A PROJECT REPORT ON
SUBMITTED
In Partial Fulfillment of the Requirements
For the Award of Degree of
BY
JOYAL YONATHAN WAGHCHOURE
Roll no: 38
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JOYAL YONATHAN WAGHCHOURE TY.BMS ROLL NO: 38
CERTIFICATE.
External Examiner
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JOYAL YONATHAN WAGHCHOURE TY.BMS ROLL NO: 38
ACKNOWLEDGEMENT.
To list who all have helped me in this project report is difficult because they are
numerous & the depth is so enormous.
I would like to acknowledge the following as being idealistic channel and fresh
dimensions in the completion of the project.
First of all I would like to take this opportunity to thank the Mumbai University
for having projects as part of B.M.S curriculum.
Lastly I would like to thank each and every person who helped me directly or
indirectly helped me in completion of my project especially my Parents &
Peers who supported throughout the project.
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JOYAL YONATHAN WAGHCHOURE TY.BMS ROLL NO: 38
DECLARATION.
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Executive Summary
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JOYAL YONATHAN WAGHCHOURE TY.BMS ROLL NO: 38
TABLE OF CONTENTS
SERIAL NO. HEADINGS PAGE NO.
1. INTRODUCTION 7
2. DIFFERENCE BETWEEN A 9
M&A
3. VARIETIES OF MERGER 10
4. DETAILS OF 11
ACQUISITTION
VALUATION MATTERS 12
5. PREMIUM FOR POTENTIAL
SUCCESS
WHAT TO LOOK FOR
6. NEED FOR THE STUDY
7. MERGER AND
ACQUISITTION PRONE
INDUSTTRIES
8. DOING THE DEAL
MERGERS AND
ACQUISITIONS: THE
EVOLVING INDIAN
LANDSCAPE
9. M&A INDUSTRY
WORLDWIDE: LATEST
STATISTICS AND TRENDS
10. M&A: THE INDIA STORY
11. REGULATORY
FRAMEWORK GOVERNING
M&A TRANSACTIONS
12. WHAT M&A FIRMS DO?
13. M&A EFFECTS
14. WHY MERGERS FAIL?
15. PHASES OF M&A
16. BENEFITS OF M&A
17. STAGES IN A MERGER
18. SYNERGY
19. PROS AND CONS OF M&A
20. WHAT CAN GO WRONG IN
M&A?
21. SCOPE OF THE STUDY
22. FLIPKART AND MYNTRA
23. OBJECTIVES OF M&A
24. IMPACT OF FLIPKART AND
MYNTRA MERGER AND
ACQUISITION
25. CONCLUSION
26. QUESTIONNAIRE
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INTRODUCTION
Mergers and acquisitions (M&A) is a general term that refers to the consolidation of
companies or assets. M&A can include a number of different transactions, such as mergers,
acquisitions, consolidations, tender offers, purchase of assets and management acquisitions.
In all cases, two companies are involved. The term M&A also refers to the department
at financial institutions that deals with mergers and acquisitions.
Merger: In a merger, the boards of directors for two companies approve the combination and
seek shareholders' approval. After the merger, the acquired company ceases to exist and
becomes part of the acquiring company. For example, in 2007 a merger deal occurred
between Digital Computers and Compaq whereby Compaq absorbed Digital Computers.
Acquisition: In a simple acquisition, the acquiring company obtains the majority stake in the
acquired firm, which does not change its name or legal structure. An example of this
transaction is Manulife Financial Corporation's 2004 acquisition of John Hancock Financial
Services, where both companies preserved their names and organizational structures.
Tender Offer: In a tender offer, one company offers to purchase the outstanding stock of the
other firm at a specific price. The acquiring company communicates the offer directly to the
other company's shareholders, bypassing the management and board of directors. Example:
when Johnson & Johnson made a tender offer in 2008 to acquire Omrix
Biopharmaceuticals for $438 million. While the acquiring company may continue to exist
— especially if there are certain dissenting shareholders — most tender offers result in
mergers.
Acquisition of Assets: In a purchase of assets, one company acquires the assets of another
company. The company whose assets are being acquired must obtain approval from its
shareholders. The purchase of assets is typical during bankruptcy proceedings, where other
companies bid for various assets of the bankrupt company, which is liquidated upon the final
transfer of assets to the acquiring firm(s)
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officers in order to help fund a transaction. Such an M&A transaction is typically financed
disproportionately with debt and the majority of shareholders must approve it. For example,
in 2013, Dell Corporation announced that it was acquired by its chief executive manager,
Michael Dell.1
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Although they are often uttered in the same breath and used as though they were
synonymous, the terms merger and acquisition mean slightly different things.
A merger occurs when two separate entities (usually of comparable size) combine
forces to create a new, joint organization in which – theoretically – both are equal
partners. For example, both Daimler-Benz and Chrysler ceased to exist when the
two firms merged, and a new company, Daimler-Chrysler, was created.
An acquisition refers to the purchase of one entity by another (usually, a smaller firm
by a larger one). A new company does not emerge from an acquisition; rather, the
acquired company, or target firm, is often consumed and ceases to exist, and its assets
become part of the acquiring company. Acquisitions – sometimes called takeovers –
generally carry a more negative connotation than mergers, especially if the target firm
shows resistance to being bought. For this reason, many acquiring companies refer to
an acquisition as a merger even when technically it is not.
Legally speaking, a merger requires two companies to consolidate into a new entity
with a new ownership and management structure (ostensibly with members of each
firm). An acquisition takes place when one company takes over all of the operational
management decisions of another. The more common interpretive distinction rests on
whether the transaction is friendly (merger) or hostile (acquisition).
In practice, friendly mergers of equals do not take place very frequently. It's
uncommon that two companies would benefit from combining forces and two
different CEO’s agree to give up some authority to realize those benefits. When this
does happen, the stocks of both companies are surrendered and new stocks are issued
under the name of the new business identity.
Since mergers are so uncommon and takeovers are viewed in a derogatory light, the
two terms have become increasingly conflated and used in conjunction with one
another. Contemporary corporate restructurings are usually referred to as merger and
acquisition (M&A) transactions rather than simply a merger or acquisition.
The practical differences between the two terms are slowly being eroded by the new
definition of M&A deals. 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. The public relations backlash for hostile takeovers can
be damaging to the acquiring company.
The victims of hostile acquisitions are often forced to announce a merger to preserve
the reputation of the acquiring entity.2
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Varieties of Mergers
From the perspective of business structures, there is a whole host of different mergers. Here
are a few types, distinguished by the relationship between the two companies that are
merging:
Horizontal merger - Two companies that are in direct competition and share the
same product lines and markets.
Vertical merger - A customer and company or a supplier and company. Think of a
cone supplier merging with an ice cream maker.
Con generic mergers - Two businesses that serve the same consumer base in
different ways, such as a TV manufacturer and a cable company.
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.
Conglomeration - Two companies that have no common business areas.
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:
o 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.
o 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.
o
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Details of Acquisitions
In an acquisition, as in some mergers, a company can buy another company with cash, stock
or a combination of the two. Another possibility, which is common in smaller deals, is for
one company to acquire 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 any). Of
course, Company Y becomes merely a shell and will eventually liquidate or enter another
area of business.
Another type of acquisition is a reverse merger, 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 acquire financing buys a publicly-
listed shell company, usually one with no business and limited assets. The private company
reverse merges into the public company, and together they become an entirely new public
corporation with tradable shares.
