its own.
 Risk of losing control over proprietary information, especially regarding complex transactions
requiring extensive coordination and intensive information sharing.
 Coordination difficulties due to informal cooperation settings and highly costly dispute resolution.
LBO, MBO, Boot Strapping
Leveraged Buyout

A leveraged buyout, commonly referred to as an LBO, is a transaction that companies use to acquire
other businesses. The buyout involves a combination of equity from the buyer, along with debt that is
secured by the target company’s assets. The deal is structured so that the target company’s assets and
cash flows are used to pay for most of the financing cost.

Advantages of an LBO

The main advantage of a leveraged buyout to the company that is buying the business is the return on
equity. Using a capital structure that has a substantial amount of debt allows them to increase returns
by leveraging the seller’s assets. There can also be some tax benefits, though these are beyond the
scope of this article.

From the seller’s perspective, there are advantages to using an LBO. First and foremost, it is one of the
many ways that an owner can sell a business. Most sellers will go through with the LBO process as
long as it allows them to exit the business at their desired price.

Leveraged buyouts also allow for the sale of companies that are in distress or going through a
turnaround. They provide a viable exit to the seller while also allowing the business to continue
operating while the problems are fixed.

Disadvantages of an LBO

From a buyer’s perspective, LBOs have some risks. The main disadvantage is that, once the deal
is completed, the target business is very leveraged. This scenario allows for little margin of error. A
problem with liquidity, such as the loss of a few key customers, could put the business in serious
distress.

From a seller’s perspective as well, executing a leveraged buyout has some disadvantages. Buyers
usually undertake an extensive due diligence process. This process can consume time and resources
which could be spent managing the business. Furthermore, their lenders may also want to do their own
due diligence, adding to the disruption. Lastly, even after all this effort, the transaction could fall through
if a key lender is not comfortable with its findings.

Structure
A leveraged buyout can be structured in various ways. However, the two most common structures are:

1. The buyer purchases the assets

In this structure, the buyer purchases only the assets of the target company. The assets are placed in
a new corporate entity designed to hold the assets and operate the business. Commonly, the selling
company is referred to as “Oldco” (“old company”), and the new company that will hold the assets is
referred to as “Newco” (“new company”).
The main advantage of this structure is that it allows the buyer to purchase the assets cleanly, limiting
potential liabilities from the old company’s past activities. Note that this description is an
oversimplification of the matter. In certain cases, a lawsuit could invalidate this protection.

2. The buyer purchases the whole company

Another way to purchase the company is to absorb it into the buyer’s existing company. This strategy
may make sense in some circumstances, though it can open the door to future liability.
How is the purchase financed?
Most small and midsize company leveraged buyouts usually require two types of financing. The buyer
needs funds to acquire the company. They also need some financing to operate and expand the
business.
The type of debt that is used to acquire the company depends on a number of variables such as
the financial health of the buyer and the seller, their reputations, and the size of the transaction. Larger
transactions that involve well-known companies commonly use a mix of bonds, senior and mezzanine
financing, and conventional bank lending.
On the other hand, smaller transactions, or those involving companies that are not well known, tend to
use alternative financing options. These options include:
1. Seller financing: Many small to midsize leveraged buyout transactions have a seller-financing
component. Basically, the seller takes a note from the buyer that is amortized over a period of time.
Seller financing is an advantage to the buyer, since sellers tend to be more willing than banks to provide
financing. This type of financing is common in smaller transactions and in management buyouts (a form
of leveraged buyout).
2. Assumption of debt: In many cases, as part of the payment, the acquiring company can assume
some – or all – of the target company’s debt.
3. Bank loans: Bank financing is also commonly used in small and midsize leveraged buyouts. Usually,
the buyer takes a loan and uses it to cover part of the purchase price. Keep in mind that banks seldom
provide 100% of the funds needed to purchase the company. They often require that the buyer use
its own capital as well. Learn about business acquisition loans.
4. Asset based funding: This funding is used to secure loans against certain assets, such as real
estate and machinery. This option is more common in transactions that include real estate or that have
machinery that is in good condition and paid off.
How are operating costs financed?
Once you own the company, you are faced with having to pay for regular operating expenses – plus
the cost of any acquisition financing. This expense can create a problem if cash flow is tight, or if the
company is going through a turnaround. Most companies will need funding to help with cash flow.
Common funding alternatives include:
1. Factoring: Factoring is a type of financing that allows the buyer to leverage the company’s accounts
receivable. Factoring improves cash flow, which, in turn, leaves the company in a better position to
make financing payments, meet payroll, or pay suppliers. Learn more about factoring.
2. Inventory financing: Inventory financing is a type of funding that lets you finance your existing, free-
and-clear inventory. Your company can usually finance up to 80% of the forced sales liquidation value,
or, in some instances, the net orderly liquidation value. Note that the liquidation value of inventory can
be substantially lower than the price you paid for it. Learn more about inventory financing.
3. Asset based lending: Asset based lending offers a combined facility that allows you to leverage
your accounts receivable, equipment, inventory, and, in some cases, property. It’s often used by larger
companies as an alternative to factoring and inventory financing. Learn more about asset-based
lending.
4. Bank financing: A great way to finance operations is through a line of credit, assuming that you
meet the bank’s lending requirements. Lines of credit provide great flexibility at a very reasonable cost.
Just remember that lines of credit have a number of covenants, including keeping certain financial ratios
at a specific level. This goal may be difficult to achieve in certain leveraged buyout scenarios. Learn
more about lines of credit.

