NAME- ESHU KHULLAR

ROLL NO -1411001806
SUBJECT CODE
SUBJECT NAME

MF0011
MERGERS ANDACQUISITIONS

Q1. Elaborate on the basic steps in organizing a merger

and explain on the five stage model of mergers
andacquisitions.
Answer: The evaluation and negotiation of a merger are a major business
decision. Your attorney, auditor, and banker are important sources of
expertise and assistance. Other outside resources include business
consultants, regional cooperatives, and university experts. The purpose of
a merger is of an economic/industrial nature. The merger of two or more
organizations allows for the generation of cost synergies (administration,
production, and listing costs), as well as greater geographical coverage (with
a positive impact on revenues and the possibility of further growth)
Steps in a Merger
There are three major steps in a merger transaction: planning, resolution and
implementation.
1. Planning, which is the most complex part of the merger process, entails
the analysis, the action plan, and the negotiations between the parties
involved. The planning stage may last any length of time, but once it is
complete, the merger process is well on the way.
More in detail, the planning stage also includes: signing of the letter of
intent which starts off the negotiations; the appointing of advisors who play
the role of consultants, examining the strengths, weaknesses, opportunities,
and threats the merger;detailingthe timetable (deadline), conditions (share
exchange ratio), and type of transaction (merger by integration or through
the formation of a new company);
Expert report on the consistency of the share exchange ratio, for all of the
companies involved.
2. The resolution is simply management's approval first, then by the
shareholders involved in the merger plan.
The resolution stage also includes:
the Board of Directors calling an extraordinary shareholders meeting whose
item on the agenda is the merger proposal;
the extraordinary shareholders meeting being called to pass a resolution on
the item on the agenda; any opposition to the merger by creditors and
bondholders within 60 days of the resolution;

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Green light from the Italian Antitrust Authority that evaluates the impact of
the merger and imposes any obligations as a prerequisite for approving
the merger.
3. Implementation is the final stage of the merger process, including
enrolment of the merger deed in the Company Register.
Normally medium-sized/big mergers require one year from the start-up of
negotiations to the closing of the transaction. This is because, in addition to
the time needed technically, there are problems relating to the share
exchange ratio between the merging companies which is rarely accepted by
the parties without drawn-out negotiations.
Five Stage model of merger & Acquisition
Step One: A New Entity ;-This step requires everyone to understand that
a merger will transform two or more organizations into a new, single entity.
This new entity will have an organizational culture that is different from
either companywhether it is a joining of equals or an acquiring company
and an acquired company. It will be a unique culture shaped from the
previously independent organizations. Hewlett-Packards (HP) acquisition of
Compaq illustrates this point. The name Hewlett- Packard is still on signage
outside the headquarters, the letterhead still has the familiar logo, and
employees wear polo shirts sporting the recognizable HP brand. But HP has
changed since the Compaq acquisition three years ago into a merger of the
two entirely different entities. Executives from engineering, accounting,
manufacturing, purchasing, human resources, research and development
from each company now work side-by-side. Respective business approaches,
the way they work with people and how they solve problems are rubbing off
on one another, thereby changing each other and creating a new entity.
Most mergers simply do not take advantage of this new entity with a new
culture as an opportunity to move forward and create a productive,
effective organization for long term success.
Step Two: A New Vision:-A new entity needs a new vision, or a statement
of what the new organization intends to become. It is a broad, forwardthinking image that the company must have before it sets out to reach its
goals. It is a concept of what it intends to deliver over time to customers,
shareholders and employees. Within this new vision, each department will
not only have its own role, but also must determine how it fits into this new
vision and how it will work with other departments to fulfill this vision.
Sometimes this results in a war room or us vs. them attitudethe
acquiring company vs. the acquired company or the big company vs. the
little company. Leadership must work hard to ensure this situation does not
materialize.
Step Three: Determine that Vision:-The vision of the new entity might be
to become the best newspaper in the United States, the fastest package
delivery service or the most reliable electricity provider. These seem like

