Dissertation_Mergers & Acqusitions- Analysis of its financing and effects

Mergers and Acquisitions, Analysis of its Financing and Effects
Student ID 130488725
Supervisor Martin Arnold
Word Count 14,165

Table of Contents
Introduction.........................................................................................................................................................1
Chapter 1 Mergers and Acquisitions.................................................................................................................3
1.1 Background……………………………………………………………………………………………………………………………………3
1.2 Types of M&A………………………………………………………………………………………………………………………………..4
1.3 Motives to Merger…………………………………………………………………………………………………………………………5
Chapter 2 The process and Parties Involved…………………………………………………………………………………..........8
2.1 The process of M&A……………………………………………………………………………………………………………………….8
2.2 Parties and Components involved………………………………………………………………………………………………….9
2.3 Creation of Value/Synergy……………………………………………………………………………………………………………10
2.4 Types of Synergies………………………………………………………………………………………………………………………..11
Chapter 3 Financing……………......................................................................................................................14
3.1 Financing methods………………………………………………………………………………………………………………….……14
3.2 Financing via acquisition………………………………………………………………………………………………………………15
3.3 Financing via IPO……………………………………………………………………………………………………………………….…16
3.4 Factors affecting choice of Financing…………………………………………………………………..…………………….…16
Chapter 4 Effects of M&A……………………………………………………………………………………………………………………..18
4.1 Effects on share price……………………………………………………………………………………………………………………18
4.2 Effects on employees……………………………………………………………………………………………………………………22
Chapter 5 Post Merger………………………………………………………………………………………………………………………….32
Chapter 6 Regulations…………………………………………………………………………………………………………………………..37
Conclusion……………………………………………………………………………………………………………………………………….……42
Biblography…………………………………………………………………………………………………………………………………………..44

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Introduction
The advancements in the field of mergers and acquisitions, especially in the past few decades
have been phenomenal. There has been a boom in the number of companies undergoing merger.
This dissertation will be discussing M&A, definitions, distinctions, various entities involved in
the merger process, components , financing methods, valuation methods, importance of valuation
and its effects on the companies, concerned regulations, changes in share price and in particular
their employees. The initial chapters will explain M&A, its various types, various parties
involved, methods of financing it, factors affecting the selection of a particular method,
identification of a target firm, creation of synergies. Later chapters discuss the effects of M&A-
share price of the companies narrowing it down to the effect on the employees of the company
followed by post-merger performance analysis and regulations regarding mergers in India and
the UK.
The importance of M&A in the current economic scenario cannot be greater than ever.
Competition is getting tougher and tougher; companies are looking for economies of scale and
what better way to than combining resources and combating the issues. This dissertation is
focused on the effects of M&A on the employees and effect on share price and post-merger
performance of the firm. The human factor is rarely in the spotlight. Mostly creation of synergies
and big numbers consume the reports made prior and after the process is completed. Employees
are left stranded to deal with the big changes at the work place (target firm or may be the
acquiring firm).
There will be focus on examples from case studies, newspaper articles depicting numbers and
stats to quantify the effect on share price, employees in terms of numbers and results and post-
merger performance. This will help in ascertaining the effects of M&A are negative or positive.
Thereafter comparing the numbers with the general economic results so as to ascertain that is it
the effect of merger deal or a general condition of the entire economy. Suggestive measures to
help counter the human capital issue in merger integration will also be discussed to round up the
sphere or cycle of effects, its causes and probable solutions. Analysis of the mind-set of the
employees from a psychological point of view. In particular how they react when they face an
acquisition, their changing behavior, the way they deal with changes at work place, lay-offs of

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their colleagues if they survive the cut, changes in policy, changes in their roles and
responsibility will also be examined.
Post-merger performance of the firm will also evaluated post discussion of the effects of merger.
Merger case study will be examined to come with probable reasons for successful post-merger
integration.
The dissertation will be rounded off with general overview of regulations regarding M&A in
India and the UK. This will better our knowledge of M&A from the legal point of view.
Describing the legal statute that concerns with the regulations of merger activities in the
respective countries.

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Chapter 1
Mergers and Acquisitions
1.1 Background
Mergers and acquisitions form a part of the corporate strategy of companies. It is a technique for
restructuring which involves, in case of a merger one company (acquirer) merging with another
company (target). In case of acquisition it involves acquirer buying the target company. These
terms are sometimes confused to be synonymous1
but has differentiating feature. In case of a
merger companies A and B join together to form company C. On the other hand in case company
A buys company B and company B gets absorbed and now forms part of company A. It can also
refer to dissolution of various entities of a parent company to form a single or less number of
companies of tax and management objectives. This exercise can also be undertaken for two
different companies.
Merger happens when two companies combine and form a new company or when two entities of
a same company for a new entity. They can get absorbed; make a new entity or just a division or
a department. The combination of a new company is a differentiating factor while merger
happens, shareholders on either side get a say and there approval is necessary. Merger can be
financed by cash, stock of the company and a combination of debt and cash. The debt part of the
deal can be money raised from an IPO, borrowed from public or money being borrowed from the
bank.
Definition2
:-
Merger is an amalgamation of the undertaking or interest in undertakings or any part of the
undertakings of one or more companies and one or more body corporate. A merger contemplates
a transfer of properties and liabilities of one or more companies to another; such transfer does not
include rights and obligations, which are not transferable such as contracts of personal service.
1
Chiplin, B & Wright, M (1987), The logic of mergers: the competitive market in corporate control in theory and
practice.
2
Bioye Tajudeen Aluko and Abdul Rasheed Amidu, “Corporate Business Valuation For Mergers and Acquisitions”.
International Journal of Strategic Property Management.9,2005. Page 179

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Hence, one or more companies may merge with an existing company or merge to form a new
company. Nevertheless, the basic feature of merger is the acquiring company takes over the
ownership of the other companies and combines their operation with their own.
Acquisition described as an act of acquiring management and ownership of one company by
another company without any combination of companies. In this aspect acquisition denotes a
takeover, acquisition over control of the company.
1.2 Types of M&A
Horizontal merger3
, companies in the same line of business or country. For example if Pepsi Co.
merges with Coco-Cola.
Vertical merger4
, when the two supplements of a business cycle merge. When a dealer merges
with the consumer for example Time Warner and American online merger in 2000. As American
online was distributing the same services online as Time Warner would sell through CNN and
other TV brands.
Conglomerate merger5
, when two companies from different industries merge together.
Reverse merger6
is a process that allows a private company to assume the working of a public
company. It is particularly popular as it saves the private company form all the hectic and long
process of converting to a public company. Other reason for private companies to go for reverse
merger is that it is a quick, less expensive.
Acquisition on the other hand is a corporate strategy in which one company buys the other
company. Generally one company bids for another company which is in the same industry, in the
same country to tackle competition or in other country to enter into the market. It basically deals
with purchase of company. The approval of shareholders is not imperative.
They can be Hostile takeover or a friendly takeover. When the bid is rejected by the management
or board of directors of the target Company and the bidder continues to pursue makes an offer
without the any prior information to the management can be termed as a Hostile takeover. While
3
http://www.mergersandacquisitions.in/types-of-mergers-and-acquisitions.htm
4
5
6
Ioannis V Floros and Travis R A Sapp, “Shell games: On the value of shell companies” Journal of Corporate
finance, 17, 2001 page 856

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if the management of the company is friendly towards the acquirer, it can be termed as a friendly
takeover, which can also be termed as a merger.
M&A have gained a substantive importance during the last 2-3 decades, being $98,903 Million
in 1990, $905,214 Million in 2000 and $308,055 Million in 20127
. Growing amount of
globalization, economic development and inter twining of various economies of the world and
inter dependency also promotes M&A. Increasing competition between companies also is a
reason for increased M&A activity.
1.3 Motives to merge
Now the question arises why merge. For this we have to look into the intentions of a company to
merge.
Company driven factors like achieving economies of scale, large scale production, better
distribution network, entering new market to name a few. Increase in production capacity and
better distribution results as the resources of two companies combine and mutually enhance the
performance of the merging parties and technological advancements.
Managerial motives can be empire building, status, greed for power, survival instinct for smaller
companies and fresh inflow of cash in times in disparity.8
Also the following can be motives9
behind a M&A deal:-
Creation of synergy- This refers to the creation of value addition that the companies are looking
for when they either merge or if one acquires the other. Can be described using the following
formulae, Value (a) + Value (b) > Value (a + b). This can be a general satisfaction level for any
company to consider the deal. Else if the value dose not supersedes the two firms combined
doesn’t make a logical decision. They aim to decrease their fixed cost by combining departments
or distribution network. Increase in revenue and market share, when a company buys or
merges with a major competitor there is a major increase in the revenue. Economies of scale are
7
Value of cross-border M&As by region/economy of purchaser, 1990-2012, UNCTAD-world investment report.
8
Friederich Trautwein, “Merger motives and merger prescriptions”. Strategic management Journal. 1990, Volume
2 pages 283-295
9
Ian Giddy, Mergers and acquisitions , http://pages.stern.nyu.edu/~igiddy/articles/mergers_and_acquisitions.html

