Anda di halaman 1dari 58

Mergers and Acquisitions 1


Mergers and Acquisitions 2


In a general sense, mergers and acquisitions are very similar corporate actions -
they combine two previously separate firms into a single legal entity. Significant
operational advantages can be obtained when two firms are combined and, in fact, the
goal of most mergers and acquisitions is to improve company performance and
shareholder value over the long-term.

The motivation to pursue a merger or acquisition can be considerable; a company that

combines itself with another can experience boosted economies of scale, greater sales
revenue and market share in its market, broadened diversification and increased tax
efficiency. However, the underlying business rationale and financing methodology for
mergers and acquisitions are substantially different.

A merger involves the mutual decision of two companies to combine and become one
entity; it can be seen as a decision made by two "equals". The combined business,
through structural and operational advantages secured by the merger, can cut costs and
increase profits, boosting shareholder values for both groups of shareholders. A typical
merger, in other words, involves two relatively equal companies, which combine to
become one legal entity with the goal of producing a company that is worth more than the
sum of its parts. In a merger of two corporations, the shareholders usually have their
shares in the old company exchanged for an equal number of shares in the merged entity.

A takeover, or acquisition, on the other hand, is characterized the purchase of a smaller

company by a much larger one. This combination of "unequal" can produce the same
benefits as a merger, but it does not necessarily have to be a mutual decision. A larger
company can initiate a hostile takeover of a smaller firm, which essentially amounts
to buying the company in the face of resistance from the smaller company's management.
Unlike in a merger, in an acquisition, the acquiring firm usually offers a cash price per
share to the target firm's shareholders or the acquiring firm's share's to the shareholders of
the target firm according to a specified conversion ratio. Either way, the purchasing

Mergers and Acquisitions 3

company essentially finances the purchase of the target company, buying it

outright for its shareholders.

In this context, it would be essential for us to understand what corporate restructuring and
mergers and acquisitions are all about.

Mergers involve the mutual decision of two companies to combine & become one
entity. The combined business can cut cost of operation & increase profit which will
boost shareholders value for both groups of shareholders. In Merger of two corporations,
shareholders usually have their shares in the old organization & are exchanged for an
equal numbers of shares in the merged entity.

According to the Oxford Dictionary “merger” means “combining of two companies into
one”. Merger is a fusion between two or more enterprises, whereby the identity of one or
more is lost and the result is a single enterprise. In merger the assets and liabilities of the
companies get vested in another company, the company that is merged losing its identity
and its shareholders becoming shareholders of the other company. All assets, liabilities
and the stock of one company are transferred to Transferee Company in consideration of
payment in the form of:
• Equity shares in the transferee company,
• Debentures in the transferee company,
• Cash, or
• A mix of the above modes.
In the pure sense, a merger happens when two firms, often of about the same size, agree
to go forward as a single new company rather than remain separately owned and
operated. This kind of action is more precisely referred to as a "merger of equals." For
example, both Daimler-Benz and Chrysler ceased to exist when the two firms merged,
and a new company, Daimler Chrysler, was created.

Mergers and Acquisitions 4

Acquisition in general sense is acquiring the ownership in the property. In the
context of business combinations, an acquisition is the purchase by one company of a
controlling interest in the share capital of another existing company.
On the other hand, Acquisition means the purchase of a smaller company by much larger
one. A larger company can initiate an Acquisition of smaller firm which essentially
amounts to buy the company in the face of resistance from smaller company’s
management. Unlike Mergers in an Acquisition the acquiring firm usually offers a cash
price per share to target firm’s shareholders.
Acquisition means an attempt by one firm to gain majority interest in the another firm
called target firm &dispose-off it‘s assets or to take the target firm private by small group
of investors.
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.

An acquisition may be affected by;

(a) agreement with the persons holding majority interest in the company management
like members of the board or major shareholders commanding majority of voting
(b) purchase of shares in open market;
(c) to make takeover offer to the general body of shareholders;
(d) purchase of new shares by private treaty;
(e) Acquisition of share capital through the following forms of considerations viz.
means of cash, issuance of loan capital, or insurance of share capital.

There are broadly two kinds of strategies that can be employed in corporate acquisitions.
These include:

Mergers and Acquisitions 5

Friendly Takeover:-

The acquiring firm makes a financial proposal to the target firm’s management
and board. This proposal might involve the merger of the two firms, the
consolidation of two firms, or the creation of parent/subsidiary relationship.

Hostile Takeover:-

A hostile takeover may not follow a preliminary attempt at a friendly takeover.

For example, it is not uncommon for an acquiring firm to embrace the target
firm’s management in what is colloquially called a bear hug.

Mergers and Acquisitions 6



Mergers and Acquisitions 7


Merger and acquisition activity in the United States has typically run in cycles,
with peaks coinciding with periods of strong business growth. U.S. merger activity has
been marked by five prominent waves: one around the turn of the twentieth century, the
second peaking in 1929, the third in the latter half of the 1960s, the fourth in the first half
of the 1980s, and the fifth in the latter half of the 1990s.

This last peak, in the final years of the twentieth century, brought very high levels of
merger activity. Bolstered by a strong stock market, businesses merged at an
unprecedented rate. The total dollar volume of mergers increased throughout the 1990s,
setting new records each year from 1994 to 1999. Many of the acquisitions involved huge
companies and enormous dollar amounts. Disney acquired ABC Capital Cities for $19
billion, Traveler's acquired Citicorp for $72.6 billion, Nation Bank acquired Bank of
America for $61.6 billion and Daimler-Benz acquired Chrysler for $39.5 billion.

Mergers and Acquisitions 8



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.
When one company takes over another and clearly established itself as the new owner,
the purchase is called an acquisition. From a legal point of view, the target company

Mergers and Acquisitions 9

ceases to exist, the buyer "swallows" the business and the buyer's stock continues to be

In the pure sense of the term, a merger happens when two firms, often of about the same
size, agree to go forward as a single new company rather than remain separately owned
and operated. This kind of action is more precisely referred to as a "merger of equals."
Both companies' stocks are surrendered and new company stock is issued in its place. For
example, both Daimler-Benz and Chrysler ceased to exist when the two firms merged,
and a new company, DaimlerChrysler, was created.

