Introduction
Mergers and acquisitions are a major part of the corporate finance world that deals with buying,
selling and combining different companies to form larger entities. They are one of the key
activities of corporate restructuring and are worth millions of dollars. From a legal perspective, a
merger is a combination of two or more firms in which all but one legally ceases to exist and the
combined organization continues under the original name of the surviving firm [key-7]. Mergers
and acquisitions are undertaken by companies to achieve certain strategic and financial
objectives , which the managers of the acquiring firm believe are beneficial to the company.
Not all mergers activities are successful. KPMG found that 83% of mergers were unsuccessful in
producing any business benefit as regards shareholder value. The objective of this essay is to
study M&A activities in two different industries Cars & Chemicals and highlight the factors
that distinguish the successful mergers form the unsuccessful ones.
Mergers and acquisitions are the part of the modern corporate finance world. Theoretically
mergers and acquisitions should be value creating for the shareholders of both the offeror and
offered companies. In practice situation is more complicated. In this work I have generalized my
knowledge about the mergers, described current trends in corporative business, analyzed the life
examples and made my own well-grounded conclusion. Mergers and acquisitions often don't
create value for offered and even for offer or. The main reason is the fast decision on the wave of
recent "merger mania" without detailed research and long-term business perspective estimation.
"Horizontal merger - Two companies that are in direct competition and share the same
product lines and markets.
Market-extension merger - Two companies that sell the same products in different
markets.
Product-extension merger - Two companies selling different but related products in the
same market.
increasing the scope of marketing and distribution, and other demand-side changes;
cross-selling;
synergy.
Theoretically two companies together are more then two separate companies. That is why
synergy is the main criteria of the success for every merger or acquisition is the synergy. It makes
the value of the combined companies greater than the sum of the two parts.
At the same time, near the half of mergers and acquisitions is not successful. Often the
executives of the acquiring company overestimate revenue and cost synergies. That is why they
make typical mistakes, described in the "Harvard Business Review" article by Dan Lovallo and
others: they rely upon future revenues too much, pay more for target firms than they're worth and
ignore the possibilities of future loss. (Lovallo, 2)
"Several studies have found a sharp divergence between market participants' pre-merger
expectations about the post-merger performance of merging firms, and the firms' actual
performance rates. David Ravens craft and F. M. Scherer's (1987) large-scale study of
manufacturing firms, for example, found that while the share prices of merging firms did on
average rise with the announcement of the proposed restructuring, post-merger profit rates were
unimpressive. Indeed, they find that nearly one-third of all acquisitions during the 1960s and
1970s were eventually divested. Ravens craft and Scherer conclude that mergers typically
promote managerial "empire building" rather than efficiency, and they support increased
restrictions on takeover activity. Michael Jensen, founder of the Journal of Financial Economics,
suggests changes in the tax code to favor dividends and share repurchases over direct
reinvestment, thus limiting managers' ability to channel "free cash flow" into unproductive."
Definition
For most practical purposes, mergers and acquisitions are treated as synonyms. The main
difference between these two appears to be in the method of execution. Sherman and Hart (2006)
define mergers as two companies joining together (usually through the exchange of shares) as
peers to become one.. They define acquisitions as involving typically one company -the
buyer- that purchases the assets or shares of the seller, with the form of payment being cash, the
securities of the buyer, or other assets of value to the seller. An acquisition can be friendly as
well as hostile. When the target companys management are receptive to the idea of the
acquisition and recommends shareholders approval, the acquisition is generally referred to as
friendly
In a merger, there is no buyer or seller. Merger is always seen as happening between equals and
though one firm may have contributed more than the others, or may have initiated the discussion,
the data gathering and due diligence part is always a two ways and mutual process.
Top 10 Indian Mergers and Acquisitions of 2014
Mergers and acquisitions (M & A) is the area of corporate finances, management and strategy
dealing which deals with purchasing and/or joining with other companies.
Though the two are often mentioned together, a merger is very different from an acquisition.
A merger, in a nutshell, involves two corporate entities joining forces and becoming a new
business entity, with a new name. It usually involves two companies of same size and stature
joining hands.
An acquisition, on the other hand, involves one bigger business taking over a smaller company
which may be absorbed into the parent company or run as a subsidiary. The company being taken
over is referred to as the target company in the corporate world.
Here is a list of some of the most happening mergers and acquisitions in India in the year
2014, listed in random order.
1. Flipkart- Myntra
The huge and most talked about takeover or acquisition of the year. The seven year old
Bangalore based domestic e-retailer acquired the online fashion portal for an undisclosed
amount in May 2014. Industry analysts and insiders believe it was a $300 million or Rs 2,000
crore deal.
Flipkart co-founder Sachin Bansal insisted that this was a completely different acquisition
story as it was not driven by distress, alluding to a plethora of small e-commerce players
11. BMW
The Global Car Industry has many major collaborative and ownership links. Within these links
there are many factors that affects the market share of a car company, which include trying to
enter into the International Market, the role of technology in the industry; e.g. how technology
has changed over the years and what the effects of that change have resulted in; the impact of
social and legislative requirements that have to be followed and how the buyers of cars will
change and how it has varied over the years. In the case of BMW-Rover, given the increasing
dynamic of car industry.