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vague statements, but they are a good way to start. Now the company must
establish a culture that can deliver that vision. Discovering the optimal
culture can be accomplished by having employees from the acquired
company complete a questionnaire or survey. One such survey, the
Organizational Culture Inventory (OCI) Ideal, creates a vision of the culture
that the new organization should strive toward to maximize long-term
effectiveness.
Step Four: Leadership Characteristics
Appropriate leadership that embraces the vision must be in place at all levels
and working toward creating the ideal culture. These leaders need to
communicate ideals to the organization before, during and after the merger.
They must be specific in describing the direction they want to take the new
organization. This must continue into the merger as well, or the organization
will slip into a defensive cultural style. Properly selected leadership, from line
managers to executive management, will set in motion the structures,
systems, technology and training to achieve the vision and ideal culture.
However, with serious personal and team training, these managers can be
revitalized. Indeed, some may choose to separate from the company
because of the changes. But this is part of leaderships challenge in forming
the new entity and leading it toward its new vision.
Step Five: Measure Success;-Measuring success helps employees feel
confident that leadership is on board to make the new company everything it
can be. Using a survey to measure the climate in an organization will reveal
if its culture is producing the desired outcomes for employees, management
and the organization. Surveys can bring to light the organizations strong
points, as well as its developmental needs. These strong points promote a
constructive culture, while the developmental needs hinder a constructive
culture by promoting either a passive/defensive or aggressive/defensive
culture.

Q2. Synergy is the additional value that is generated by

the combination of two or more than two firms creating
opportunities. Explain the role of industry life cycle and
pre requisites for creation of synergy.
Answer: Life cycle models are not just a phenomenon of the life sciences.
Industries experience a similar cycle of life. Just as a person is born, grows,
matures, and eventually experiences decline and ultimately death, so too do
industries and product lines. The stages are the same for all industries, yet
every industry will experience these stages differently, they will last longer
for some and pass quickly for others. Even within the same industry, various
firms may be at different life cycle stages. A firms strategic plan is likely to
be greatly influenced by the stage in the life cycle at which the firm finds
itself. Some companies or even industries find new uses for declining
products, thus extending their life cycle.

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The growth of an industry's sales over time is used to chart the life cycle. The
distinct stages of an industry life cycle are: introduction, growth, maturity,
and decline. Sales typically begin slowly at the introduction phase, then take
off rapidly during the growth phase. After leveling out at maturity, sales then
begin a gradual decline. In contrast, profits generally continue to increase
throughout the life cycle, as companies in an industry take advantage of
expertise and economies of scale and scope to reduce unit costs over time.
Role of industry life Cycle
In the introduction stage of the life cycle, an industry is in its infancy. Perhaps
a new, unique product offering has been developed and patented, thus
beginning a new industry. Some analysts even add an embryonic stage
before introduction. At the introduction stage, the firm may be alone in the
industry. It may be a small entrepreneurial company or a proven company
which used research and development funds and expertise to develop
something new. Marketing refers to new product offerings in a new industry
as "question marks" because the success of the product and the life of the
industry is unproven and unknown.
Growth
Like the introduction stage, the growth stage also requires a significant
amount of capital. The goal of marketing efforts at this stage is to
differentiate a firm's offerings from other competitors within the industry.
Thus the growth stage requires funds to launch a newly focused marketing
campaign as well as funds for continued investment in property, plant, and
equipment to facilitate the growth required by the market demands.
However, the industry is experiencing more product standardization at this
stage, which may encourage economies of scale and facilitate development
of a line-flow layout for production efficiency.
Maturity
As the industry approaches maturity, the industry life cycle curve becomes
noticeably flatter, indicating slowing growth. Some experts have labeled an
additional stage, called expansion, between growth and maturity. While sales
are expanding and earnings are growing from these "cash cow" products, the
rate has slowed from the growth stage. In fact, the rate of sales expansion is
typically equal to the growth rate of the economy.
Decline
Declines are almost inevitable in an industry. If product innovation has not
kept pace with other competing products and/or service, or if new
innovations or technological changes have caused the industry to become
obsolete, sales suffer and the life cycle experiences a decline. In this phase,
sales are decreasing at an accelerating rate. This is often accompanied by
another, larger shake-out in the industry as competitors who did not leave
during the maturity stage now exit the industry. Yet some firms will remain to
compete in the smaller market. Mergers and consolidations will also be the
norm as firms try other strategies to continue to be competitive or grow
through acquisition and/or diversification.