Paying the seller vs. paying for operational costs

A major challenge of executing an LBO correctly is making sure the acquired company has enough
working capital to operate after the transaction completes. Buyers often try to use every available asset
from the seller to make the initial payment. This strategy can backfire.
It’s best to use assets such as accounts receivable and inventory to finance operations (after the sale),
rather than to finance the initial acquisition. Using these assets to finance the acquisition cost could
leave you without any resources to cover operating expenses. This approach could create a serious
cash flow problem which could derail the whole acquisition.
 Management Buyout (MBO)

A management buyout (MBO) is a transaction where a company’s management team purchases the
assets and operations of the business they manage. A management buyout (MBO) is appealing to
professional managers because of the greater potential rewards from being owners of the business
rather than employees. MBOs are favoured exit strategies for large corporations who wish to pursue
the sale of divisions that are not part of their core business, or by private businesses where the owners
wish to retire. The financing required for an MBO is often quite substantial, and is usually a combination
of debt and equity that is derived from the buyers, financiers and sometimes the seller.

BREAKING DOWN ‘Management Buyout – MBO’

In a management buyout (MBO), a management team pools resources to acquire all or part of a
business they manage. Funding usually comes from a mix of personal resources, private equity
financiers, and seller financing. An MBO is different from a management buy-in (MBI), in which an
external management team acquires a company and replaces the existing management team. It also
differs from a leveraged management buyout (LMBO), where the buyers use the company assets as
collateral to obtain debt financing. The advantage of an MBO over an LMBO is that the company’s debt
load may be lower, giving it more financial flexibility.

An MBO’s advantage over an MBI is that as the existing managers are acquiring the business, they
have a much better understanding of it and there is no learning curve involved, which would be the case
if it were being run by a new set of managers. Management buyouts are conducted by management
teams that want to get the financial reward for the future development of the company more directly
than they would do as employees only.

However, there are several drawbacks to the MBO structure as well. While the management team can
reap the rewards of ownership, they have to make the transition from being employees to owners, which
requires a change in mindset from managerial to entrepreneurial. Not all managers may be successful
in making this transition.

Also, the seller may not realize the best price for the asset sale in an MBO. If the existing management
team is a serious bidder for the assets or operations being divested, the managers have a potential
conflict of interest. That is, they could downplay or deliberately sabotage the future prospects of the
assets that are for sale to buy them at a relatively low price.
Boot Strapping
Bootstrap is a situation in which an entrepreneur starts a company with little capital. An individual is
said to be bootstrapping when he or she attempts to found and build a company from personal finances
or from the operating revenues of the new company.
Compared to using venture capital, boot strapping can be beneficial, as the entrepreneur is able to
maintain control over all decisions. On the downside, however, this form of financing may place
unnecessary financial risk on the entrepreneur. Furthermore, boot strapping may not provide enough
investment for the company to become successful at a reasonable rate.

BREAKING DOWN ‘Bootstrap’

The term boostrap itself originates from the phrase “pulling oneself up by one’s bootstraps,” and
professionals who engage in bootstrapping are known as bootstrappers. These individuals typically rely
on personal savings and the earliest instances of revenue to begin funding their own startup companies.
This contrasts with other entrepreneurial actions, which may include contacting external investors and
other business professionals to begin funding their operations. Studies show that more than 80% of
new startup operations are funded through the founders’ personal finances. The recorded median in
start-up capital is reported at approximately $10,000.

Pros & Cons of Bootstrapping

Though not as quick in turning profits, bootstrapping is a steady way to begin compiling revenue and to
support future investments by providing the business with a safety net for long-term cost management.
Bootstrapping provides professionals with the peace of mind they need to focus on building relations
with customers and other professionals.

Because the business does not have to rely on other sources of funding, initial business owners do not
have to worry about diluting ownership between investors. Entrepreneurs do not need to issue equity,
and they can focus debt on personal sources. Bootstrapping allows business owners to experiment with
their brand more, as there is not as much pressure for them to get their product right the first time. With
personal startup funds, they can experiment with focus groups until they are satisfied with the results
of their venture.

However, this also increases the degree of risk for the starter, because they may need
to micromanage their source of income as well as their business venture. When a startup is launched
with the starter’s own funds, generating revenue is essential in order to keep the business afloat. A
successful profit plan must be operational early, which can lead to growth models that weren’t part of
the original plan. Additionally, without large amounts of money from outside investors, some startups
might not be able to develop and expand as quickly as desired. For instance, a certain amount of
revenue is essential for expanding the team and for adequate marketing. Milestone could take longer
to reach.