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VALUATION MATTERS
Naturally, both sides of an M&A deal will have different ideas about the worth of a target
company: Its seller will tend to value the company at as high of a price as possible, while the
buyer will try to get the lowest price that he can.
There are, however, many legitimate ways to value companies. The most common method is
to look at comparable companies in an industry, but deal makers employ a variety of other
methods and tools when assessing a target company. Here are just a few of them:
1. Comparative Ratios. The following are two examples of the many comparative metrics
on which acquiring companies may base their offers:
o Price-Earnings Ratio (P/E Ratio) - With the use of this ratio, an acquiring
company makes an offer that is a multiple of the earnings of the target
company. 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.
o 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.
2. Replacement Cost – In a few cases, acquisitions are based on the cost of replacing
the target company. For simplicity's sake, suppose the value of a company is simply
the sum of all its equipment and staffing costs. The acquiring company can literally
order the target to sell at that price, or it will create a competitor for the same cost.
Naturally, it takes a long time to assemble good management, acquire property and
get the right equipment. This method of establishing a price certainly wouldn't make
much sense in a service industry where the key assets – people and ideas – are hard to
value and develop.
3. Discounted Cash Flow (DCF) – A key valuation tool in M&A, discounted cash flow
analysis determines a company's current value according to its estimated future cash
flows. forecasted free cash flows (net income + depreciation/amortization - capital
expenditures - change in working capital) are discounted to a present value using the
company's weighted average costs of capital (WACC). Admittedly, DCF is tricky to
get right, but few tools can rival this valuation method.4
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For the most part, acquiring companies nearly always pay a substantial premium on the stock
market value of the companies they buy. The justification for doing so nearly always boils
down to the notion of synergy; a merger benefits shareholders when a company's post-merger
share price increases by the value of potential synergy.
Let's face it, it would be highly unlikely for rational owners to sell if they would benefit more
by not selling. That means buyers will need to pay a premium if they hope to acquire the
company, regardless of what pre-merger valuation tells them. For sellers, that premium
represents their company's future prospects. For buyers, the premium represents part of the
post-merger synergy they expect can be achieved. The following equation offers a good way
to think about synergy and how to determine whether a deal makes sense. The equation
solves for the minimum required synergy:
In other words, the success of a merger is measured by whether the value of the buyer is
enhanced by the action. However, the practical constraints of mergers, which we discuss in
part five, often prevent the expected benefits from being fully achieved. Alas, the synergy
promised by deal makers might just fall short.
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It's hard for investors to know when a deal is worthwhile. The burden of proof should fall on
the acquiring company. To find mergers that have a chance of success, investors should start
by looking for some of these simple criteria:
A reasonable purchase price- A premium of, say, 10% above the market price
seems within the bounds of level-headedness. A premium of 50%, on the other hand,
requires synergy of stellar proportions for the deal to make sense. Stay away from
companies that participate in such contests.
Cash transactions- Companies that pay in cash tend to be more careful when
calculating bids and valuations come closer to target. When stock is used as the
currency for acquisition, discipline can go by the wayside.
Sensible appetite- An acquiring company should be targeting a company that is
smaller and in businesses that the acquiring company knows intimately. Synergy is
hard to create from companies in disparate business areas. Sadly, companies have a
bad habit of biting off more than they can chew in mergers. Mergers are awfully hard
to get right, so investors should look for acquiring companies with a healthy grasp of
reality.
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Regardless of their category or structure, all mergers and acquisitions have one common goal:
they are all meant to create synergy that makes the value of the combined companies greater
than the sum of the two parts. The success of a merger or acquisition depends on whether this
synergy is achieved.
Synergy takes the form of revenue enhancement and cost savings. By merging, the
companies hope to benefit from the following:
Becoming bigger: Many companies use M&A to grow in size and leapfrog their
rivals. While it can take years or decades to double the size of a company
through organic growth, this can be achieved much more rapidly through mergers or
acquisitions.
Preempted competition: This is a very powerful motivation for mergers and
acquisitions, and is the primary reason why M&A activity occurs in distinct cycles.
The urge to snap up a company with an attractive portfolio of assets before a rival
does so generally results in a feeding frenzy in hot markets. Some examples of
frenetic M&A activity in specific sectors include dot-coms and telecoms in the late
1990s, commodity and energy producers in 2006-07, and biotechnology companies in
2012-14.
Domination: Companies also engage in M&A to dominate their sector. However,
since a combination of two behemoths would result in a potential monopoly, such a
transaction would have to run the gauntlet of intense scrutiny from anti-competition
watchdogs and regulatory authorities.
Tax benefits: Companies also use M&A for tax purposes, although this may be an
implicit rather than an explicit motive. For instance, since the U.S. has the highest
corporate tax rate in the world, some of the best-known American companies have
resorted to corporate “inversions.” This technique involves a U.S. company buying a
smaller foreign competitor and moving the merged entity’s tax home overseas to a
lower-tax jurisdiction, in order to substantially reduce its tax bill.
Staff reductions: As every employee knows, mergers tend to mean job losses.
Consider all the money saved from reducing the number of staff members from
accounting, marketing and other departments. Job cuts will also probably include the
former CEO, who typically leaves with a compensation package.
Economies of scale: Yes, size matters. Whether it's purchasing stationery or a new
corporate IT system, 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: Companies buy companies to reach
new markets and grow revenues and earnings. A merger may expand two companies'
marketing and distribution, giving them new sales opportunities. A merger can also
improve a company's standing in the investment community: bigger firms often have
an easier time raising capital than smaller ones.
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Sadly, synergy opportunities may exist only in the minds of the corporate leaders and the deal
makers. Where there is no value to be created, the CEO and investment bankers – who have
much to gain from a successful M&A deal – will try to create an image of enhanced value.
The market, however, eventually sees through this and penalizes the company by assigning it
a discounted share price.5
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Mergers and acquisitions are most common in the health care, technology, financial
services, retail and, lately, the utilities sectors.
In health care, many small and medium-sized companies find it difficult to compete in
the marketplace with the handful of behemoths in the field. A rapidly changing
landscape in the health-care industry, with government legislation leading the way,
has posed difficulties for small and medium companies that lack the capital to keep up
with these changes. Moreover, as health-care costs continue to skyrocket, despite
efforts from the government to rein them in, many of these companies find it nearly
impossible to compete in the market and resort to being absorbed by larger, better
capitalized companies.
The technology industry moves so rapidly that, like health care, it takes a massive
presence and huge financial backing for companies to remain relevant. When a new
idea or product hits the scene, industry giants such as Google, Facebook and
Microsoft have the money to perfect it and bring it to market. Many smaller
companies, instead of unsuccessfully trying to compete, join forces with the big
industry players. These firms often find it more lucrative to be acquired by one of the
giants for a huge payday.
Throughout the 21st century, particularly during the late 2000s, merger and
acquisition activity has been constant in the financial services industry. Many
companies that were unable to withstand the downturn brought on by the financial
crisis of 2007-2008 were acquired by competitors, in some cases with the government
overseeing and assisting in the process. As the industry and the economy as a whole
have stabilized in the 2010s, mergers and acquisitions by necessity have decreased.
However, the 15 largest companies in the industry have a market capitalization of
over $20 billion as of 2015, giving them much leverage to acquire regional banks and
trusts.
