Mergers, Acquisitions and Corporate Restructuring

Basic Concepts
Merger :a statutory combination of two or more
companies into a single company, in such a way
that only one survives while the other is
dissolved.

Example: Centurion bank of Punjab merged with HDFC bank

Punjab Tractors Ltd. merged with Mahindra &
Mahindra Ltd.

Volvo Buses India merged with Volvo India Pvt. Ltd.

MTS India merged with Reliance Communications
Ltd.
Basic Concepts
Merger:
Amalgamation: is the combination of two or more
companies into a new company.

In other words, Amalgamation is an

agreement or deal between two or more
companies to consolidate their business
activities by establishing a new company
having a separate legal existence.
Example:
Ambuja Cement Eastern Ltd. and Ambuja Cement Rajastan
Ltd. are amalgamated into Gujarath Ambuja Cement Ltd.
Brooke Bond India Ltd. and Lipton India Ltd. are
amalgamated into Brooke Bond Lipton India Ltd.
Basic Concepts
Merger :
Amalgamation:
Acquisition: is a corporate action in which a company
buys most of the target companys
ownership stakes in order to assume control
of the target company.

Example: Star India acquires MAA Network

Emami Ltd. acquires Austrailian personal
care firm Fravin Ltd.
Wipro Acquired US-based HealthPlan
Services for Rs.3150 crores
Basic Concepts
Merger :
Amalgamation:
Acquisition:
Takeover: It refers to transfer of control of a firm from
one group of shareholders to another group of
shareholders. Change in the controlling interest
of a company, either through a friendly
acquisition or unfriendly.
A "friendly takeover" is an acquisition which is approved by
the management.
A "hostile takeover" allows a bidder to take over a target
company whose management is unwilling to agree to
a merger or takeover.
Basic Concepts
Merger :
Amalgamation:
Acquisition:
Takeover:
Corporate Restructuring: is a process of rearranging the
organizational or business structure of the company for
increased efficiency and profitable growth.
1. Financial restructuring
2. Market restructuring
3. Technical restructuring
4. Organisational restructuring
Types of Mergers
1. Horizontal Merger: merger between two firms
operating and competing in the same kind of business.
Lipton India & Brooke bond
Bank of Mathura with ICICI Bank
Motives:
Economies of scale
Elimination/reduction in competition
Types of Mergers
2. Vertical Merger: Merger between firms that are in
different stages of production or value chain (buyer &
seller relationship), with a reason to expand its
operation by backward/forward integration.
Nirma Ltd. & Gujarat Heavy Chemicals Ltd.
Motives:
Low cost of materials
Lower distribution costs
Assured supplies and market
Increasing/creating barriers to entry for potential
competitors
Types of Mergers
3. Conglomerate Merger: Merger between firms engaged in
unrelated business activity.
L&T and Voltas Ltd.
Product extension: mergers between firms in related
business activities (this is also called concentric
mergers)
Geographic market extension: merger with two firms
operating in two different geographical areas
Pure conglomerate : involves merger between two
firms with unrelated business activities
Motives: To increase the market share
Synergy & cross-selling
To reduce the risk exposure
Theories of Mergers
1. Efficiency Theory or Hypothesis
It states that mergers will only occur when they are
expected to generate enough realisable synergies to
make the deal beneficial to both the parties.
Theories of Mergers
1. Efficiency Theory or Hypothesis

i. Differential Efficiency Theory: A few firms may

operate below their potential and have low efficiency,
such firms may merge with more efficient firms in the
same industry.
Theories of Mergers
1. Efficiency Theory or Hypothesis

i. Differential Efficiency Theory:

ii. Inefficient Management Theory: Management of one
company simply is not performing up to its potential
and another control group is in a position to manage the
firm more effectively.
Theories of Mergers
1. Efficiency Theory or Hypothesis
iii. Synergy: Reaction that occur when two or more
organizations combine to produce a greater effect
together than that which sum of the two operating
independently could account for.
Theories of Mergers
1. Efficiency Theory or Hypothesis
iii. Synergy:
(a).Operating Synergy: it states that economies of scale
exist in the industry, before merger take place, the level
of activity that the firms operate at are insufficient to
exploit the economies of scale.
Theories of Mergers
1. Efficiency Theory or Hypothesis
iii. Synergy:
(a).Operating Synergy:

(b). Financial Synergy: it states that when the cash flow

rate of the acquirer is greater than that of the acquired
firm, capital is relocated to the acquired firm and its
investment opportunities improve.
Theories of Mergers
1. Efficiency Theory or Hypothesis
iii. Synergy:
(a).Operating Synergy:
(b). Financial Synergy:

(c). Managerial Synergy: It states that a firm, whose

management team has greater competency than is
required by the current tasks in the firm, may seek to
employ the surplus resources by acquiring firm, which is
less efficient due to lack of adequate managerial
resources.
Theories of Mergers
1. Efficiency Theory or Hypothesis
i. Differential Efficiency Theory:
ii. Inefficient Management Theory:
iii. Synergy:
(a).Operating Synergy:
(b). Financial Synergy:
(c). Managerial Synergy:

iv. Pure Diversification : It states that diversification

through mergers is commonly preferred to
diversification through internal growth, since the firm
may lack internal resources or capabilities required.
Theories of Mergers
1. Efficiency Theory or Hypothesis
i. Differential Efficiency Theory:
ii. Inefficient Management Theory:
iii. Synergy:
(a).Operating Synergy:
(b). Financial Synergy:
(c). Managerial Synergy:
iv. Pure Diversification :

v. Strategic Realignment to Changing Environment: It

states that firms use the strategy of M&As as ways to
rapidly adjust to changes in their external environment
such as regulatory & technological changes.
Theories of Mergers
1. Efficiency Theory or Hypothesis
i. Differential Efficiency Theory:
ii. Inefficient Management Theory:
iii. Synergy:
(a).Operating Synergy:
(b). Financial Synergy:
(c). Managerial Synergy:
iv. Pure Diversification :
v. Strategic Realignment to Changing Environment:

vi. Undervaluation: It states that undervalued

companies can also be one of the motivating factors
leading to mergers.
Theories of Mergers
1. Efficiency Theory or Hypothesis
2. Information and Signaling Theory :
It states that certain corporate actions such as merger
negotiation & tender offer for acquisition convey other
significant forms of information to market about
potential for increase in future value.
Theories of Mergers
1. Efficiency Theory or Hypothesis
2. Information and Signaling Theory :
3. Market Power Theory:
it states that a firm wants to get market power or
leadership in the industry through the horizontal
mergers.
Theories of Mergers
1. Efficiency Theory or Hypothesis
2. Information and Signaling Theory :
3. Market Power Theory:
4. Tax Considerations Theory:
it states that mergers and acquisitions will take place to
reap the tax advantages such as tax benefits from carry
forward of operating losses, substitution of capital gains
for ordinary income.
Theories of Mergers
1. Efficiency Theory or Hypothesis
2. Information and Signaling Theory
3. Market Power Theory
4. Tax Considerations Theory
5. Agency problem & Managerialism or Agency Theory:
it states that agency problems will lead to takeovers,
M&A acquisitions.
Theories of Mergers
1. Efficiency Theory or Hypothesis
2. Information and Signaling Theory
3. Market Power Theory
4. Tax Considerations Theory
5. Agency problem & Managerialism or Agency Theory
6. Hubris Hypothesis :
It implies that managers look for acquisition of firms for
their own potential motives and the economic gains are
not the only motivation for M & A.
Theories of Mergers
1. Efficiency Theory or Hypothesis
2. Information and Signaling Theory
3. Market Power Theory
4. Tax Considerations Theory
5. Agency problem & Managerialism or Agency Theory
6. Hubris Hypothesis
7. Free Cash Flow Hypothesis:
Cash flow in excess of the amounts required to fund all
projects that have positive NPV.
Theories of Mergers
1. Efficiency Theory or Hypothesis
2. Information and Signaling Theory
3. Market Power Theory
4. Tax Considerations Theory
5. Agency problem & Managerialism or Agency Theory
6. Hubris Hypothesis
7. Free Cash Flow Hypothesis:
8. Value increases by redistribution:
The gains come at the expense of other stakeholders in
the firm.
Value Creation in Horizontal Mergers
Value Creation: The performance of actions that increase
the worth of goods & services or even a business.