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also a very important factor. Taxation advantages in the sense that the buying company may use
the losses made or incurred but the target firm to use it to reduce their tax liabilities.10
Companies when looking to enter a new market specifically geographically they sometimes
come across restrictions placed on the new companies' entrance. In that case the company eager
to enter the market usually forges a partnership in the sense that they merge to form a new entity
with a local company. This gives them access to the local market and the local company is
benefited from the expertise and cash influx brought on by the foreign company. For example the
Big4 accounting firms have presence in almost every country worldwide. They have a network
of firms working under the same umbrella. They have grown their network of firms by merging
or forming partnership with a domestic partnership of the country, that agrees to operate as per
the quality standards of the international firm and in return shares the clients and networks. Also
as a growing trend the promoters of successful startups sell out their stake when the company is
in boom. They do this as they saw a potential good investment and then they cashed out when
the time was right.
The top level management of the company is most often or not the driving force behind its
merger activities. To build and empire, for quick cash, in some cases survival can be few of the
motives or intentions behind a management decision regarding merger. It is apt at this point to
mention that it's not always that a company management is ruthless in taking over or doing a
hostile takeover. Many a times they have to give in to some other company purchasing them, in
this case they try and get the best deal in interest of their employees and shareholders.
The other type of factor being market driven factors such as advancement in technology leads to
formation of startups, either they perish or are taken over by a new company or are funded to
continue its services. Political changes in the country like deregulation and increase in
privatization also leads to mergers. For example in India prior to 1991(before the policies of
liberalization, privatization and globalization were introduced) there were only 411
companies
had license for manufacturing of steel, power and in field of communication. After 1991 when
these policies were made effective increase in private sector businesses, companies, growth took
place which subsequently leads to an increased M&A activity, advisory from law firms. Two
10
Friederich Trautwein, “Merger motives and merger prescriptions”. Strategic management Journal
11
Chanchal Kumar Sharma, “A discursive dominance theory of economic reforms sustainability” India review
Volume 10, 2011 pages128-184

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massive and notable mergers as Vodafone-Hutch12
, Tata steel buys Corus Plc13
has taken place.
This clearly shows the effect of the changes in government policies on M&A activities.
Merger can also be looked at as an voluntary action or a process that is approved by the
shareholders or the stakeholders of the parties involved. While on the other hand acquisition or
take over is more of a procedure which doesn’t require approval of any sort. A different way of
putting it across is that merger takes place between equals for example merger of Times Warner
and AOL. Acquisition is when company is purchased by another.
12
http://www.imaa-institute.org/statistics-mergers-acquisitions.html#MergersAcquisitions_India
13
http://articles.economictimes.indiatimes.com/2008-06-27/news/27729384_1_tata-steel-koushik-chatterjee-corus

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Chapter 2
The process and parties involved
2.1 The process of M&A14
:-
The process itself is very important for the companies involved as the success of the core process
greatly affects the outcome of the whole deal. This can be divided broadly in to the following sub
processes.
Valuation - The identification of the target firm is the first step in the process. This involves
valuation of the target firm, which also links this step to the motive “creation of synergies”.
Current financial performance, future expected cash flow, organizational structure, capital
requirements are some of the factors taken into consideration.15
Proposal formation/ negotiations - After the thorough analysis a target firm is identified. Then
the acquirer has to come up with a proposal of the deal. In my view this could be the stage where
a friendly merger if not accepted by the target firm management turns into a takeover. Depending
on the course of action, buying blocks of shares in open market of the target firm and other
options to finance the deal may be evaluated and eventually selected. Various terms and
conditions of the agreement of the deal are discussed, formed and finalized in this stage.
Arguably the most significant step in the entire procedure.
Plan B - Despite the planning in some cases the deal fell through. The acquirer may be in a state
where he has financial obligation as a deal was planned to go through. So it fails and
reinvestment or a way to relieve from the financial obligation should be devised.16
Final agreement - In case of acquisition a purchase agreement is drafted and in case of a merger
final agreement papers are processed to comply the terms and conditions of the deal.
Integration - Most deals do not work out despite water tight financial strategy because most of
the companies do not stress importance of the integration of the newly formed organization in
case of merger and the acquired in case of a acquisition. It is important to make sure that the
14
http://finance.mapsofworld.com/merger-acquisition/process.html
15
http://www.mergersandacquisitions.in/process-of-merger-and-acquisition.htm
16
http://finance.mapsofworld.com/merger-acquisition/process.html

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newly formed company, follows same policies, rules and regulation same as throughout the
organization, specially the incoming new employees and their sentiments have to be managed
because they also affect the overall success of the deal and the financial wellbeing of the
acquired firm, in turn of the whole organization.17
2.2 Parties and components involved
There are different angels to an M&A process. Involvement of contributing parties to the process
like a paralegal, corporate lawyers, advising banks and CEO of the companies makes it that
much more interesting. In the following paragraphs I would like to draw some attention to these
various parties and components to better understand the entire procedure.
The Bid18
The bid is generally as offer, which can be two types; A) tendered by the acquirer company to
the shareholders of the target company to buy/acquire their shares in return of cash and or equity.
This transaction or offer has no involvement of the directors of the target company. B) Tendered
by the acquiring company to the management of the target company.
The resultant of the acceptance of the bid or a successful bidding offer is that the control passes
to the new owner/majority shareholder.
The advising banks19
The banks use their expertise on data gathering and analysis to advise the companies involved.
Banks can be operational on the buy side and sell side. They advise one about feasibility of the
buying price and the other party regarding selling price. Not to mention they cannot be the same
bank because that creates a clear conflict of interest. Commercial banks usually work on the
relationship basis, they are usually into advising parties that they have had banking relations
with, so that prior information can be used to form a clear opinion and hence give the firm
concerned correct advise. On the other hand investment banks go for advising the acquirer on
17
http://www.mergersandacquisitions.in/process-of-merger-and-acquisition.htm
18
Louise, Gullifer and Jennifer Payne , Corporate Finance law, page 563
19
.Linda allen, Julapa jagtiani, Stavros Peristiani, Anthony Saunders, “The role of Bank advisors in Mergers and
Acquisitions”. Zicklin school of business, Baruch College University of New York,

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basis of the fees or commission they will be able to make on the deal. The sheer size or
magnitude in terms of publicity of the deal may also be a factor. Involvement of the banks does
certainly add value and a sense of worthiness to the entire process of M&A.
Lawyers20
Lawyers get involved at the initial stages of the process and are present to see the deal through in
most cases. Due diligence of various information regarding the target firm is undertaken by the
lawyer, as it requires expertise and an eye for detail. Negotiations form a very important part of
the process and lawyers are hugely involved. As kumkum sen rightly says “success of the
lawyer’s negotiation and drafting capabilities lies if he can clinch his client’s choice for
governing law and jurisdiction. If not, make sure that a midway bargain is struck”.
2.3 Creation of Value/Synergy21
This is the single most significant motive/component of the entire M&A procedure. Value
creation is the starting point, the catalyst that makes a company to go for merger in the first
place.
For ascertaining value creation, the acquirer first has to ascertain the value of the target firm. It is
done by most companies by using the (DCF)22
, discounted cash flow method. Which involves
forecasting cash flows, ascertain a discount rate, discount the cash flow obtained and sum them
up to estimate the value of the firm. The integration of the process affects the future cash flows
which in turn affects the value realized in the future by the newly formed company.
DCF can be also explained as budgeting technique that helps to reach the value of the target firm
as in merger deal the acquirer buys the business of the target firm not just an asset. The buyer
firm shells out cash to buy the target firm in expectation that the future cash flows derived from
20
Kum Kum Sen, “Role of lawyers” Business standard, (New Delhi, 28 September 2009)
21
David M. Schweiger and Philippe Very , “Creating value through merger and acquisition integration” . Advances
in mergers and acquisitions, Volume 2, 2003. Pages 1-26
22
J Rejendaran Panidan and Pete Woodlock “Reassessing M&A Valuation assumptions” Journal of corporate
accounting and finance 2013, Wiley, page 35