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Synergy pre-requisite :Synergy is a buzzword that managers and HR pros
like to bandy around; sometimes they get it and sometimes they really dont
have a clue. In short, synergy happens in the workplace when two or more
people working together produce a better outcome than if they did it alone.
It is not a touchy-feely concept, but instead is a practical approach to getting
results and its not all that difficult to create. Mergers and acquisitions are
made with the goal of improving the companys financial performance for the
shareholders. Two businesses can merge to form one company that is
capable of producing more revenue than either could have been able to
independently. Synergy creation means that there should be good
synchronization between sales, marketing and customer services of a
company. Or in other words, it means the three units i.e. sales, marketing
and customer service should work together.
General Issues in any company which hampers profit making:
Due to these issues there is a need for creating synergy between the three.
But most often sales, marketing and customer service fails to work together
because sales people think that marketing people doesnt understand their
needs and marketing people think that sales people focus on selling the
product and dont see the bigger picture. Customer service people just-do
their job.
ADVANTAGES of Synergy creations:

Increases the efficiency and decreases the cost of sales

Maximizes chances of converting a potential customer into a customer
Builds morale of salespersons
Increases customer loyalty and retention
Improves customer experience
Increases profit for the organization

Q3. Corporate restructuring is a broad based business

initiative that results in major change of size, ownership,
control
and/or
management.
Write
down
the
characteristics of corporate restructuring and explain the
types of corporate restructuring.
Answer: Corporate restructuring is one of the most complex and
fundamental phenomena that management confronts. Each company has
two opposite strategies from which to choose: to diversify or to refocus on its
core business. While diversifying represents the expansion of corporate
activities, refocus characterizes a concentration on its core business. From
this perspective, corporate restructuring is reduction in diversification.
Corporate restructuring is an episodic exercise, not related to investments in

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new plant and machinery which involve a significant change in one or more
of the following
Pattern of ownership and control
Composition of liability
Asset mix of the firm.
It is a comprehensive process by which a co. can consolidate its business
operations and strengthen its position for achieving the desired objectives:
(a)Synergetic
(b)Competitive
(c)Successful
It involves significant re-orientation, re-organization or realignment of assets
and liabilities of the organization through conscious management action to
improve future cash flow stream and to make more profitable and efficient.
MEANING & NEED FOR CORPORATE RESTRUCTURING
Corporate restructuring is the process of redesigning one or more aspects of
a company. The process of reorganizing a company may be implemented due
to a number of different factors, such as positioning the company to be more
competitive, survive a currently adverse economic climate, or poise the
corporation to move in an entirely new direction. Here are some examples of
why corporate restructuring may take place and what it can mean for the
company. Restructuring a corporate entity is often a necessity when the
company has grown to the point that the original structure can no longer
efficiently manage the output and general interests of the company. For
example, a corporate restructuring may call for spinning off some
departments into subsidiaries as a means of creating a more effective
management model as well as taking advantage of tax breaks that would
allow the corporation to divert more revenue to the production process. In
this scenario, there structuring is seen as a positive sign of growth of the
company and is often welcome by those who wish to see the corporation
gain a larger market share. Corporate restructuring may also take place as a
result of the acquisition of the company by new owners.