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Causes of Failures
Causes of Success
No post-acquisition
integration plans
No prior acquisition
experience
The Acquisition
BMW had a number of motives behind the acquisition of the Rover company. The primary
among them was to grow. BMW wanted to increase their market spread while achieving a
greater volume spread [key-16]. They saw Rover, which came up for sale at the right time as the
perfect deal at that time. Rover had acquired significant cost advantages due to its association
with Japanese production methods. They also had the front-wheel driving and the 4 x 4
technology that BMW wanted to acquire. The price BMW paid was deemed to be a bargain as
the cost to develop the technology and the production methods from scratch were significantly
more.
Another major factor in the acquisition was the low level of cost in the British manufacturing
sector compared to the costs in Germany [key-15]. These costs, which were 60% lesser in
Britain, had the ability to substantially reduce BMW costs. Rover also has in its repository
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Analysis
Behind the acquisition of Rover by BMW, there was certainly a strategic motive and proper
plans of gaining synergies. However, the acquisition was unsuccessful because they didnt plan
the entire process well. Palmer(2003) quotes both Kloss and Boorn in describing how the
strategic plan got stuck in the upper echelons of the hierarchy due to lack of communication and
coordination. BMWs integration plan suggested a three phase process in which the initial two
years were wasted in just providing financial help without any integration of the two
companies. It was 3-4 years before any concrete integration plans began and only in 1999 were
the two companies fully integrated [key-16].
Another important problem for this deal was the linguistic differences between the two
companies. Although BMWs top management could do business in English, the engineers and
the middle managers were unable to do so. This created a lack of communication problem which
eventually delayed the integration process. There were also substantial differences between the
business culture of BMW and Rover. As Batcheler(2001) points out, the German direct approach
was in contrast to the more relaxed approach followed by the British.
Sirower (1997) suggested that it is incorrect to judge the soundness of an acquisition based on
what it would have cost to develop that business from scratch. For this case, it seems to be this
same problem as BMWs decision was partly based on the substantial cost difference between
developing the technologies in house and buying it from Rover. BMW didnt achieve the
synergies and ended up spending 2bn and sold the company off to Phoenix Consortium for a
token sum of 10.
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The Acquisitions
After AkzoNobel sold off its pharmaceutical business Organon in 2007, it became a much more
focused in the coatings sector, which was now considered to be the core business of the group
[key-12]. The chief executive of the group, Hans Wijers identified ICI as the next attractive
target because of the many strategic and financial benefits[key-1]. One of the most important
benefit was the possible creation of one of the largest coatings and specialty chemical company
in the World. Akzo was the global leader in industrial coatings and ICI was very strong in the
decorative paint market. Many solvents and chemicals are common to both the companies and
this gives tremendous synergy opportunities for the combined company [key-20]. The enlarged
Akzo Nobel group could also benefit from a diversified and broad geographic presence and
highly attractive platforms for growth in emerging markets[key-1].
At the time of the deal, the strategic synergies estimated by Akzo was 280mn. Financially, the
deal was expected to enhance the earnings to the shareholders, generate an internal rate of return
above Akzo Nobels WACC (8%) and create positive EVA in year three following the
transaction.
Akzo paid 670p for each ICI share and the deal was finalised for 8.0bn on January 2, 2008.
Akzo de-listed ICI from the London Stock Exchange on the January 3rd and sold off its adhesive
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(Schuler and Tarique, 2007). However, two streams can be found in the literature suggesting two
different views about this phenomenon of globalization. One view suggests that it is being
evolved to accomplish the power, politics, and wealth accumulation objectives and to do so, it
has been instilled through carefully planned strategies, plans and tactics (Chomsky, 1999;
Schuler and Tarique, 2007). Other view conveys a contrasting philosophy asserting that it is a
social phenomenon which is benefiting the people around the globe by reducing monopolies of
few (Castells,1996).
Though these two views convey two opposite messages stating it political fixture designed for
the purpose of gaining control of power, authority and wealth or a phenomenon which is
operating to benefiting the people around the globe has instigated challenges for the business
organization, somehow. Whether these are threats or opportunities, these are challenging
(Mourdoukoutas, 2006). This phenomenon has changed the face of the world economy, and
economic conditions of most of the countries are forcing the organization to change their
business strategies. The organizations are using various forms of collaborations and alliances
such as mergers, acquisitions and joint ventures inside and across the national boundaries in
order to survive through the threats or to grow on the new challenging opportunities provided by
globalization. Kogut and Singh (1988) state that collaborations such as joint ventures, mergers
and acquisitions are the source of sharing and spreading and sharing risks over partners firms.
According to Contractor and Lorange (1988) such collaborations "allow developing and
harnessing knowledge of the host organization". Choi and Hong (2002) suggest that
"collaborations can be for the purpose of knowledge or/and material flow".
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