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Chapter 3
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A strategy where two or more companies agree to combine
their operations with mutual consent
Buying entity is called the Merged or Surviving Entity and
the one merging with it is called Merging Entity.
Under merger one company survives and the other loses its
corporate existence and the Surviving Entity acquires all the
assets and liabilities of the merging company and may
either retains its identity or get re-christened.
Laws in India use the term 'amalgamation' for merger
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Amalgamation as the merger of one or more companies with
another or the merger of two or more companies to form a
new company, in such a way that all assets and liabilities of
The amalgamating companies become assets and liabilities
of the amalgamated company and shareholders not less
than nine-tenths in value of the shares in the amalgamating
company or companies become shareholders of the
amalgamated company
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Merger through Absorption:
Is a combination of two or more companies into an 'existing
company
Here all companies except one lose their identity
For Example:
Absorption of Tata Fertilizers Ltd (TFL) by Tata Chemicals Ltd (TCL).
TCL, an acquiring company / buyer, survived after merger while TFL, an
acquired company / seller, ceased to exist. TFL transferred its assets,
liabilities and shares to TCL.
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Merger through Consolidation:
Is a combination of two or more companies into a 'new
company
Here all companies are legally dissolved and a new entity is
created.
Acquired company transfers its assets, liabilities, and shares to
the acquiring company for cash or exchange of shares
For Example:Merger of Hindustan Computers Ltd, Hindustan Instruments Ltd, Indian
Software Company Ltd and Indian Reprographics Ltd into an entirely new
company called HCL Ltd.
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Amalgamationmeans an amalgamation pursuant to the
provisions of the Companies Act, 1956 or any other statute,
which may be applicable to companies
Amalgamation in the nature of merger is an amalgamation
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All the assets and liabilities of the transferor company become,after amalgamation, the assets and liabilities of the transferee
company
Shareholders holding not less than 90% of the face value of theequity shares of the transferor company become equity
shareholders of the transferee company by virtue of the
amalgamation
The above to exclude the equity shares already held therein,
immediately before the amalgamation, by the transferee
company or its subsidiaries or their nominees
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The consideration is discharged by the transferee company
wholly by the issue of equity shares in the transferee company
Cash may be paid in respect of fractional shares, if any
The business of the transferor company is intended to be
carried on by the transferee company after amalgamation
No adjustment is intended to be made to the book values of
the assets and liabilities of the transferor company when they
are incorporated in the financial statements of the transferee
company except to ensure uniformity of accounting policies.
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Merger movements often occur when the economy experiencessustained high rates of growth as it reflects favourable businessprospects
The movements coincide with developments in the businessenvironment
Often result in efficient resource allocation, reallocationprocesses and efficient resource utilization
The waves occur when firms respond to new investment andprofit opportunities arising out of changes in economicconditions and technological innovations ..
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In each of the waves mistakes have been repeated and failures
have been common
Unlike in the past, M & A have become a global phenomenon
and are no longer restricted to the US
A new trend being observed is the rise of emerging market
acquirer.
Research shows that merger waves result from a combination of
economic, regulatory, and technological shocks(Mark Mitchell
and J. H. Mulherin, 1996) .
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Economic shocks deal with economic expansion that
motivates companys to expand in order to meet the ever
growing demand
Regulatory shocks occur when regulatory barriers areeliminated paving the way for corporate communication
Technological shocks represent changes in technology that
not only change the existing industries but also create newones.
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Occurred after the Great Depression of 1883
Peaked between 1898 and 1902 and ended in 1904.
Professor Ralph Nelsons study Industries affected were
primary metals, food products, petroleum, products,chemicals, transportation equipment, fabricated metalproducts, machinery and bituminous coal
Wave saw horizontal mergers and industry consolidationsresulting in near monopolistic market structures.
Giants born during this wave included J.P Morgans U. S. Steel,DuPont Inc., Standard Oil, General Electric, Eastman Kodak,American Tobacco Inc. and Navistar International.
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Sherman Act enacted to control creation of suchmonopolies yet mergers continued
Reasons responsible for the growing number of M & As
were: Unwillingness of U.S. Supreme Court to literally interpret the anti monopoly provisions of the Sherman Act
Some States relaxed Corporation Laws that enabled companies to securecapital, create stock in other companies and expand their operationsunabated
Development of U.S transportation system facilitated expansion of markets
Expansion of the firms resulted in economies of scale in production anddistribution and resulted in greater efficiency
A few takeover battles saw judges and elected officialsbeing bribed to violate legal provisions.