1.
2.
3.
4.
5
6
7

Purpose of Corporate Restructuring To enhance the shareholder value, the company should continuously
evaluate its:
Portfolio of businesses,
2.Capital mix,
Ownership &
Asset arrangements to find opportunities to increase the shareholders
value.
To focus on asset utilization and profitable investment opportunities.
To reorganize or divest less profitable or loss making businesses/products.
The company can also enhance value through capital Restructuring, it can
innovate securities that help to reduce cost of capital.
Characteristics of Corporate Restructuring -

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1. To improve the companys Balance sheet, (by selling unprofitable division
from its core business).
2. To accomplish staff reduction (by selling/closing of unprofitable portion)
3. Changes in corporate mgmt.
4. Sale of underutilized assets, such as patents/brands.
5. Outsourcing of operations such as payroll and technical support to a more
efficient 3rd party.
6. Moving of operations such as manufacturing to lower-cost locations.
7. Reorganization of functions such as sales, marketing, & distribution
8. Renegotiation of labor contracts to reduce overhead
9. Refinancing of corporate debt to reduce interest payments.
10. A major public relations campaign to reposition the co., with consumers.

Q4. Leveraged Buyouts (LBO) is a financing technique of

purchasing a private company with the help of borrowed
or debt capital.
Explain the modes of LBO financing and governance
aspects of LBOs.
Answer:
The acquisition of another company using a significant amount of borrowed
money (bonds or loans) to meet the cost of acquisition. Often, the assets of
the company being acquired are used as collateral for the loans in addition to
the assets of the acquiring company. The purpose of leveraged buyouts is to
allow companies to make large acquisitions without having to commit a lot of
capital.
LBOs are a very common occurrence in a "Mergers and Acquisitions" (M&A)
environment. The term LBO is usually employed when a financial sponsor
acquires a company. However, many corporate transactions are partially
funded by bank debt, thus effectively also representing an LBO. LBOs can
have many different forms such as Management Buyout (MBO), Management
Buy-in (MBI), secondary buyout and tertiary buyout, among others, and can
occur in growth situations, restructuring situations and insolvencies. LBOs
mostly occur in private companies, but can also be employed with public
companies (in a so-called PtP transaction Public to Private).
Characteristics of LBOs :-LBOs have become very attractive as they
usually represent a win-win situation for the financial sponsor and the banks:
The financial sponsor can increase the returns on their equity by employing
the leverage; banks can make substantially higher margins when supporting
the financing of LBOs as compared to usual corporate lending, because the
interest chargeable is that much higher.
The amount of debt banks are willing to provide to support an LBO varies
greatly and depends, among other things, on:

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1. The quality of the asset to be acquired (stability of cash flows, history,
growth prospects, hard assets, )
2. The amount of equity supplied by the financial sponsor
3. The history and experience of the financial sponsor
4. The economic environment
Governance aspects of LBOs
Corporate Governance of LBOs: The Role of Boards, which was recently made
publicly available on SSRN, we study whether the success of private equitybacked firms is due to their superior corporate governance or instead due to
financial engineering. We focus in particular on the role of boards in LBOs
and look at changes in the board when a public company is taken private by
a private equity group.
We construct a new data set, which follows the board composition and
financial figures of all public to private transactions that took place in the UK
between 1998 and 2003. Out of these 142 transactions, 88 have private
equity sponsors and are thus identified as LBOs. The remaining transactions
are either pure MBOs or other types, and are used as benchmarks. We track
each company two or three years before the announcement of the buyout
until the exit of private equity investors or until 2010, whichever is earlier.
We find that when a company goes private, fundamental shifts in board size
and composition take place. The board size decreases on average by 15%
and the presence of outside directors is drastically reduced, as they are
replaced by individuals employed by the private equity sponsors. We also
find evidence that the board size and presence of LBO sponsors on the board
depend on the style or preferences of the private equity firm. Overall, the
boards become more in line with the type of boards that the corporate
governance literature would identify as exhibiting better corporate
governance. We then set to find out what role these boards play.
Central to our analysis is the examination of the private equity
representatives presence on the board. We find that private equity sponsors
are more present on the boards of the more difficult deals, presumably
because these deals need more expertise, monitoring and advice. One way
in which we identify more difficult cases is by looking at LBOs where the CEO
is changed when the company is taken private. These may be the forced CEO
change cases where a large overhaul of the company has been necessary
due to unsatisfactory performance of the management, or the voluntary CEO
change cases where losing the CEO who is very familiar with the business
constitutes a significant challenge to a successful restructuring of the
company.
We then turn to study the effects of the private equity firms involvement in
the boards. We focus on CEO turnover after the company is taken private, as
CEO turnover is an indication of how active and attentive a board is in the
corporate governance literature.

