46 mergers & acqusition (b.j.)

8/6/2019 46 Mergers & Acqusition (B.J.)

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Mergers and Acquisitions

Introduction to

Mergers and Acquisition

We have been learning about the companies coming together to from

another company and companies taking over the existing companies to expand

their business.

With recession taking toll of many Indian businesses and the feeling of

insecurity surging over our businessmen, it is not surprising when we hear about

the immense numbers of corporate restructurings taking place, especially in the

last couple of years. Several companies have been taken over and several have

undergone internal restructuring, whereas certain companies in the same field of

business have found it beneficial to merge together into one company.

All our daily newspapers are filled with cases of mergers, acquisitions, spin-

offs, tender offers, & other forms of corporate restructuring. Thus important issues

both for business decision and public policy formulation have been raised. No firm

is regarded safe from a takeover possibility. On the more positive side Mergers &

Acquisitions may be critical for the healthy expansion and growth of the firm.

Successful entry into new product and geographical markets may require Mergers

& Acquisitions at some stage in the firm's development. Successful competition in

international markets may depend on capabilities obtained in a timely and efficientfashion through Mergers & Acquisition's. Many have argued that mergers increase

value and efficiency and move resources to their highest and best uses, thereby

increasing shareholder value. .

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To opt for a merger or not is a complex affair, especially in terms of the

technicalities involved. We have discussed almost all factors that the management

may have to look into before going for merger. Considerable amount ofbrainstorming would be required by the managements to reach a conclusion. e.g.

a due diligence report would clearly identify the status of the company in respect

of the financial position along with the net worth and pending legal matters and

details about various contingent liabilities. Decision has to be taken after having

discussed the pros & cons of the proposed merger & the impact of the same on

the business, administrative costs benefits, addition to shareholders' value, tax

implications including stamp duty and last but not the least also on the employees

of the Transferor or Transferee Company.

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Merger:-

Merger is defined as combination of two or more companies into a single

company where one survives and the others lose their corporate existence. The

survivor acquires all the assets as well as liabilities of the merged company or

companies. Generally, the surviving company is the buyer, which retains its

identity, and the extinguished company is the seller.

One plus one makes three this equation is the special alchemy of a merger or

acquisition. The key principle behind buying a company is to create shareholdervalue over and above that of the sum of the two companies. Two companies

together are more valuable than two separate companies--at least, that's the

reasoning behind M&A.

Merger is also defined as amalgamation. Merger is the fusion of two or more

existing companies. All assets, liabilities and the stock of one company stand

transferred to Transferee Company in consideration of payment in the form of:

Equity shares in the transferee company,

Debentures in the transferee company,

Cash

A mix of the above modes.

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Acquisition: -

In an acquisition, a company can buy another company with cash, with

stock, or a combination of the two. Another possibility, which is common in smaller

deals, is for one company to acquire all the assets of another company.

Example:

Company X buys all of Company Y's assets for cash, which means that Company

Y will have only cash (and debt, if they had debt before). Of course, Company Y

becomes merely a shell and will eventually liquidate or enter another area of

business.

Methods of Acquisition:

An acquisition may be affected by: -

Agreement

With the persons holding majority interest in the company management like

members of the board or major shareholders

commanding majority of voting power

Purchase of shares in open market

To make takeover offer to the general body of shareholders

Purchase of new shares by private treaty

Acquisition of share capital through the following forms of considerations

viz. means of cash, issuance of loan capital, or insurance of share capital.

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Mergers & Acquisitions rationale is particularly alluring to companies when times

are tough. Strong companies will act to buy other companies to create a morecompetitive, cost-efficient company. The companies will come together hoping to

gain a greater market share or achieve greater efficiency. Because of these

potential benefits, target companies will often agree to be purchased when they

know they cannot survive alone.

In practice, however, actual mergers of equals don't happen very often. Often, one

company will buy another and, as part of the deal's terms, simply allow the

acquired firm to proclaim that the action is a merger of equals, even if it's

technically an acquisition. Being bought out often carries negative connotations.

By using the term "merger," dealmakers and top managers try to make the

takeover more palatable.

A purchase deal will also be called a merger when both CEOs agree that joining

together in business is in the best interests of both their companies. But when the

deal is unfriendly--that is, when the target company does not want to be

purchased--it is always regarded as an acquisition.

So, whether a purchase is considered a merger or an acquisition really depends

on whether the purchase is friendly orhostile and how it is announced. In other

words, the real difference lies in how the purchase is communicated to and

received by the target company's board of directors, employees and shareholders.

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Purpose and Terms of Mergers and

Acquisition

The purpose for an offer or company for acquiring another company shall

be reflected in the corporate objectives. It has to decide the specific objectives to

be achieved through acquisition. The basic purpose of merger or business

combination is to achieve faster growth of the corporate business. Faster growth

may be had through product improvement and competitive position.

Other possible purposes for acquisition are short listed

below: -

1.Procurement of supplies:

To safeguard the source of supplies of raw materials or intermediary

product;

To obtain economies of purchase in the form of discount, savings in

transportation costs, overhead costs in buying department, etc.;

To share the benefits of suppliers economies by standardizing the

materials.

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2. Revamping production facilities:

To achieve economies of scale by amalgamating production facilities

through more intensive utilization of plant and resources.

To standardize product specifications, improvement of quality of

product, expanding

Market and aiming at consumers satisfaction through strengthening after

sale services

To reduce cost, improve quality and produce competitive products to

retain and improve market share.

3. Market expansion and strategy:

To eliminate competition and protect existing market

To obtain a new market outlets in possession of the offeree

Strengthening retain outlets and sale the goods to rationalize distribution

4. Financial strength:

To improve liquidity and have direct access to cash resource.

To dispose of surplus and outdated assets for cash out of combined

enterprise.

To enhance gearing capacity, borrow on better strength and the greater

assets backing.

To avail tax benefits.

To improve EPS (Earning Per Share).

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5. General gains:

To improve its own image and attract superior managerial talents to manage

its affairs;

To offer better satisfaction to consumers or users of the product.

6. Own developmental plans:

The purpose of acquisition is backed by the offer or companys own

developmental plans. A company thinks in terms of acquiring the other

company only when it has arrived at its own development plan to expand its

operation having examined its own internal strength where it might not have

any problem of taxation, accounting, valuation, etc. but might feel resource

constraints with limitations of funds and lack of skill managerial personnels. It

has to aim at suitable combination where it could have opportunities to

supplement its funds by issuance of securities, secure additional financial

facilities, eliminate competition and strengthen its market position.

7. Strategic purpose:

The Acquirer Company view the merger to achieve strategic objectives

through alternative type of combinations which may be horizontal, vertical,

product expansion, market extensional or other specified unrelated

objectives depending upon the corporate strategies. Thus, various types of

combinations distinct with each other in nature are adopted to pursue this

objective like vertical or horizontal combination.