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the new business bought would compensate them the cost they paid. Hence, the merger will be a
success when the present value is greater than acquisition price.23
Another factor that has to be taken into consideration is that these are forecasted figures based on
market and other volatile factors that are bound to change, so a buffer should be made so that the
changes in future can be countered. If the deal results in benefits in terms of increased sales or
market capture, it has to be quantified and should be more than the value determined. Also it
will make sense for the acquirer firm to bargain and pay less than the ascertained price.
Tax considerations also play important part in the creation of synergy. Many deals are directed
towards taking advantage of the tax regime in particular tax jurisdiction, eligibility for tax
deductions can be a factor. Countering foreseeable certain changes to the taxation regime is also
a factor.
2.4 Types of Synergies:-
Cost synergies- reduction of cost to enhance income is a common motive for firms engaging in
merger. “Fixed cost is concerned with general or administrative cost and sales expenses”.
Variable cost is concerned with production capacity and purchasing power, which can be
countered by combining the resources of the two companies.
Revenue synergies are achieved by combining the distribution network of the companies which
in turn increases the sales figure of the acquirer through cross selling.
Negative synergies- most of the time during a merger, the numbers are in the front row in terms
of importance. Integration of the organization post-merger is seldom given the importance it
deserves. This leads to loss of goodwill of the firm, sentiments of employees. These cannot be
measured in terms of money but surely does affect the performance and hence the value thus
created.
23
Bioye Tajudeen Aluko and Abdul Rasheed Amidu, “Corporate Business Valuation For Mergers and
Acquisitions”. Page 184

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To conclude synergies, the integration of the firms should have paramount consideration.
Although merger does provide opportunities to create synergies but without proper integration
the firm will be like a vehicle without proper wheels, it will not be able to function properly.
Valuation or Pricing
It is a universal fact that in most cases the valuation is the underlying factor that drives the
merger activity. It can be linked directly linked to the creation synergy as we cannot ascertain
that there is synergy unless we know how much the optimum price is. Not to be confused with
value creation as this is concerned with determination of the price that an acquirer is willing to
pay for the target firm24
. Valuation is a complex and holds importance in the process. The
resultant increase in the value of the target firm due to the investment inflexed by the buying
firm can also be used as a way to reach proper valuation. Assets of the target firm, their future
value, the cash flow they are expected to generate are considered while valuating the price.
Calculation and analysis of various financial ratios are undertaken to better predict the financial
condition of the target firm in the future to justify the price to be paid.25
Usually in case of a proposed merger deal the financial accounts, cash flow statements, auditor’s
and director’s statement of the target firm are analyzed to ascertain the current market situation
and possible future financial performance26
. The balance sheet gives an idea about the financial
health of the company and the size of the organization is displayed by the assets of the company.
Some assets are fixed assets as machinery, property. Some are intangible as copyrights and
patents others are current assets which can be easily converted to cash. Liabilities showcase the
liquidity condition of the company, short term and long term liquidity of the company. Short
term liabilities as loans and long term liabilities as issued shares and debentures. This can help
the buyer to forecast how much he has to pay in future and how many resources are there at his
disposal.
Valuation of assets depends on the ascertainment of fair value. Fair value of land and property is
the exchangeable value that willing parties are ready to pay as per International accounting
24
J Rejendaran Panidan and Pete Woodlock “Reassessing M&A Valuation assumptions” Journal of corporate
accounting and finance 2013, Wiley, page 36
25
Irwin H. Silberman “A note of Merger Valuation” Journal of Finance, Blackwell publishing, pages 528-534
26
Bioye Tajudeen Aluko and Abdul Rasheed Amidu, “Corporate Business Valuation For Mergers and
Acquisitions”. Page 180

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standard board27
. Best parameter of the fair value will be the current market value of the assets of
the similar property. Depreciation on the assets also has to be taken into consideration while
valuating. Their book value less the depreciation can give us the salvage value which will be less
than the value in the balance sheet.
Role of accounting and financial ratio is critical in the valuation process. They attach numerical
values to the bulk of data present in the financial statements of the company. Some of the ratios
that are used are profitability ratio that gives the returns on investment in terms of profit
generated. Price-earnings ratio is stock price over earnings per share. Leverage ratio used to
determine the liquidity of the company, how much debt is the company is carrying. Efficiency
ratios displays how good are the assets of the company are utilized to generate revenue or sales,
which in turn affects the profit earned. Liquidity ratio used to judge how quickly can the current
assets of the company be realized and converted into cash by calculating the current ratio.
28
27
Ibid page 182
28
ibid Page 183-184

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Chapter 3
Financing
Background
Financing the deal or the process of M&A is the next big decision once the target firm has been
identified. The deal can be financed by cash, buying share, underwriting of shares, raising money
by IPO (equity), loans from bank and issuance of debentures (debt) or combination of the
aforementioned components, also deferred payments. Extensive research goes in reaching a
decision so as to which method to be chosen. We will also be looking into the factors that affect
the choice of method of financing.
3.1 Financing methods:-
1) Equity financing: - A company that is limited by shares be it private or public must at
least one issued share29
. Shares can be defined as the divided unit in terms of money. The
total number of shares will form the total capital of the company. M&A deals can be
financed when the acquirer issues share to raise capital and use that capital to buy the
target company shares. Shares can be of two types preferential and equity shares.
Preferential shares have a right to the dividend paid. On the other hand equity shares have
a right to vote and influence the management decisions and they are users of the residual
profits of the company, which is left over after all the obligations have been met. Equity
issue is a popular instrument of corporate finance which includes merger deals. Debt, as
in debentures or bank loans are in some cases costlier and it is beneficial for the company
to issue shares to raise the capital. On the hind-sight the issue of equity also results in
ownership dilution of the company.
2) Debt financing: - In some cases the management decides to go through and raise capital
via debt financing30
, issue of debentures/bonds and or bank loans. Debentures can also be
convertible and non-convertible. Although they carry a fixed rate of interest that has to be
paid periodically but does not result in dilution of ownership as is the case of equity
issue. They are a quicker way to gather financing. When going through debt financing the
29
Louise Gullifer and Jenifer Payne Corporate finance law pages 8
30
ibid page 20-30

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management faces subsequent choices like whom to borrow, should debt be placed
privately, use a credit, short term or long term debt etc.31
.
3) Cash: - Up front cash is also a way to finance a merger deal. It provides the deal a
simplified aura. Not much planning is necessary as compared to debt or equity financing.
Cash fueled deals do not result in dilution of capital. No interest or dividend payment
obligations are encountered. Also provides the deal a more concrete and definite feel.
4) Hybrids32
: - In this ever changing world of finance where most of the factors are affected
by market and other factors. Combination of equity and debt known as hybrid
instruments are becoming popular methods of raising finance. The motive behind
development and usage of hybrids is that best of both the worlds can be achieved when
hybrid instruments are used. They can be tailor made as per requirements of the company
needing finance.
3.2 Financing via Acquisition
A slightly different merger deal financing can be done by buying shares and assets, individually
or both. The integration of the two processes is important. Combining the two methods is very
crucial as it highly affects the outcome of the deal.
Acquisition by shares refers to the buying the controlling stake in the target firm33
, which entitles
voting rights which in turn helps in making or influencing the important management decisions.
This right also entitles the acquirer to replace. All together remove the management of the target
firm. It is applicable to both private and public owned companies.
Another way of acquiring is to acquire the assets of the target firm. 34
The acquirer also can buy
assets of the target firm to complete the deal. Benefits of this method are that the liabilities of the
target firm are not taken over by the buyer. Not just that, the buyer can ask or buy certain assets
and does not have to worry about all the assets. Taxation regime of a particular country also
plays a vital role in the selection of any of the above two methods. The parties will be inclined to
transact in countries where there is less or no tax on that particular transaction.
31
Jean Tirole 2006, The theory of corporate finance Princeton university press
32
Louise Gullifer and Jenifer Payne Corporate finance law pages 44
33
Adriaan, Dorresteijn, Tiago, Monteiro, Christoph, Teichmann and Erik, Werlauff European corporate law,
second edition Wolters and Kluewer pages 233
34
Ibid page 235

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3.3 Financing by IPO
Raising finance for merger activities through an IPO is a very popular method to finance the
merger activities. We have seen that there has been steady increase in IPO’s for raising finance.
An IPO facilitates the ability and reach of a private firm to go ahead and pursue feasible target
firms. By turning to IPO for merger activity the firm rises above or has an advantage over the
firms that go through private funding. Usually because the amount and reach available for public
funded company is more that private funded35
. The acquirer firm is also able to “test the waters”
as they say; a good response to public offering can be used as a gauge to the feasibility of the
merger deal. In case of a mediocre or not so good response they have an opportunity to re think
there strategy. In other words the IPO response can be a good way to justify the investment made
by the acquirer firm in the prospective target firm. Importance of IPO as financing can be
displayed with the following statistics. From a sample of 5771 firms at least 2059 (36%)
completed an acquisition within a year, 13% completed within three years36
. In simple words
money from IPO means that the firm has direct access not just at the moment but also for future
projects.
3.4 Factors affecting choice of financing method
Management of the bidder company resolves to various financing methods.
a) Cash: - If the management is in favor of maintaining ownership they are most likely to
finance the deal with as much as cash as possible. Cash financed deal will not result in
dilution of the ownership and risk losing the control of the company37
. If greater
emphasis is on marinating control hence decision making capacity than financing by
stock or shares is unlikely. If the acquirer firm has the muscle power it will also resort to
cash financing.
b) Equity and Debt: - Risk-averse management will resort to equity financing rather than
depending on cash. Mergers are financed with shares to reduce financial leverage hence
decreasing vulnerability from risk. Non-diversified firm structure also may result in
35
Armen Hovakimian and Irena Hutton “Merger-motivated IPO” Financial management pages 1547-1573
36
Ibid page 1547
37
Saeyoung Change Managerial motives and merger financing” The financial review 2000 page 142