The retail sector is highly cyclical in nature. General economic conditions maintain a
high level of influence on how well retail companies perform. When times are good,
consumers shop more, and these firms do well. During hard times, however, retail
suffers as people count pennies and limits their spending to necessities. In the retail
sector, much of the merger and acquisition activity takes place during these
downturns. Companies able to maintain good cash flow when the economy dips find
themselves in a position to acquire competitors unable to stay afloat amid reduced
revenues.
Since 2000, M&As have picked up in the utilities sector. After a brief downturn in the
immediate wake of the financial crisis of 2008, the pace of acquisitions has risen,
especially between 2012 and 2015, driven primarily by a basic focus on operational
efficiency and resulting profitability. The fallout from the 2008 financial crisis saw a
number of weaker firms, but ones with significant assets, become ripe as takeover
targets, especially in Europe. Utilities companies in many of the developed markets
became busy supplementing or realigning their portfolios.
Low wholesale prices, resulting from dramatic declines in the prices of oil and natural
gas, and new regulatory frameworks to deal with, have both been factors as firms seek
to align themselves in the most advantageous position.
Some companies have undertaken significant divestitures, looking to rid themselves
of less-profitable divisions or subsidiaries. Regulatory changes and the simple
recognition that renewable energy sources will be an increasing portion of the utilities
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business moving forward have been the impetus for several firms to acquire
promising wind power companies.
The rapid economic growth in emerging market economies, especially the rapid
expansion of utility infrastructure and tens of millions of brand-new customers, has
kept many utility companies focused on acquisitions in China, India and Brazil.
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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.
A letter of intent, or LOI, is used to set forth the terms of a proposed merger or acquisition. It
provides a general overview of the proposed deal. The LOI may include the purchase price,
whether it is a stock or cash deal and other elements of the proposed deal. After the LOI is
submitted, the buyer performs significant due diligence on the seller’s business.
A LOI does not have to be legally binding upon the parties unless the terms of the LOI
specifically state it is, or it may include both binding and nonbinding provisions. There may
be provisions stating the buyer agrees to keep all confidential information it sees during due
diligence secret.
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. In a merger, there may be much at stake for the management of the target
(particularly, their jobs). If they're not satisfied with the terms laid out in the tender
offer, the target's management may try to work out more agreeable terms that let them
keep their jobs or, even better, send them off with a nice, big compensation package.
Not surprisingly, highly sought-after target companies that are the object of several
bidders will have greater latitude for negotiation. Furthermore, managers have more
negotiating power if they can show that they are crucial to the merger's future success.
Execute a Takeover Defense or Find Another Acquirer – There are several
strategies to fight off a potential acquirer (see Defensive Maneuvers, below).
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Mergers and acquisitions can face scrutiny from regulatory bodies. For example, if the two biggest
long-distance companies in the U.S., AT&T and Sprint, wanted to merge, the deal would require
approval from the Federal
Communications Commission (FCC). The FCC would probably regard a merger of the two
giants as the creation of a monopoly or, at the very least, a threat to competition in the
industry.
If the transaction is made with stock instead of cash, then it's not taxable. There is simply an
exchange of share certificates. The desire to steer clear of the tax man explains why so many
M&A deals are carried out as stock-for-stock transactions.
When a company is purchased with stock, new shares from the acquiring company's stock are
issued directly to the target company's shareholders, or the new shares are sent to a broker
who manages them for target company shareholders. The shareholders of the target company
are only taxed when they sell their new shares.
When the deal is closed, investors usually receive a new stock in their portfolios – the
acquiring company's expanded stock. Sometimes investors will get new stock identifying a
new corporate entity that is created by the M&A deal.6
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• Distressed sales, leading to a business potentially being available ‘cheap’ several other
catalysts of M&A activity globally are mirrored by India Inc.:
However, the global merger of Lafarge and Holcim faced a hurdle in India, with the
Competition Commission of India finally setting the sale of Lafarge India as a prerequisite to
the global deal consummation in India, thereby paving entry for other players into India’s
cement market.
• Sale of non-core assets, mainly to reduce debt: With rising debt levels, many corporate
houses have been forced to put a ‘for sale’ tag on several prized assets. Consequently, some
notable transactions have taken place: Reliance Infrastructure’s sale of its cement assets to
Birla Corp in a 5,000 crore INR deal announced in February 20166 and Jaypee Group’s
sale of cement plants to Ultratech for a deal valued at over 16,000 crore INR (July 2016),7
not long after it sold power plants to the JSW Group in 2015. All these deals were primarily
undertaken to reduce debt.
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• E-commerce sector: India’s e-commerce sector is a hotbed of activity. With large global
players like Amazon and Uber taking on a dominant role with their deep pockets, the sector
is now in consolidation mode, which has become an imperative need for survival for many.
For example, Tiny Owl got acquired by Roadrunnr8 and Jabong was acquired by the
Flipkart owned Myntra9 at significantly lower valuations than they once commanded.
Whatever the triggers for any M&A, the benefits are undeniable. Some of them are
enumerated below:
• Economies of scale
• Access to new markets, be it new geographies, new products or new lines of business
• Newer technology
Of course, with the increase in M&A activity in India, the tax and regulatory environment is
continually evolving, with either several challenges arising or new avenues opening up:
• Shareholder activism: Though activism against M&A activity is yet to pick up as much
steam in India as it has globally, with Indian retail investors largely going by sentiments than
fundamentals, proxy advisory firms are increasingly looking at transactions with a
microscope and are advising shareholders. ‘Crompton Greaves’ deal structure to segregate
its consumer products business (to bring in a strategic investor) into a separate entity, while
still retaining control with itself, had to eventually be changed to vertically split the
businesses. Arguably, shareholder sentiment, fanned by proxy advisory firms against the
original deal structure, was a significant trigger.
• Tax concerns: Starting from 2007, when the Vodafone controversy erupted, India has
witnessed several high-profile tax controversies surrounding M&A transactions, which were
on account of withholding tax obligations on indirect transfer of capital assets situated in
India. With the advent of the proposed GAAR in 2017, structuring of transactions is set to
become more vexed. It is likely that tax indemnity negotiations between parties could get
more involved, and, to achieve certainty, more taxpayers could approach tax authorities (such
as the Authority for Advance Rulings) for clarity. Tax insurance cover is also likely to be on
the rise, though, in the Indian context, it may still be elusive or very expensive.
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• Funding restrictions: Indian companies have several restrictions imposed on them for
funding acquisitions, especially in case of share acquisitions, making leveraged buyouts in
India difficult. Local bank funding for acquisition of shares is currently still permitted only in
restricted circumstances. However, with the advent of newer instruments like masala bonds
and listed non-convertible debentures (NCD’s), fund raising is set to become easier. Further,
the external commercial borrowings (ECB) policy is also under liberalization. Given the
emergence of clarity on pass-through taxation of REIT’s, InvIT’s and alternative investment
funds, it is likely that more companies will use them as a means to raise funds, either to lower
their existing debt levels or for acquisitions (unlike overseas listing of unlisted Indian
companies which never really took off, though the FDI policy was amended to allow it).