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8. Corporate friendliness:

Although it is rare but it is true that business houses exhibit degrees of

cooperative spirit despite competitiveness in providing rescues to each other from

hostile takeovers and cultivate situations of collaborations sharing goodwill of

each other to achieve performance heights through business combinations. The

combining corporate aim at circular combinations by pursuing this objective.

9. Desired level of integration:

Mergers and acquisition are pursued to obtain the desired level of integration

between the two combining business houses. Such integration could be

operational or financial. This gives birth to conglomerate combinations. The

purpose and the requirements of the offeror company go a long way in selecting a

suitable partner for merger or acquisition in business combinations.

Terms Relating to Merger and Acquisitions:

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1. Asset Stripping :

When a company acquires another and sells it in parts expecting that the funds

generated would match the costs pf acquisition, it is known as asset stripping.

2. Black Knight :

The company that makes a hostile takeover is known as the Black Knight.

Dawn Raid :

This is a process of buying shares of the target company with the expectation that

the market prices may fall till the acquisition is completed.

De-merger or Spin off :

During the process of corporate restructuring, a part of the company may beak up

and set up as a new company and this is known as demerger. Zeneca and Argos

are good examples in this regard that split from ICI and American Tobacco

respectively.

Carve out:

This is a case of selling a small portion of the company as an Initial PublicOffering.

Greenmail:

Greenmail is a situation where the target company purchases back its own sharesfrom the bidding company at a higher price.

Grey Knight:

A grey knight is a company that takes over another company and its intentions arenot clear.

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Hostile Takeover:

Hostile bids occur when acquisitions take place without the consent of the

directors of the target company. This confrontation on the part of the directors of

the target company may be short lived and the hostile takeover may end up being

friendly. Most American\n and British companies like the phenomenon of hostile

takeovers while there is some more which do not like such unfriendly takeovers.

Macaroni Defense :

Macaroni Defense is a strategy that is taken up to prevent any hostile

takeovers. The issue of bonds that can be redeemed at a higher price if

the company is taken over does this.

3. Management Buy In :

When a company is purchased and the investors bring in their

managers to control the company, it is known as management buy in.

4. Management Buy Out :

In a management buy out, the managers of a company purchases it

with support from venture capitalists.

5. Poison Pill or Suicide Pill Defense :

This is a strategy that is taken by the target company to make itself less appealing

for a hostile takeover. The bondholders are given the right to redeem their bonds

at a premium before a takeover occurs.

Types of mergers

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A merger refers to the process whereby at least two companies combine to formone single company. Business firms make use of mergers and acquisitions for

consolidation of markets as well as for gaining a competitive edge in the industry.

Merger types can be broadly classified into the following five subheads as

described below.

They are Horizontal Merger, Conglomeration, Vertical Merger, Product-Extension

Merger and Market-Extension Merger.

Horizontal Merger refers to the merger of two companies who are direct

competitors of one another. They serve the same market and sell the same

product.

Conglomeration 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.

Vertical Merger is affected either between a company and a customer or

between a company and a supplier.

Product-Extension Merger is executed among companies, which sell

different products of a related category. They also seek to serve a common

market. This type of merger enables the new company to go in for a pooling in

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of their products so as to serve a common market, which was earlier

fragmented among them.

Market-Extension Merger occurs between two companies that sell

identical products in different markets. It basically expands the market base of

the product.

From the perspective of how the merge is financed, there are two

types of mergers:

Purchase mergers

Consolidation mergers.

Each has certain implications for the companies involved and for

investors

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Purchase Mergers:

As the name suggests, this kind of merger occurs when one company purchases

another one. The purchase is made by cash or through the issue of some kind of

debt instrument, and the sale is taxable.

Acquiring companies often prefer this type of merger because it can provide them

with a tax benefit. Acquired assets can be written up to the actual purchase

price, and the difference between book value and purchase price of the assets

can depreciate annually, reducing taxes payable by the acquiring company.

Consolidation Mergers:

With this merger, a brand new company is formed and both companies are bought

and combined under the new entity. The tax terms are the same as those of a

purchase merger.

Advantages of mergers and takeovers

Mergers and takeovers are permanent form of combinations which vest in

management complete control and provide centralized administration which are

not available in combinations of holding company and its partly owned subsidiary.

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Shareholders in the selling company gain from the merger and takeovers as the

premium offered to induce acceptance of the merger or takeover offers much

more price than the book value of shares. Shareholders in the buying companygain in the long run with the growth of the company not only due to synergy but

also due to boots trapping earnings.

Motivations for mergers and acquisitions

Mergers and acquisitions are caused with the support of shareholders,

managers ad promoters of the combing companies. The factors, which motivatethe shareholders and managers to lend support to these combinations and the

resultant consequences they have to bear, are briefly noted below based on the

research work by various scholars globally.

1. From the standpoint of shareholders:

Investment made by shareholders in the companies subject to merger should

enhance in value. The sale of shares from one companys shareholders to

another and holding investment in shares should give rise to greater values i.e.

the opportunity gains in alternative investments. Shareholders may gain from

merger in different ways viz. from the gains and achievements of the company i.e.

through

o Realization of monopoly profits

o Economies of scales

o Diversification of product line

o Acquisition of human assets and other resources not available otherwise

o Better investment opportunity in combinations.

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2. From the standpoint of managers:

Managers are concerned with improving operations of the company, managing

the affairs of the company effectively for all round gains and growth of the

company which will provide them better deals in raising their status, perks and

fringe benefits. Mergers where all these things are the guaranteed outcome get

support from the managers. At the same time, where managers have fear of

displacement at the hands of new management in amalgamated company and

also resultant depreciation from the merger then support from them becomesdifficult.

3. Promoters gains:

Mergers do offer to company promoters the advantage of increasing the size of

their company and the financial structure and strength. They can convert a closely

held and private limited company into a public company without contributing much

wealth and without losing control.

4. Benefits to general public:

Impact of mergers on general public could be viewed as aspect of benefits and

costs to:

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Consumer of the product or services

Workers of the companies under combination

General public affected in general having not been user or consumer or the

worker in the companies under merger plan.

(a) Consumers

The economic gains realized from mergers are passed on to consumers in the

form of lower prices and better quality of the product, which directly raise their

standard of living and quality of life. The balance of benefits in favour ofconsumers will depend upon the fact whether or not the mergers increase or

decrease competitive economic and productive activity, which directly affects the

degree of welfare of the consumers through changes in price level, quality of

products, after sales service, etc.

(b) Workers community

The merger or acquisition of a company by a conglomerate or other acquiring

company may have the effect on both the sides of increasing the welfare in the

form of purchasing power and other miseries of life. Two sides of the impact as

discussed by the researchers and academicians are

Mergers with cash payment to shareholders provide opportunities for them to

invest this money in other companies, which will generate further employment and

growth to uplift of the economy in general.

