Introduction of merger and acquisition

A merger is a transaction that result in the transfer of
ownershipand control of a corporation.
When one company purchases another company of an
approximately similarsize. Thetwo companies come
together to becomeone.
2
Twocompanies usually agree to merge when they feel
that they can dosomething together that they can not do
one their own.

Latest company Merged
 TATA STEEL-CORUS
 VODAFONE-HUTCHISON ESSAR
 HINDALCO-NOVELIS
 RANBAXY-DAIICHI SANKYO
 ONGC-IMPERIAL ENERGY
 MAHINDRA & MAHINDRA- SCHONEWEISS
 STERLITE- ASARCO:
 TATA MOTORS-JAGUAR LAND ROVER
 Flipkart and eBay
 Airtel and Telenor
 Wipro Ltd and InfoSERVER S.A.
 https://www.jagranjosh.com/current-affairs/acquisition-merger-1286444605-catlistshow-1-p3
 https://economictimes.indiatimes.com/topic/mergers-and-acquisitions

• It refers to the merger of two companies who are direct
competitors of one another.
• They serve the same market and sell the same
product.
Example
• The formation of Brook Bond Lipton India Ltd. through
the merger of Lipton India and Brook Bond
• The merger of Bank of Mathura with ICICI (Industrial
Credit and Investment Corporation of India) Bank
Example- Boeing-McDonnell Douglas
7

A merger between twocompanies producing different
goods and services for one specificfinished products.
Themerger of the firm thathave actualor potentialbuyer-
seller relationship.
 This would be an example of the supplier merging
with the producer and is the essence of vertical
mergers Example
 Pixar & Disney

CONGLOMERATE MERGER
• It refers to the merger of companies, which do
not either sell any related products or cater to
any related markets.
• Here, the two companies entering the merger
process do not possess any common business
ties. Example—•. Tata-Sky, PepsiCo-Pizza
Hut; Proctor& Gamble-Clorox

Market-extension Merger
• This involves the combination of two
companies that sell the same products in
different markets.
• A market-extension merger allows for the
market that can be reached to become larger
and is the basis for the name of the merger.
• Example- Dell’s Alienware Gaming Laptops

Product-extension Merger
• It takes place between two business
organizations that deal in products that are
related to each other and operate in the same
market.
• Companies which sell different products of a
related category.

Waysofmerger–Amergercantakeplace infollowingways:
12
By purchasing ofassets
 By purchase of commonshares
 By exchanging of shares forassets
 By exchanging of sharesfor shares

By purchaseof
assets
By purchaseof
common shares
13

By exchangingof
shares forassets
By exchangingof
shares forshares
14

Reasons
of
merger
Future
goals Mutual
benefits
Maximizi
ngprofits
Expansio
n of
business
Economy
of scale
Increase
market
share
Cost
maxim
i
zation
Diversific
ation of
risk
Goodwill
Product
improvement
10/31/2013 SwatiGarg/Merger 15

ACQUISITION
 A transaction where one firms buys another firm with
the intent of more effectively using a core
competence by making the acquired firm a
subsidiary within its portfolio of business
 It also known as a takeover or a buyout
 It is the buying of one company by another.
 In acquisition two companies are combine together
to form a new company altogether.
 Example: Company A+ Company B= Company A.

DIFFERENCE BETWEEN MERGER AND
ACQUISITION:
iii.
i. Merging of two organization in
to one.
ii. It is the mutual decision.
Merger is expensive than
acquisition(higher legal cost).
iv. Through merger shareholders
can increase their net worth.
v. It is time consuming and the
company has to maintain so
much legal issues.
vi. Dilution of ownership occurs
in merger.
iii.
MERGER ACQUISITION
i. Buying one organization by
another.
ii. It can be friendly takeover or
hostile takeover.
Acquisition is less expensive
than merger.
iv. Buyers cannot raise their
enough capital.
v. It is faster and easier
transaction.
vi. The acquirer does not
experience the dilution of
ownership.