Another downside to bootstrapping could be a lack of credibility. Not having outside investors could hurt
a company’s credibility in the beginning, because it could seem as though no investors were interested,
even if that isn’t case. Being backed by well-respected investors can give potential customers the
reassurance to buy in, which self-funding could potentially highlight a company’s lack of resources and
experience.
Restructuring of Sick Companies
Sick industrial company
According to Section 3(1)(o) of the Sick Industrial Companies (Special Provisions) Act, 1985, “sick
industrial company” means an industrial company (being a company registered for not less than five
years), which has at the end of any financial year accumulated losses equal to or exceeding its entire
net worth.

Major causes of sickness of industrial companies

1. Inability of management to keep a constant vigil over competitive forces
2. Inability of management to focus on continued viability of the industrial unit
3. Inability of management to introduce dynamic changes to suit the development taking place in
the industry
4. Lack of serious efforts to combat sickness at the initial stage and to take efforts to revive it
5. Lack of adequate and quality manpower
6. Lack of funds required for meeting replenishment and much needed modernization and up
gradation programmes
7. Technological obsolescence
8. Sweeping changes across the industry
9. Political and economic factors
10. Change in consumer behaviour
11. Lack of timely government support
12. Mismanagement by directors
13. Diversion and misapplication of funds
14. Reckless investments in other businesses
15. Disproportionate investments

Reasons for Industrial Sickness

A) Internal Causes
1) Project related - under estimation of project cost, non availability of critical information having a vital
bearing on the project, delayed project implementation and resultant cost escalation
2) Human resource related – poor quality management, excessive commitment to non appropriate
policies, poor financial/marketing/management control, management succession problems, poor inter-
personal and inter-departmental coordination
3) Performance related – faulty choice of product/technology, under utilisation of available resources,
inadequacy of working capital, diversion of funds, inadequate market forecast

B) External Causes
1) Non cooperative government policies
2) Recession/adverse economic conditions
3) Powerful competitors in market
4) Non availability and shortage of inputs
5) Regional and industry-wise phenomena
6) Technological advancement
7) Delayed financial assistance

Why Revival Should Be Undertaken

Revival should be undertaken as winding up of a company would result in:
A) Closing down of unit which provided some goods or services
B) It would throw out of employment numerous persons resulting in grave hardship
C) Loss of revenue to the state
D) Scarcity of goods and diminishing employment opportunities
Preparation and Sanction of Scheme for Revival

Where an industrial company, has become a sick industrial company, the Board of directors of such
company shall make a reference to the Tribunal and prepare a scheme of its revival and rehabilitation
and submit the same to the Tribunal along with an application containing such particulars as may be
prescribed for determination of the measures which may be adopted with respect to such company:

If the Tribunal appoints an operating agency in order to conduct an enquiry that a company has become
a sick industrial company, then the industrial agency is required to prepare and submit a schedule in
respect of referred company by providing the following measures:
A) Financial reconstruction
B) Proper management of sick industrial company by change in, or takeover of
C) The amalgamation of the sick industrial company or vice-versa

The Tribunal may finalize the scheme on the suggestion of the operating agency and thereafter formally
sanction the scheme referred to as “sanctioned scheme”.

Winding Up of Sick Industrial Company

Where the Tribunal, after making inquiry under section 424B and after consideration of all the relevant
facts and circumstances and after giving an opportunity of being heard to all concerned parties, is of
the opinion that the sick industrial company is not likely to make its net worth exceed the accumulated
losses within a reasonable time while meeting all its financial obligations and that the company as a
result thereof is not likely to become viable in future and that it is just and equitable that the company
should be wound up, it may record its findings and order winding up of the company.
For the purpose of winding up of the sick industrial company, the Tribunal may appoint any officer of
the operating agency, if the operating agency gives its consent, as the liquidator of such industrial
company and the officer so appointed shall for the purpose of the winding-up of such sick industrial
company be deemed to be, and have all the powers of, the official liquidator under this Act.
Notwithstanding anything contained in Para 2 above, the Tribunal may cause to be sold the assets of
the sick industrial company in such manner as it may deem fit and pass orders for distribution in
accordance with the provisions of section 529A, and other provisions of this Act.
Without prejudice to the other provisions contained in this Act, the winding up of a company shall, as
far as may be, conclude within one year from the date of the order made by Tribunal

Penalty for certain offences

Whoever violates the provisions of any scheme, or any order, of the Tribunal or the Appellate Tribunal
or makes a false statement or gives false evidence to the Tribunal or the Appellate Tribunal, and
attempts to tamper the records of reference or appeal filed under this Act, he shall be punishable with
simple imprisonment for a term which may extend to three years or shall be liable to fine not exceeding
ten lakh rupees.
No court shall take cognizance of any offence under except on a complaint in writing of an officer of the
Tribunal or the Appellate Tribunal or any officer of the Central Government authorized by it or any officer
of an operating agency as may be authorized in this behalf by the Tribunal or the Appellate Tribunal, as
the case may be.