Conceptual Framework

Mergers, Acquisitions &

Corporate Restructuring

“Any significant and permanent change in the capital structure of an organisation, long term assets, manufacturing

operations, organisation or marketing”

Types of MA & CR

Mergers/Amalgamation

Acquisitions/Take -Over

Spin-offLBODivestitureESOP Joint VentureHolding Company

Split UpStrategic AllianceSell–offMBOMBIMLPReverse MergerEquity Carve-out

Motives for M & A

I Strategic Motive

II Financial Motive

III Organisational Motive

I Strategic Motive

GrowthScale of OperationsCompetitionMarket ShareAcquiring SizeBackward

IntegrationForward

Integration

SynergyCore CompetenceDiversificationReduction of RiskBalancing Product

CycleMgt of RecessionEntry into New

Markets/New Segment

II Financial Motive

Investment of Surplus Funds Higher Market Capitalisation Reducing Costs Tax Planning/Tax Benefits Revival of Sick Units Increasing EPS Creation of Shareholder Value

III Organisational Motive

Entrepreneur’s Personal Compulsions Retention of Management Talents Removal of Inefficient Management Quality of Management Lobby Power Emergence as an MNC Emergence as a Conglomerate

Theories of Merger

I. Efficiency TheoryII. Information & SignallingIII.Market PowerIV.Tax ConsiderationsV. Agency Problems &

ManagerialismVI.Hubris Hypothesis

I Efficiency Theories

A) Differential Efficiency TheoryB) Inefficient Management TheoryC) SynergyD) Pure DiversificationE) Strategic RealignmentF) Undervaluation

A. Differential Efficiency Theory

Differences in Efficiency

Predator Attitude

Easeness of Take-over

Distress Sale

Usage of Surplus Managerial Personnel

B. Inefficient Management Theory

Poor Valuation

Shareholders Support

Market & Funding Agencies Support

Better Image for Both

C. Synergy

Value, Premium Paid & Expenses of Merger Financial Synergy -Different Cash flows -Different investment Opportunities -Better Funding ExternallySpecialised Funding Agencies provide funds Operating Synergy -Scale, Scope, indivisible Equipment,

Production, R&D and marketing Managerial Synergy -Restructuring, Better Allotment of Authority,

and Usage of Surplus Managerial Personnel

D. Pure Diversification

Risk Management

Better Usage of Managerial Personnel

Better Exposure to Managerial Personnel

Better Visibility of the Company

Distributors Support

E.Strategic Realignment

Changing Market

Changing Economic Environment

F. Undervaluation

Perception of the Market

Underperformance

Target Company’s market Image

II Information & Signalling

Coming into the news

Media Exposure

Higher Visibility

Market taking note

Hidden Valuation for the Target Company

Strength of the Acquiring Company

III Market Power

Increasing Market share

Becoming a Trendsetter

Avoidance of Price War

Reduced Marketing Expenses

Avoidance of Duplicating Efforts

Rationalisation

IV Tax Considerations

Assuming Losses of the Target Firm

Carry Over of Tax Credits

Avoidance of Dividend thus reducing Tax Liability

Saving Sales Tax in case of Vertical Integration

V.Agency Problem & Managerialism Shareholders are the Principal and the

Managers are the Agents When Managers act in their own

interest, they benefit at the cost of Shareholders

By Takeover, such Managers are removed

Lesser Image in the Stock Market Target for the Acquirer Managerialism believes Takeover is the

result of Agency Problem

VI Hubris Hypothesis

Winners Curse make the Acquirer to be overconfident of his estimates

Heavy Premium is explained Acquirer believes that he is a better

judge than others In a competitive tender offer, the urge

to win comprises the Hubris Happens due to the urge to avoid loss

of face, getting publicity in the media, inexperience, overestimation of synergy, over enthusiasm of Investment Bankers etc.

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