India continues to be an investment destination, with few corporate houses having the muscle
to do outbound acquisitions the scale of Tata Tea’s acquisition of Tetley, Tata Steel’s of
Corus, Lupin’s acquisition of Gavis or Motherson Sumi’s multiple acquisitions. The newest
addition to the list of Motherson Sumi’s acquisitions is Finnish truck wire maker PKC
Group. With the opening up of the economy and the government’s thrust on various
initiatives, such as Make in India and Digital India, inbound M&A activity is only going to be
on the uptick. In the following chapters, we will delve into various aspects of M&A,
especially from an Indian tax and business perspective, which is ever evolving. Aspects like
easier delisting norms via an acquisition, dual listing, full capital account convertibility,
opening up funding avenues and a stable taxation system will go a long way in making
India’s M&A activity the stuff of global headlines.7
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The era of volatility has made it inevitable for a business to grow only through
organic means. The global M&A highlights sourced from Dealogic10 suggest that
after three consecutive year-on-year increases, global M&A dropped to 3.84 trillion
USD in 2016 from 4.66 trillion USD in 2015 (an annual record high), namely a
decline of 18% year-on-year.
Although cross-border M&A was down by 3% globally year-on year, China’s
outbound volume hit a record high (225.4 billion USD) as did US inbound M&A
(486.3 billion USD). October 2016 was the biggest month on record for global M&A,
with 600.8 billion USD.
As per the EMIS (a Euro money Institutional Investor company) Report on Asia
Markets,11 in the first nine months of 2016, activity surged in India, with a total of
712 deals and an increase of 135 deals year-on-year.
The report also suggests that, in Asian markets, the increase in the volume of deals
was the highest in the IT and Internet sector; however, the increase in value of deals
was the highest in the finance and insurance sector.
Interestingly, the withdrawn M&A volume of 606.4 billion USD was the highest total
on record in the first half of 2016 and the second highest full year since 2009.
Causes for the withdrawal of M&A deals include difficulty in justifying valuations,
negotiation and contracting difficulties between parties, etc.
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Macroeconomic Trends
The world economy is divided between mature and emerging markets. The recent
trend of an increase in buyers from emerging markets investing in mature markets can
have a dynamic effect on the deals space.
Due to the monetary easing policies of developed countries, banks and corporate have
more funds which are deployed towards M&A activities.
With the US Central Bank increasing rates in 2016, there is bound to be an impact on
corporate’ ability to undertake inorganic expansion.
Capital markets are always a key influencer in M&A activities. The action taken by
Federal Bank of USA is likely to affect worldwide capital markets, which would have
to embrace lot of volatility before things stabilize.
The insecurity is intensified due to events such as Brexit, the ramifications of which
cannot be gauged yet.
Commodity prices have been under pressure, and the sector is expected to undergo a phase of
consolidation. Further, uncertainty regarding the policies of Donald Trump, the new president
of the worlds’ largest economy, has been sending confusing signals to emerging markets.
Cross-border activity by India Inc. on the rise Cross-border activities are fuelled by
several factors such as strong domestic cash flows, availability of cheap finance,
dynamic global demand, requirements of new markets and upgraded technologies.
In order to fulfill any or all of these company objectives, the processes of M&A are
quintessential. Third quarter deals in India totalled 12.2 billion USD, the highest
quarterly value in more than two years.
Considering India Inc.’s cross-border activities in the nine months of 2016, the top
two big-ticket deals in the arena of domestic, inbound and outbound activities are
as follows:
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The Indian scenario and macroeconomics impacting India As per the Credit Suisse
Emerging Consumer Survey 2016, 12 India is at the top of the Emerging Consumer
Scorecard, indicating a robust level of income expectations by the consumer and
making India stand out in the emerging world.
Considering World Bank’s Doing Business 2016 ranking, India has improved its
global ranking, which clearly indicates the positive impact of various initiatives that
the government has undertaken. The report specifically emphasizes the improvement
in the indicator of ‘starting a business’, which reflects the simplified process for
initiating various start-ups and their rapid growth.
The regulatory reform of the Reserve Bank of India (RBI) allowing lenders (banks) to
boost support for a debt
Issued by a company to 50% from the erstwhile 20% has helped to enhance the credit
rating of securities and spur the bond market. This regulatory reform would increase
investor interest worldwide, and the increase in credit enhancement would inflate
opportunities for the company to expand further.
In addition, the opening up of the banking sector through the issuance of new
banking licenses, payment bank licenses, etc., has provided a much-needed impetus to
the financial sector and the overall economy.
Consolidation of banks, as suggested by the former RBI Governor, RaghuramRajan,
in the Report of the Committee on Financial Sector Reforms,13 is a clear measure to
integrate banks with the global economy and aid them in achieving fuller capital
account convertibility. The recent merger of State Bank of India (SBI) and its
associate banks would increase SBI’s asset base by five times more than that of the
second-largest Indian bank, ICICI Bank, post-merger.
In July 2015, a Press Information Bureau release by the Ministry of Commerce and
Industry, Government of India, 14 stated that there has been a 48% growth in FDI
equity inflows after the launch of the Make in India campaign.
This reaffirms the confidence of global investors in a resurgent India. In addition, it
ensures that such initiatives lead to a positive growth environment. In line with the
above initiatives, the government has liberalized the FDI policy to increase the cap of
FDI investments in various sectors.
For example, the FDI cap in the insurance and pension sectors has been raised to
49%, and 100% FDI has been allowed both in railway infrastructure (excluding
operations) and the defense sector. This has attracted large investments in the
insurance and defense sector over the last 6–8 months.
Non-debt finance in the form of FDI pursuant to these liberalizations is an unseen
advantage to the country. The government recently took a bold demonetization
initiative that affected not just common people but also the economy to a great extent.
It was an unflinching measure to merge the unorganized and organized sectors. Due to
demonetization, banks have been flooded with funds. This surplus of funds with
banks could lead to enhanced lending in high-growth sectors.
Subsequently, increased lending may lead to reduced interest rates, bringing in
multiple benefits such as lower cost of production to companies, higher profits and
diversified growth. The manifold consequences of demonetization could take growth
in the Indian economy to new heights.
This favorable impact on India due to reforms in policy regimes could have a domino
effect, leading to enhanced availability of resources for the country’s future missions,
including that of smart cities. In the World Economic Forum’s Global
Competitiveness Index, which ranks countries based on parameters such as
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Acquisitions
Acquisitions can either be in the form of share purchase, whereby controlling interest in the
target is acquired, or it could be in the form of acquisition of a business undertaking. While
share acquisition is an effective solution, where the acquirer seeks to acquire entire control
over the target, it becomes inevitable for asset acquisition in cases where the acquirer wants
to assume control of an identified business undertaking.
A share sale is usually for cash consideration to the shareholders of the target. In September
2016, Tata Power Renewable Energy Private Limited acquired shares of Welspun Renewable
Energy Private Limited for around 1.4 billion USD (9,249 crore INR), thereby increasing its
green energy portfolio by 1.14 GW.15
An acquisition of a business undertaking could be effected in various manners such as
demerger of a business from the target, slump sale or slump exchange. In case of a typical
demerger, the shareholders of the target are issued shares of the acquirer.
In case of a slump sale/exchange, cash is paid or securities are issued to the target itself and
not to its shareholders. The year 2016 has seen a number of such transactions, some of
which are listed below:
• In May 2016, JSW Energy Limited (JSW), a listed company engaged in power generation,
acquired 1 GW power plant from the heavily debt-laden Jindal Steel and Power Limited
(JSPL) for 0.98 billion USD (6,500 crore INR) by way of slump sale by JSPL into its wholly
owned subsidiary and share acquisition by a special purpose vehicle (SPV) of JSW.
