Mergers & Acquisitions

Corporate Restructuring

Business activities that expand or contract a firm’s operations

or substantially modify its financial structure or bring about a
significant change in its organizational structure and internal
functioning.

It may include activities such as

Mergers ( also called as Amalgamations in India )

Acquisitions/Takeovers
Purchase of business units
Demergers ( spin off/split up )
Leveraged Buyout
MERGER

A merger refers to a combination of two or more companies into

a single company. This combination may be either through
absorption or consolidation.

Absorption : one company absorbs another company.

• Ashok Leyland Ltd absorbed Ductron Castings Ltd

Consolidation : Two or more companies combine to form

a new company.

• Hindustan Computers Ltd, Hindustan Instruments Ltd, Indian

Software Co Ltd, Indian Reprographics Ltd combined to HCL Ltd
Examples of Mergers :

Merger of Air India Limited and Indian Airlines Limited resulted as

a new Company viz National Aviation Company of India Limited
(NACIL).

Merger of Reliance Petroleum Limited with Reliance Industries Limited.

America Online Inc and Time Warner Inc to form a new company as
AOL Time Warner.
Acquisitions or Takeovers

A takeover generally involves the acquisition of certain block of

equity capital of a company, which enables the acquirer to exercise
control over the affairs of the company.

In theory, the acquirer must buy more than 50 percent of the paid up
equity of the acquired company to enjoy complete control.

According to Charles A. Scharf, the element of willingness on the part

of the buyer and seller distinguishes an acquisition from a takeover.

If there exist willingness of the company being acquired, it is known

as acquisition,.

If the willingness is absent, it is known as takeover.

Examples For Acquisitions :

Tech Mahindra acquired Satyam Computer Services Ltd.

India-based Hindalco Industries Limited (Hindalco), a subsidiary of the AV

(Aditya Vikram) Birla Group of Companies (Aditya Birla Group), acquired the
US-Canadian aluminum giant Novelis Inc.

Tata Steel completed acquisition of Corus Group plc. (steel producers)

Ranbaxy Laboratories Ltd has acquired Romania’s largest independent

generics drug company, Terapia SA.
The acquiring company ( ABC Co ) acquires the assets & liabilities
of acquired/merging company/target company ( XYZ Co ).

So the shareholders of XYZ Co. receive shares of the ABC Co. in

exchange for their shares in the XYZ Co.

A M&A deal can be executed by means of a cash transaction,

stock-for-stock transaction or a combination of both
Motives for Mergers
Synergy

Principal economical rationale of a merger is that “the value of

the combined entity is expected to be greater than the sum of
the independent values of merging entities”.

If firms A and B merge, the value of the combined entity V(AB), is

expected to be greater than (VA+VB) , the sum of independent values
of A and B.

Synergy is used to refer to the idea that the combination of two

companies would allow for more cost efficient and profitable
operation. For example, if one company has an outstanding
product but no way in which to distribute, while another
company has a terrible product but great distribution
techniques, then potentially the two companies could create
synergy with a merger.
2+2=5!
By merging, the companies hope to benefit from the following:
Advantages of Mergers and Acquisitions
Economies of Scale :

When two or more companies combine, economies of scale

arises when increase in the volume of production leads to a
reduction in the cost of production per unit.

This refers to the fact that the combined company can often
reduce duplicate departments or operations, lowering the costs
of the company relative to theoretically the same revenue
stream, thus increasing profit.
BENEFITS :

Acquiring new technology:

By buying a smaller company with unique technologies, a large

company can maintain or develop a competitive edge.

Improved market reach and industry visibility:

Greater market share and Companies buy companies to reach
new markets and grow revenues and earnings. A merge may
expand two companies' marketing and distribution, giving them
new sales opportunities.
Other Advantages :

Staff reductions

Tax Benefits

Extending product/service portfolio

Reduces competition if a rival is taken over.

Strategic Benefits

Lower Financing Costs

The disadvantages of mergers and acquisitions are:

Diseconomies of scale if business becomes too large, which

leads to higher unit costs.

Clashes of culture between different types of businesses can

occur, reducing the effectiveness of the integration.

May need to make some workers redundant, especially at

management levels – this may have an effect on motivation.

May be a conflict of objectives between different businesses,

meaning decisions are more difficult to make and causing
disruption in the running of the business.
TYPES OF MERGER

Horizontal Merger : A merger of two companies who are direct

competitors of one another. They serve the same market and sell the
same product.

EX : Tata Industrial Finance Ltd. With Tata Finance Ltd

Vertical Merger : A merger of firms engaged at different stages of

production in an industry. Like merger between a company and a
customer or between a company and a supplier.

Backward Integration where company merges its suppliers.

Forward Integration where it merges its customers.