Any restrictions placed on such mergers will decrease the growth and investment

activity with corresponding decrease in employment. Both workers and

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communities will suffer on lessening job opportunities, preventing the distribution

of benefits resulting from diversification of production activity.

(c) General public

Mergers result into centralized concentration of power. Economic power is to be

understood as the ability to control prices and industries output as monopolists.

Such monopolists affect social and political environment to tilt everything in their

favour to maintain their power ad expand their business empire. These advances

result into economic exploitation. But in a free economy a monopolist does not

stay for a longer period as other companies enter into the field to reap the benefits

of higher prices set in by the monopolist. This enforces competition in the market,

as consumers are free to substitute the alternative products. Therefore, it is

difficult to generalize that mergers affect the welfare of general public adversely or

favorably. Every merger of two or more companies has to be viewed from different

angles in the business practices which protects the interest of the shareholders in

the merging company and also serves the national purpose to add to the welfare

of the employees, consumers and does not create hindrance in administration of

the Government polices.

Reverse Merger

Generally, a company with the track record should have a less profit earning or

loss making but viable company amalgamated with it to have benefits of

economies of scale of production and marketing network, etc. As a consequence

of this merger the profit earning company survives and the loss making company

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extinguishes its existence. But in many cases, the sick companys survival

becomes more important for many strategic reasons and to conserve community

interest.

The law provides encouragement through tax relief for the companies that are

profitable but get merged with the loss making companies. Infact this type of

merger is not a normal or a routine merger. It is, therefore, called as a Reverse

Merger.

A reverse merger occurs when a private company that has strong prospects and

is eager to raise financing buys a publicly listed shell company, usually one with

no business and limited assets. The private company reverse merges into the

public company, and together they become an entirely new public corporation with

tradable shares.

Regardless of their category or structure, all mergers and acquisitions have one

common goal: they are all meant to create synergy that makes the value of the

combined companies greater than the sum of the two parts.

High Court discussed 3 tests for reverse merger

a. Assets of Transferor Company being greater than Transferee Company.

b. Equity capital to be issued by the transferee company pursuant to the

acquisition exceeding its original issued capital.

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c. The change of control in the transferee company clearly indicated that the

present arrangement was an arrangement, which was a typical illustration

of takeover by reverse bid.

Court held that prime facie the scheme of merging a prosperous unit with a sick

unit could not be said to be offending the provisions of section 72A of the Income

Tax Act, 1961 since the object underlying this provision was to facilitate the

merger of sick industrial unit with a sound one.

Salient features of reverse merger under section 72A:

1. Amalgamation should be between companies and none of them should be a

firm of partners or sole-proprietor. In other words, partnership firm or sole-

proprietary concerns cannot get the benefit of tax relief under section 72A

merger.

2. The companies entering into amalgamation should be engaged in either

industrial activity or shipping business. In other words, the tax relief under

section 72A would not be made available to companies engaged in trading

activities or services.

3. After amalgamation the sick or financially unviable company shall survive

and other income generating company shall extinct. In other words essential

condition to be fulfilled is that the acquiring company will be able to revive or

rehabilitate having consumed the healthy company.

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4. One of the merger partners should be financially unviable and have

accumulated losses to qualify for the merger and the other merger partner

should be profit earning so that tax relief to the maximum extent could be had.In other words the company, which is financially unviable, should be technically

sound and feasible, commercially and economically viable but financially weak

because of financial stringency or lack of financial recourses or its liabilities

have exceeded its assets and is on the brink of insolvency. The second

requisite qualification associated with financial unavailability is the accumulation

of losses for past few years.

5. Amalgamation should be in the public interest i.e. it should not be against public

policy, should not defeat basic tenets of law, and must safeguard the interest of

employees, consumers, creditors, customers and shareholders apart from

promoters of company through the revival of the company.

6. The merger must result into following benefit to the amalgamated company i.e.

Carry forward of accumulated business loses of the amalgamated company

Carry forward of unabsorbed depreciation of the amalgamating company

Accumulated loss would be allowed to be carried forward set of for eight

subsequent years.

7. Accumulated loss should arise from Profits and Gains from business or

profession and not be loss under the head Capital Gains or Speculation.

8. For qualifying carry forward loss, the provisions of section 72 should have not

been contravened.

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9. Similarly for carry forward of unabsorbed depreciation the conditions of section

32 should not have been violated.

10.Specified authority has to be satisfied of the eligibility of the company for the

relief under section 72 of the Income Tax Act. It is only on the recommendations

of the specified authority that Central Government may allow the relief.

11.The company should make an application to a specified authority for requisite

recommendation of the case to the Central Government for granting or allowing

the relief.

12.Procedure for merger or amalgamation to be followed in such cases is same as

in any other cases. Specified Authority makes recommendation after taking into

consideration the courts direction on scheme of amalgamation.

Synergy

The success of a merger or acquisition depends on how well this

synergy is achieved.

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Synergy:

Synergy is the magic force that allows for enhanced cost efficiencies of the new

business. Synergy takes the form of revenue enhancement and cost savings.

By merging, the companies hope to benefit from the following:

1. Staff reductions as every employee knows, mergers tend to

mean job losses. Consider all the money

saved from reducing the number of staff

members from accounting, marketing and otherdepartments.

2. Economies of scale yes, size matters. Whether it's purchasing stationery

or a new corporate IT system, a bigger

company placing the orders can save more on

costs. Mergers also translate into improved

purchasing power to buy equipment or office

supplies--when placing larger orders,

companies have a greater ability to negotiate

price with their suppliers.

3. Acquiring new technology to stay competitive, companies need to stay on

top of technological developments and their

business applications. By buying a smaller

company with unique technologies, a large

company can keep or develop a competitive

edge.

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4. Improved market reach and industry visibility

Companies buy companies to reach new markets and grow revenues andearnings. A merge may expand two companies' marketing and distribution, giving

them new sales opportunities. A merger can also improve a company's standing

in the investment community: bigger firms often have an easier time raising capital

than smaller ones.

That said, achieving synergy is easier said than done--it is not automatically

realized once two companies merge. Sure, there ought to be economies of

scale when two businesses are combined, but sometimes it works in reverse. In

many cases, one and one add up to less than two.

Sadly, synergy opportunities may exist only in the minds of the corporate leaders

and the dealmakers. Where there is no value to be created, the CEO and

investment bankers--who have much to gain from a successful M&A deal--will try

to build up the image of enhanced value. The market, however, eventually sees

through this and penalizes the company by assigning it a discounted share price.