• July 2016 saw a major consolidation in the cement sector by way of ‘slump exchange’ when
the cement capacity of 21.20 million tones per annum owned by Jaiprakash Associates
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ii. Mergers
Simply put, a merger is a combination of one company into another, whereby the transferor
company loses its existence upon merger with the transferee company. Various types of
mergers include horizontal mergers (merger of companies involved in the same industry and
in direct competition), vertical merger (merger of two companies operating in the same
industry but at different level within the industry’s supply chain) or a conglomerate merger
(where completely unrelated companies come together to achieve synergy benefits). In a
typical merger, the shareholders of the transferor company are allotted shares as
consideration for their holding in the transferee company.
As recent as August 2016, an amalgamation of Aditya Birla Nuvo Limited (ABNL) with Grasim
Industries Limited (Grasim), both being listed on stock exchanges, was announced in a bid to
unlock shareholders’ value and create a 9 billion USD (60,300 crore INR) consolidated
enterprise. The entire arrangement would be undertaken in two steps as under:
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1. Company law
2. Securities laws
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4. Competition regulations
Any acquisition requires prior approval of CCI if such acquisition exceeds certain
financial thresholds and is not within a common group. While evaluating an
acquisition, CCI would mainly scrutinize if the acquisition would lead to a dominant
market position, resulting in an adverse effect on competition in the concerned sector.
5. Stamp duty
The Indian Stamp Act, 1899, provides for stamp duty on transfer/issue of shares at
the rate of 0.25%. In case the shares are in dematerialized form, there would be no
stamp duty on transfer of shares. Conveyance of business under a business transfer
agreement in the case of a slump sale is charged to stamp duty at the same rate as in
the case of conveyance of assets. Typically, a scheme of merger/demerger is charged
to stamp duty at a concessional rate as compared to conveyance of assets. The exact
rate levied depends upon the specific entry under the respective state laws.
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The merger or acquisition deal process can be intimidating and this is where the merger and
acquisition firms step in, to facilitate the process by taking on the responsibility for a fee.
These firms guide their clients (companies) through these transformative, multifaceted
corporate decisions. The various types of merger and acquisition firms are discussed below.
The role of each type of firm is to successful seal a deal for its clients, but each does differ in
its approach and duties.
Investment Banks
Investment banks perform a variety of specialized roles. They carry out transactions
involving huge amounts, in areas such as underwriting. They act as a financial
advisor (and/or broker) for institutional clients, sometimes playing the role of an
intermediary. They also facilitate corporate reorganizations including mergers and
acquisitions. The finance division of investment banks manages the merger and acquisition
work, right from the negotiation stage until the deal's closure. The work related to the legal
and accounting issues is outsourced to affiliate companies or empanelled experts.
The role of an investment bank in the procedure typically involves vital market intelligence in
addition to preparing a list of prospective targets. Then once the client is sure of the targeted
deal, an assessment of the current valuation is done to know the price expectations. All the
documentation, management meetings, negotiation terms and closing documents are handled
by the representatives of the investment bank. In cases where the investment bank is handling
the selling side, an auction process is conducted with several rounds of bids to determine the
buyer..
Law Firms
Corporate law firms are popular among companies looking to expand externally through a
merger or acquisition, especially companies with international borders. Such deals are more
complex as they involve different laws governed by different jurisdictions thus requiring very
specialized legal handling. The international law firms are best suited for this job with their
expertise on multi-jurisdiction matters.
These companies also handle merger and acquisitions deals with obvious specialization in
auditing, accounting and taxation. These companies are experts in evaluating assets,
conducting audits and advising on taxation aspects. In cases where cross border merger or
acquisition is involved, the understanding of the taxation part becomes critical and such
companies fit well in such situations. In addition to audit and account expects these
companies have other experts on the panel to manage any aspect of the deal well.
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The leading management consulting and advisory firms guide clients through all stages of a
merger or acquisition process – cross industry or cross-border deals. These firms have a team
of experts who work towards the success of the deal right from the initial phase to successful
closure of the deal. The bigger companies in this business have global footprint which helps
in identifying targets based on suitability in all aspects. The firms work on the acquisition
strategy followed by screening to due diligence and advising on price valuations making sure
that the clients are not overpaying and so on.
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M&A activity obviously has longer-term ramifications for the acquiring company or
the dominant entity than it does for the target company in an acquisition or the firm
that is subsumed in a merger.
For the target company, an M&A transaction gives its shareholders the opportunity to
cash out at a significant premium, especially if the transaction is an all-cash deal. If
the acquirer pays partly in cash and partly in its own stock, the target company’s
shareholders would hold a stake in the acquirer, and thus have a vested interest in its
long-term success.
For the acquirer, the impact of an M&A transaction depends on the deal size relative
to the company’s size. The larger the potential target, the bigger the risk to the
acquirer. A company may be able to withstand the failure of a small-sized acquisition,
but the failure of a huge purchase may severely jeopardize its long-term success.
Once an M&A transaction has closed, the impact upon the acquirer would typically be
significant (again depending on the deal size). The acquirer’s capital structure will
change, depending on how the M&A deal was designed. An all-cash deal will
substantially deplete the acquirer’s cash holdings. But as many companies seldom
have the cash hoard available to make full payment for a target firm in cash, all-cash
deals are often financed through debt. While this additional debt increases a
company’s indebtedness, the higher debt load may be justified by the additional cash
flows contributed by the target firm.
Many M&A transactions are also financed through the acquirer’s stock. For an
acquirer to use its stock as currency for an acquisition its shares must often be
premium-priced to begin with, else making purchases would be needlessly dilutive.
As well, management of the target company also has to be convinced that accepting
the acquirer’s stock rather than hard cash is a good idea.
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In some circumstances, the employees of the newly created entity receive new stock
options (such as an employee stock ownership plan) or other benefits as a reward and
incentive.
Foreign currency exchange rates can have a major impact on the flow of cross-border
mergers and acquisitions (M&A) deals – that is, when the target company and the acquiring
company are in different countries. Studies show that companies in countries whose
currencies have appreciated substantially are more likely to target acquisitions in countries
whose currencies have not appreciated as much. Since the acquiring company has a stronger
currency relative to the country of the acquisition, the transaction is more affordable on a
relative basis.
Foreign currency traders may even take advantage of major international M&As for
profitable trade setups. A large cross-border M&A often requires a large currency transaction.
This transaction can have an impact on the relative exchange rates between the two countries
for large deals.
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It's no secret that plenty of mergers don't work. Those who advocate mergers will argue that
the merger will cut costs or boost revenues by more than enough to justify the price premium.
It can sound so simple: just combine computer systems, merge a few departments, use sheer
size to force down the price of supplies and the merged giant should be more profitable than
its parts. In theory, 1+1 = 3 sounds great, but in practice, things can go awry. Different
systems and processes, dilution of a company's brand, overestimation of synergies and lack of
understanding of the target firm's business can all occur, destroying shareholder value and
decreasing the company's stock price after the transaction.
Flawed Intentions
For starters, a booming stock market encourages mergers, which can spell trouble.
Deals done with highly rated stock as currency are easy and cheap, but the strategic
thinking behind them may be easy and cheap too. Also, mergers are often attempt to
imitate: somebody else has done a big merger, which prompts other top executives to
follow suit.