In practice, however, actual mergers of equals don't happen very often. Usually, one
company will buy another and, as part of the deal's terms, simply allow the acquired firm
to proclaim that the action is a merger of equals, even if it's technically an acquisition.
Being bought out often carries negative connotations, therefore, by describing the deal as
a merger, deal makers and top managers try to make the takeover more palatable.
A purchase deal will also be called a merger when both CEOs agree that joining together
is in the best interest of both of their companies. But when the deal is unfriendly - that is,
when the target company does not want to be purchased - it is always regarded as an

Whether a purchase is considered a merger or an acquisition really depends on whether

the purchase is friendly or hostile and how it is announced. 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.

Mergers and Acquisitions 10


There are three main types of mergers which are Horizontal merger, Vertical merger
& Conglomerate merger. These types are explained as follows;

Mergers and Acquisitions 11

1. Horizontal Merger:-
This type of merger involves two firms that operate & compete in a similar kind
of a business. Horizontal merger is based on the assumptions that it will provide
economies of scale from the larger combined unit. The economies of scale are
obtained by the elimination of duplication of facilities, broadening the product line,
reduction in the advertising cost. Horizontal mergers also have potentials to create
monopoly power on the part of the combined firm enabling it to engage in anti-
competitive practices.
Examples: -
• Mumbai - Glaxo India Limited and Smith Kline Beecham Pharmaceuticals
(India) Limited have legally merged to form GlaxoSmithKline
Pharmaceuticals Limited in India (GSK). A merger would let them pool
their research & development funds and would give the merged company a
bigger sales and marketing force.
• Merger of Centurion Bank & Bank of Punjab.
• Merger between Holicim & Gujarat Ambuja Cement ltd

2. Vertical Merger:-
A vertical Merger involves merger between firms that are in different stages of
production or value chain. A company involved in vertical merger usually seeks to
merge with another company or would like to takeover another company mainly to
expand its operations by backward or forward integration. The acquiring company
through merger of another units attempt to reduce inventory of raw materials and
finished goods. The basic purpose of vertical merger is to eliminate cost of searching
raw materials. Vertical merger takes place when both firm plan to integrate the
production process and capitalize on the demand for the product. A company decides
to get merged with another company when it is not in a position to get strong
position in a market because of imperfect market of intermediary product, scarcity of

Mergers and Acquisitions 12

Example: - Among the Indian corporate that have emerged as big international
players is the Videocon group. The group became the third largest colour picture
tube manufacturer in the world when it announced the purchase of the colour picture
tube business of France-based Thomson SA, which includes units in Mexico, Poland
and China, for about Rs 1260 crore.

3. Conglomerate merger:-
Conglomerate mergers means mergers between firms engaged in unrelated types
of business activity. The basic purpose of such combination is utilization of
financial resources. Such type of merger enhances the overall stability of the acquirer
company and creates balance in the company’s total portfolio of diverse products and
production processes and thereby reduces the risk of instability in the firm’s cash
Conglomerate mergers can be distinguished into three types:
I. Product extension mergers These are mergers between firms in related
business activities and may also be called concentric mergers. These
mergers broaden the product lines of the firms.
II. Geographic market extension mergers: These involve a merger
between two firms operating in two different geographic areas.

III. Pure conglomerates mergers: These involve mergers between two

firms with unrelated business activities. They do not come under product
extension or market extension.

Mergers and Acquisitions 13



Mergers and Acquisitions 14

There are many reasons or factors that motivate companies to go for mergers and
acquisitions such as growth, synergy, diversification etc.

1. Growth: One of the most common reason for mergers is growth. There are
two broadways a firm can grow. The first is through internal growth. This can
be slow and ineffective if a firm is seeking to take advantage of a window of
opportunity in which it has a short-term advantage over competitors. The
faster alternative is to merge and acquire the necessary resources to achieve
competitive goals. Even though bidding firms will pay a premium to acquire
resources through mergers, this total cost is not necessarily more expensive
than internal growth, in which the firm has to incur all of the costs that the
normal trial and error process may impose. While there are exceptions, in the
vast majority of cases growth through mergers and acquisitions is significantly
faster than through internal means. Mergers can give the acquiring company
an opportunity to grow market share without having to really earn it by doing
the work themselves - instead, they buy a competitor's business for a price.
Usually, these are called horizontal mergers. For example, a beer company
may choose to buy out a smaller competing brewery, enabling the smaller
company to make more beer and sell more to its brand-loyal customers.
Example- RPG group had a turnover of only Rs. 80 crores in 1979, which has
increased to about Rs.5600 crores in1996. This phenomenal growth was due
to the acquisitions of several companies by the RPG group. Some of the
companies acquired are Asian Cables, Calcutta Electricity Supply and
Company, etc.

2. Synergy: Another commonly cited reason for mergers is the pursuit of

synergistic benefits. The most commonly used word in Mergers &
Acquisitions is synergy, which is the idea of combining business activities, for
increasing performance and reducing the costs. Essentially, a business will
attempt to merge with another business that has complementary strengths and
weaknesses. This is the new financial math that shows that 1 + 1 = 3. That is,

Mergers and Acquisitions 15

as the equation shows, the combination of two firms will yield a more
valuable entity than the value of the sum of the two firms if they were
operating independently.
Value (A + B) > Value (A) + Value (B)
Although many merger partners cite synergy as the motive for their
transaction, synergistic gains are often hard to realize. There are two types of
synergy one is derived from cost economies and other one is derived from
revenue enhancement. Cost economies are the easier to achieve because they
often involve eliminating duplicate cost factors such as redundant personnel
and overhead. When such synergies are realized, the merged company
generally has lower per-unit costs. Revenue enhancing synergy is more
difficult to predict and to achieve. An example would be a situation where one
company’s capability, such as research process, is combined with another
company’s capability, such as marketing skills, to significantly increase the
combined revenues.