17 | P a g e
merger financing from stocks. Financing through this method does not imply any cash
outflow from the acquirer company.
c) Cost of capital: - Cost of raising the capital via debt or equity also plays a crucial role in
decision on financing methods. Merger activities always carries other cost too like
advisory firms fees, takeover fees etc. So the management of the bidder company is
always on the lookout to decrease their cost of capital.
d) Current economic environment also has substantial effect on the financing method
selection. As the economies around the world are so intertwined bust in one economy has
effect on another. Management of the bidder company does take the current market
condition, domestically and globally into consideration before selecting a financing
method.
e) Regulatory constraints also affect the choice of method. For example India as per FDI
guidelines investment is allowed up to a certain limit in various sectors38
. It affects
merger financing as FDI can be a driving force behind merger activities. It brings new
cash and other resources to the domestic economy and can lead to or help companies to
acquire small companies with help of the new capital influx. It helps the foreign
companies as they want to enter the Indian market, hence will finance merger activities.
38
http://dipp.nic.in/English/default.aspx Consolidated FDI policy, (Department of Industrial policy and promotion
Ministry of commerce and industry, Government of India)

18 | P a g e
Chapter 4
Effects of M&A
Just as the company completed the M&A deal. The effect of the deal is sometimes quite different
varying from section to section. These sections may be the employees of the company,
irrespective from acquirer or target firm, the shareholders are affected as the share price
fluctuates right after the deal is finalized. It also changes when the deal is announced but here we
are concerned about post-merger affects. Management of the company also faces issues post-
merger as they have to mitigate various risks and issues. We will be discussing the affects in
detail in the following sections.
There post-merger performance of the company can be measured by observing the stock market
as in case of shares of the company. Post-merger financial statements can be compared with pre-
merger statements to analyze the affect and quantify it with help of numerical data.
4.1Effect on the share price
The shareholders of both the involved companies get affected. The ones in the acquirer firm have
to part away with their share as the new incoming share holder will now share the proceeds. The
equity or debt financing irrespective puts toll on the shareholders of the acquiring firm. The
affect is more drastic if the degree of benefits from the merger is less than the what they gave up
to make the deal happen. On the other hand the shareholders of the target firm are generally in
profit. To make them accept the offer to let go of their shares, they are offered more share.39
They are divergent views on the shareholder value. Various studies (Meeks (1997), Singh (1971
1975)) have concluded the mergers on an average basis create negative or no value had been
created. Although a stud by Cosh, Hughes and Singh (1980) suggest an increase in post-merger
profitability.40
39
http://finance.mapsofworld.com/merger-acquisition/impact.html
40
James A fairburn & john A kay 1989, Merger and merger policy, Oxford University press

19 | P a g e
Recent merger activities to display the effect of the announcement of a merger carry. Iliad
telecom shares fell 7% on in early trading in Paris41
due to the announcement of their motives to
bid for the US telecom giant T-Mobile.
Oi SA, Brazil’s biggest phone company has it shares drop down 5.6% as it prepares to bid for
Portuguese telecom SGPS SA42
Dozens of research studies report that, on average, the wealth of target firm stockholders is
greatly enhanced, while the wealth of acquiring firm stockholders is unaffected, or at worst,
slightly diminished (averaging 4 percent decline).
The share value of the acquiring company takes a greater hit than of the target. As said before the
shareholders of the target company have to offered lucrative offers to persuade them to go for the
merger, this extra amount paid affect or dilutes the wealth or value of the existing shareholders
of the acquiring company. Following table shows the shows the abnormal returns experience by
the target and the acquiring firms after the announcement of the merger deal.
41
Adam Thompson Financial times. (Paris 01/08/2014)
42
Christine Lucchesi and Christina Sciaudone Bloomberg.com (28/04/2014).

20 | P a g e
Announcement Period Abnormal Returns by Decade, 1973-1998
1973-79 1980-89 1990-98 1973-98
Combined
-1 day, +1
day 1.50% 2.60% 1.40% 1.80%
-20 day,
Close 0.10% 3.20% 1.60% 1.90%
Target
-1 day, +1
day 16% 16% 15.90% 16%
-20 day,
Close 24.80% 23.90% 23.30% 23.80%
Acquirer
-1 day, +1
day -0.30% -0.40% -1.00% -0.70%
-20 day,
Close -4.50% -3.10% -3.90% -3.80%
No. Observations 598 1226 1864 3688
43
In the Glencore and Xstrata deal worth 90 billion dollars, two major shareholders said they will
vote against the deal as their share value devalues due to the deal. It was announced that this deal
is the merger of equals. But the new company will have 45% stake for Xstrata shareholders.
There was a 5 percent decrease in share value of Xstrata due to unrest surrounding the merger
43
Effects of merger on price and earnings
“http://www.drkash.com/site/index.php?option=com_frontpage&Itemid=1”

21 | P a g e
deal. The valuation of their share was at 1290p which dropped to 1100p right before the
announcement of the deal.44
Example of target firm’s share value increasing, Walt Disney’s buying Marvel entertainment for
a $50 per marvel share, valuing the deal at $4 Billion.45
But the closing price of the share value
of Marvel was $48.3746
, close to $1.5 below the agreed merger value of shares. This shows the
resultant increase in value of share prices of the target firm due to merger.
The above two examples are contradicting, in one the share value of the target firm is decreasing
as a result of merger and in other the value is increasing. Hence, the effect of the merger deal in
most cases is the decrease in share value for the acquirer and increase in share value of the target
firm but as we observed these cannot be generalized.
It is perceived that M&A deals do not work for acquiring company, let us take the example of
the merger deal of TATA motors (India) and Jaguar motors (Britain) to examine a different side
of the effects.
The car manufactures FORD announced the sales of the British car brands Jaguar and Land
Rover. TATA motors from India wins the bid and buys the brands for over 1 billion pounds. The
deal was completed on 2 June 2008. Two months before the deal was completed TATA motors
had a market capitalization of 24000 Crore Indian rupees but 5 months after the deal it plunged
to 6500 Crore, although the market cap decreased initially but after a year of takeover
completion the market cap went up to a 1,00,000 Crore Indian rupees.47
So we can see there is an upward swing in the market cap of the company, signifies successful
integration of the deal.
The deal helped rising up production making it a 24 hour running plant (the plant near Liverpool,
England) to fuel the increasing demand of the Range Rover. This in turn produced 1000 new
jobs. TATA motors did what a few companies are able to do, facilitate a makeover of the target
firm and actually resulting in increased sales and jobs. In its fiscal year the sales had a 27 percent
44
“Glencore and Xstrata announce $90 billion merger deal” BBC Business News, 7/02/2012
45
http://thewaltdisneycompany.com/disney-news/press-releases/2009/08/disney-acquire-marvel-entertainment
Walt Disney press release
46
http://www.learningmarkets.com/how-mergers-and-acquisitions-affect-stock-prices/
47
http://www.nseindia.com/products/content/equities/equities/eq_security.htm Data from National stock exchange
of India archive

22 | P a g e
jump to 306000 vehicles. One of the main reason for the successful deal is considered that the
day to day dealing were left with the executives in England and were not directed from the
TATA headquarters in India. “If you look at Land Rover and Jaguar now, they have probably the
strongest product line in their recent history”, Tim Urquhart analyst at HIS automotive in
London. More recently Jaguar posted a 16.3 percent increase in global sales as compared to the
same time last year. As a reply to the question why the seal worked the global operating director
for JLR said “the investment was carefully targeted effective, the growth is supported by a
disciplined financial plan”. 48
Putting ample light on the fact that if the deal is carefully planned out and the integration is given
importance, even a deal of such magnitude can be carried out and that too with excellent results.
The TATA motors now have a vast portfolio of cars from luxury, sports to average cars. There
financial efficiency is at a increase because they also control the steel makes Corus which TATA
acquired in October 2006 which is a main supplier of raw material to JLR.
4.2 Effect on the Employees
4.2.1
Merger and acquisitions have become a very common phenomenon these days. It forms a part of
the corporate strategy of the companies. They effect the organization in so many and one such
subtle effect is on the employees of the companies involved. Irrespective of which side they are
on in the merger battle. Billions of dollars are involved in the deal and it affects thousands of
workers on both side. Human capital management during a merger are rarely the epicenter of the
deal, the big numbers involved usually takes that place. One such example, during acquisition of
Proctor & gamble and Gillette 6000 people lost their job. This fact was concealed in the details
that the deal is worth a whopping 57 billion dollars.49
But there is a contrasting and a valid view,
that if two companies are coming together then there will be some grey area. There will be a
certain things that are same and have to be changed or removed. If not removed then the
underlying motive of combining the resources to achieve economies of scale will never be
48
Vikas Bajaj, The New York times,( 30/10/2012)
49
https://knowledge.wharton.upenn.edu/article/the-human-side-of-mergers-those-laid-off-and-those-left-aboard/ The
Human side of Mergers: Those laid off and those left aboard. Strategic management America