A merger may often have more to do with glory-seeking than business strategy. The
executive ego, which is boosted by buying the competition, is a major force in M&A,
especially when combined with the influences from the bankers, lawyers and other
assorted advisers who can earn big fees from clients engaged in mergers. Most CEOs
get to where they are because they want to be the biggest and the best, and many top
executives get a big bonus for merger deals, no matter what happens to the share price
later.
On the other side of the coin, mergers can be driven by generalized fear.
Globalization, the arrival of new technological developments or a fast-changing
economic landscape that makes the outlook uncertain are all factors that can create a
strong incentive for defensive mergers. Sometimes the management team feels they
have no choice and must acquire a rival before being acquired. The idea is that only
big players will survive a more competitive world.
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Even if the rationale for a merger or acquisition is sound, executives face major
stumbling blocks after the deal is consummated. Potential operational difficulties may
seem trivial to managers caught up in the thrill of the big deal; but in many cases,
integrating the operations of two companies proves to be a much more difficult task in
practice than it seemed in theory.
The chances for success are further hampered if the corporate cultures of the
companies are very different. When a company is acquired, the decision is typically
based on product or market synergies, but cultural differences are often ignored. It's a
mistake to assume that personnel issues are easily overcome. For example, employees
at a target company might be accustomed to easy access to top management, flexible
work schedules or even a relaxed dress code. These aspects of a working environment
may not seem significant, but if new management removes them, the result can be
resentment and shrinking productivity.
Cultural clashes between the two entities often mean that employees do not execute
post-integration plans well. And since the merger of two workforces often creates
redundant functions, which in turn often result in layoffs, scared employees will act to
protect their own jobs, as opposed to helping their employers realize synergies.
And sometimes, the expected advantages of acquiring a rival don't prove worth the
price paid. Say pharma company A is unduly bullish about pharma company B’s
prospects – and wants to forestall a possible bid for B from a rival – so it offers a very
substantial premium for B. Once it has acquired company B, the best-case scenario
that A had anticipated doesn't materialize: A key drug being developed by B may
turns out to have unexpectedly severe side-effects, significantly curtailing its market
potential. Company A’s management (and shareholders) may then be left to rue the
fact that it paid much more for B than what it was worth.
More insight into the failure of mergers is found in a highly acclaimed study from
McKinsey, a global consultancy. The study concludes that companies often focus too
intently on cutting costs following mergers, while revenues, and ultimately, profits,
suffer. Merging companies can focus on integration and cost-cutting so much that
they neglect day-to-day business, thereby prompting nervous customers to flee. This
loss of revenue momentum is one reason so many mergers fail to create value for
shareholders.13
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a. Company Description
f. Financial Information
g. Joint Ventures
h. Strategic Alliances
a. Financial
b. Risk Profile
c. Intangible Assets
d. Significant Issues
a. Value Drivers
b. Project Synergies
c. EBIDTA Adjustments
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a. Identify Candidates
a. Continuity of Management
d. Consideration Method
e. Cash Compensation
f. Stock Consideration
g. Tax Issues
h. Contingent Payments
i. Legal Structure
c. Financial Analysis
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b. Indemnification Provisions
a. Human Resources
b. Tangible Resources
c. Intangible Assets
d. Business Processes
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1. Economies of scale. This occurs when a larger firm with increased output can reduce
average costs. Lower average costs enable lower prices for consumers.
Technical economies; if the firm has significant fixed costs then the new larger firm
would have lower average costs,
Bulk buying – A bigger firm can get a discount for buying large quantities of raw
materials
Financial – better rate of interest for large company
Organizational – one head office rather than two is more efficient
A merger can enable a firm to increase in size and gain from many of these factors.
Note a vertical merger would have less potential economies of scale than a horizontal merger
e.g. a vertical merger could not benefit from technical economies of scale. However, in a
vertical merger, there could still be financial and risk-bearing economies.
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Some industries will have more economies of scale than others. For example, car
manufacture has high fixed costs and so gives more economies of scale than two clothing
retailers. More on economies of scale
2. International competition. Mergers can help firms deal with the threat of multinationals
and compete on an international scale. This is increasingly important in an era of global
markets.
3. Mergers may allow greater investment in R&D This is because the new firm will have
more profit which can be used to finance risky investment. This can lead to a better quality of
goods for consumers. This is important for industries such as pharmaceuticals which require a
lot of investment. It is estimated 90% of research by drug companies never comes to the
market. There is a high chance of failure. A merger, creating a bigger firm, gives more scope
to tolerate failure, encouraging more innovation.
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Evaluation of mergers
The desirability of a merger will depend upon several factors such as:
Is there scope for economies of scale? Are there high fixed costs in the industry?
Will there be an increase in monopoly power and a significant reduction in
competition?
Is the market still contestable? (is there freedom of entry and exit)
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STAGES 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:
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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;
Green light from the Italian Antitrust Authority, which 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.
During the merger process, share prices will adjust to the share exchange ratio. On the
effective date of the merger, financial intermediaries will enter the new shares with the new
quantities in the dossiers. The shareholders may trade without constraint the new shares and
benefit from all rights (dividends, voting rights).
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SYNERGY
What is 'Synergy'
Synergy is the concept that the value and performance of two companies combined will be
greater than the sum of the separate individual parts. Synergy is a term that is most
commonly used in the context of mergers and acquisitions. Synergy, or the potential financial
benefit achieved through the combining of companies, is often a driving force behind a
merger. Shareholders will benefit if a company's post-merger share price increases due to the
synergistic effect of the deal. The expected synergy achieved through the merger can be
attributed to various factors, such as increased revenues, combined talent and technology, or
cost reduction.
Mergers and acquisitions are made with the goal of improving the company's 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, or to
create one company that is able to eliminate or streamline redundant processes, resulting in
significant cost reduction. Because of this principle, the potential synergy is examined during
the merger and acquisition process. If two companies can merge to create greater efficiency
or scale, the result is what is sometimes referred to as a synergy merge.
TYPES OF SYNERGY
1) Operations Synergy
This is obtained through integrating functional activities. It can be created through
economies of scale / or scope.
2) Technology Synergy
To create synergies through this, firms seek to link activities associated with research and
development processes. The sharing of R&D programs, the transfer of technologies
across units, products and programs, and the development of new core business through
access to private innovative capabilities are examples of activities of firms trying to create
synergies
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4) Management Synergy
These synergies are typically gained when competitively relevant skills that were
possessed by managers in the formerly independent companies or business units can be
transferred successfully between units within the newly formed firm.
5) Private Synergy
This can be created when the acquiring firm has knowledge about the complementary
nature of its resources with those of the target firm that is not known to others.
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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 (Richard et al,
2007). Union of 2 firm's leads in overall cost reduction
and utilize alternative tax benefits.
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
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 19
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1. Backward/forward integration:
Many M&A transactions are based on the premise that it makes perfect logic to inorganically
acquire key customers or key suppliers of the target enterprise as it gives the opportunity to
add margins to the company with little incremental effort. More often than not, one can see
front-end companies acquiring their back-end suppliers with the logic that the margin that
the back-end company is making can be easily added and increased as well as cut down
when it becomes a captive unit.
The managements of back-end businesses operating in the B2B domain are not only focused
on maintaining high-end quality but very tight cost controls as well. They would try and
squeeze out all costs wherever possible as industrial buyers have high availability of
information and are often able to cut cost year on year. The auto industry is one such
example where suppliers cut down the price per unit on a continuous basis. However, when
the back-end supplier is acquired by a front-end company where the management is more
focused on sales and marketing rather than cost controls, there is a likelihood of
inefficiencies creeping in over a period of time. Even if there is no new inefficiency creeping
in, the pace of innovation and continuous focus on cost controls does go down, leading to
less than optimal realization of planned synergies.