MERGER:WHY & WHY NOT
i. Increase Market Share.
ii. Economies of scale
iii. Profit for Research and
development.
iv. Benefits on account of
tax shields like carried
forward losses or
unclaimed depreciation.
v. Reduction of
competition.
iii.
i. Clash of corporate
cultures
ii. Increased business
complexity
Employees may be
resistant to change
WHY IS IMPORTANT PROBLEM WITH MERGER

PROCESS OF MERGER & ACQUISITION IN INDIA:
The process of merger and acquisition has the following steps:
i. Approval of Board of Directors
ii. Information to the stock exchange
iii. Application in the High Court
iv. Shareholders and Creditors meetings
v. Sanction by the High Court
vi. Filing of the court order
vii. Transfer of assets or liabilities
viii. Payment by cash and securities
Maximum Waiting period:210 days from the filing of notice(or
the order of the commission - whichever earlier).

IMPACT OF MERGERS AND ACQUISITIONS

WHY MERGERS AND ACQUISITIONS FAIL?
Cultural Difference
Flawed Intention
No guiding principles
No ground rules
No detailed investigating
Poor stake holder outreach

HOW TO PREVENT THE FAILURE
 Continuous communication – employees,
stakeholders, customers, suppliers and
government leaders.
 Transparency in managers operations
 Capacity to meet new culture higher
management professionals must be ready to
greet a new or modified culture.
 Talent management by the management

REASONS FOR FAILURE
 The merger coincided with a flurry of increased
domestic and international competition.
 Weak management and organization structure.
 More attention to non-core issues such as long
term fleet acquisitions and establishing subsidiaries
for ground handling and maintenance, than to
addressing the state of the flying business.
 Bloated workforce
 Unproductive work practices
 Political impediments to shedding staff
35

Interview Questions on Finance – Acquisition & Merger
Q. How do you value a company?
• A. Although it depends on the industry and situation of the company,
basic key lies in the discounting the future earnings to the present
value. It can be DCFF, DCFE or DDM depending upon the industry
of company.
Q.In case of an acquisition, what would you consider – the equity
value or the enterprise value?
• A.While equity price reflects the market value and fundamental
value of company, it is essential to consider the enterprise value in
case of acquisition. This is because the enterprise value is an
indicator of the company as a whole.
Q. Can a company have negative enterprise value?
A. Yes, it surely can. If the company is on the brink of bankruptcy, it
will have negative enterprise value. Added to this, if the company
has large cash reserves, enterprise value will swing to the negative
side.

Assignment Questions
• What is Merger? Explain types of Merger .
• Reason for Merger
• Explain in detail types of Acquisition
• Distinguish between Merger & Acquisition
• Process of Merger and Acquisition

Interview Questions on Finance – Acquisition & Merger
Q. How would you know if an acquisition is dilutive?
• A.If your current shareholders’ earnings per share go down after the transaction,
this would be dilutive. However, if your current shareholders’ earnings per share go
up, then it would be accretive. It is best to look at the effects over a number of
years; otherwise, this could be a bit short sighted.
Q. I hope you are familiar with beta. Will you throw some light on how you will
proceed to calculate the beta?
• A.Plot the index in one column and relevant stock price in other column. Say the
data is plotted for one week basis. Then calculate % change in the two parameters
and plot the data in the next two columns. Beta can be calculated by dividing
%changes in index by % changes in the stock prices. You can then de-lever the beta
to get another beta that can be re-levered in subsequent calculations.
Q. What is the difference between asset beta and equity beta?
• A. The asset beta is the unlevered beta which holds no risk to the leverage that the
asset may hold. On the other side, when the beta is calculated by looking into the
beta of other company, you obtain your levered beta. The mere thing left to do is to
de-lever the beta.

RESTRUCTURING- Meaning
Corporate restructuring refers to the changes in ownership, business mix, assets mix
and alliances with a view to enhance the shareholder value.
Hence, corporate restructuring may involve ownership restructuring, business
restructuring and assets restructuring.

Restructuring Activities
• In the 1980’s and 90’s the term
“Restructuring” became one of the major
buzzwords, also known as
• “getting lean and mean”
• Purpose: to improve efficiency, restore
international competitiveness, pay for
leveraged buy-outs

Restructuring consists of all or some of
the following:
• Closing plants
• laying off employees
• moving operations
• reorganization of operations (very popular)
• cost cutting, cost cutting, cost cutting

Types of Restructuring
• Expansion- Mergers, Acquisitions, Takeovers,
Tender offer, Joint Venture
• Contraction- Sell offs, Spin offs, Split offs, Split
ups, Divestitures, Equity Carve outs
• Corporate Control: Takeover Defenses, Share
Repurchases, Exchange Offers, Proxy Contests
• Changes in Ownership: Leveraged Buy out,
Going Private.