Procedure for acquisition

And Acquisition

Doing the Deal

Start with offer:

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When the CEO and top managers of a company decide they want to do a

merger or acquisition, they start with a tender offer. The process typically begins

with the acquiring company carefully and discreetly buying up shares in the targetcompany, building a position.

Once the acquiring company starts to purchase shares in the open market, it

is restricted to buying 5% of the total outstanding shares

Working with financial advisors and investment bankers, the acquiring

company will arrive at an overall price that it's willing to pay for its target in cash,

shares, or both. The tender offer is then frequently advertised in the business

press, stating the offer price and the deadline by which the shareholders in the

target company must accept (or reject) it

.

The Target's Response

Once the tender offer has been made, the target company can do one of several

things:

1. Accept the terms of the offer: If the target firm's top managers and

shareholders are happy with the terms of

the transaction, they will go ahead with the

deal.

2. Attempt to negotiate: The tender offer price may not be high

enough for the target company's

shareholders to accept, or the specific terms

of the deal may not be attractive. In a

merger, there may be much at stake for the

management of the target. So, if they're not

satisfied with the terms laid out in the tender

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offer, the target's management may try to

work out more agreeable terms.

3. Execute a poison pill or some other hostile takeover

defense:

A poison pill scheme can be triggered by a target company when a hostile suitor

acquires a predetermined percentage of company stock. To execute its defense,

the target company grants all shareholders--except the acquirer--options to buy

additional stock at a dramatic discount. This dilutes the acquirer's share and

intercepts its control of the company.

Mergers and acquisitions can face scrutiny from regulatory bodies.

For example

If the two biggest long-distance companies in the United States, AT&T and Sprint,

wanted to merge, the deal would require approval from the Federal

Communications Commission. No doubt, the FCC would regard a merger of the

two giants as the creation of a monopoly or, at the very least, a threat to

competition in the industry.

Closing the Deal

Finally, once the target company agrees to the tender offer and regulatory

requirements are met, the merger deal will be executed by means of some

transaction. In a merger in which one company buys another, the acquirer will pay

for the target company's shares with cash, stock, or both.

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A cash-for-stock transaction is fairly straightforward, target-company shareholders

receive a cash payment for each share purchased. This transaction is treated as a

taxable sale of the shares of the target company.

If the transaction is made with stock instead of cash, then it's not taxable. There is

simply an exchange of share certificates. The desire to steer clear of the taxman

explains why so many M&A deals are carried out as cash-for-stock transactions.

When a company is purchased with stock, new shares from the acquirer's stock

are issued directly to the target company's shareholders, or the new shares are

sent to a broker who manages them for target-company shareholders. Only when

the shareholders of the target company sell their new shares are they taxed.

When the deal is closed, investors usually receive a new stock in their portfolio--

the acquiring company's expanded stock. Sometimes investors will get new stock

identifying a new corporate entity that is created by the M&A deal.

Why Mergers fail?

It's no secret that plenty of mergers don't work. Those who advocate mergers will

argue that the merger will cut costs or boost revenues by more than enough to

justify the price premium. It can sound so simple.

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Just combine computer systems, merge a few departments, use sheer size to

force down the price of supplies, and the merged giant should be more profitable

than its parts .

In theory, 1+1 = 3 sounds great, but in practice, things can go awry.

Historical trends show that roughly two thirds of big mergers will disappoint on

their own terms, which means they will lose value on the stock market.

Motivations behind mergers can be flawed and efficiencies from economies of

scale may prove elusive. And the problems associated with trying to make merged

companies work are all too concrete.

Flawed Intentions

For starters, a booming stock market encourages mergers, which can spell

trouble. Deals done with highly rated stock as currency are easy and cheap, but

the strategic thinking behind them may be easy and cheap too. Also, mergers are

often attempts to imitate, somebody else has done a big merger, which prompts

top executives to follow suit.

A merger may often have more to do with glory seeking than business strategy.

The executive ego, which is boosted by buying the competition, is a major force inM&A, especially when combined with the influences from the bankers, lawyers

and other assorted advisers who can earn big fees from clients engaged in

mergers. Most CEOs get to where they are because they want to be the biggest

and the best, and many top executives get a big bonus for merger deals, no

matter what happens to the share price later.

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On the other side of the coin, mergers can be driven by generalized fear.

Globalization, or the arrival of new technological developments, or a fast-changingeconomic landscape that makes the outlook uncertain are all factors that can

create a strong incentive for defensive mergers. Sometimes the management

team feels they have no choice and must acquire a rival before being acquired .

The idea is that only big players will survive a more competitive world.

The Obstacles of making it Work

Coping with a merger can make top managers spread their time too thinly,neglecting their core business, spelling doom. Too often, potential difficulties

seem trivial to managers caught up in the thrill of the big deal.

The chances for success are further hampered if the corporate cultures of the

companies are very different. When a company is acquired, the decision is

typically based on product or market synergies, but cultural differences are often

ignored. It's a mistake to assume that people issues are easily overcome.

For example

Employees at a target company might be accustomed to easy access to top

management, flexible work schedules or even a relaxed dress code. These

aspects of a working environment may not seem significant, but if new

management removes them, the result can be resentment and shrinking

productivity.

V. E. S @ T. Y. B. M. S 29


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More insight into the failure of mergers is found in the highly acclaimed study from

the global consultancy McKinsey. The study concludes that companies often

focus too intently on cutting costs following mergers, while revenues and,ultimately, profits suffer. Merging companies can focus on integration and cost

cutting so much that they neglect day-to-day business, thereby prompting nervous

customers to flee. This loss of revenue momentum is one reason so many

mergers fail to create value for shareholders.

Remember

Not all mergers fail. Size and global reach can be advantageous, and strong

managers can often squeeze greater efficiency out of badly run rivals. But the

promises made by dealmakers demand the careful scrutiny of investors.

The success of mergers depends on how realistic the dealmakers are and how

well they can integrate two companies together while maintaining day-to-day

operations.

Life after a merger or an acquisition

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A recent Forrester report predicts a major shakeout in the offshore IT industry and

recommends that even large players align with each other to prepare for amaturing market. They predict consolidation, not just at the small company level,

but among companies of all sizes.

We have recently witnessed the acquisition of Mphasis by EDS, one of the more

significant deals in the offshore space. In an industry that is seeing consolidation

at various levels, it is relevant to examine both the motives behind this trend and,

more important, look at what it takes to create a successfully merged entity.

CASE- STUDY

V. E. S @ T. Y. B. M. S 31

Chapter5


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1. GlaxoSmithKline Pharmaceuticals Limited, India:

( Merger Success )

Glaxo India Limited and SmithKline Beecham Pharmaceuticals (India) Limited

have legally merged to form GlaxoSmithKline Pharmaceuticals Limited in India

(GSK). It may be recalled here that the global merger of the two companies came

into effect in December 2000.