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one being Coca Cola, where Coke still runs Coke and Thumps Up as successful brands in
India. It is clearly easy to cull a product or a brand and move ahead but managing brands
and products which may end up competing with each other is a rather difficult thing to do.
However, in industrial brands, many companies have been successful in following the
strategy of pulling the plug on one of the products.
20
https://www.pwc.in/assets/pdfs/trs/mergers-and-acquisitions-tax/mergers-and-
acquisitions-the-evolving-indian-landscape.pdf
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E-Commerce (B2C, C2C) revenues have been growing at a whopping ~50% year on year
with USD 10billion in 2011. Technopak estimates that e-tailing in India will grow from the
current USD 0.6 billion to USD 76 billion by 2021, i.e., more than hundredfold. The key
reason for this disruptive growth lies in the fact that the market enabling conditions and
ecosystem creation for e-tailing will outpace the same for corporatized brick & mortar retail.
This growth will offer many advantages to the Indian economy, besides bringing in immense
benefits to consumers. The growing need of consumer in various zones, travelling, jobs,
entertainment and changing trends in fashion, has attracted customers to get comfortable
ordering online. The companies have played a vital role in building a critical mass of Indian
users – and they will continue to evolve. Key competitors of market Jabong, Flipkart, Yebhi
and makemytrip has made a tremendous growth in case of turnovers21
21
https://www.ripublication.com/ijmibs-spl/ijbmisv4n1spl_10.pdf
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As India’s community of online shoppers grows, so will the traditional and online players
that make smart and strategic moves to enjoy the major share by optimizing operations for
profit. The main idea behind any merger and acquisition is to gain competitive advantage in
global market and accelerate company’s growth particularly when its growth is constrained
due to paucity of resources. For entering in new product/markets, the company may lack
technical skills and may require special marketing skills and a wide distribution network to
access different segments of market. The joining or merging of the two companies creates
additional value which we call "synergy" value. Synergy value can take three forms
Revenues: By combining the two companies, we will realize higher revenues then if
the two companies operate separately
Expenses: By combining the two companies, we will realize lower expenses then if
the two companies operate separately.
Cost of Capital: By combining the two companies, we will experience a lower
overall cost of capital. The model below represents the process and map of merger
and acquisition
Many mergers are driven by the need to cut costs. However, the best mergers seem to
have strategic reasons for the business combinations.
These include
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on either Myntra or Flipkart. However, the companies will not integrate the
back end. The two teams will also function separately.
To begin with Flipkart will invest $100 million in fashion business. On the other
hand Myntra’s goal is to generate 20,000 crore in gross sales by 2020 for which the
site needs more than $150-200 million fresh funds. Flipkart and Myntra deal will
create the first Indian e-tailing powerhouse, and provide a big fillip to India's still
nascent but very promising e-commerce industry. Myntra sells products from over
650 brands like Nike, HRX by HrithikRoshan, Biba and Steve Madden and clocked
revenue of about Rs 1,000 crore in the previous financial year.
As part of the acquisition, Myntra co-founder MukeshBansal will join Flipkart's
board and will also oversee Flipkart's fashion business. Flipkart and Myntra will
remain as two separate entities, but people holding stock options in Myntra will now
hold the same in Flipkart. The current deal appears to be win-win for both
companies, and could be the making of a giant company, better positioned to address
India's growing demand for online retail-one that could put up strong competition
against rivals Flipkart, which also operates under the marketplace model allowing
retailers to offer products on its platform, has since its inception raised over $500
million. Common investors such as early-stage investor Accel Partners and
investment fund Tiger Global are expected to remain invested in Myntra, as also
recent investor Premji Invest, which participated in the 300 crore funding round in
the fashion portal in February.
22
22
https://www.ripublication.com/ijmibs-spl/ijbmisv4n1spl_10.pdf
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Myntra continues to function as an independent entity and so does the fashion division of
Flipkart.
Only MukeshBansal from Myntra joins the Flipkart board. He’ll head the fashion
business for Flipkart.
Together, Flipkart and Myntra will have over 50% share in the online fashion market in
India (Myntra’s current share is ~30%).
There are no immediate plans of integrating the duo but the possibilities will be explored
in near future.
There are enough funds with Flipkart to sustain for long; hence there are no immediate
plans for next round of funding.
Flipkart is definitely eyeing for an IPO but not the priority as of now.
Flipkart plans to go Alibaba way rather than the Amazon way due to more similarities in
between Indian and Chinese consumers.
Flipkart aims to grow its fashion/apparel business to an extent that it accounts to 30% of
their revenue shares.
23
https://yourstory.com/2014/05/myntra-fipkart-merger/
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Cost savings
Cost savings is a very general concept that may be attained in many distinct ways. What is
important for the analysis of merger motives is to identify the type of cost saving, i.e., if it
consists on a reduction of average or marginal costs of production, fixed costs or financial -
11 - costs. Fixed costs are those that do not vary with production but that are necessary to
produce. They include for instance administrative support, public relationships, maintenance
of property plant and equipment, salaries, advertising, etc.
Rationalization
Rationalization consists on a more optimal reallocation of production across the different
lines of production of the merging firms. That is, shifting production from a plant with higher
marginal costs to another with lower marginal costs, without necessarily increasing the joint
technological capabilities, is a mean to save costs.
Purchasing power
Cost savings may arrive when firms at the downstream level of production merge to increase
their bargaining power towards their providers of inputs (firms at the upstream level of
production). That is, by increasing its size, a downstream firm may also increase its buyer
power and obtain quantity discounts or just better prices from their upstream suppliers. This
practice would clearly imply a cost saving for the new merged entity.
Creating internal capital markets
This hypothesis states that if external capital markets (stocks, securities or banks) are not
sufficiently efficient to create value, then by building up an M-form larger firm that creates
an internal capital market, value will be generated.
Taxes
Mergers before the 1980s were strongly motivated by tax advantages. The reason is that at
the time when an acquisition premium was paid above the values at which a company’s
depreciable assets were recorded in tax accounts, the acquired assets could benefit of
higher depreciation charges, protecting the acquirer from tax liabilities.
Interest rates
Often small firms cannot borrow at competitive interest rates due to liquidity constraints or
to asymmetric information in the external capital market. Since a large - 13 - corporation has
better access to the outside capital market that a small one, the merger is said to be
motivated by the possibility of borrowing more cheaply than separate units.
Diversification
The common feature between them is that they occur in conglomerate mergers and
acquisitions. Here, the idea is that managers assemble a portfolio composed of selected
portfolios based on their overall risk-return performance rather than portfolios with
securities that have individual high risk-return performance.6 This is a financial strategy that
may reduce the risk of bankruptcy too. Sometimes diversification may be chosen with the
purpose of higher managerial rents.
24
24
https://economics.soc.uoc.gr/wpa/docs/paper2mottis.pdf
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FS analyzed and comprehended the major factors that forced Myntra and Flipkart to merge
their ventures –
[A] Flipkart and Myntra Merge – Business Expansion and Market Consolidation
Flipkart has already acquired a large consumer base in e-commerce of Books, Electronics
Goods etc. So instead of struggling with its rudimentary vertical of Fashion and Lifestyle
Products, the acquisition of well trusted player of same domain, Myntra, was upright choice
for Flipkart. More than 150k product catalogue of Myntra helped Flipkart in enhancing its
business vertical of Apparel.