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Question 5 Joint Ventures (JV) have become an important
strategic option for many businesses. Give the meaning of
JV with example. Explain the characteristics of Joint
Ventures. Also explain the Rationale for Joint Ventures and
alternatives to JVs as expansion strategy options with
example.
Meaning of JV with example :- -joint venture (JV) is a project or

enterprise in which multiple companies or individuals invest.

Participants usually share equally in the project's direction and
profits.
HOW IT WORKS (EXAMPLE): :-If two or more parties think they can mutually
benefit from an entrepreneurial opportunity, they may enter into a joint
venture (JV). In a JV, all interested parties take a stake in the project by
contributingcapital (sometimes known as putting "skin in the game").
For example, suppose Company ABC and Company XYZ agree that Project
P will be profitable. Project P requires an initial investment of $10,000. The
companies agree to create a JV, and each pledgs $5,000 in funding (50%
each). If Project P generates $1,000 in earnings in year 1, each company gets
$500.
8.3 Characteristics of Joint Ventures The main features of a JV are: JVs
are basically not inactive investments. The parties provide skills as
well as money. JVs are basically a particular business project rather than a
long-term
bond between the partners
JVs are not the major activity of the concerned parties who have core
businesses to which the JV is an aide. JV is a combined extension of their
commercial activities. The relationship between the participants is almost
consistently
regulated by a written agreement called a JV Agreement (JVA).
8.4 Rationale for Joint Ventures :-JVs may include companies in one or
more countries. International JVs are becoming more widespread, particularly
in capital-intensive industries, such as oil and gas exploration, mineral
abstraction and metal processing. The basic reasoning is simple: to save

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money. For example, to start a mining procedure in the United States in
1984, a company would have had to spend close to two billion dollars. Few
companies can finance such an expenditure on their own. JVs become
feasible solutions to stake risks and costs and generate scale economies.
Alternatives to JVs as Expansion Strategy Options Strategic alliances,
in the form of partnerships, licensing arrangements and plain alliances are
viable alternatives to JVs as the route for business expansion and/or
diversification. All these have one thing in common: they bring together one
or more parties into a business. But the format of each of these options has
notable differences. Partnerships are Special Purpose Vehicles (SPV) set up
by two independent entities for a specific purpose. The format of the SPV is a
partnership. Licensing arrangements are adopted for similar short-term ad
hoc purposes. An entity with an income-producing asset, licenses the asset
to be used for the purpose of working the asset to generate revenues and
net incomes. The income net of license fee is retained by the licensee. A
strategic alliance is when two or more businesses join together for a set
period of time. The businesses are not in direct competition, but have similar
products or services that are directed towards the same target market.
Alliance means "cooperation between groups that produces better results
from a transaction. The key characteristics of strategic alliances are: 1. Two
or more firms bond to follow a set of agreed goals, but remain independent
following the creation of an alliance. 2. The partner firms control the
performance of assigned tasks and share the benefits of the alliance. 3. The
partner firms contribute on a continuing basis in one or more key strategic
areas. Example Walmart Stores (Walmart), the world's largest retailer, and
Bharti Enterprises (Bharti), a leading business group in India, signed a
Memorandum of Understanding (MoU) to explore business opportunities in
the Indian retail industry. This JV marked the entry of Walmart into the Indian
retailing industry.