Commenting on the prospects of GSK in India, Vice Chairman and Managing

Director, GlaxoSmithKline Pharmaceuticals Limited, India, Mr. V Thyagarajan

said,

The two companies that have merged to become GlaxoSmithKline in Indi a have

a great heritage a fact that gets reflected in their products

with strong brand equity.

He added, The two companies have a long history of

commitment to India and enjoy a very good reputation with

doctors, patients, regulatory authorities and trade bodies. At

GSK it would be our endeavor to leverage these strengths to

further consolidate our market leadership.

GlaxoSmithKline, India

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The merger in India brings together two strong companies to create a

formidable presence in the domestic market with a market share of about 7

per cent.

With this merger, GlaxoSmithKline has increased its reach significantly in India.

With a field force of over 2,000 employees and more than 5,000 stockiest, the

companys products are available across the country. The enhanced basket of

products of GlaxoSmithKline, India will help serve patients better by

strengthening the hands of doctors by offering superior treatment and

healthcare solutions.

GlaxoSmithKline, Worldwide

GlaxoSmithKline PLC is the worlds leading research-based pharmaceutical and

healthcare company. With an R&D budget of over 2.3 billion (Rs.16, 130

crores), GlaxoSmithKline has a powerful research and development capability,

encompassing the application of genetics, genomics, combinatorial chemistry and

other leading edge technologies.

A truly global organization with a wide geographic spread, GlaxoSmithKline has its

corporate headquarters in the West London, UK. The company has over 100,000

employees and supplies its products to 140 markets around the world. It has one

of the largest sales and marketing operations in the global pharmaceutical

industry.

About merger

Glaxo Wellcome Plc and Smith-kline Beecham Plc announced a 114bn "merger

of equals" between the two companies on January 17. The merger comes almost

V. E. S @ T. Y. B. M. S 33


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two years since a previous attempt to bring them together broke down after

disagreements between senior managers.

The merger will create the world's largest pharmaceutical company with annual

sales of over 15bn and a research and development budget of 2.4bn.

CEO of SmithKline said, The time is right and the market is right for what we are

doing .As definitely he was correct because drug market was having boom period

at that time, since the boom period is still there.

The merger was too successful that the company was formed with a 7.3 percentshare of the global pharmaceuticals market even Other major pharmaceutical

companies had market shares around 4 to 4.5 per cent and even a

merged Pfizer Warner-Lambert would only reach 6.7 per cent.

The company has base in UK, since there they have more than 80 % of

shareholders, while it has operational base in united states, the world largest

pharmaceutical market.

V. E. S @ T. Y. B. M. S 34

7.3 %

6.7 %

GlaxoSmithKline

Pfizer Warner -


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The company has 5 % of sale in UK compare to 50 % in US.

Dr Jean-Pierre Garnier (chief operating officer, Smithkline Beecham, and chief

executive designate, GSK) said:

"This is a merger of strong with strong, in contrast to some other mergers in this

industry."

Competitive advantage for the newly merged company are:

1. Enhanced R&D productivity "Money and scale are important, but you also

need quality." The two companies have 13 compounds and 10 vaccines

currently in phase III development. Both companies were leaders in genomics

and bioinformatics.

2. Superior marketing power Over 40,000 employees in sales and marketing,

including 8,000 representatives in the US, making the company the marketing

partner of choice.

3. Superior consumer marketing skills, these will be much more important

than ever before. The market was being changed by direct-to-consumer

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advertising and e-marketing via the Internet. Many of the company's products

would be switched to over-the-counter status in the future.

4. Operational excellence Efficiency savings of over 750m would be

achieved over three years, on top of savings of 570m already achieved.

Savings of 250m would be made by streamlining research and development.

This money would be reinvested.

5. A talented management team Both sides had previous experience of

integrating companies after mergers.

2. Standard Chartered Grindlays (Acquisition Success)

It has been a hectic year at London-based Standard Chartered Bank, going by its

acquisition spree across the Asia-Pacific region. At the helm of affairs, globally, is

V. E. S @ T. Y. B. M. S 36


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Rana Talwar, group CEO. The quintessential general, he knew what he was up

against when he propounded his 'emerging stronger' strategy of growth

through consolidation of emerging markets for the turn of the Millennium loads ofscepticism.

The central issue: Stan Charts August 2000 acquisition of ANZ Grindlays Bank,

for $1.3 billion.

Everyone knows that acquisition is the easy part, merging operations is not. And

recent history has shown that banking mergers and acquisitions, in particular, are

not as simple to execute as unifying balance sheets. Can StandardChartered

proposed merger with ANZ Grindlays be any different?

The '1'refers to the new entity, which will be India's No 1 foreign bank once the

integration is completed. This should take around 18 months; till then, ANZ

Grindlays will exist separately as Standard Chartered Grindlays (SCG).

The '2' and '3'are Citibank and Hong Kong and Shanghai Banking Corp (HSBC),

India's second and third largest foreign banks, respectively.

That makes the new entity the world's biggest 'emerging markets' bank. By way of

strengths, it will have treasury operations that will probably go unchallenged as

the country's most sophisticated. Best of all, it will be a dynamic bank. Thanks to

pre-merger initiatives taken by both banks, it could per- haps boast of the

country's fastest growing retail-banking business.

StandardChartered is rated highly on other parameters too. It is currently

targeting global cost-savings of $108 million, having reported a profit-before-tax of

$650 million in the first half of 2000, up 31 per cent from the same period last

V. E. S @ T. Y. B. M. S 37


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year. Net revenue increased 6 per cent to $2 billion for the same period.

Consumer banking, a typically low-profit business which accounted for less than

40 per cent of its global operating profits till four years ago, now brings in 55 percent of profits. So the company's global report card looks fairly

good.

StandardChartered knows it should not let its energy dissipate. It has been

growing at a claimed annual rate of 25 per cent in the last two years, well over the

industry average of 10 per cent.

But maintaining this pace won't prove easy, with Citibank and HSBC just

waiting to snip at it. The ANZ Grindlays acquisition had happened just before that,

though the process started in early 1999, at Stan Charts headquarters in London.

At first, it was just talk of a strategic tie-up with ANZ Grindlays, which had the

same colonial British antecedents.

But this plan was abandoned when it became evident that all decision-

making would vacillate between Melbourne and London, where the two are

headquartered. By December, ANZ had expressed a willingness to sell out, and

StanChart initiated the due-diligence proceedings. It wasn't until March that a few

senior Indian bank executives were let into the secret.

V. E. S @ T. Y. B. M. S 38

Growth rate

Standard chartered

25 %

Industry average

10 %


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Now, it's time to get going. A new vehicle, navigators in place, engines revvingand map charted, the road ahead is challenging and full of promise. To steer clear

of trouble is the only caution advised by industry analysts, as the two banks

integrate their businesses. Skeptics don't see how StanChart can really be greater

than the sums of its part.