Flipkart co-founder and CEO SachinBansal stated about this acquisition that they, at
Flipkart, believed that they wanted to be leaders in every segment and fashion was a
category of the future, this acquisition would help us become leaders in this category.
MukeshBansal, Founder of Myntra, stated that they wanted to exploit their mutual
synergies (like the technology at Flipkart and market leadership of Myntra) in order to
accelerate their growth.
Flipkart also ensured the sector consolidation of e-commerce by acquisition of Myntra. It’s
like becoming one single known name when online shopping comes into mind. So the best
strategy for market consolidation of e-commerce is by incorporating all possible verticals into
one single business model.
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Myntra claimed to have 8million registers and loyal user base while Flipkart has 18 million.
So the deal developed a large loyal market volume for both of the players.
Addressing the consumer behavior and acquisition, SachinBansal stated that Cost
synergies were not their priority for this deal, it was about scaling the two businesses in
much faster to expand market share in fashion.
Also, the regulation of FDI was a big concern for both of the player. As the government was
planning to allow 100% FDI in retail, players like Amazon, Ebay, and Walmart could have
introduced their own products and shifted to an inventory based model. Earlier model of
Flipkart was also inventory based before they faced capital issues and shifted to market based
model.
The combined market share of both the players was already 50% which was expected to
increase up to 70% after this apparel concentrated acquisition. So the deal was a win-win
situation for both to stand against the market competition in long run.
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25
http://www.fuckedupstartups.com/fs-analyser/myntra-merger-with-flipkart-a-successful-exit-or-strategic-
acquisition/
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1 AGE
INTERPRETATION:-
OUT OF THE TOTAL AGE COUNT, 5.3% OF THE CUSTOMERS BELONG TO AGE 18, 10.5%
BELONGS TO 19, 42.1% BELONGS TO AGE 20, 10.5% BELONGS TO AGE 21, 15.8% BELONGS
TO AGE 23, 5.3% BELONGS TO AGE 29, 5.3% BELONGS TO AGE 43 AND 5.3% BELONGS TO
AGE 60.
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2. GENDER
INTERPRETATION:-
OUT OF THE TOTAL CUSTOMERS 44.1% ARE FEMALES AND THE REST 55.9% OF CUSTOMERS
ARE MALES.
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INTERPRETATION:-
OUT OF THE TOTAL CUSTOMERS, 10.5% OF THE CUSTOMERS BELONG TO 1-2
HOURS A DAY CATEGORY. 26.3% OF THE CUSTOMERS BELONG TO 2-4 HOURS
A DAY CATEGORY, 31.6% OF THE CUSTOMERS BELONG TO 4-6 HOURS A DAY
CATEGORY AND 31.6% OF THE CUSTOMERS BELONG TO 6+ OURS A DAY
CATEGORY.
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4. OCCUPATION
INTERPRETATION:-
OUT OF THE TOTAL CUSTOMERS, 5.3% OF THE CUSTOMERS BELONG TO
SALARIED PROFESSIONALS, CA AND SALARIED SENIOR/JUNIOUR EXECUTIVE,
NO CUSTOMER BELONGS TO BUSINESS AND UNSKILLED CATEGORIES, 73.7%
OF CUSTOMERS BELONG TO STUDENT CATEGORY AND 15.8% OF STUDENTS
BELONG TO OTHERS.
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INTERPRETATION:-
OUT OF THE TOTAL CUSTOMERS, 21.1% OF CUSTOMERS BELONGS TO NOT
LIKELY AND MOST LIKELY CATEGORY AND 57.9% OF THE CUSTOMERS
BELONGS TO VERY LIKELY CATEGORY. I NEVER SHOP ONLINE CATEGORY
INCLUDES NO CUSTOMERS.
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INTERPRETATION:-
OUT OF THE TOTAL CUSTOMERS, 44.4% OF CUSTOMERS USES INTERNET FOR
EMAILS, 83.3% OF CUSTOMERS USES INTERNET FOR SOCIAL NETWORKING
SITES, 61.1% OF CUSTOMERS USES INTERNET FOR LISTENING TO MUSIC AND
WATCHING VIDEOS, 50% OF CUSTOMERS USES INTERNET TO BUY THINGS
ONLINE AND 5.6% OF CUSTOMERS USES INTERNET FOR TEH UPDATES AND
VLOGS.
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INTERPRETATION:-
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INTERPRETATION:-
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INTERPRETATION:-
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INTERPRETATIONS:-
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INTERPRETATIONS:-
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INTERPRETATIONS:-
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INTERPRETATION:-
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INTERPREATATION:-
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INTERPRETATION:-
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CONCLUSION
Many companies find that the best way to get ahead is to expand through mergers and
acquisitions. For others, separating the public ownership of a subsidiary or business segment
offers more advantages. At least in theory, mergers create synergies and economies of scale,
expanding operations and cutting costs.
M&A comes in many shapes and sizes, and investors need to consider the complex issues
involved in M&A. The most beneficial form of equity structure involves a complete analysis
of the costs and benefits associated with the deals.
A merger can happen when two companies decide to combine into one entity or when
one company buys another. An acquisition always involves the purchase of one
company by another.
The functions of synergy allow for the enhanced cost efficiency of a new entity made
from two smaller ones. Synergy is the logic behind mergers and acquisitions.
Acquiring companies use various methods to value their targets. Some of these
methods are based on comparative ratios —such as the P/E and P/S ratios—
or replacement cost or discounted cash flow analysis.
An M&A deal can be executed by means of a cash transaction, stock-for-
stock transaction or a combination of both. A transaction struck with stock is not
taxable.
Break up or de-merger strategies can provide companies with opportunities to raise
additional equity funds unlock hidden shareholder value and sharpen management
focus. De-mergers can occur by means of divestitures, carve-outs spin offs or tracking
stocks.
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Mergers can fail for many reasons, including a lack of management foresight, the
inability to overcome practical challenges and loss of revenue momentum from a
neglect of day-to-day operations.26
26
http://www.investopedia.com/university/mergers/mergers6.asp
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QUESTIONNAIRE
2. AGE
3. GENDER
MALE
FEMALE
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18. WHAT FEEDBACK WOULD YOU LIKE TO GIVE ABOUT THE MERGER
OF FLIPKART- MYNTRA?
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BIBLIOGRAPHY
http://www.edupristine.com/blog/mergers-acquisitions
http://www.investopedia.com/terms/m/mergersandacquisitions.asp
http://www.investopedia.com/university/mergers/mergers6.asp
https://www.slideshare.net/sujithkumarsugathan7/mergers-and-acquisitions-14375592
http://whatis.techtarget.com/definition/mergers-and-acquisitions-MA
http://study.com/academy/lesson/what-are-mergers-and-acquisitions-definition-examples-
quiz.html
https://www.shopify.com/encyclopedia/mergers-and-acquisitions-m-a
https://www.scribd.com/doc/260386472/flipkart-myntra-case-study-assignment-2-pdf
https://www.ripublication.com/ijmibs-spl/ijbmisv4n1spl_10.pdf
https://www.slideshare.net/piyushparashar50/flipkart-weds-myntra
https://yourstory.com/2014/05/flipkart-myntra-acquisition/
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