Question :-6 Amalgamation is the nature of merger is an

amalgamation/consolidation which satisfies/ meets the
following conditions. Explain the two methods of
amalgamation.
Explain the treatment of Goodwill arising on
Amalgamation and treatment of reserves of
amalgamation.
, There are two method of accounting for amalgamations:

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(a) The Pooling of Interest Method (applicable in case of amalgamation
in the nature of merger) and (b) The Purchase Method (applicable in case of
amalgamation in the nature of purchase). 12.4.1 Pooling of interests method
Pooling of interests refers to the adding together of interests of the merging
entities. The method involves the following steps:
1. The assets, liabilities and reserves of the transferor company are recorded
by the transferee company at their existing carrying amounts (unless, of
course, adjustment is necessary due to different accounting polices); 2. The
balance of the profit and loss account of the transferor company should be
aggregated with the corresponding balance of the transferee company or
transferred to the General Reserve, if any; and 3. The difference between the
amount recorded as purchase consideration (shares issued plus any
additional consideration) and the amount of share capital of the transferor
company should be adjusted in reserves. 1
2.4.2 Purchase method This method is applied for amalgamation in the
nature of purchase. The purchase method involves the following steps:
1. Assets and liabilities of the transferor company should be merged at the
present holding sums/amounts or there must be a consideration on the
individual identifiable assets and liabilities based on their fair values at the
date of amalgamation;
2. The reserves of the transferor company (other than statutory reserves)
should not be incorporated in the financial statements of the transferee
company;
3. The legislative reserves/funds by the transferor company should be
integrated in the financial accounts of the transferee company and should be
maintained for a specified period. In this case, statutory reserves/funds
should be matched by another account
4. Any consideration on the excess amount over the value of the net assets
attained should be recognised/recorded in the financial accounts of
transferee company as goodwill arising on amalgamation. In case of the
consideration amount being lower than the value of net assets acquired, the
difference should be treated as capital reserve/fund; and 5. The goodwill
arising on amalgamation should be written off over a period of five years (a
longer period may be considered if deemed necessary).

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Treatment of Reserves of Amalgamation In case of 'amalgamation in the
nature of merger', under the assembling of interests technique, the character
of the reserves/funds are conserved and appear in the financial accounts of
the transferee company just like the way they are in the financial accounts of
the transferor company. Hence the General Reserve of the transferor
company becomes the General Reserve of the transferee company, the
Capital Reserve of the transferor company becomes the Capital Reserve of
the transferee company and the Revaluation Reserve of the transferor
company becomes the Revaluation Reserve of the transferee company. The
reserves/funds that are offered for circulation as dividend before the
amalgamation would also be open for distribution as dividend after the
amalgamation. The difference between the Mergers and Acquisitions amount
recorded as share capital issued (plus any additional consideration in the
form of cash or other assets) and the amount of share capital of the
transferor company is adjusted in reserves in the financial statements of the
transferee company. If the amalgamation is an amalgamation in the nature
of purchase, then the identity of the reserves/funds are not conserved. The
consideration amount is deducted from the net asset value of the transferor
company acquired by the transferee company. In case of the negative result
of the computation, the difference/variance is debited to goodwill arising on
amalgamation. In case of the positive result of the computation, the
difference is credited to Capital Reserve. The transferor company may have
been created certain reserves by pursuant to the necessities of, or to avail of
the benefits under, the Income tax Act, 1961;
12. Amalgamation Goodwill represents a payment made in expectancy
income for the future and is appropriate to treat this like an asset which
needs to be amortised to income on a systematic basis over its useful life. As
a nature of goodwill, it is hard to evaluate its useful life with rational
conviction. Such estimation is therefore made on a prudent basis.
Accordingly, it is considered suitable to amortise goodwill over a period
which does not exceed five years unless a longer period could be justified.
Factors which may be considered in estimating the useful life of goodwill
arising on amalgamation include: the estimated life of the business or
industry
the effects of product obsolescence (when it worn out), The economic
factors and its demands which goes through the changes key individuals or
groups of employees going through the service life

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expectancies anticipated actions by competitors or potential competitors
legal, regulatory or contractual provisions affecting the useful life.