The aggression, though, is not as raw as it sounds. Behind it all is a

strategy that everyone at StanChart seems to be in synchrony with. And behind

that strategy is Talwar, very much the originator of the oft-repeated phrase uttered

by every executive - "getting the right footprint". The other key words that tend to

find their way into every discussion are 'focus' and 'growth'.

StanChart India's net non-performing loans, as a percentage of net total

advances, are reported at just 2 per cent for 1999-2000. In terms of capital

adequacy too, the banks are doing fine. StanChart has a capital base of 9.5 per

cent of its risk-weighted assets, while SCG has 10.9 per cent. So, with or without

a safety net provided by the global group, the Indian operations are on firm

ground.

3. Deutsche Dresdner Bank (Merger Failure)

The merger that was announced on march 7, 2000 between Deutsche Bank and

Dresdner Bank, Germanys largest and the third largest bank respectively was

considered as Germanys response to increasingly tough competition markets.

The merger was to create the most powerful banking group in the world with the

balance sheet total of nearly 2.5 trillion marks and a stock market value around

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150 billion marks. This would put the merged bank for ahead of the second largest

banking group, U.S. based citigroup, with a balance sheet total amounting to 1.2

trillion marks and also in front of the planned Japanese book mergers ofSumitomo and Sukura Bank with 1.7 trillion marks as the balance sheet total.

The new banking group intended to spin off its retail banking which was not

making much profit in both the banks and costly, extensive network of bank

branches associated with it.

The merged bank was to retain the name Deutsche Bank but adopted the

Dresdner Banks green corporate color in its logo. The future core business lines

of the new merged Bank included investment Banking, asset management, where

the new banking group was hoped to outside the traditionally dominant Swiss

Bank, Security and loan banking and finally financially corporate clients ranging

from major industrial corporation to the mid-scale companies.

With this kind of merger, the new bank would have reached the no.1

position of the US and create new dimensions of aggressiveness in the

international mergers. But barely 2 months after announcing their

agreement to form the largest bank in the world, negotiations for a

merger between Deutsche and Dresdner Bank failed on April 5, 2000.

What happened?

The union of the two previous competitors should be carried out "by agreement,areas that overlapped should not be shut down or broken up but merged and

integrated. Although they intended a reduction of 16,000 jobs, this was to proceed

by "socially acceptable" means. This was insisted upon by both the union

representatives on the supervisory board as well.

V. E. S @ T. Y. B. M. S 40


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From the outset, the international investors rejected this concept of a socially

acceptable merger. After a short initial rise, the share values of the two institutions

slumped by almost 30 percent.Banking analysts, on whose assessments large investors rely, stated that this type

of merger would "set free too little synergy".

One banking analyst explained that in order to obtain the "large reduction of

costs necessary", the Dresdner Bank would have had to go down. The reduction

of 16,000 jobs announced could only have been the start.

Only the shares of the insurance company Allianz AG increased, rising over 20

percent on the first day after news of the agreement to merge. The Allianz had

contrived the merger plans and was regarded as the actual winner. It

owns a 21.7 percent share in the Dresdner Bank and has wanted to

dispose of this for some time in order to concentrate on its own

business.

The Allianz is also interested in the retail banking business, which has become

unattractive to the banks, in order to utilise these structures to sell their insurance.

In the merger plan, it was intended that the Allianz would take a majority holding inthe new Bank 24, which would retain the majority of the two banks' smaller

customers. A third point concerned asset management. In return for its share of

the Dresdner Bank, the Allianz was to receive DWS, the asset management arm

of the Deutsche Bank, Germany's market leader with investments of 175 billion

marks.

V. E. S @ T. Y. B. M. S 41

30 %

20 %


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Shareholders of the two banks did not look kindly on the fact that the Allianz was

to receive the golden egg without requiring any effort of its own. The morenegotiations over the mergerwhich at first had only been roughly discussed in a

small circleturned to the details, the more open the contradictions and

differences became.

On the one hand, the pressure from the workforce increased. There were several

demonstrations by bank staff as it became increasingly clear that it was mainly

Dresdner Bank employees from the branches and central administration who were

on the blacklist.

The boards of directors also lost control concerning the distribution of highly paid

jobs in middle management. Many started to look around for new employers

offering safer prospects. The dependency of their salary levels on the banks'

share value (now sinking) also played a role.

There was a nation-wide outcry by customers after a member of the Dresdner

board announced that the merged bank was only interested in customers with

over 200,000 marks. Those with less would be transferred to the new Bank 24.

Many customers consequently moved their accounts over to the competition.

The main point at issue became the fate of the bank's investment arm, DKB

(Dresdner Kleinwort Benson), which the executive committee of the Dresdner

Bank did not want to relinquish under any circumstances.

Apart from asset management, investment banking- i.e. the trade with securities

and the consultancy business concerning mergers, acquisitions and floatations

forms part of the most profitable business of the financial markets, with high profits

arising from the stock market boom and the rapidly increasing wave of mergers.

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"Either Dresdner Kleinwort Benson is completely sold off, or at the most a

few hundreds of its 7,500 workforce will be taken over. Another version is

out of the question. We will not let our business be ruined," were

widespread opinions.

The Deutsche Bank's London investment bankers were not prepared to

compromise and used the weight of the share they contributed to the profits to

pressure Breuer. After the merger was announced, they immediately dispatched a

message via the Financial Times that either the DKB was smashed up or sold off.

Walter from the Dresdner Bank was not prepared for this, since DKB was

considered his "pearl". At a press conference on March 9, Breuer had to publicly

assure the distrustful Walter that statements about the sale of DKB were "absolute

nonsense" and that this company was a "jewel".

However, Breuer did not succeed in getting the investment bankers onto his side.

Their division head Edson Mitchell, one of the most successful investment

bankers with an annual salary of over 10 million marks, continued to exert

enormous pressure on Breuer via Joseph Ackermann, the division's chief

executive. Finally, Breuer capitulated to the pressure of his subordinates.

At the last joint session of the two boards of directors on April 5, he placed himself

completely on the side of Ackermann, which led to the withdrawal of the Dresdner

Bank from the merger negotiations. Made to look foolish by his own staff, the

otherwise independent and self-assured Breuer stepped forward with tremblingvoice to publicly explain the failure of the merger.

Conclusion

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The Financial Times hit the nail on the head concerning the failed merger when it

remarked that Breuer got a bloody nose in the attempt to combine American

behaviour with German culture. The conclusion is that those who wish to become"global players"on the international financial markets must adhere to their rules.

It is not possible to force "German culture"i.e., the traditions of mutually

acceptable decisions and social equilibrium, which characterised Germany after

the Second World Waronto global capitalism. Global competition leaves no

more room for deviations from the profit yardstick.