3. Diversification : Other reasons for mergers and acquisitions include

diversification. A company that merges to diversify may acquire another
company engaged in unrelated industry in order to reduce the impact of a
particular industry's performance on its profitability. The track record of
diversifying mergers is generally poor with a few notable exceptions. A few
firms, such as General Electric, seem to be able to grow and enhance
shareholders wealth while diversifying. However, this is the exception rather
than a norm. Diversification may be successful, but it needs more skill and
infrastructure than some firms have.

4. 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. This refers to the fact

Mergers and Acquisitions 16

that the combined company can often reduce duplicate departments or

operations, lowering the costs of the company relative to theoretically the
same revenue stream, thus increasing profit.

5. Increase Market Share & Revenue: This reason assumes that the company
will be absorbing a major competitor and increasing its power (by capturing
increased market share) to set prices. Companies buy companies to reach new
markets and grow revenues and earnings. A merge may expand two
companies' marketing and distribution, giving them new sales opportunities. 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.
Example-Premier and Apollo Tyres,

6. Increase Supply-Chain Pricing Power: By buying out one of its suppliers or

one of the distributors, a business can eliminate a level of costs. If a company
buys out one of its suppliers, it is able to save on the margins that the supplier
was previously adding to its costs; this is known as a vertical merger. If a
company buys out a distributor; it may be able to sale its products at a lower

7. Eliminate Competition: Many mergers and acquisitions deals allow the

acquirer to eliminate future competition and gain a larger market share in its
product's market. The downside of this is that a large premium is usually
required to convince the target company's shareholders to accept the offer. It
is not uncommon for the acquiring company's shareholders to sell their shares
and push the price lower in response to the company paying too much for the
target company.

8. Acquiring new technology: To stay competitive, companies need to stay on

top of technological developments and their business applications. By buying

Mergers and Acquisitions 17

a smaller company with unique technologies, a large company can maintain or

develop a competitive edge and vice versa.

9. Procurement of production facilities: Procurement of production facilities

may be the reason for acquiring company to go for mergers and acquisition. It
is a kind of backward integration. Acquiring Firms will take the decision of
merging with another firm who supplies raw material to acquiring firm in
order to safeguard the sources of supplies of raw material or intermediary
product. It will help acquiring firm to bring economies in purchasing of raw
material. It will also help to cut down the transportation cost.
Example- Videocon takes over Thomson picture tube in China to procure
supply of picture tube required for producing television sets.

10. Market expansion strategy: Many firms go for mergers and acquisitions as
a part of market expansion strategy. Mergers and acquisitions will help the
company to eliminate competition and to protect existing market. It will also
help the firm to obtain new market for promoting their existing or obsolete
For example, Lenovo takes over IBM in India to increase market for Lenovo
products like desktops, laptops in India.

11. Financial synergy: Financial synergy may be the reason for mergers and
acquisitions. Following are the financial synergy available in case of mergers
and acquisitions;
I. Better credit worthiness- This helps companies to purchase good on
credit, obtain bank loan and raise capital in the market easily.
II. Reduces cost of capital- The investors consider big firms as safe and
hence they expect lower rate of return for the capital supplied by them. So
the cost of capital reduces after merger.

Mergers and Acquisitions 18

III. Increase debt capacity- After the merger the earnings and cash flows
become more stable than before. This increase the capacity of the firm to
borrow more funds.
IV. Rising of capital- After the merger due to increase in the size of the
company, better credit worthiness and reputation the company can easily
raise the capital at any time.

12. Own development plans: The purpose of mergers & acquisition is backed by
the acquiring company’s own developmental plans. A company thinks in
terms of acquiring the other company only when it has arrived at its own
development plan to expand its operation having examined its own internal
strength where it might not have any problem of taxation, accounting,
valuation, etc. but might feel resource constraints with limitations of funds
and lack of skill managerial personnel. It has to aim at suitable combination
where it could have opportunities to supplement its funds by issuance of
securities; secure additional financial facilities eliminate competition and
strengthen its market position.

13. Corporate friendliness: Although it is rare but it is true that business houses
exhibit degrees of cooperative spirit despite competitiveness in providing
rescues to each other from hostile takeovers and cultivate situations of
collaborations sharing goodwill of each other to achieve performance heights
through business combinations. The combining corporate aims at circular
combinations by pursuing this objective

14. General gains:

I. To improve its own image and attract superior managerial talents to
manage its affairs.
II. To offer better satisfaction to consumers or users of the product.

Mergers and Acquisitions 19

15. Taxes: A profitable company can buy a loss maker to use the target's loss as
their advantage by reducing their tax liability. In the United States and many
other countries, rules are in place to limit the ability of profitable companies to
"shop" for loss making companies, limiting the tax motive of an acquiring
 Ahmadabad Cotton Mills Merged with Arvind Mills ( Rs =3.34 crores)
 Sidhaper Mills merged with Reliance Industries Ltd.(Rs. 3.34 crores)

Mergers and Acquisitions 20


Mergers and Acquisitions 21



Mergers and acquisitions is the permanent combination of the business which vest
management in complete control of the business of merged firm. Shareholders in the
selling company gain from the mergers and acquisitions as the premium offered to
induce acceptance of the merger or acquisitions. It offers much more price than the
book value of shares. Shareholders in the buying company gain premium in the long
run with the growth of the company.

Mergers and acquisitions are caused with the support of shareholders, managers and
promoters of the combing companies. The advantages, which motivate the
shareholders and managers to give their support to these combinations and the
resulting consequences they have to bear, are briefly noted below.

• From shareholders point of view: - Shareholders are the owners of the

company so they must get be benefited from the mergers and acquisitions.
Mergers and acquisitions can affect fortune of shareholders. Shareholders
expect that investment made by them in the combining companies should
enhance when firms are merging. The sale of shares from one company’s
shareholders to another and holding investment in shares should give rise
to greater values. Following are the advantages that would be generally
available in each merger and acquisition from the point of view of

1. Face value of the share is increased.

2. Shareholders will get more returns on the investments made by

them in the combining companies.