Many business operators now focus on value creation both

in the context of creating better value
for customers purchasing its products and services, as well
as for shareholders in the business who want to see their
stake appreciate in value.
Value Creation in Horizontal Mergers
Source of value creation
1. Revenue enhancement
Increased market power
Network externality & Revenue growth
Leveraging marketing resources and capabilities
2. Cost savings
Reducing excess capacity:
Economies of scale:
Economies of scope:
Learning Economies:
3. New growth opportunities
Creating new capabilities and resources
Creating new products, markets & Processes
Value Creation in Vertical Mergers
The economic rationale for vertical mergers is derived from
the comparative efficiency of vertical integration in terms
of the technical and coordination efficiency.

A. Technical efficiencies
More control over quality & delivery of inputs
/Products
Premium for branded products avoided if those are
made internally
Creation of control over production
Leakage of private information to supplier is avoided
Value Creation in Vertical Mergers
The economic rationale for vertical mergers is derived from
the comparative efficiency of vertical integration in terms
of the technical and coordination efficiency.
A. Technical efficiencies

B. Coordination efficiencies
Bargaining power of supplier is avoided
Contract enforcement costs are minimized
Free-riding by distributors on the reputation of
manufacturers is avoided
Value Creation in Vertical Mergers
The economic rationale for vertical mergers is derived from
the comparative efficiency of vertical integration in terms
of the technical and coordination efficiency.
A. Technical efficiencies
B. Coordination efficiencies

Source of value creation

1. Revenue enhancement
2. Cost savings
3. New growth opportunities
Value Creation in Conglomerate Mergers
Models
A. Economic Model : Increased market power, Operating
an efficient internal capital market.
B. Strategic Model: Resources and capabilities transfer.
C. Finance Theory / Model: Efficient diversification,
Bankruptcy risk reduction, Agency cost.
D. Managerial Model : Managers power and status,
Managers want size related benefits.
E. Organisational Model : Integration costs, coordination
costs.
Internal and External Change Forces Contributing to
Mergers and Acquisitions
The mantra of organisational change is proclaimed to be
effective management of change.
Change management is an approach to shifting
individuals, teams, and organizations to a desired future
state.
Internal and External Change Forces Contributing to
Mergers and Acquisitions
Internal Change Forces
1. Management Change
2. Organizational Restructuring
3. Intrapreneurship

External Change Forces

1. Macroeconomic Factors
2. Technological evolution
3. Globalization
4. New Legislation
5. Competitive dynamics.
Impact of M & A on Stakeholders
 CHANGE FORCES CONTRIBUTING TO M&A ACTIVITIES
1.Technological changes (technological requirements of firm has
increased)
2.Economies of scale and complimentary benefits (growth
opportunities amongproduct areas are unequal)
3.Opening up of economy or liberalization of economy
4.Global economy (increase in competition)
5.Deregulation
6.New industries were created.
7.Negative trends in some economies.
8.Favorable economic & financial conditions (real
time financial planning andcontrol information requirements have
increases).
9.Widening inequalities in income & wealth
10.High valuation on equities.
11.Requirement of human capital has grown relative to physical
assets.12.Increase in new product line.13.Distribution and marketing
methods have changed.
Theories of Mergers
1. Efficiency Theory or Hypothesis
i. Differential Efficiency Theory:
ii. Inefficient Management Theory:
iii. Synergy:
(a).Operating Synergy:
(b). Financial Synergy:
(c). Managerial Synergy:
iv. Pure Diversification :
Theories of Mergers
1. Efficiency Theory or Hypothesis
iii. Synergy:
(a).Operating Synergy:
(b). Financial Synergy:
(c). Managerial Synergy:
iv. Pure Diversification :