23 | P a g e
fulfilled. As highlighted by John Paul MacDuffe, Wharton center for management policy, “if the
growth prospects are high, people may take a relative positive feeling into the merger”.
The sense of loss of their job, the engraving feeling of not knowing where there next pay check
is going to come from is quite frightening in itself. Then the psychological effects on the minds
of the employee and those dependent on them is immense. The adverse effects of this leads to
family problems, marital problems and some-time even to extremes of suicides. As Professor
Sigal Barsade professor of management says “devastating experience, both psychologically and
physically”. When the company lay off employees they feel betrayed and they feel that a
Psychological contract has been breached by the company.
It is not all dark and gloomy; some merger deals also lead to employees getting more exposure,
more money, better training and all round development as a professional. One such example as
already illustrated the TATA JLR deal lead to generation of 1000 new jobs in England50
. That’s
1000 house hold sustaining them, that many happy lives.
This part of the dissertation will try and highlight both the sides’ kind of effects.
Now51
there is a need to examine the question why is the factor not given the deserved
importance. As Peter Cappelli, Director of Wharton center for human resources, says “The
investment community focuses on costs. They generally always like the idea that can you cut the
workers”, This is done to cut the cost when eventually the deal is announced. Due to increasing
competitiveness and eat or be eaten rule at play, the investors want the maximum return on their
capital, hence resort to all the possible options to cut cost and maximize returns. As a result of
which “it’s difficult for them to factor in the associated costs of layoff, declining morale, and
other chaos, they don’t factor them in”, hence it is one of the reason mergers do not work out.
Agreeing with Peter there is a need for the business community to re-examine their motives to
engage in deals. No one is a socialist, they are bound to try and make profit but they should be
aware of the effects their decisions going to have to have on the society as a whole. Let us
assume a small community is completely dependent on a factory which is going to be shut down
as a result of a merger. Shouldn’t the investors be sensitive towards the issue and try to take a
50
Vikas Bajaj, The New York times,( 30/10/2012)
51
The Human side of Mergers: Those laid off and those left aboard. Strategic management America

24 | P a g e
middle path so that the interest of the community and there can be aligned so that no one has to
pay the price.
The company has to treat the one laid off, but let’s turn our attention to the ones who are left
aboard. Among the ones retained the resilient ones tend to do better. These employees also help
others to come out of the “grieving stage” as said by physician Elizabeth Kubler-Ross, “they go
through stages of grieving, as they are mourning there lost friends”. Even the employees left
behind are shocked by the layoff52
. It takes time to get their head around such news. It is a
“feeling of betrayal which is very hard but they have to manage” it says author Bersade.
It becomes very tricky for the managers to manage the atmosphere of the office floor after a
restructuring involving lay off. The senior level management are still saved as they take the
decision but the middle level managers are in the worst situation as they have to face the raw
emotions of the employees, it is all the more worse as the decision is not their but still they
suffer. MacDuffe suggests “appointment of a therapist” to help the employees deal with their
emotions. The company should communicate properly, effectively and carefully try and make
them feel valued and safe. Communication is also crucial as there will be policies changes dud to
a merger and people may refute to follow them as a reaction to anger and grief that they are
feeling.
4.2.2
Many a merger deals fail to achieve any sort of synergy, let alone be financially successful.
Another factor to understand here is the why an increasing number of deals is there. Because the
number of the mergers is increasing so is the number of unsuccessful deals and so is the research
to as to why be the deals failing. The increase in merger deals can be attributed to the relaxed
regulations, market conditions, and easy availability of finance and merger motives of managers.
There is a need to change the approach with which we encounter a failed merger deal53
. The
initial strategy decisions are taken by accountants and lawyers who started at the bottom of the
52
Ibid The Human side of Mergers page 3
53
Sue Cart Wright and Cary L Cooper “The Impact of Mergers and acquisitions on people at work” British journal
of management, 2001 Volume 1. Pages 67

25 | P a g e
hierarchical order and are now at decision making capacity in companies. They are termed as
“paper entrepreneurs”54
. They have the skill and expertise but on paper as they lack risk appetite,
hunger of a CEO. Number driven motives cloud their judgment towards integration of the deal.
In the earlier stages of planning synergy creation is only concerned with a good strategic fit
rather than cultural integration. This leads to the deal going down, thus also drags down the
expected financial expectations. Chunk of resources and time is spent on financial planning, it is
seen in most deals that very little consideration is on preparing the for effective human capital
management. Some commonly cited reasons are poor communication, lack of pre planning, trial
and error philosophy towards human capital management for an unsuccessful merger deal.
The area of merger failure in terms of financial reasons is well researched; still there are few
glitches in assessing the outcomes of a merger. Ever changing market conditions, poor choice of
financing methods, non-realization of financial motives are important factors which lead a
merger failure. However, such analysis is not complete or comprehensive as it leaves out the
basic factor that affects any deal, the combination or merger of the people. If the transition or as
they say the integration is positive, smooth then the financial synergy is achieved as the financial
synergy depends upon the realization of the human synergy. It is difficult to achieve as the
announcement of an M&A leads to many changes in the organization that generates uncertainty,
confusion regarding their future and job security. This anxiety feeling weakens the employee
morale, dedication. Rather than concentrating on their job they are pre-occupied with the anxiety
relating to their future. Lowered morale, job dissatisfaction, unproductive behavior, acts of
sabotage, increased staff turnover and absenteeism rates and concomitant stress55
. As also
highlighted by the a discussion paper by the British institute of Management (1986) that states
that out of 16 probable factors for merger failure more than half relate to issues of human capital
management.
Taking it further lets now discuss the Employee response to merger56
. Merger has a basic
differentiating feature from acquisition that merger is a combination of two equals, there is no
power struggle. The resources, people of the two are combined together while in acquisition
there is a clear winner and a looser. There is a power struggle and one ends up accepting defeat.
54
Free, V (1983) “Ceo and their corporate cultures: New game plans”. Marketing communication. Pages 21-27
55
Sue Cart Wright and Cary L Cooper, “The Impact of Mergers and acquisitions on people at work” pages 65-67
56
Ibid page 70

26 | P a g e
In merger the power is evenly distributed. Hence, the employee reaction to the two situations is
also very different. There is a sense of hostility which rises from the sense of defeat in case of an
acquisition. In case of a merger the employees are more looking forward to the new opportunities
that will present as a result of the merger (at least in theory).
The psychological response57
of the announcement of M&A from the employees has been
compared to a feeling of grave loss. Same as experienced after the bereavement of a close friend
or relative. Many authors have also divided the reaction in stages as stage 1-Disbelief and
Denial; stage 2 Anger, rage, stage 3- Emotional bargaining, depression and last stage 4-
acceptance.58
Other factors like stress of transfer, new working conditions, new colleagues, job
security can be some of the reactions. The equilibrium becomes very difficult for the
management to attain as various emotions are at play, also the fact that the human factor cannot
be manipulated through market strategies or numbers makes it tough.
4.2.3
Let’s dive into the study of the psychological and behavioral effects of M&A on the
employees59
. Despite indigenous planning most of the deals are failing. Financial synergies are
not realized despite all the required factors. This has led a shift in the studies of failed mergers to
importance the human factor. Organizational integration is the key to a successful merger.
Doesn’t just the human factor but all the factors have to be aligned to achieve the optimum
success level? Integration includes procedural, managerial and socio-cultural. The focus on the
human factor provides insights to challenges faced during M&A.
There are a few theories developed for better understanding of the issue.
As merger deals with large organizations change it is a major reason for anxiety among
employees, forming the anxiety theory60
. Level of anxiety differs depending upon hierarchal
order of the employee. The people at the bottom often are worried about their job securities, a bit
57
https://knowledge.wharton.upenn.edu/article/the-human-side-of-mergers-those-laid-off-and-those-left-
aboard/ The Human side of Mergers: Those laid off and those left aboard. Strategic management America.
58
Ibid page 2
59
Myeong-Gu and N Sharon Hill , “Understanding the human side of merger and acquisition: An integrative
framework” The journal of applied behavioural science, 2005.
60
Ibid page 3