3. Sale of shares from one company’s shareholder to another is


Mergers and Acquisitions 22

4. Shareholders get better investment opportunities in mergers and


• From managers point of view: - Managers are concerned with improving

operations of the company, managing the affairs of the company
effectively for all round gains and growth of the company which will
provide them better deals in raising their status, perks and fringe benefits.
Mergers where all these things are the guaranteed outcome get support
from the managers.

• From Promoters point of view: -

1. Mergers offer company’s promoters advantages of increase in the

size of their company, financial structure and financial strength.

2. Mergers can convert closely held and private limited company

into public limited company without contributing much wealth and
losing control of promoters over the company.

• From Consumers point of view: - Consumers are the king of the market
so they must get some benefits from mergers and acquisitions. Benefits in
favour of the consumer will depend upon the fact whether or not mergers
increase or decrease competitive economic and productive activity which
directly affects the degree of welfare of the consumers through changes in
the price level, quality of the products and after sales service etc.
Following are the benefits that consumers may derive from mergers and
acquisitions transactions;
1. Low price & better quality goods: - The economic gains realized
from mergers and acquisitions are passed on to consumers in the
form of low priced and better quality goods.
2. Improve standard of living of the consumers: - Low priced and
better quality products directly improves standard of living of the

Mergers and Acquisitions 23

Merger or acquisition of two companies in the same field or in diverse field may involve
reduction in the number of competing firms in an industry and tend to dilute competition
in the market. They generally contribute directly to the concentration of economic power
and are likely to lead the merger entities to a dominant position of market power. It may
result in lesser substitutes in the market, which would affect consumer’s welfare. Yet
another disadvantage may surface, if a large undertaking after merger because of
resulting dominance becomes complacent and suffers from deterioration over the years in
its performance. Following are some disadvantages of mergers and acquisitions;

• Creates monopoly- when two firms merged together they get dominating
position in the market which may lead to create monopoly in the market.
• Leads to unemployment-Raiders shouldn’t have the right to buy up firms they
have no idea how to run – the employees who have spent their lives building up
the firm should be making the decisions.
• Raiders become filthy rich without producing anything, at the expense of
hardworking people who do produce something.
• M&A damages the morale and productivity of firms.
• Corporate debt levels have risen to dangerous levels.
• Managers pressured to forego long-term investment in favour of short-term profit.
• Shareholders may be payed lesser dividend if the firm is not making profits. There
may be a possibility that shareholders would be paid less returns on investment if
the company is not earning enough profit.
• Corporate raiders use their control to strip assets from the target, make a quick
profit, destroying the company in the process, throwing people out of work.

Mergers and Acquisitions 24



Mergers and Acquisitions 25

1. Search for merger partner- The first step in mergers is to search for merger
partner. The top management may use their own contact in the same line of
economic activity or in the other diversified field which could be identified as a
better merger partners. Such identification should be based on the detail
information of the merger partners collected from public and private sources.

2. Agreement between the two companies- The beginning of actual merger

procedure starts with agreement between the merging companies, but mere
agreement does not provide legal cover to the transaction unless it is sanctioned
by the Court under section 391 of Companies Act 1956.

3. Scheme of merger – The scheme of merger should be prepared by the companies

which have taken decision of merging. There is no specific form prescribed for
scheme of merger but scheme should contain following information;

 Particulars about the merging companies.

 Main terms of transfer of assets and liabilities from transferor to


 Conditions of conducting business.

 Particulars about share capital of merging companies specifying

authorized capital issued capital and paid up capital.

 Description of proposed profit sharing ratio and any condition attached to


 Conditions about payment of dividend.

 Status of employees of the merging companies and also status of provident

fund, gratuity fund or any funds created for the benefits of existing

 Treatment of debit balance of merging companies.

 Miscellaneous provisions covering income tax dues, contingencies and

other accounting entries.

Mergers and Acquisitions 26

4. Approval of Board Of Directors for the scheme- The scheme for merger must
be approved by the respective Board Of Directors of transferor and transferee

5. Approval of scheme by financial institutions- The Board of Directors should in

fact approve the scheme after it has been approved by the financial institutes,
debenture holders, banks which have granted loans to the companies. Approval of
Reserve Bank of India is also needed.

6. Application to the Court- The next step is to make an application under section
39(1) of Indian Companies Act 1956 to the High Court for getting permission for
merging between companies.

7. Approval of scheme by the Court- On the receipt of the application for merger
the Court will decide whether to approve the scheme of merger or not. Once the
Court has approved the application then firms can merged.

8. Transfer of assets and liabilities- The High Court has the power to give order
for transfer of any property from Transferor Company to Transferee Company.
By the virtue of such order assets and liabilities of the Transferor Company shall
automatically stand transferred to Transferee Company.

9. Allotment of shares to shareholders of transferor company- By the virtue of

sanctioned scheme of merger, the shareholders of Transferor Company are
entitled to get shares in Transferee Company in the exchange of ratio provided
under the said scheme.

10. Intimation to stock exchanges- After merger is effected; the company which
takes over assets and liabilities of the Transferor Company should apply to the
Stock Exchanges where its securities are listed, for listing the new shares allotted
to the shareholders of the company.

11. Public announcement- Public announcement of merger is mandatory as required

under SEBI regulations. The Transferee Company shall appoint merchant bank to
make a public announcement of merger on the behalf of Transferee Company.