v. Strategic Realignment to Changing Environment: It

states that firms use the strategy of M&As as ways to
rapidly adjust to changes in their external environment
such as regulatory & technological changes.
Theories of Mergers
1. Efficiency Theory or Hypothesis
iii. Synergy:
(a).Operating Synergy:
(b). Financial Synergy:
(c). Managerial Synergy:
iv. Pure Diversification :

v. Strategic Realignment to Changing Environment: It

states that firms use the strategy of M&As as ways to
rapidly adjust to changes in their external environment
such as regulatory & technological changes.
1. The absorption of one firm by another
such that the acquired firm no longer
exists as a separate entity is called a(n):
A)acquisition of stock.
B)merger.
C)shared agreement.
D)consolidation.
2. Which one of the following creates a
brand new firm by merging existing
entities?
A)acquisition of stock
B)merger
C)shared agreement
D)consolidation / Amalgamation
 3. Which one of the following statements is
correct?
A)With a consolidation, the acquiring firm keeps
its legal existence but the acquired firm does
not.
B)The acquiring firm acquires the assets, but not
the liabilities, of the acquired firm in a merger.
C)When Babco acquired Sitco it was most likely a
consolidation because the combined firm's
name was Basit.
D)The key difference between a merger and a
consolidation is that a merger creates an
entirely new firm whereas a consolidation does
not.
4. Which of the following are correct regarding
mergers?
I. A disadvantage of a merger is that it requires the
approval of the shareholders of both the acquiring and the
acquired firms.
II. A disadvantage of a merger is that it is legally complex.
III. An advantage of a merger is that it is relatively
inexpensive compared to other forms of acquisitions.
IV. An advantage of a merger is the avoidance of the need
to transfer title of the individual assets of the acquired firm
to the acquiring firm.
A)I and III only
B)II and IV only
C)III and IV only
D)I, III, and IV only
5. The restructuring of a corporation should be
undertaken if
A. the restructuring can prevent an unwanted
takeover.
B. the restructuring is expected to create value for
shareholders.
C. the restructuring is expected to increase the
firm's revenue.
D. the interests of bondholders are not negatively
affected.
Theories of Mergers
1. Efficiency Theory or Hypothesis
It states that mergers will only occur when they are
expected to generate enough realizable synergies to
make the deal beneficial to both the parties.
i. Differential Efficiency Theory: A few firms may
operate below their potential and have low efficiency,
such firms may merge with more efficient firms in the
same industry.
ii. Inefficient Management Theory: Management of one
company simply is not performing up to its potential
and another control group is in a position to manage the
firm more effectively.
Theories of Mergers
1. Efficiency Theory or Hypothesis
iii. Synergy: Reaction that occur when two or more
organizations combine to produce a greater effect
together than that which sum of the two operating
independently could account for.
(a).Operating Synergy: it states that economies of scale exist in
the industry, before merger take place, the level of activity that
the firms operate at are insufficient to exploit the economies of
scale.
(b). Financial Synergy: it states that when the cash flow rate of
the acquirer is greater than that of the acquired firm, capital is
relocated to the acquired firm and its investment opportunities
improve.
(c). Managerial Synergy: It states that a firm, whose
management team has greater competency than is required by
the current tasks in the firm, may seek to employ the surplus
resources by acquiring firm, which is less efficient due to lack of
adequate managerial resources.
A "friendly takeover" is an acquisition which is
approved by the management. Before a
bidder makes an offer for another company, it
usually first informs the company's board of
directors. In an ideal world, if the board feels
that accepting the offer serves
the shareholders better than rejecting it, it
recommends the offer be accepted by the
shareholders.
A "hostile takeover" allows a bidder to take
over a target company whose management is
unwilling to agree to a merger or takeover. A
takeover is considered "hostile" if the target
company's board rejects the offer, and if the
bidder continues to pursue it, or the bidder
makes the offer directly after having
announced its firm intention to make an offer.