27 | P a g e
higher employees resort to political maneuvering to save their status and position. This can be
also not losing the respect of their team. Many a times a manager is changed or laid off to make
new place for new management with keeping the same team. The team members left behind feel
anxious and tend to be rebellious towards the new management due to empathy towards their
previous leader.
Proper communication, counseling, timely and accurate information regarding the deal, allowing
employees be part of the future decisions to make them feel wanted and valued are some of the
ways that the anxiety can be tackled, leading to a better integration and ultimate success of the
entire merger deal.
It is basic human nature to feel valued, to belong to a particular cause. In an organization this can
be related to their role in the team. Usually after a merger the organization structure is changed
or evolved to accommodate the synergies the merger aims to create. Social identity theory61
refers to feelings of an individual affected as the organization structure is changed. Some
departments or teams may be given enhanced or vice versa which leads to a feeling of biasness
in the minds of the individuals. The willingness of the individuals to accept the changing identity
depends upon the prospective success or future of their group after the merger. The changes if
communicated effectively and proper legitimate reasons are provided then may be not instantly
but eventually the employees may get accustomed to the changes around them.
Role conflict theory62
refers to the changes in the roles of employees, or when they are
encountered with multiple roles which may be not compatible with their skill set. Basically as the
roles change their expectation from the job description change this leads them to a state of
uncertainty. To combat the conflict, face to face two way communications can be used. It
requires on the part of employees to keep an open mind and try to take out positives from the
new role, on part of the managers to actively listen and try to manage employee expectations
regarding their new/changed roles.
Hence, the aforementioned were some psychological think process that a employee goes through
and how it can affect the organization integration. Which emphasizes the argument again that
61
Ibid page 6
62
Ibid page 9

28 | P a g e
human factor is a very important factor that leads to a successful transition and ultimate
realization of the synergies intended.
4.2.463
Now that we have examined the theoretical part of the effects of merger and acquisitions, now
we will look into quantify the argument with data. This will help us to understand impact on the
M&A performance. There had been limited attention to the importance of the human capital and
performance of the firm post-merger. Studies have been only focused on the financial analysis of
the merger deal irrespective of its success and failure. Application of the human capital factor to
the data from various plants.
A) The performance of the 15,946 plants in Sweden (1985-1996)64
was observed and analyzed to
reveal:
 Acquisition did lead to downsizing.
 Overall productivity was improved, leading to a increased per employee amount of
divisible profit
 The market share of the firms increased which also benefits employees
 Part acquisition is more beneficial than total acquisitions
 M&A had a positive effect on the career of the workers as it enhanced sorting and
matching of workers and managers.
B) The effect of merger activity has not been adverse in the US in the study of 1980-2000 but
when compared to Europe the effect has been much severe65
. The unemployment has been due
to economic downturn rather than merger activity. The demand for in the labor market has
declined in UK and EU after acquisition activity but that has not been the case with US, on the
contrary the demand in the labor market, although slightly but has surely increased. The labor
market is more adaptive to changes caused by economic or merger activity, this is not the case
with EU where the labor market fluctuates rapidly. Highly regulated labor markets like the one in
63
Donald S siegel and Kenneth L. Simons “Accessing the effects of mergers and acquisitions on the firm
performance, plant and workers”. Strategic Management Journal 2010, pages 903-916 .
64
ibid page 913
65
Klaus Gugler and B. Burcin Yurtoglu, “The effects of mergers and acquisitions on company employment in the
USA and Europe” G34 L2, University of Vienna page 1-31

29 | P a g e
EU makes it costlier for firms to hire labor so by default they carry a bigger work force. On the
other hand in US as the labor market is not that strict hiring is a bit easier, hence adequate labor
force66
. Now, the fact that hiring is costly more labor force is carried, mergers are used as a way
to restructure and reduce labor. Stressing the fact, that the demand for labor decreases more in
EU as compared to the US.
In case hostile takeover in Michigan, US (1978-1984) in assets only merger wages have
increased 5 percent and employment about 5 percent lower than it would normally be.
Manufacturing sector merger activity has led to job loss but in small number and in the central
office not in the manufacturing plant, however the production capacity has increased. In case of
the UK hostile takeovers have been the largest source of decreasing labor demand.
Not evidences have been found to show adverse effects of mergers in the US, while in EU we
see a 10 percent decrease in labor demand due to merger activities.67
C) Further evidences suggest that a study in 2008 showed that 10-15 percent of the work force in
the US was impacted by M&A activity. Similar situation faced by workers in The Netherlands,
Australia, Germany and Brazil, the country impacted most was India and the least was Japan,
where only 5 percent of the work force was affected. Same illustrated via a graph.68
66
ibid page 7
67
Ibid page 1
68
The effects of mergers and acquisition on employee engagagements (www.kenexa.com) an IBM company

30 | P a g e
Other sources say M&A have depleted employment in Europe by 7.9 percent. It is observed that
job losses cannot be avoided. 69
Also most of the layoffs during the 2007-2009 periods were due to the recession70
and not due to
merger activity. Although there were firing due to M&A but not of that scale as when compared
to economic downturn. It is safe to conclude that M&A do result in lay-offs but they also result
in increased productivity. Downsizing can also be seen as an inherent vice, as when restructuring
happens after M&A companies are bound to off load redundancies. Irrespective it being a
manufacturing plant, duplicate product, process and although sad but in reality even employees.
It was announced that merger of Standard Life Investment and Ignis is expected to put jobs at
risk. The deal is said to be of 390 Million pounds.71
When the deal was finally executed there
were 250 jobs that were feared to be at risk. It has been identifies that 50 million pounds will be
69
Mergers and Unemployment, Oxford analytica in Forbes (2010)
70
Douglas McIntyre, “The lay-off kings”, Daily finance ( 18/08/2010)
71
Bradley Gerrard, “Mega fund manager M&A deals ‘will lead to job losses ‘, The financial times (31/03/2014)
0 5 10 15 20 25
India
UK
Italy
The Netherlands
Australia
Germany
US
Brazil
Russia
Mexico
China
Canada
Japan
Percentage of organisations affected by M&A
Percentage of organisations
affected by M&A

31 | P a g e
saved as a result of cost cutting. The job loss is also a speculation as it has not been finalized as
the companies are yet to reach a decision regarding redundancies.72
When contacted the spokesman for Standard life said Standard Life Investments, added: “We
would emphasize that Standard Life Investments is a growing business. “We have created nearly
300 jobs in the last five years and are confident we will create more in future and currently have
130 vacancies. At this time there is no planned closure of the Glasgow or London offices of Ignis
.We will speak first to our people and potential colleagues in advance of anything further being
disclosed but our focus is on continuing to grow our business and redeploying talent wherever
we can.” 73
So it can be noted that the lay-offs are a result of offices in same city, which can be combined
and result in saving money. Redundancies have to be removed in order to achieve cost synergies.
Also it is a speculative figure, something that hasn’t been done yet and management is ready to
work towards a common ground that satisfies all concerned.
72
Scott McCulloch, “Standard life investment’s takeover of Ignis puts 250 Glasgow jobs at risk”, Business insider
(02/07/2014)
73
Ibid

32 | P a g e
Chapter 5
Post-Merger
As we have discussed the various effects of merger on employees, their psychological outlook
towards merger and established that there are very few evidences to prove that there is an
adverse effect of M&A. We shall now look into what companies can do to mitigate the risk of
non-satisfaction of employees; so that they can achieve the financial synergies they aspire to and
later on in the chapter discuss post-merger performance
5.1
Taking the argument forward that companies can combat the way the employees behave and
affect the integration of the merger deal and affect the feasibility of the entire deal. To better
counter or tackle the issue firstly the managers have to ascertain the current situation of the
employee. Following are the suggestive 4 situation in which the employees may find
themselves.74
Loyalty is the stage where the employees of the company, accept the changes and actively
participate in the integration process. They provide all their complete support in solving the
issues at work place and hence facilitate the changes occurring. It makes lives of the
management that much easier as they have tackled a very trivial issue of human integration.
Changes can also be seen as a challenge, a chance to grow professionally and make the best of
new opportunities available, Cartwright and Cooper (1989).75
Compliance is the stage where employees passively take part in the integration process, quietly
getting on with their job and accepting the changes. Employees at a lower level to whom the
situation does not affect massively can also be termed in compliance stage.76
Voice, the employees who raise their voice as in show signs of opposition to the changes are in
this stage. They work actively against the changes and explicitly show their disapproval towards
the acquisition.
74
Mitchell Lee and Philip H Mirvis “merger ahead: A research agenda to increase Mergers and Acquisition success”
Journal of Business psychology Volume 26,2011 pages 161.168
75
Dimitris Bourantas and Irene I. Nicandrou “Modelling post-acquisition employee behaviour: typology and
determining factors, employee relations. Volume 20 No 1 1998 page 75
76
Ibid page 77