Mergers and Acquisitions 27

Public announcement shall be made at least in one national English daily one
Hindi daily and one regional language daily newspaper of that place where the
shares of that company are listed and traded. Public announcement should be
made within four days from finalization of negotiations or entering into any
agreement of merger. Public announcement should contain following information;

• Paid up share capital of the transferee company, the number of fully paid up
and partially paid up shares.
• The minimum offer price for each fully paid up or partly paid up share.
• Mode of payment of consideration.
• Salient features of the agreement, if any, such as the date, the name of the
seller, the price at which the shares are being acquired, the manner of payment
of the consideration and the number and percentage of shares in respect of
• which the acquirer has entered into the agreement to acquire the shares or the
consideration, monetary or otherwise, for the acquisition of control over the
transferee company, as the case may be;
• Objects and purpose of the mergers and acquisitions and the future plans of
the transferor company for the transferee company. Provided that where the
future plans are set out, the public announcement shall also set out how the
transferor proposes to implement such future plans.

• The date by which individual letter of offer would be posted to each of the
• The date of opening and closure of the offer and the manner in which and the
date by which the acceptance or rejection of the offer would be communicated
to the share holders.
• The date by which the payment of consideration would be made for the shares
in respect of which the offer has been accepted.

• Approvals of banks or financial institutions required, if any;

• Such other information as is essential for the shareholders to make them
informed about the offer.

Mergers and Acquisitions 28

Mergers and Acquisitions 29



Investors in a company that are aiming to take over another one must determine
whether the purchase will be beneficial to them. In order to do so, they must ask
themselves how much the company being acquired is really worth. Naturally, both sides
of a mergers and acquisitions deal will have different ideas about the worth of a target
company. The seller will tend to value the company at highest 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. Following are some methods that are employed by the
merging firms;

Mergers and Acquisitions 30

1. Comparative Ratios - The following are two examples of the many comparative
metrics on which acquiring companies may base their offers:

 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.
 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 mergers and
acquisitions, 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.

Mergers and Acquisitions 31

Mergers and Acquisitions 32



Mergers and Acquisitions process requires highly skilled and qualified group of
advisers. Each advisor specializes in a specific aspect of the merger and acquisition
process. The role played by such advisers or professional experts are as follows;

1. Investment bankers: Investment banking is one of the most important

department in the process of mergers and acquisitions. It is fee based adviser
department which works with the company that wish to acquire other company or

Mergers and Acquisitions 33

with industries that wish to purchase a smaller industry. The main role of
investment banks is to provide finance for mergers and acquisitions transactions.
2. Lawyers: The legal framework surrounding a typical transaction has become so
complicated that no one individual can have sufficient expertise to address all the
issues. In large and complicated transactions, legal teams consists of more than
one dozen lawyers each of them represents specialized aspects of law. Lawyers
are expected to perform all legal proceedings.
3. Accountants: Services provided by accountants include advice on the optimal
tax structure, financial structuring and performing financial due diligence. A
transaction can be structured in many different ways, with each having different
tax implications for the parties involved. Tax accountants are vital in determining
the appropriate tax structure. Accountants also perform the role of auditors by
reviewing the transferor company’s financial statements and operations through a
series of interviews with senior and middle level managers.
4. Valuation experts: They may be appointed either by the bidder or the Transferor
Company to determine the value of the transferor company. They build models
that incorporate various assumptions such as costs or revenue growth rate.
5. Institutional investors: They include public and private pension funds, insurance
companies, banks, mutual funds. Collection of institutions can influence firm’s
action. They invest their money in the company.

Mergers and Acquisitions 34




1. Factors responsible for successful mergers and acquisitions

Mergers and Acquisitions 35

The success of merger depends upon many critical factors but the main factor is that
Transferor Company should buy Transferee Company at right time, at right place and at
right cost. Just because of company is for sale and another company can afford buying
that company is not good reason to do a deal. The success of mergers and acquisitions
depend on how realistic deal makers are and how well they can integrate two companies
while maintaining day-to-day operations. There are several key ingredients that need to
come together for merger and acquisitions to be successful;

I. Strategy- Strategy is the basis for any merger and acquisition. Company should be
able to express in one sentence the motive behind merger and acquisition. If the
transferor company is not able to express the motive for doing a deal for merger
then the deal should not be done. There are many strategic reasons to buy a
company some of them are listed as follows;
• Acquire Innovative technical skills.
• Obtain new markets and customer.
• Enhance product line.
II. Motive- Buying company i.e. transferor company does not know reasons why
another company is being sold. It should ask reasons for selling the company.
Transferor Company should also try to know what selling company knows about
the business that they are not telling potential buyers. After knowing all reasons for
selling a company buying company would be in a position to decide whether to go
for a deal or not. If they are going for deal then buying company should decide
appropriate price for the deal. Buying company should also examine its own motive
for wanting to acquire the company, whether it is good asset for the company that
would enhance the market of buying company.
III. Price- A low price does not always equate to a good deal, but higher the price; it is
fewer cushions for unexpected problems. Buying company is often forced to pay
more price than they want to pay for the deal. In a competitive situation the buying
company needs to decide how much it is willing to pay and not exceed that level,
even if it means losing the company. However, in any merger and acquisition there
is a pricing range, based on different assumptions of the future performance of the

Mergers and Acquisitions 36

merger and acquisition. The buying company has to decide the price to offer for the
deal, or how risk will be divided between shareholders of merging company. .

POST MERGER MANAGEMENT- For a merger to succeed much work a remains

after the deal has been signed. The strategy and business model of the old firms may
no longer be appropriate when a new firm is formed. Each firm is unique and
presents it’s own set of problems and solutions. It takes a systematic effort to
combine two or more companies after they have come under a single ownership.
IV. DUE DILIGENCE- Due diligence means, “A large part of what makes a deal
successful after completing it, is what is being done before completing it”. Before
the closing of the deal, the buyer should engage in a thorough due diligence review
of the sellers business. The purpose of the review is to detect any financial and the
business risk that the buyer might inherit from the seller. The due diligence team
can identify ways in which assets, process and other resources can be combined in
order to realize cost saving and other expected synergies. The planning team can
also try to understand the necessary sequencing of events and resulting pace at
which the expected synergies may be realized.