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Known as Period of Merging for Oligopoly
Saw consolidation of several industries and growth of
oligopolistic industry structure
Wave produced fewer monopolies, more oligopolies
and many vertical mergers
Period also saw mergers between many unrelated industries
creating first large-scale conglomerates.
Period saw disproportionate number of mergers in primary
metals, petroleum products, food products, chemicals andtransportation equipment
Corporations born during this wave General Motors, IBM, John
Deere and Union Carbide
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Decade saw large companies taking over smaller firms withthe motive of getting tax relief
Firms encouraged to sell businesses to outsiders since the
estate taxes were very high and it was very expensive sellingbusinesses within the family
Mergers did not result in concentration of economic powersince most of them held very insignificant portion of the
industrial assets
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Celler-Kefauver Act passed to prevent or prohibit theanticompetitive acquisition of a firms assets
Made horizontal and vertical mergers tougher resulting information of conglomerates for expansion
Wave continued until 1968 when Litton Industries announcedthat its quarterly earnings had declined first time in fourteenyears
Market turned sour to conglomerates and the selling pressure
on stock prices increased
Anti-trust lobby was hell bent upon preventing mergers for theybelieved they are anti competitive and result in abuse ofmonopoly power.
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Known as era of Hostile Takeovers
Saw a dramatic decline in the number of mergers
Decade saw some trendsetting events such as: A change in the acceptable takeover behaviour Hostile takeover of major established companies started For Example:
INCO (International Nickel Companys) attempt to takeover ESB, the largestbattery maker
United Technologies bid for Otis Elevator Colt Industries attempt of hostile takeover move of Garlock Industries
Sanctioning of aggressive advances by investment Banks
Investment Bankers started offering consultancy services in anti-takeoverdefences
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Known as Wave of Megamergers
Hostile takeovers increased dramatically
Large firms became acquisition targets
Mergers seen in oil and gas industry, drugs, medicalequipments, banking and petroleum industry.
Leading megamergers included: Chevron and Gulf Oil
Philip Morris and Kraft Texaco and Getty Oil
DuPont and Conoco British Petroleum and Standard Oil of Ohio U.S. Steel and Marathon Oil Kohlberg Kravis and Beatrice
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Megadeals often financed with large amounts of debt. ForExample: Leveraged Buyouts
Conflicts between The Federal and State Governmentsincreased as State Governments started passing anti-
takeover legislations at the behest of local companies whichwas seen by Federal Government as infringement ofinterstate commerce
Deals motivated by Non U.S. companies that desired toexpand into larger and more stable U.S market.
Different sectors responded to deregulation differently. ForExample: Response of broadcasting sector quicker than airtransport
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Period saw a major economic transition such as increase inaggregate demand, longest post-war expansion of companiesand rise in stock market values
Phase saw large megamergers happening, few hostile deals
and more strategic mergers
Fad of financing merger deals through debt also got erodedand increased use of equity financing noticed.
Roll ups became popular i.e. fragmented industriesconsolidated through large scale acquisition of companies
Trend very common in industries such as funeral printing, officeproducts and floral products
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Examples: Mittal takeover of Arcelor Dubai based Ports World takeover of Peninsular and
Oriental Navigation Company
Tata Steel takeover of Corus Group
European nations started erecting barriers to impede takeoverof national champions.
Examples:
Merger of Suez SA and Gaz De France SA by the French Government tofend away Italian utility Enel SpA;
Spain enforced a new law to prevent German E.On AGs takeover bid ofSpanish utility Endesa SA
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Horizontal Merger Two companies that are in direct competition and sharing the same
product lines and markets combine
Based on the assumption that it will provide synergy and allow
enhanced cost efficiencies to the new business.
Examples of Synergistic Benefits: staff reduction and reductions in
related costs, economies of scale, opportunity to acquire technologies
unique to the target company and increased market reach and
industry visibility.
For Examples: Daimler Benz and Chrysler, Glaxo Wellcome Plc.
and SmithKline Beecham Plc., Exxon and Mobil, Volkswagen and Rolls
Royce and Lamborghini, Ford and Volvo and so on.