33 | P a g e
Neglect, is the stage where employee that display a passive opposition towards the acquisition by
not doing their job properly, repeated and continuous absentness. There is a feeling of acceptance
of the fact that nothing is going to change due to their efforts.77
5.278
The integration process of the merger deal is a very important step that can largely affect the
outcome of the entire deal. Cultural factor in the integration is among the most difficult factors to
deal.79
It is even more important in case of a cross border acquisition. The cultural differences
have been found to be the key element affecting the implementation of the integration process.
Despite the increasing number of M&A deals, two thirds of those deals fail to create the
optimization they were expected to. The rate of failure of the deals is 55-70 percent. Previous
literature has extensive study towards examining the cultural factor as a main reason for M&A
failure. There is need to stress the importance of the role of cultural in integration process. As per
Fralicx and Bolster “culture can be the make or break factor in the merger equation”.
Culture refers to a set of values, practices that are generated and shared due to interaction of
people, be it in work place or at home. Combining the diverse cultures is likely to have major
consequences in terms of outcome and underestimating its importance is a fundamental reason
for failure of M&A.
5.3
Companies these days engage heavily in M&A activities. They have become a common way to
improve productivity, profit, sales etc. In order to achieve the above they need to form a full
proof organizational plan which compliments the integration process. Hence, employees form an
integral part of the plan.80
Redundancies are unavoidable during an M&A, this leads to lay-offs, as the companies cannot
ignore this, the best they can do is to communicate properly and reduce any uncertainty among
the employees. This in turn reduces the anxiety levels in the workers. Those who are laid off
77
Ibid page 78
78
George Lodorfors and Agyenim Boateng “The role of culture in the merger and acquisition process”,
Management Decision, Volume 44 No 10 2006 pages 1405-1421
79
http://www.m-and-a-explained.com/ Making M&A process transparent and measurable.
80
The Human side of Mergers: Those laid off and those left aboard. Strategic management America page 1-2

34 | P a g e
should be told or communicated without avoiding any ambiguity and with ample severance
packages. The ones retained should have a clear idea of their new role, new responsibilities.
Training and development plans should be used to make employees aware of the new policies,
procedural changes as a result of the merger. New technology that will be implemented, changes
in hierarchal order and most important how are all the changes are going to affect them.81
In case of a cross border acquisition or even cross country. It is very important that the
employees are prepared for the cultural shift that they are going to encounter. Small things like
not to use a local language, gestures. The changes can also affect the employee’s morale in a
negative. Open and proper communication regarding the future prospects of the organization
promptly to reduce any ambiguity to build up. Motivation is also a very good source to calm the
nerves that cropped up due to merger. Especially in the tough times when the workers are
anxious about their future, motivation provided by the firm can work wonders. Social gathering,
team outings, team building activities are a great way to allow employees of both the
organization to get to know each other mix up and form good working relationships.
5.4 82
Stock prices in the market and other financial reports have been traditionally used to gauge the
success of the post-merger performance of the firm. But studies have revealed that this is a very
narrow area to look into and determine the outcome. Other factors as cultural integration,
employees integration, future prospects of business growth should also be taken into
consideration.
For better understanding this fact let us take an example of merger of JP Morgan and Chase
Manhattan Bank. JPMC stock after the merger lost half of its value still it is considered to be a
very good merger integration. The stock loss were mainly due to the economic downturn and no
merger deals during that period were expected to result in a increased stock value. JPMC merger
helped make them a stop shop for all the banking needs for the clients. The way that the
businesses and clients of the two banks integrated it helped the new formed JPMC to gain market
leadership and increased revenue. Financial integration was achieved expertly, employee
satisfaction was at 68% in the poll conducted post-merger, there were little or no client issues or
81
ibid page 5-6
82
Mac J Epstein “The determinants and evaluation of merger success” Business Horizons, 48 2005, pages 37-46

35 | P a g e
clashes. Hence the merger must be evaluated beyond just financial data and numbers, It is like
focusing on the bigger picture and paying attention to the prospect of better opportunities to
come. In a nutshell the opportunities and business growth were much higher and better post-
merger as compared to JP Morgan and Chase Manhattan individually. This clearly shows they
clearly achieved the ultimate synergy via merger integration.83
From the same case study we can also establish a check list of factors which can help firms carry
out a successful merger deal. Although not full proof, but can provide indicative steps that a
acquiring firm can follow.
Strategic alignment or long term strategy of the firm must be assessed to better match it to the
target firms. Long term financial growth and sustainable income source should be the paramount
considerations. If the “ABC” of both the companies do not match then the deal can rarely be a
success. Strategies of the companies should be complimentary to each other. This will help them
increase their businesses, revenues, achieve desired results, avoid employee conflicts, leading to
a perfect merger integration. If the strategies are supplementing or wrongly directed then it leads
to duplication, issues, scenarios where layoff have to be made, hindering the transition and hence
the deal.84
Due diligence should be exercised with utmost caution. Ideally it should involve members from
both the sides of the deal. Diligence is reviewing financial reports, assets values, investigation
into the organizational structure, checking the ability to merger cultures and employees. This
includes evaluation of policies, work culture; facilities provided, benefits, compensation
structure etc. Basically to ascertain the value and feasibility of the deal. To avoid any unpleasant
surprises due diligence is very important, better to know about the problem before paying or
committing then to come across it during integration. 85
Financing, as already discussed in this dissertation. It is very important to select the method that
suits the long term financial plans of the acquirer. Also the amount paid in the deal should be
carefully analyzed. Failure to do either can lead to serious long term implications.
83
ibid pages 44-46
84
Ibid page-38
85
Ibid p-39

36 | P a g e
Pre-merger, right from the announcement of the deal to the time of actual execution of the deal is
very critical. Many things can change and the acquirer firm has to act swiftly especially if it is
takeover. Even otherwise there should be set time-lines set to outline the performance of
particular tasks, the press should be handled with confidence, everyone involved in the deal
should be clear about their tasks and duties. Third party point of view is important at this stage to
get a fresh perspective to ascertain nothing is missed.
Post-merger integration, already stressed earlier in the paper that post-merger is very important
for a successful deal. Most of the companies plan a good integration but miss out on executing
the plan. Good and open sources of communication. Rapid execution and creating a feel good
factor without comprising any set-back is fundamental.86
86
ibid p-40

37 | P a g e
Chapter 6
Regulations
As there is an increase in merger activities, there is an inherent need for regulations that regulate
the If’s and But’s of the M&A process. The merger regulations of policies are made with a core
or fundamental purpose to safeguard competition and avoid monopolistic market situation.87
. In
this chapter we will aim to have an overview of merger regulation from the UK and India.
India
The corporate scene in India is changing at a rapid pace. Economic development, increased
globalization and FDI are paving way for increased merger activities. The competition act 2002
is the principal piece of legislation which regulates such activities in India. It is enforced by
competition commission of India (CCI)88
.
“An Act to provide, keeping in view of the economic development of the country, for the
Establishment of a Commission to prevent practices having adverse effect on
Competition, to promote and sustain competition in markets, to protect the interests of
Consumers and to ensure freedom of trade carried on by other participants in markets,
In India, and for matters connected therewith or incidental thereto.”89
There are three main areas that are regulated, also constituted in the act. They are the following:-
 Anti-competitive agreements
Transaction pertaining to cause adverse effect on competition through agreements regarding
supply and production of goods is prohibited.90
Any such agreements will be deemed null and void.91
87
http://www.internationalcompetitionnetwork.org/uploads/library/doc333.pdf “The analytical framework for
merger control” ICN Merger working group: Analytical framework sub group, ICN annual conference, Office of fair
trading, London. Page 1
88
http://www.iflr.com/Article/3315555/2014-Merger-Control-Survey-India.html
89
The competition act 2002, enacted by parliament of India.
90
The competition act 2002, s 3 (1)

38 | P a g e
The above sections of the act regulate or restrict companies, firms or enterprises to pursue or get
in to agreement which will adversely affect the competitive set up of the market. This regulations
are necessary to safeguard the interest of the enterprises operation in the free market, especially
the ones that are small scales and do not possess the financial muscle to fend off the bigger
enterprises. Also it safe guards the interests of enterprises who will not be able to survive if the
market is not regulated and turns into a monopolistic market92
. Any agreements leading to price
determination, rigging or joint bidding, influencing the supply system are presumed to have a
negative effect on the market93
.
 Abuse of Dominant power
The abuse of power or abuse of dominance is another factor that is regulated by The Competition
Act 2002. Its section 4 (1) states “no enterprise or group shall abuse its dominant position”94
. It
also defines the acts that can be considered as use of dominant position. Several acts such as sale
or purchase of goods and services pricing of a particular goods and services which harms the
competition and can only be done from a position on power95
. Practices that restricts the
production and distribution of the good, technical advancements, market access, acceptance of
supplementary contracts for conclusion of currents contracts, affecting one market using the
presence in another market are also considered abuse of power96
.
 Combinations
Combination of enterprises happens when one or more of them are acquired by one enterprise or
a group of enterprises. To determine whether a particular enterprise or an acquisition qualifies to
be deemed as combination, monetary measures are used. Brackets of turnover and assets value
have been set. It is very important to determine if the deal will result in a combination97
. Other
methods of determining a combination is to monitor the direct or indirect involvement of the
person acquiring or the acquiring enterprise to check if they engage in production, distribution
91
92
Aditya Bhattacharya, “India’s new competition law : a comparative assessment”, Journal of competition law and
economics, Volume 4(3),2008, page 627-628
93
94
95
The competition act 2002, s 4 (2) a
96
The competition act 2002, s 4 (2) b
97
The competition act 2002, s 5 (a)