2. Factors responsible for failure of mergers and acquisitions

As there are many factors responsible for success of mergers similarly there are many
factors responsible for failure of the merger. The main factor is buying wrong company at
wrong time, at wrong place and by paying wrong price. If the process through which
merger is executed is faulty then it will affect merger adversely. Historical trends show
that roughly two thirds of big mergers will disappoint on their own terms, which means

Mergers and Acquisitions 37

they will lose value on the stock market. Some of reasons for failure of mergers and
acquisitions are listed below;
I. Payment of high price- The merger fails when the maximum price is paid to
buy another company. In such situation shareholders of Transferee Company
will receive more cash but the shareholders of Transferor Company will pay
more cash. As a result of this deal for merger will fail.
II. Culture clash- Lack of proper communication, differing expectations and
conflicting management styles due to differences in corporate culture contribute
to failure in implementing plan and therefore, failure of mergers and
III. Overstated synergies: - An acquisition can create opportunities of synergy by
increasing revenues, reducing costs, reducing net working capital and improving
the investment intensity. Over estimation of such synergies may lead to a failure
of this merger. Inability to prepare plans leads to failure of mergers and
IV. Failure to integrate operations- Once firms are merged management must be
prepared to adapt plans in favour of changed circumstances. Inability to prepare
plans leads to failure of mergers and acquisitions.
V. Inadequate due diligence- The process of the due diligence helps in detecting
any financial and business risks that the buyer might inherit from the seller.
Inadequate due diligence results in the failure of the mergers and acquisitions.

Mergers and Acquisitions 38



No marketplace currently exists for the mergers and acquisitions of privately-owned

small to mid-sized companies. Market participants often wish to maintain a level of
secrecy about their efforts to buy or sell such companies. Their concern for secrecy
usually arises from the possible negative reactions a company's employees, bankers,

Mergers and Acquisitions 39

suppliers, customers and others might have if the effort or interest to seek a transaction
were to become known. At present, the process by which a company is bought or sold
can prove difficult, slow and expensive. A transaction typically requires six to nine
months and involves many steps. Locating parties with whom to conduct a transaction
forms one step in the overall process and perhaps the most difficult one. Qualified and
interested buyers of multimillion dollar corporations are hard to find. Even more
difficulty is to bring a number of potential buyers forward simultaneously during
negotiations. Potential acquirers in industry simply cannot effectively "monitor" the
economy at large for acquisition opportunities even though some may fit well within their
company's operations or plans.
An industry of professional "middlemen" (known variously as intermediaries, business
brokers, and investment bankers) exists to facilitate mergers and acquisitions
transactions. These professionals do not provide their services cheaply and generally
resort to previously-established personal contacts, direct-calling campaigns, and placing
advertisements in various media. In servicing their clients they attempt to create a one-
time market for a one-time transaction. Many but not all transactions use intermediaries
on one or both sides. Despite best intentions, intermediaries can operate inefficiently
because of the slow and limiting nature of having to rely heavily on telephone
communications. Many phone calls fail to contact with the intended party. Busy
executives tend to be impatient when dealing with sales calls concerning opportunities in
which they have no interest. These marketing problems typify any private negotiated
The market inefficiencies can prove detrimental for this important sector of the economy.
Beyond the intermediaries' high fees, the current process for mergers and acquisitions has
the effect of causing private companies to initially sell their shares at a significant
discount. Furthermore, it is likely that since privately-held companies are so difficult to
sell they are not sold as often as they might or should be.
Previous attempts to streamline the mergers and acquisitions process through computers
have failed to succeed on a large scale because they have provided mere "bulletin boards"
hence; it becomes difficult to maintain secrecy. There is a need of a method for
efficiently executing mergers and acquisitions transactions without compromising the

Mergers and Acquisitions 40

confidentiality of parties involved and without the unauthorized release of information

which is difficult rather almost impossible. It's no secret that plenty of mergers don't
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 but to apply all
these things in practical is very difficult. In other words, in theory, 1+1 = 3 sounds great,
but in practice, it is not so easy.
Another difficulty may be Government rules and regulations. Countries like India do not
allow foreign companies to enter into the domestic market. Thus foreign companies are
forced to merge with Indian company to enter into Indian market even though they have
the power and funds to enter in India alone that is without merging with any other
Example- 1) Wal-Mart is trying to enter into Indian market by merging with
Bharti telecom.
Historical trends show that roughly two thirds of big mergers will disappoint on their own
terms, which means they will lose value on the stock market. The motivations that drive
mergers can be flawed and efficiencies from economies of scale may prove elusive. In
many cases, the problems associated with trying to make merged companies work are all
too concrete.

Mergers and Acquisitions 41



Mergers are generally differentiated from acquisitions partly by the way in which they
are financed and partly by the relative size of the companies. Various methods of
financing an M&A deal exist:

Cash- Payment by cash such transactions are usually termed acquisitions rather than
mergers because the shareholders of the target company are removed from the
picture and the target comes under the control of the acquirer's shareholders alone.

Mergers and Acquisitions 42

Financing- Financing cash can be borrowed from a bank, or raised by an issue of bonds.
Mergers and Acquisitions financed through debt are known as leveraged buyouts,
and the debt will often be moved down onto the balance sheet of the acquired
company. A cash deal would make more sense during a downward trend in the
interest rates. Another advantage of using cash for mergers and acquisition is that
there tends to lesser chances of EPS dilution for the acquiring company. But a
caveat in using cash is that it places constraints on the cash flow of the company.
Hybrids- Mergers and acquisition can involve a combination of cash and debt, or a
combination of cash and stock of the purchasing entity.

Mergers and Acquisitions 43




For the period January-August 2006, 533 mergers and acquisitions worth Rs 59741 crore
were announcement from January 2006 till august 2006, compared to the 790 deals
aggregating Rs 52804 crore for the same period a year ago.