Acquisitions
• In a simple acquisition, the acquiring company
obtains the majority stake in the acquired firm,
which does not change its name or legal
structure.
• An example of this transaction is Manulife
Financial Corporation's 2004 acquisition of John
Hancock Financial Services, where both
companies preserved their names and
organizational structures.

Take-over
• The term takeover is understood to connote hostility.
• When an acquisition is a ‘forced’ or‘ unwilling’
acquisition, it is called a takeover.
• A holding company is a company that holds more than
half of the nominal value of the equity capital of another
company, called a subsidiary company, or controls the
composition of its Board of Directors.
• Both holding and subsidiary companies retain their
separate legal entities and maintain their separate books
of accounts. Takeover

Tender Offer
• In a tender offer, one company offers to purchase the
outstanding stock of the other firm at a specific price.
• The acquiring company communicates the offer directly
to the other company's shareholders, by passing the
management and board of directors.
• Example: when Johnson & Johnson made a tender offer
in 2008 to acquire Omrix Biopharmaceuticals for $438
million.
• While the acquiring company may continue to exist —
especially if there are certain dissenting shareholders —
most tender offers result in mergers.

Joint venture
• this Involves two companies coming together
and forming a new company whose ownership
is changed.
• Generally this strategy is adopted by MNC’s to
enter into foreign companies.
• DCM Group and Daewoo Motors entered into a
joint venture to form DCM Daewoo Limited to
manufacture auto mobiles in India Joint Venture

Contraction
• Sell off- A sale of assets, typically at a low price,
carried out in order to dispose of them.
• Spin offs- This type of demerger involves division of
company into wholly owned subsidiary of parent
company by distribution of all its shares of subsidiary
company on a pro-rata basis.
• For Example Kotak Mahindra finance limited formed
a subsidiary called Kotak Mahindra Capital
Corporation by spinning off its investment banking
division.

.
• Split-off refers to a corporate divestiture process
in which a company's subsidiary turnout as a
separate entity, with independent listing of its
capital stocks
• Split ups- an ending of a relationship or
partnership; a separation.
• Divestitures- These are sale of segment of a
company for cash or for securities to an outside
party. Selling assets, divisions, subsidiaries to
another corporation or combination of
corporations or individuals Divestitures

Equity Carve out
• The firm sell a part (20% or less) of its wholly
owned subsidiary’s common stock in the
market.
• This is similar to spin –offs, expect that some
part of share holders of this subsidiary company
is offered to public through a public issue and
the parent company continues to enjoy control
over the subsidiary company by holding
controlling interest in it.

LBO-Definition
• It involves the use of a large amount of debt to
purchase a firm.
• LBOs are clear-cut example of a financial
merger undertaken to create a high-debt private
corporation with improved cash flows and value.
• Typically, in an LBO, 80% or more of the
purchase price is financed with debt.
• A large part of the borrowing is secured by the
acquired firm’s assets.

Features of an LBO Candidate
• An attractive candidate for acquisition via LBO
should possess the following attributes:
– It must have a good position in the industry with
sound profit history.
– It should have a relatively low level of debt and high
level of “bankable” assets.
– It must have stable and predictable cash flows that
are adequate to meet interest and principal payments
on the debt and provide adequate working capital.

Leveraged Buy-Outs
Unique Features of LBOs
Large portion of buy-out
financed by debt
Shares of the LBO no longer
traded on the open market

Leveraged Buy-Outs
●
●
●
●
●
●
Junk bond market
Leverage and taxes
Other stakeholders
Leverage and incentives
Leverage restructurings
LBOs and Leverage restructurings
Potential Sources of Value in LBOs

Introduction of merger and acquisition

More Related Content

What's hot (20)

Similar to Introduction of merger and acquisition (20)

Recently uploaded (20)

Introduction of merger and acquisition