The Dynamics of

SRCC

M E R G E R S

A N D

ACQUISITIONS
VOLUME 2

C ONTRIB U T O R S
Aaradhya Daga Divyam Gupta Ishnaman Kaur Mahir Dhariwal
Rachit Jain Vatsal Sharma Vishal Agarwal
 STAGES OF MERGERS AND ACQUISITION
Business leader always look for opportunities to expand and thus look for new entities to tie up with them or take
them over. For any successful M&A, business leaders must follow the following steps.

Identifying Growth Opportunities and scope for business expansion

The first step is to look for opportunities and the direction in which expansion can take place. For this, firms
must acquire relevant data (like demographics, trends of preferences of customers, product or service line,
demand projections and financials) and analyse them extensively. Internal analysis (like SWOT) as well as
environmental scanning (like BCG matrix) needs to be done to identify market potential and market share.

Identifying target firm for merger or acquisition

This step involves looking for candidates for merger and acquisition. All suitable candidates should be taken
into consideration. While some firms might be similar to our firm in terms of target group or product and
service line, our analysis should not be restricted to just these firms.

Evaluating the feasibility and the strength of the target firm

After deciding the various candidates for M&A, the next step involves analysis of the possible synergies and
risk involved. For this, financials should be strictly taken into account and carefully analysed. The relative
cost and revenue should be compared and the firm to tie up with should be decided.

Conducting Valuation
The costs involved, demand projection, anticipated revenue and profit, and many other factors
determine the valuation of the deal. Corporate leaders must find alternatives for structuring M&A deal
and evaluate them to select the best one. There are various methods of evaluating M&A deal. A few have
been discussed under the section Valuation Methods for Mergers and Acquisitions deals.
 Accretion or Dilution Analysis
Accretion or dilution analysis is a step to determine the effect of merger or acquisition on the Earning Per
Share (EPS) of transferee company. Accretion is when the EPS of the combined entity is higher than
acquirer’s EPS before the deal. Similarly, dilution is when the pro-forma (post deal) EPS is lower than
acquirer’s EPS. It determines whether the EPS will increase or decrease and whether it is affordable and
feasible for the company to execute the deal.

Making a decision as to go for the deal

The most crucial step in the entire process is the decision whether to enter into a deal with the target firm
or not. All the analysis done should be scrutinized before coming to a conclusion. SWOT and PESTLE analysis
of the target firm and the combined entity should be deployed to decide the strengths and opportunities
and overcome weaknesses and minimise threats. All possible synergies and drawbacks of the proposed new
entity should be very carefully analysed to arrive at any decision.

Performing due diligence, negotiating agreement and executing the transaction

The information pertaining to the financial, legal and strategic position of the target firm should be
verified to understand the issues, opportunities and risks involved in the transaction. Therefore, due
diligence review must be conducted to ensure full disclosure of the information. Following this, an
agreement shall be negotiated between the business leaders to ascertain the mutual terms, such that the
deal is in the best interests of both the parties.

Implementing transaction and monitoring the performance

This step involves bringing an operational change in the functioning of the management, change in the
workforce and tackling the issues of the employees in relation to the amalgamation and fulfilling the legal
and environmental requirements. Once the amalgamation is executed, the rest is to ensure smooth
functioning of the combined entities.
TYPES OF MERGERS AND ACQUISITION

Horizontal Merger/Acquisition Vertical Merger/Acquisition

A Horizontal Merger refers to a situation in In Vertical Mergers, two organizations in a
which a company takes over or merges
another company offering similar product similar industry unite, however, they are at
lines to the consumers. As the name suggests, various points on the supply chain. They
both the companies are at the same stage of become all the more vertically incorporated by
production. In simple terms, two organizations improving coordination, solidifying staff and
with comparative items/administrations come
together. It leads to economies of scale due to decreasing the time to advertise for items. It
increased production, thereby reducing costs also helps to avoid disruption of supply.
and increasing profitability.
For example, In 2002 Hewlett Packard took An attire retailer who purchases a garment
over Compaq Computers for $24.2 billion. The assembling organization would be a case of a
objective was to make the dominant PC vertical merger.
provider by combining the PC products of the
two organizations.