Mergers and Acquisitions 44

While the number of Acquisition deals Announced was 48 percent lower as compared as
to previous year, the consideration amount was more than 12 percent. For the same
period, 69 open offers amounting to a consideration of Rs 6714 crore were announced.
Last quarter April-June and July-August recorded 270 and 176 mergers and acquisitions
respectively and their consideration was 18229 crore.71 acquisition was recorded in the
month of August only and the consideration amounting to 9409 crore.11 open offers in
the remaining part of the year.8 offers were made by Indian Companies and 3 by foreign
multinationals. Largest offer was made by Oracle Corporations to shareholders of I-flex.
Largest Acquisition was made by Reliance Industries to acquire 37.95 percent equity in
Reliance Energy for a consideration of 2662 crore.
Mergers saw a downswing in the last quarter of the fiscal year 2005.June-August 2005
saw 66 mergers as compared to 51 mergers recorded for the same period in the previous
year. However in the monthly trend, 36 mergers were recorded as compared to 17
mergers in August 2005.
August 2006 recorded companies like Anand Inds and Clariant Group announcing
mergers of their subsidiaries merging their subsidiaries into themselves to bring synergy
into their business activities. The merger in the following months was not satisfactory.
August 2007 recorded merger of Air India and Indian Airlines into a new entity
National Aviation Company of India.

Mergers and Acquisitions 45




Year (05- 06)
Serial no Industry Numbers
1 Food and Beverages 40
2 Textiles (cotton, synthetic) 28
3 Chemical 43
4 Fertilizers & Pesticides 10
5 Tyres & Tubes 6

Mergers and Acquisitions 46

6 Cement 5
7 Metal 9
8 Machinery 15
9 Electronics 28
10 Computers Software 16
11 Automobile Industry 2
12 Manufacturing & Mining 16
13 Electricity 3
Transport &
14 Communication 6
15 Finance industry 38
16 Others 98

Total 363


ACQUISITIONS - Year (2005- 2006)
Serial no Industry Numbers Value (Rs crore)
1 Food and Beverages 108 6396
2 Textiles 124 7320
3 Chemical 119 10417
Fertilizers &
4 Pesticides 46 2975
5 Tyres & Tubes 27 7539
6 Cement 21 7485
7 Metal 42 928
8 Machinery 45 2951
9 Electronics 112 10126
10 Computers Software 88 9003
11 Automobile 46 4570

Mergers and Acquisitions 47

Manufacturing &
12 Mining 73 3619
13 Electricity 11 4178
Transport &
14 Communication 27 9951
15 Finance industry 65 6937
16 Others 232 24427
Total 1186 118822

Mergers and Acquisitions 48




Top 10 M&A deals worldwide (value in mil $)

Transaction value
Year Purchaser Purchased
(in mil. USD)

Mergers and Acquisitions 49

Vodafone Airtouch
1999 Mannesmann 183,000

1999 Pfizer Warner-Lambert 90,000

1999 Citicorp Travelers Group 73,000

Air Touch
1999 Vodafone Group 60,000

2002 Pfizer Inc. Pharmacia Corporation 59,515

2004 Sanofi-Synthelabo Aventis SA 60,243


2000 Glaxo Wellcome SmithKline Beecham Plc. 75,961


2001 Comcast AT&T Broadband & 72,041

Corporation Internet Svcs

Mergers and Acquisitions 50



GlaxoSmithKline Pharmaceuticals Limited, India

Glaxo India Limited and SmithKline Beecham Pharmaceuticals (India) Limited have
legally merged to form GlaxoSmithKline Pharmaceuticals Limited in India (GSK). It

Mergers and Acquisitions 51

may be recalled here that the global merger of the two companies came into effect in
December 2000.
Commenting on the prospects of GSK in India, Vice Chairman and Managing Director,
GlaxoSmithKline Pharmaceuticals Limited, India, Mr. V Thyagarajan said, “The two
companies that have merged to become GlaxoSmithKline in India have a great heritage –
a fact that gets reflected in their products with strong brand equity.” He added, “The two
companies have a long history of commitment to India and enjoy a very good reputation
with doctors, patients, regulatory authorities and trade bodies. At GSK it would be our
endeavor to leverage these strengths to further consolidate our market leadership.”

GlaxoSmithKline, India
The merger in India brings together two strong companies to create a formidable
presence in the domestic market with a market share of about 7 per cent. With this
merger, GlaxoSmithKline has increased its reach significantly in India. With a field force
of over 2,000 employees and more than 5,000 stockiest, the company’s products are
available across the country. The enhanced basket of products of GlaxoSmithKline, India
will help serve patients better by strengthening the hands of doctors by offering superior
treatment and healthcare solutions.

GlaxoSmithKline, Worldwide
GlaxoSmithKline is the world’s leading research-based pharmaceutical and healthcare
company, with an R&D budget of over ₤2.3 billion (Rs.16, 130 crores). GlaxoSmithKline
has a powerful research and development capability, encompassing the application of
genetics, genomics, combinatorial chemistry and other leading edge technologies. A truly
global organization with a wide geographic spread, GlaxoSmithKline has its corporate
headquarters in the West London, UK. The company has over 100,000 employees and
supplies its products to 140 markets around the world. It has one of the largest sales and
marketing operations in the global pharmaceutical industry.


Mergers and Acquisitions 52

International Business Machines Corp.(IBM) has agreed to sell its personal computer
business to China's largest personal computer maker, Lenovo Group Ltd., for US$1.25
billion. The sale brings to a close a major chapter in IBM's pioneering PC business that it
started in 1981.

The agreement calls for Lenovo to pay IBM $650 million in cash, $600 million in
Lenovo Group common stock and for Lenovo to assume $500 million in net balance
sheet liabilities from IBM. Lenovo took over IBM's desktop PC business, including
research and development and manufacturing.

IBM will own an 18% stake in the new established PC Company, and will let it continue
to use the IBM brand as well as other trademarks on PC's and notebook computers. The
new company will become the number three maker of PCs behind Dell Inc. and Hewlett-
Packard Co. The new company will be based in New York, with principal operations in
Beijing and. It is expected that 2,500 IBM employees will join the new company.