If some Dresdner Bank staff popped the champagne corks on hearing news that

the merger had failed (because they believed to have avoided losing their jobs),

they are deluding themselves. The failure of this fusion does not mean an end to

the wave of mergers, but only that in future they will be carried out more ruthlessly

and more brutally.

The pressure of the international financial markets continues to intensify and a

whole wave of hostile take-over will follow. The entire German banking system will

be turned upside-down and a previously unknown degree of aggressiveness will

feature in the merger and take-over of banks.

A member of the Deutsche Bank board of directors said afterwards that following

the experiences of the past weeks he would never again agree to a "merger of

equals". And a Deutsche Bank investment banker put forward the view that "such

a fusion can only be hard and brutal".

Following the failure, rumours immediately began to circulate that different

international banks wanted to take over Dresdner Bank, such as Citibank, Chase

Manhattan or the Dutch ABN Amro. Despite its recent record profits, announced

V. E. S @ T. Y. B. M. S 45


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almost at the same time as the merger failure, the Dresdner Bank remains a

candidate for take-over.

International analysts assess its yield is too weak, and say that it has no clear

strategy and is set up badly.

Deutsche Bank supervisory board said, "The game of roulette continues. But

nobody knows where the ball will stay.... The wave of mergers in banking

continues apace."

An expert commented, "Too many finance houses in Germany are sharing too

little market.... Anyway, we are only at the start. And after the private banks, the

savings banks will soon follow. Also the credit cooperatives face a wave of

mergers."

4. TATA TETLEY

(Controversial Issue over Success And Failure)

The Tata group was infusing a fresh 30 million pounds into Tata tea that had been

used to buy an 85.7% stake in the UK-based Tetley last year.

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Tata Teas much hyped acquisition of Tetley, one of the worlds biggest tea

brands, isnt proceeding according to the plan. 15 months ago, the Kolkata based

Rs 913 crores Tata Teas buyout of the privately held The Tetley Group for Rs1843 crores had stunned corporate watchers and investment bankers alike. It was

a coup! An Indian company had used a leveraged buyout to snag one of the

Britains biggest ever brands. It was by far, the biggest ever leveraged buyout by

an Indian company.

Tata Tea didnt pay cash upfront. Instead, it invested 70 million pounds as equity

capital to set up Tata Tea. It borrowed 235 million to buy the Tetley stake. The

plan was that Tetleys cash flows would be insulated from the debt burden.

When Tata Tea took the big gamble to buy Tetley, its intent was very clear. The

company had established a firm foothold in the domestic market and had a

controlling position in growing tea. Going global looked like the obvious thing to

do. With Tetley, the second largest brand after Lipton in its bag, Tata Tea looked

ready to set the Thames on fire.

Right from the start, Tetley was never a easy buy. In 1996, Allied Domecq, the

liquor and retail conglomerate had put Tetley on the block. Even then Tata Tea,

nestle, Unilever and Sara lee had put in bids, all under 200 million pounds.

Allied wanted to cash on the table. Tata Tea didnt have enough of its own. The

others bids also did not go through. Eventually, Tetley group together with a

consortium Of financial investors like Prudential and Schroders, bought the entireequity stake for 190 million pounds in all cash deal. Two years later, Tetley went

for an IPO, hoping to raise 350-400 million pounds. But the IPO never took place.

Soon afterwards, the investors began looking for exit options. Tetley was once

again on the block.

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It was until Feb 2000 that the due diligence was completed. By this time, the

Tata's were ready with their offer. They would pay 271 million pounds to buy the

entire Tetley equity and the funds would go towards first paying off Tetleys 106million debt. The balance would go the owners.

The offer price did not include rights to Tetley coffee business, which was sold to

the US-based Rowland Coffee Roasters and Mother Parkers Tea and Coffee in

Feb 2000 for 55 million pounds.

For Tetley new owners, too, the problems were only just beginning. The deal

hinged on Tetleys ability, over and above covering its own debts, to service the

loans Tata Tea had taken for the acquisition. Thats where reality bites.

Consider the facts. When Tata Tea acquired Tetley through Tata Tea, it sunk in

70 million pounds as equity and borrowed 235 million pounds from a consortium

to finance the deal. Implicit in the LBO was that Tetleys future cash flows would

fund the SPVs interest and principal repayment requirements. At an average

interest rate of 11.5%, Tetley needed to generate 22 million pounds in interest

alone on a loan o 190 million pounds. Add to this the interest on the high cost

vendor loan notes of 30 million poundsit worked out to be 4.5 million and the

charges on the working capital portion, amounting to 2 million pounds per annum.

All this works out to about 28 million pounds in interest alone per year.

At the same time, it also has to pay back the principal of 110 million pounds over a

nice period through half yearly installments. This works out to 12 million poundsper year. If you were to assume that depreciation and restructuring charges were

pegged at last years levels, the bill tots up to 48 million pounds a year. In FY

1999, the Tetleys cash flows were 29 million pounds.

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Some of the problems could have been obviated if Tetleys cash flows had

increased by 40 % in FY 2001 over the previous year. That way, the company

would have covered both its own commitments as well as of the Tata's. But thesituation worsened. Major UK retailers clamped down on grocery prices last year.

That substantially reduced Tetleys pricing flexibility.

Besides, the UK tea markets have been under pressure for some time now.

According to the UK governments national food survey, there has been a

substantial fall in the consumption of mainstream teas- tea-bag black teas drunk

with milk and sugar. Also the tea drinking population in UK has come down from

77.1% to 68.3% in 1999. On the other hand, natural juices and coffee have

consistently increased their market share.

So, when it was confronted by Tetleys sliding performance, what options did Tata

Tea have? On its own, it could not do much. The last year has been one of the

worst years for the Indian tea industry and Tata Tea has also been affected. The

drop in tea prices and a proliferation of smaller brands in the organized segment

have taken toll on Tata Teas performance.

V. E. S @ T. Y. B. M. S 49

Tea drinking population 1999

77.1 %

68.3 %


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In FY 2001, Tata Teas net profit fell by 19.59% from Rs 124.63 crores to Rs

100.21 crores. Income from operations declined by 8.72%.

But letting Tetley sink under the weight of the interest burden would have been an

unthinkable option, given the prestige attached to the deal.

Thus from the above case we infer that Tata had to shell out a lot of money to

cover all the debts of Tetley which was found not worthy enough by the general

public.

But Tata still calls it to be a success whereas in reality it

is a failure.

5. Chrysler and Daimler-BenzThe takeover of Chrysler Corporation by Daimler-Benz in a $38 billion stock deal

is a powerful demonstration of the globalization of the world economy. The largest

industrial company in Germany, and in Europe as a whole, is acquiring one of the

V. E. S @ T. Y. B. M. S 50

124.63 cr.

100.21 cr.