39 | P a g e
and or trading of a similar or substitute goods. Valuation of assets of the enterprises is taken into
consideration98
As now we know what is deemed as a combination, let us discuss why it is regulated.
Combination result in pooling of financial resources of big corporate houses, hedge funds and
other agencies. If not regulated, the competition in the market will be wiped out. As if
combinations are allowed than mostly, all the process from A-Z will be owned by same
enterprise or a group of enterprises. This also increases exposure to tax evasion. Complex
corporate structure makes it that more difficult to track money when it is among same
enterprises. Hence, regulation of combinations is very necessary.99
The above was a general description of the Indian competition act 2002 (amended in 2007) that
regulates the merger activities in India.
The CCI has decided to tighten its rules so that the companies cannot escape it watchful eye. The
parties that decide to merger have to provide audited accounts to the CCI of last two financial
years. Some changes have been made via CCI amendment regulations, 2014 on March 28, the
Forms to be furnish information regarding the merger transaction in order to ascertain the filing
jurisdiction of the merger deal.100
The UK
The UK merger control legislation is the Enterprise Act 2002, enforced since 1st
April 2014 by
the Competition and Markets Authority. The UK is also subject to EU regulations for merger,
subject to a threshold test. Where if the threshold limit is met the EU rules are applicable and
vice versa if not then the UK rules are applicable101
. The Enterprise Act 2002 is enforced by the
Competition and Markets Authority (CMA). The CMA took over from Office of Fair Trading
(OFT) for the task of reviewing mergers102
.
98
The competition act 2002, s 5 (b)
99
Aditya Bhattacharya, “India’s new competition law : a comparative assessment”, Journal of competition law and
economics, Volume 4(3),2008, page 632-634
100
ET Bureau, Competition commission of India tightens rules to see through mergers and acquisitions structures”
The Economic Times , (02/04/2014)
101
www.ashurst.com “UK merger control” Ashurst LLP page 1
102
A quick guide to merger assessment- CMA page1

40 | P a g e
The merger review process has two steps; Firstly implication as in effect of merger on
competition is investigated. Secondly detailed investigation of contentious merger takes place.
The CMA handles the review processes103
. The CMA is responsible for collecting information
and investigate if the outcome of the merger will result in less or uneven competition and in turn
affect the customers in a adverse way, as in price rise, inadequate supply of goods, poor
alternative choices for consumers.104
Another aspect is that some mergers are termed as public
interest merger. It allows political influence is used as a way to intervene a merger deal
concerned with public interest and a intervention may be required to ensure safeguarding of
people’s interest105
.
In case of cross border mergers the “The companies regulation (2007/2974) implement the
European directive on cross border mergers (2005/56/EC). It enables the transfer of assets and
liabilities between two companies, given one of them in incorporated in the EU (except UK) and
the other one is incorporated in the UK106
. The European Commission examines M&A deals
with EU and global turnover amounts above or below a certain amount, some of them may have
an impact in the UK. Mergers that have their main impact in the UK can be transferred to the
CMA for examination, and some mergers that do not meet the EC’s thresholds may nonetheless
be transferred to it by the merging businesses or the CMA.107
Turnover Test:- Where the annual value of the UK turnover of the enterprise being acquired
exceeds £70 million, the turnover test will be satisfied. For the purposes we have to look to sales
generated by customers located in the UK when the merger is completed or, for mergers “in
contemplation”, at the time of the reference decision. While the figures from an enterprise’s
latest books of accounts will fit the purposes of application of the test, some changes may be
required like significant M&A activity have been carried out since the finalization of accounts.
“In ‘pure mergers’, i.e. where no enterprise stays under the same ownership (because two
businesses are merged into one, and the owners become common to both), the normal ‘target’s
103
“UK merger control” Ashurst LLP page 2
104
A quick guide to merger assessment- CMA page2
105
“UK merger control” Ashurst LLP page 2
106
“Cross border merger” GP 07 September 2013, Companies House, Companies Act 2006
107
A quick guide to merger assessment- CMA page 1

41 | P a g e
turnover’ rule cannot apply.” Then the turnover amounts of the enterprises involved are added
and the highest amount is subtracted from the total. 108
108
http://www.slaughterandmay.com/media/64563/uk_merger_control_under_the_enterprise_act_2002_-
_nov_2009.pdf Slaughter & May, November 2009, page 7

42 | P a g e
Conclusion
With the increasing global business activity, M&A activities have been on the rise and more and
more companies are likely to engage in M&A. This dissertation reviews types of mergers,
motives of merger activity (creation of synergies, revenue growth, economies of scale), various
aspects of merger activity (parties involved in the process), valuation of the target firm,
importance of synergy creation and various types of synergies, financing methods and factors
affecting financing methods.
Then the effects of M&A on share prices of the firms, various studies and data shows that the
share value of the acquiring firms usually takes a dip after the merger and the share value of the
target firm soars high or remains un-affected. Through facts from TATA and JLR motors deal, it
is safer to conclude that although M&A result in value depletion in the short run but if post-
merger integration is handled properly it leads to increased and steady growth. The main reason
for value depletion is been found as less priority being awarded to post merger integration.
Cultural differences, employee issues are some reasons of a non-successful merger deal. To
ascertain the factors and to ascertain the effect on the employees we examined the mind set or
the psychological effect of the merger on a employee. This was done to better understand the
effects and to reach a well-informed conclusion, so as to effects are positive or negative. The
numbers obtained from previous studies were compared with the lay-offs made in the 2007-2009
period (recession) to eliminate the lay-off due to recession. So that the result achieved displays a
correct picture of the scenario. After comparison of the numbers, it is certain that M&A do affect
the employees but not severely. Merger activity does result in lay-offs and firings but they also
present employees with opportunities to grow and learn more.
Taking the scope of the dissertation forward, we discuss post-merger evaluation. Financial
figures do not provide exact evaluation of the deal. As it has been seen in previous studies that
integration fails mostly due to cultural and human capital factors. With the use of JP Morgan and
Chase Manhattan bank merger study, factors or rather steps of a good post-merger integration are
established. The fact that cultural integration should be the paramount concern or priority in a
post-merger scenario is re-emphasized with help of JPMC merger study.

43 | P a g e
After understanding the psychological effects on the employee, it was possible to come with
remedial ways that the manager can deal with the sentiments of the employees. Proper and clear
communication is a very important tool. It helps eradicate anxiety created sue to uncertainty of
the firm future. New roles and responsibilities should be effectively communicated to retained
employees. In case of the employees laid-off clear and open communication comes to play again,
severance packages, if applicable should be carefully designed.
An overview of M&A regulations in India and the UK are described. India has had a massive
increase in merger activities in the past few decades. Mainly due to liberal economic policies,
growth of private sector and entrepreneurial skills. The main crux of regulations in India is that
the activities resulting in harming the competition or in other words creating unfavorable market
conditions are regulated, there is a strict watch on combinations and abuse of dominant position.
These are all placed with the sole purpose of safeguarding consumer’s interest and keep the
competition balanced in the market. Likewise in the UK, regulations are placed to watch over
merger activities. The merger deals are reviewed and if needed intervened to safeguard various
interest groups. The EU regulations also come into play at times of a cross border merger, but
there are tests created to establish jurisdiction or in other words to establish which regulation UK
or EU will be applicable.
Lastly M&A does have considerable effect on the share prices by examining figures, numbers
and examples it is can be concluded that the share price of the acquirer in the most cases
decreases as compared to the share value of the target firm shareholders increase. This is the
result of the fact that the target firm shareholders have to be paid more than the value to induce
them to accept the offer and thus it balances out with a decrease in acquirer share value, post-
merger. There are examples where the share value of the target firm has declined due to the
announcement of the deal.
As for the effects on employees, M&A do result in lay-offs but it is an inherent vice, it is non-
avoidable, as during post-merger integration redundancies have to be removed to achieve the
synergies aimed by the merger deal. This integration helps firms to achieve synergies which
create opportunities that are much bigger and advantageous. When the number of lay-offs in the
last few years is taken into account, it was mostly due to economic downturn and due to mergers.
So, it can be concluded that the effect of employees is not negative.

44 | P a g e
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