merger and acquistation
TRANSCRIPT
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MERGERS AND
ACQUISITIONS
Module I
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Topics to be Covered Meaning & Definitions of Merger
Types of Mergers
Motives & Reasons behind the mergers
Theories of Mergers
Synergy
Types of Synergy
Value creation in Horizontal, Vertical & Conglomerate
Mergers.
Change forces contributing to M&A activities
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MEANING OF MERGERS
It denotes combination of two or more companies insuch a way that only one survives and the other is dissolved
Generally mergers represent a process of allocation andre-allocation of resources by firms in response to change ineconomic conditions and technological innovations.
Generally we can see basically two types of mergers A Statutory merger is a merger where the acquiring company
assumes the assets and the liabilities of the merged companies A subsidiary merger is a merger of two companies where the
target company becomes a subsidiary or part of a subsidiary ofthe parent company
Consolidation is a merger of two companies where the targetcompany and bidding company become one under different orone of the existing name.
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MEANING OF AQUISITIONS
It refers to a situation where one firm acquires
other and the latter ceases to exist occurs when onecompany takes controlling interest in another
company
Assets of the dissolved company (targetcompany) are owned by the acquiring company
The shareholders of the target firm are paid
either cash or given shares in acquiring company.
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AMALGAMATION
Mergers may either in the form of amalgamation or
acquisitionnature of purchase
Amalgamation: when two or more companies
carrying on similar business go into liquidation and a
new company is formed to takeover the businesses
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Mergers & Acquisitions in India The top deal so far last year is the US$2.3 billion acquisition
of Ford Motor Co's. Jaguar and Land Rover brands by TataMotors Ltd.
Mergers & Acquisitions activity: In 2008, 1,270 deals withIndian participation and a known value of 50 billion. USDhave been announced.
May 9, 2008 - India's top mobile operator Bharti Airtel Ltd isin exploratory talks to acquire 51 percent in South Africa'sMTN Group at a value of around US$19 billion, creating theworlds sixth-largest mobile company with 130 millionsubscribers across 21 countries.
The countrys biggest deals in the first half of 2009 wereONGC Videsh Ltds purchase of the UKs Imperial EnergyCorp. Plc. for $1.9 billion, Tech Mahindra Ltds $576 millionacquisition of fraud-hit Satyam Computer Services Ltd in a
global bid, and Sesa Goa Ltds $350 million takeover ofDempo Mining Corp. Pvt. Ltd.
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Types of Mergers
Horizontal Mergers
Vertical Mergers
Conglomerate Mergers
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TYPES OF MERGER
Horizontal MergerCombination of two or more firms in similar type of
production or area of business.
Ex: EXXON & MOBIL (Larger share in Oil & Gas
Market)
Vertical Merger
Combination of two or more firms involved in different
stages of production or Merging of firms along the valuechain.
Ex: MERCK (Manufacturer of Pharmaceuticals) &MEDCO ( Distributor)to gain advantage in distributing its
products
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Conglomerate Merger
Combination of firms engaged in unrelated lines
of business activities. Typically, industries with poorprospects for growth will seek to diversify their
business.
Ex: GE got into new areas like financial services
and TV Broadcasting.
Circular Merger:
Involves bringing together of products orservices that are unrelated but marketed through the
same channels, allowing shared dealerships. Ex:
McLeod Russell (a tea company) with Eveready
Industries (batteries)
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Sl/No CATEGORY Value Created
1
Revenue
Enhancement
Increased market power
Network externalities
Leveraging marketing resources
and capabilities
2 Cost Savings Reduction of excess capacity
Scale of economiesProduction /Mkt/ Sales &
Dist. / logistics / branding / R&D,
Learning Economies
3 New growthopportunities
Creating new capabilities andresources
Creating new products, markets
and processes
VALUE CREATION IN HORIZONTAL MERGERS
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Sl/ No CATEGORY TYPE OF VALUE CATEGORY SOURCES
1 Efficiency Revenue enhancement
New growth opportunities through
leveraging existing resources and also
capabilities of the merging firms
2 Increase in income Revenue enhancement may arise from
the ability to offer a package of services
and products rather then just product
alone.
3 Improve profitability Higher profitability may be realized
through increased market power that
vertical merger confers.
It Provides opportunities for indirect
price discrimination.
Remove firms barriers b/w suppliers or
distributors.
VALUE CREATION IN VERTICAL MERGERS
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Sl/No CATEGORY TYPE OF VALUE CATEGORY SOURCES
1 Market Power It can be entry strategy into new
product market
2 Efficient internal
capital market
As two products are different the
sourcing of capital becomes easy
3 Resource &
capabilities transfer
Diversifying acquirer resources
redeploys excess & capabilities to
target and Resources cannot be
sold but transfer cost effectively.
4 Efficient
diversification & risk
reduction
Corporate diversification more
efficient and Cheaper
Diversification of income and
cash flow reduces volatility and
default risk
VALUE CREATION IN CONGLOMERATE
MERGERS
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Sl/No CATEGORY TYPE OF VALUE CATEGORY
SOURCES
5 Agency cost Conglomerate diversification
manifests agency problem will be
reduces.
6 Personal risk reduction Most of managers human andfinancial capitalinvested in their firm, so need todiversify risk
7 Management efficiencyin complementing eachother
Managers exploit surplus firm-specific skills andmake themselves indispensable
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SYNERGY
A state in which two or more things work together in a particularlyfruitful way that produces an effect greater the sum of their individual
effects. Expressed also as "the whole is greater than the sum of its parts."
In general, also sunergos , meaning "working together" is the
combined working together of two or more parts of a system so that thecombined effect is greater than the sum of the efforts of the parts. In
business and technology, the term describes a hoped-for or real effect
resulting from different individuals, departments, or companies working
together and stimulating new ideas that result in greater productivity.
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THEORIES OF MERGER
1. INEFFICIENT MANAGEMENT2. DIFFERENTIAL EFFICIENCY
3. SYNERGY (Operating synergy, Financial synergy &Managerial synergy)
4. DIVERSIFICATION
5. MARKET SHARE
6. STRATEGIC REALIGNMENT
7. HUBRIS AND THE WINNERS CURSE
8. AGENCY PROBLEMS
9. INFORMATION AND SIGNALLING10. MANAGERIALISM
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DRIVING FORCES FO M&A
1. INTERNAL FACTORS Motive to Grow
Synergy
Diversification
2. EXTERNAL FACTORS
Managerial Efficiency
Market Entry
Tax Shield
Strategy Competition
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TYPES OF MOTIVES FOR MERGER
STRATEGIC MOTIVES
FINANCIAL MOTIVES
ORGANIZATIONAL MOTIVES
CROSS BORDER MOTIVES
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STRATEGIC MOTIVES
Expansion and growth
Dealing with the entry of MNCs
Economics of scale
Synergy
Market penetration
Market leadership
Backward /Forward integration
New product entry
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Cont. New market entry
Surplus resource
Minimum size
Risk reduction
Balancing product cycle
Arresting downward trends
Growth and diversification strategy
Re- fashioning
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FINANCIAL MOTIVES
Deployment of surplus funds
Fund raising capacity
Market capitalization
Tax planning
Creation of share holder value
Tax benefits
Revival of sick units
Asset stripping Under valuation of target company
Increasing EPS
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ORGANIZATIONAL MOTIVES
Superior management
Ego satisfaction
Retention of managerial talents
Removal of inefficient management
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CROSS BORDER MOTIVES
Growth orientation
Access to input
Unique advantage
Clients needs
Opportunism
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