Lenovo Group Ltd. has purchased $1.75 billion PCs from IBM Inc, creating the third-
largest personal computer vendor in the world and giving IBM greater entry into the
rapidly growing Chinese market. Lenovo will gain control of IBM's Think Centre
desktop and popular ThinkPad notebook brands, as well as the thousands of customers
who buy those products.

Customer reaction to the deal when it was first announced in December was mixed, but
IBM executives were aggressive in getting out the message that the quality of the
products, services and support would not change.

Lenovo will operate two divisions—Lenovo International, which is essentially the old
IBM PC business, and Lenovo China, the company's Chinese business.

The main purpose of IBM to merge with Lenovo is that to give competition to Dell Inc.
(world’s largest PC manufacturer) in China. Reason for Lenovo to merge with IBM is to
enter into US market. After the merger Dell Inc. announced that it would discontinue

Mergers and Acquisitions 53

selling their lower end PCs in China because it was nit able to compete on price of local


Mergers and Acquisitions 54

The merger of Air India and Indian Airlines cleared the last legal hurdle on 24th August
2007 with corporate affairs ministry giving its green signal, setting the creation of mega
national airline. State-owned carriers Air-India and Indian Airlines)were formally merged
on Friday after the Ministry of Corporate Affairs gave its formal approval to the merger
of the two carriers, which will have a combined fleet of 112 carriers.

The merger carrier would have about 34000 employees and equity base of Rs 150 crore.
Air India would have total fleet of 112 by 2011-12 when all the planes ordered by two
carriers are delivered.

The two airlines were merged into a new company -- National Aviation Company of
India Ltd-- a government release said.

V Thulasidas will be the chairman while Vishwapati Trivedi will be managing director of
the new company that will fly under the brand name 'Air India'. The merged entity will
operate on the domestic and as well as international sectors, the release said.

Air-India will have a combined fleet of 112 aircraft and will be among the top 10 airlines
in Asia and among the leading 30 airlines globally.As a part of its fleet acquisition
program of 112 aircraft, the new airline will induct 21 new aircraft this year including
seven Boeing 777s, 10 A-320s and 4 Boeing 737-800 this year. Air India has already
launched its inaugural flight between Mumbai and New York as a joint entity from
August 1. This is the first time a national carrier is offering a non-stop flight between
India and the United States.

Air India has already launched its inaugural flight between Mumbai and New York as a
joint entity from August 1. This is the first time a national carrier is offering a non-stop
flight between India and the United States.

Air India will have two more brands along with the main carrier, its low-cost arm Air
India Express (which will operate on international and domestic sectors) and Air India

Mergers and Acquisitions 55

The airline also plans to tie up with one of the aircraft manufacturer for a maintenance,
repair and overhaul facility which will also serve as a strategic business unit for the
airline the statement said.


Mergers and Acquisitions 56

It seems that finally Arcelor is relenting. Some rumors state that Arcelor's CEO Guy
Dolle may recommend Mittal's offer to the board. Some say that Mittal will increase his
bid. It seems the 5 month long saga may be reaching its climax soon.

June 23 - Mittal Steel Co., the world's largest steelmaker, said it's approaching an
agreement to buy Arcelor SA that would end a five-month struggle and lead to the
biggest steel-industry merger.

The two companies will continue talks on Mittal's 24 billion-euro ($30 billion) offer
today and tomorrow, Sudhir Maheshwari, Mittal's managing director for business
development and treasury, said in an interview today. Luc Scheer, a spokesman for
Arcelor in Luxembourg, declined to comment. Arcelor's board is scheduled to meet June

Mittal may increase its offer by 3 billion euros, which would value each Arcelor share at
40.62 euros, according to Bloomberg calculations before it was 36.04 euros per Arcelor

Mittal has already increased its offer, first made Jan. 27, by 34 percent. As part of the
improved terms, billionaire Chairman Lakshmi Mittal agreed to eliminate his preferential
voting rights in the combined company.

Mittal is now offering to give Arcelor shareholders more than half the new company's
shares and keep Dolle as CEO, the Wall Street Journal reported today. Lakshmi Mittal
would probably be chairman or president, according to the report.

Mittal needs Arcelor to control 10 percent of global steel production. If Arcelor merges
with Mittal’s, it will replace Mittal as the world's biggest producer of steel.
Mittal’s Steel shareholders on Tuesday approved the merger with Arcelor Mittal, paving
the way for the merger between Mittal and Arcelor, expected to conclude later this year.
Mittal Steel won approval from 98.8 % of its shareholders present or represented by

Mergers and Acquisitions 57

proxy voting to merge with Arcelor Mittal. Mittal Steel, incorporated in the Netherlands,
is finalizing its merger with Arcelor in a two-step process, to create a company governed
by Luxembourg law, Mittal Steel said during its extraordinary shareholders meeting held
in Amsterdam.


One size doesn't fit all. Many companies find that the best way to get ahead is to expand
ownership boundaries through mergers and acquisitions. At least in theory, mergers
provide economies of scale by expanding operations and cutting costs. Investors can take
comfort in the idea that a merger will deliver enhanced market power.

Now a day, many companies are taking decision to go for merger and acquisitions to
expand their business. But, the procedure for merger is time consuming it almost takes 6
to 7 months. Therefore, most of the mergers and acquisitions are not completed.

Mergers and acquisition transactions are often affected by government rules and
regulations, most of the countries do not allowed foreign companies to enter into local
market alone. Such foreign companies can enter only when they make merger with any
local company.

The current trend shows that there is decline in the number of mergers and acquisitions.
It is because of mergers and acquisitions transactions the needs of expertise persons have
increased. Expertise persons include valuation expert, lawyers, accountants, etc.
Merger and acquisition will give positive result only when it is executed properly.

Mergers and Acquisitions 58


1. CMIE Reports
2. Economic Times
3. DNA money
4. Essentials of Business Environment – K. Ashwathapa
5. Business Environment – Kale Ahmed


2. (links and search data)
3. (links and search data)
6. (term of the day)