EX : Merge of Reliance Petrochemicals Ltd. With Reliance Industries Ltd

Product Extension Merger : Merger between two
companies selling different products of related category in
the same market.

Market Extension Merger : Merger between two companies

selling same products in different markets.

Conglomerate Merger : Merger of firms engaged in

unrelated lines of business.

Purchase Mergers
One company purchases another.

Consolidation Merger
With this merger, both companies are combined and formed under
a new entity.
Reverse Merger :

A merger of private company with an existing public shell company.

A reverse merger is a method by which a private company can become a

publicly traded company without the expense and the time requirements
Involved in an IPO.

Private company obtains the majority of the shell’s stock ( usually 90% ).

The private company normally will change the name of the public
corporation. ( often to its own name ).

Public company will be the legal acquirer and private company will be
accounting acquirer
Example of Reverse Merger :

Reverse Merger transaction between BTHC VIII, Inc., a public

shell corporation controlled by Halter Financial Group , and THT
Heat Transfer Technology Co., Ltd., a PRC company.

Following the close of the reverse merger transaction, BTHC VIII

will change its name to THT Heat Transfer Technology Co., Ltd.
Types of Acquisition

Hostile Takeover: A hostile takeover is a type of corporate takeover

which is carried out against the wishes of the board of the target
company. ( Also called as Open Market Purchase )

Friendly Takeover: Target company’s Management and board of

directors agree to an Acquisition by another company.
( Also called as Preferential Allotment )
Keys to a Profitable Merger

Comparative Ratios
Price-Earnings Ratio (P/E Ratio) –
P/E ratio is that it is a prediction or more likely an expectation
of the company's performance in the future.

Looking at the P/E for all the stocks within the same industry
group will give the acquiring company good guidance for what
the target's P/E multiple should be.

P/E Ratio = Market Value per Share

Earnings per Share
Enterprise-Value-to-Sales Ratio (EV/Sales) - With this ratio, the
acquiring company makes an offer as a multiple of the revenues,
again, while being aware of the price-to-sales ratio of other
companies in the industry.
A ratio for valuing a stock relative to its own past performance, other
companies or the market itself. Price to sales is calculated by dividing
a stock's current price by its revenue per share for the trailing 12
months:

PSR = Share Price

Revenue per share

Replacement cost

In a few cases, acquisitions are based on the cost of replacing the

target company.
Discounted Cash Flow is the most accurate and reliable tool
used to evaluate whether a merger or acquisition with be a
profitable one.
The purpose of DCF-Valuation is to determine the value of
a company in terms of its future cash flows.
If the value arrived at through DCF analysis is higher than
the current cost of the investment, the opportunity may be
a good one.  

Calculated as:
Mergers and Acquisitions: Doing The Deal

Preliminary Assessment or Business Valuation

In this first step of Merger and Acquisition Process, the market value
of the target company is assessed.

Start with an Offer

When the CEO and top managers of a company decide that they
want to do a merger or acquisition, they start with a tender offer.
Working with financial advisors and investment bankers, the acquiring
company will arrive at an overall price that it's willing to pay for its
target in cash, shares or both. The tender offer is then frequently
advertised in the business press, stating the offer price and the
deadline by which the shareholders in the target company must
accept (or reject) it.
The Target's Response

Once the tender offer has been made, the target company
can do one of several things.
Accept the Terms of the Offer
- If the target firm's top managers and shareholders are
happy with the terms of the transaction, they will go ahead
with the deal.

Attempt to Negotiate
The tender offer price may not be high enough for the target
company's shareholders to accept, or the specific terms of
the deal may not be attractive

Using a Poison Pill

A strategy used by corporations to discourage a hostile
takeover by another company
Closure of the deal of merger or acquisition:

Finally, once the target company agrees to the tender offer and
regulatory requirements are met, the merger deal will be
executed by means of some transaction. In a merger in which
one company buys another, the acquiring company will pay for
the target company's shares with cash, stock or both.
Why mergers fail ?

• Lack of management foresight.

• Cultural misfit.

• Loss of key employees

• Inability to overcome practical challenges.

• Acquiring company's management team inexperienced at M&A.

• Ineffective corporate governance.

Capital IQ provides the latest information about
Mergers & Acquisition deals and overall market activity
which helps the invsetors.

Updates on Conference calls regarding special events

like mergers & acquisitions to shareholders, investors
and analysts.

Special \ Merger & Acquisitions Calls (SMC) is the tag used.

CONCLUSION :

A merger may be effective or successful to deliver the

immediate objective but may be failed to deliver all the
theoretically defined benefits.

As the chances of failure in M & A can be high, it should be

planned carefully.

A merger will be successful when its purpose is

accomplished.