19.59 %


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biggest American corporations, creating a transnational giant with a work force of

410,000 and an annual output of over $130 billion.

The combination is the largest industrial merger in history and the biggest-ever

acquisition of an American company by an overseas concern. The merged

company, to be called DaimlerChrysler, will be the fifth largest auto maker in

terms of the number of vehicles produced, ranking after GM, Ford, Toyota and

Volkswagen.

In terms of the value of the vehicles, DaimlerChrysler, will rank third. If

DaimlerChrysler were a country, it would rank 37th in the world in terms of Gross

Domestic Product, just behind Austria, but well ahead of six other members of the

European Union--Greece, Portugal, Norway, Denmark, Finland and Ireland.

Unlike auto industry mergers, which frequently involved the gobbling up of small

or failing companies by more powerful rivals, theDaimler-Chrysler deal involves

two highly profitable companies, with combined net earnings of $5.7 billion in

1997.

Daimler-Benz has rebounded from losses in the early 1990s to post record profits,

while Chrysler makes a larger profit per vehicle than any other auto manufacturer.

The driving force behind the combination is the necessity to create ever-largerglobally-based enterprises which can compete in all the major markets of the

world, and especially in the three main centers of world capitalism:

North America

Europe

Asia

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Before the merger, Chrysler and Daimler-Benz were essentially regional

producers--Chrysler with the third-largest market share in North America, Daimler-Benz controlling the luxury market in Europe.

Chrysler was compelled to sell its European and Latin American operations during

its financial crises of the 1980s and early 1990s. It sold only 17,713 vehicles

outside North America, compared to nearly a quarter of a million vehicles in its

home market. Daimler-Benz opened its first plant outside Europe and it began

assembling a sport-utility version of the Mercedes-Benz at a plant in Tuscaloosa,

Alabama.

In the wake of the merger, financial commentators and auto industry analysts

predicted that the remaining regional auto manufacturers would be compelled to

combine into global-scale firms in order to compete with GM, Ford, Toyota, Honda

and the new DaimlerChrysler. They cannot remain nationally limited

manufacturers, selling to a national market. As one analyst told the Times of

London,"The country flags have come down and the flag of profitability has gone

up."

What happened?

Daimler-Benz has cut 40,000 jobs since 1995, when Schrempp became CEO, and

officials at the German company said that one of the most attractive features of

V. E. S @ T. Y. B. M. S 52

Chrysler job reduction graph


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Chrysler was its "expertise" at cutting jobs and slashing costs. Chrysler has

shrunk from 160,000 to 79,000 workers since the early 1980s.

Whatever the short-run impact of the merger, a principal goal of every such

combination is to consolidate operations and achieve economies of scale, which

inevitably involves the destruction of jobs.

By 2002, Chrysler figured, there would be 80 more assembly plants

than the market demanded, an overcapacity equal to six Chrysler Corporations

but this gigantic surplus of productive capacity is "excess" only from the

standpoint of capitalism, because it means that far more cars can be produced

than can be sold at a profit.

This productive capacity cannot be put to use, within the framework of the profit

system, to meet the needs of people all over the world for cheap and convenient

transportation. Instead, it looms over the industry, insuring that the next downturn

V. E. S @ T. Y. B. M. S 53

1,60,000

79,000


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in the business cycle will have dire consequences for autoworkers and the

working class worldwide.

The Daimler-Benz takeover of Chrysler is part of an enormous outflow of capital

from Germany, as giant corporations like Hoechst, Bertelsmann's, Siemens and

Volkswagen buy foreign companies or invest in new plant and equipment outside

the country.

The goal of this investment is to achieve higher profits by obtaining labor at

cheaper rates than these corporations currently pay within Germany itself.

Volkswagen has purchased Skoda, the biggest Czech manufacturer, while

Siemens acquired the electrical equipment business of Westinghouse and now

has more than half its corporate work force outside Germany.

Daimler-Benz has bought or built plants throughout the former Soviet bloc. Its

most recent excursion in search of low-paid labor is to Alabama, where labor

costs were less than half the $29-an-hour which the company pays in Stuttgart

and other German cities.

The takeover of Chrysler is likely to followed by a further shift in production by the

merged company from Germany to North America, slashing the jobs of German

workers while, in the short term, maintaining or even temporarily increasing the

number of jobs in the US and Canada.

This explains the enthusiastic support for the merger from the union bureaucrats

of the United Auto Workers and the Canadian Auto Workers. They count on

increasing their dues income at the expense of their counterparts in the German

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IG Metall. Moreover, the UAW and CAW bureaucrats hope that Daimler-Benz

officials will extend to America the corporatist policies carried out in Germany

under the rubric of "co-determination." Under the German system, union officialsare given half the seats on the corporation's board and play a more substantial

role in the administration of the business than their American counterparts.

Co-determination, however, has nothing to do with genuine industrial democracy,

workers' control or socialism. It is only a more developed form of the labor-

management collaboration, which the UAW has embraced over the past two

decades, sacrificing the jobs and living standards of autoworkers in return for well-

paid perks and posts for union bureaucrats.

The Chrysler-Daimler merger demonstrates the urgent necessity for the working

class to develop an international strategy to fight the attacks of globally organized

capital. It demonstrates the backwardness and stupidity of those, from union

bureaucrats to middle class ex-radicals, who seek to limit the working class to

struggles within a national framework, or waged by purely trade union methods. It

underscores the incapacity of the old nationally based labor organizations to

provide an effective means of struggle for the working class.

Conclusion

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The Chrysler-Daimler merger is another powerful proof that only the perspective

of socialist internationalism offers a way forward for working people. The cultures

were very different. It was a much more limited undertaking.

This merger has a lot of promise, but the difference between the promise and the

reality is yet to be seen. And if there's one major difference here, it is this--not

simply cultural approach in terms of a German and American culture--but a very

different approach to building cars.

And the way in which that works out, the way the labor issues work out, it will be

essential to seeing whether or not they will be popping champagne 10 years down

the road.

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Conclusion

One size doesnt fit all. Many companies find that the best route forward is

expanding ownership boundaries through mergers and acquisitions. For others,

separating the public ownership of a subsidiary or business segment offers more

advantages.

At least in theory, mergers create synergies and economies of scale, expanding

operations and cutting costs. Investors can take comfort in the idea that a merger

will deliver enhanced market power.

By contrast, de-merged companies often enjoy improved operating performance

thanks to redesigned management incentives. Additional capital can fund growth

organically or through acquisition. Meanwhile, investors benefit from the improved

information flow from de-merged companies.

M&A comes in all shapes and sizes, and investors need to consider the complex

issues involved in M&A. The most beneficial form of equity structure involves a

complete analysis of the costs and benefits associated with the deals.

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Bibliography

46 mergers & acqusition (b.j.)

Documents