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Attained mainly by external acquisition and mergers and is
not generally possible through internal development
Are also called concentric mergers
Firms operating in different geographic locations also prefer
conglomerate mergers
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Has to bear capital gains tax on difference betweenbases in assets sold and purchase price allocated to
such assets which could be substantial if assets are
heavily depreciated
If the target company desires to use the proceeds of
the asset sale for paying dividend to the stockholders,
dividend would be subject to an additional tax, thus
increasing the burden on the target company
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The acquirer purchases the entire outstanding equityof the target company
Acquirer purchases the entire company and all assets
and liabilities of the business that come with it
Stock purchase does not cause any disruption in the
operations which can continue as usual.
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Closings are simplified
Fewer contract consents and very little paper work is
required to transfer specific assets.
All employees and employee benefits are transferred
with the stock sale.
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Cannot pick and choose assets and liabilities. Also it has toinherit everything, including unknown liabilities such as
sellers contracts, employees, etc.
The tax basis in the assets purchased does not get steppedup.
Potential of larger capital gains tax on a future sale of
heavily depreciated assets although lower depreciationprovision reduces the tax liability.
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Dogs: Businesses that have a very small share in the market and have a very
low growth potential i.e. they do not hold much future economic
promise and are on the verge of dying. Investing in such divisions
reflects a narrow view of the business having no future except high
risk. Are cash traps and can only eat into the profits of the company.
Acquirer should avoid acquiring such companies as they would not
add any value and would result increased losses and turn out to be a
bad buy decision.
If the company owns any such unit or division it is better to divest sucha division as soon as possible or else it would keep accumulating losses
and affect the overall profitability of the group
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Include: Market growth
Market size
Competitive intensity and
Capital requirements.
When factors are assessed collectively it implies that greater
the market growth, the larger the market, the lesser the
capital requirements and less the competitive intensity, the
more attractive the industry will be.
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The matrix suggests that: Acquirer should invest in winners and questions marks where the
industry attractiveness and competitive position are both favourable;
Maintain the market position of average businesses and profit
producers where industry attractiveness and competitive position is
average and Sell losers, in case it owns any.
For Example: Unilever undertook a major exercise of assessing its
business portfolio and based on the results decided to sell off several
speciality chemical units that were not contributing to the firmsprofitability. The resources generated through such divestitures were
used to acquire related businesses like Ben and Jerry, Homemade and
Slim-fast
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Based on the logic that a corporate strategy should be able
to counter the opportunities and threats prevailing in the
organizations external environment.
Especially true in case of the competitive strategy which the
argument states should be based on the understanding of
industry structures and the way they change.
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Supplier concentration Importance of volume to supplier
Differentiation of inputs
Impact of inputs on cost differentiation
Switching costs of firms in the industry Presence of substitute inputs
Threat of Forward integration
Cost relative to total purchases in industry
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Merger is a process where two entities agree tomove forward as a single entity as against
remaining separately owned and operated entities.
Mergers are typically more expensive than
acquisitions, with the parties incurring higher legal
costs.
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A merger does not require cash. A merger may be accomplished tax-free for both parties.
A merger lets the target company realize the appreciation potential of the
merged entity, instead of being limited to sales proceeds.
A merger allows the shareholders of smaller entities to own a smaller piece
of a larger pie, increasing their overall net worth.
A merger of a privately held company into a publicly held company allows
the target company shareholders to receive a public companys stock.
A merger allows the acquirer to avoid many of the costly and time-
consuming aspects of asset purchases, such as the assignment of leases and
bulk-sales notifications.
Merger is of considerable importance when there are minority stockholders.The transaction becomes effective and dissenting shareholders are obliged
to go along once the buyer obtains the required number of votes in support
of the merger.
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Synergy Operating synergy
Financial synergy
Examples:
When HUL acquired Lakme, it helped them to enter the cosmetics market
through an established brand.
When Glaxo and Smithkline Beecham merged, they not only gained
market share but also eliminated competition between each other.
Tata tea acquired Tetley to leverage Tetleys international marketing
strengths.
Acquiring new technology: For example: Mergers amongst logistics companies such as a land
transport entity with an airline cargo company
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Improved profitability For example, European Media Group Bertelsmann, Pearson, etc. have
driven their growth by expanding into US through M & A.
Acquiring a Competence: For example: Similarly IBM merged with Daksh for acquiring
competencies that the latter possessed.
Entry into new markets
For example: The merger of Orange, Hutch and Vodafone was carriedout to achieve this objective.
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Tax benefitsFor example: Ashok Leyland Information Technology (ALIT)
was acquired by Hinduja Finance, a group company, so that
it could set off the accumulated losses in ALITs books against
its profits.
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