Conglomerate Concentric
Merger/Acquisition Merger/Acquisition
Two organizations in various businesses unite This type of merger takes place between
or one assumes control over the other to two organizations which share clients in a
widen their scope of administrations and particular industry but don’t offer the
items. This methodology can help decrease same services. This is generally undertaken
costs by consolidating back-office exercises as to encourage customers, as it is
well as reduce risk by working in the scope of comparatively easy to sell the products
ventures. together. Selling one of the items will
There are two types of conglomerate mergers: likewise support the clearance of the other,
pure and mixed. Pure conglomerate mergers subsequently increasing the income of the
involve firms with nothing in common, while organisation and hence the profitability.
mixed conglomerate mergers involve firms that A model would be Sony who manufactures
are looking for product extensions or market DVD players but who also bought the
extensions. Columbia Pictures film studio in 1989.
For example, merger between L&T and Voltas Sony was now able to produce movies to
Ltd. Larsen & Turbo (L&T) is India's largest have the option to be played on their DVD
engineering company with expertise in wide players.
area like infrastructure, oil and gas, power and
process. And Volta a Tata group company, is a
major player in the electro-mechanical
Engineering.
 VALUATION METHODS
For the most part, when valuing a company, there purchase the company's deals, and for the most
are two unique ways to approach the valuation part, the lower the EV to Sales proportion is, the
of the company: the first is the liquidation more alluring or underestimated the company is
estimation of the company, and the second is believed to be by possible procuring parties. A
the estimation of the company as a going company can basically be purchased by its own
concern. Frequently in a mergers and money if the EV/Sales measure is negative –
acquisitions transaction, the target company will implying that the money in the company is more
be valued as a going concern, except if the target prominent than the market capitalization and
company is in trouble and the procuring company obligation structure.
is obtaining it to strip it down and sell the assets,
or to expel it from the market as a contender. Book Value
Valuation dependent on the book value
Other valuation considerations include: technique works best for those companies that
(1) What stage the company is at in its life cycle; don't have intangible resources and significant
(2) What it would cost for the acquirer to build a resources, for example, intellectual property,
similar business;
trade secrets, brand value, and the competency
(3) Observable growth history and healthy future
prospects;
of the managers and officers are ignored in the
(4) Percentage of recurring revenue; valuation. The book value will likewise rely upon
(5) Churn/retention rate; the various bookkeeping rehearses the company
(6) Gross margin; uses. Liabilities are frequently in question when
(7) Customer acquisition costs; arranging a valuation in a mergers and
(8) Addressable market size; acquisitions transaction when using book value.
(9) Competition.
Liquidation Value
The following will include some of the ways to Liquidation value is the estimation of the sale of
approach valuations in the mergers and assets at one point in time employing the use of
acquisitions set, as well as some of their strengths an appraiser. Normally this strategy will be used
and weaknesses. for firms in money related pain or those that
have a questionable future. Regularly, it is hard
Enterprise Value-to-Sales Ratio to get an agreement between the parties as
This proportion is a valuation measure liquidation values tend to change with the
comparing a company's Enterprise Value to the appraiser, and such factors should be mulled
sales of the company. This over, for example, the physical state of the
proportion is utilized by assets, or at times, the age of the assets.
speculators in a mergers and Moreover, a few appraisers may overlook the
acquisitions transaction to estimation of certain intangible assets.
get a base gauge of the
value it would cost to Discounted- Cash-Flow Method
The rule behind this kind of valuation is that a minus the value of any claims on the company’s
business' worth depends on the company's cash flows by debt holders, preferred
capacity to produce and develop its income for shareholders, non-controlling interest
the suppliers of the capital. It gives an shareholders, and any contingent claimants.
estimation of the organization's absolute worth,
based on its Free Cash Flows to the firm limited Industry Rule of Thumb
at the Weighted Average Cost of Capital. The FCFs In some sectors, the buying and selling of
of the firm are the cash flows from operations companies is common, therefore leading to the
accessible to every single capital supplier, net of development of industry-wide rules of thumb.
the necessary capital investments important to Taking account of industry relevant factors
keep up the organization as a going concern. The (such as turnover, customer numbers, number of
WACC mirrors the hurdle rate that suppliers of outlets/sales channels) a buyer will work out what
capital require based on the the company is worth to them. While it would be
hazard they face from unusual for a company to be valued purely by
putting resources into the reference to a rule of thumb, such analysis can be
organization. The equity useful to support/disprove any analysis where a
value per share that is, the company has been valued under another
value accruing to the methodology.
common shareholders is
given by the operating value of the
company

Art of Negotiation
The deal of a Mergers and Acquisition doesn’t lie solely on the quantitative valuations churned out,
but also in the art of negotiations. As an art, negotiation involves the
judgement and interpretation of data; evaluation of transaction
dynamics; and selling the story and crafting the deal at the
lowest/highest possible price from the point of a buyer or seller
respectively. Negotiation theory has evolved over the years.
There are four basic tenets:
(1) separate the basic impulse of the person from the problem,
(2) focus on the other side’s interest rather than their position
(3) work cooperatively to find win-win options, and
(4) establish agreed standards to evaluate these possible
solutions.
Additionally, it should be ensured that negotiation is carried forward step-by-step, so all parties have
a proper chance to put their point forth. Moreover, time should be managed well to avoid fatigue,
and negative emotional situations.
 Strategic vs Financial Buyers
M&A deals are made for various reasons and the motive underlying a particular transaction divides the
buyers into two broad categories- Strategic Buyers and Financial Buyers.

Strategic buyers are usually a competitor in the same industry or an adjacent or close one. This large
company buys smaller companies to acquire ‘strategic synergies’ so that the whole becomes greater
than the sum of the parts. Example- Facebook acquiring Instagram and WhatsApp

Financial buyers may be a private equity firm, a venture capital firm or any institutional investor who
makes a deal for the returns they will reap from such purchase. Example- Berkshire Hathaway
acquires various companies to sell them in future.

Key differences

Which is a better deal?

Be convinced or not, the answer to the question “which is right?” is not always as clear as it might seem.
Whether a strategic buyer or a financial buyer is healthy for a particular company depends primarily on the
seller’s goals in selling the business.