financial management sem ii unit-6 mergers and acquisitions

8/19/2019 Financial Management Sem II Unit-6 Mergers and Acquisitions

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F\NANC...\AL MA-NA6JEMeN ·-r SEMl[ UN1T

3.1 INTRODUCTIONMERGjER.sRA-ME H

AND Aees> U \..51 T I a f · ;-MEt-1T 4

The corporate world is undergoing a paradigm shift, from expansion and

diversification to ever-increasing mergers and acquisitions (M&As! Merger waves

"egan in #$$% following the depression that ended that ear! The first merger

wave came a"out due to the economic expansion that occurred at the time (www!

learnmergers!com! The initial trend was dominated " a few 'mega' deals involving! corporate giants! owever, toda the whole picture is undergoing a sea change!

)ompanies have started reali*ing that in the increasingl competitive, changing,

and challenging environment, M&As can "oost the value of their "usinesses!

· Mergers and acquisitions have "ecome a strategic tool that is "eing effectivel

used to acquire esta"lished "rands and to expand to emerging and often low cost

mar+ets, particularl mar+ets that provide an enormous num"er of s+illed wor+ers!

The help counter competition, acquire new consumers, get a technological

edge, improve "ottom lines, etc! t is no wonder then that the corporate world

is fast reali*ing that M&As are here to sta!

3.2 CONCEPT OF MERGER

A merger is a tool used " companies to increase their long-term profita"ilit

" expanding their operations! Mergers are carried out with mutual consent

"etween the two companies merging with each other! The compan "uing the

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Mergers and Arquisitions - 81

other compan is called the merged or surviving entit, and the one merging

with it is called the merging entit!

A merger is thus a strateg where two or more companies agree to com"ine their

operations! nce the merger happens, one compan survives and the other loses

its corporate identit! The surviving compan acquires all the assets and lia"ilities

of the merging compan! t either retains its identit or is re-christened!The simplest definition of merger is,' a com"ination of two or more "usinesses

into one "usiness'! .aws in ndia use the term 'amalgamation' for merger! The

ncome Tax Act, #/0# 12ection 3( lA4 defines an amalgamation as the merger

of one or more companies with another, or the merger of two or more compa

nies to form a new compan, in such a wa that all assets and lia"ilities of the

amalgamating companies "ecome the assets and lia"ilities of the amalgamated

compan! 2hareholders holding not less than nine-tenths in value of the sha!res

in the amalgamating compan or companies "ecome shareholders of the amal

gamated compan (ncome Tax Act, #/0l 5are Act!

Thus, as descri"ed in the act, mergers or amalgamations ma ta+e two forms

(www!"usiness!gov!in , as descri"ed in 2ections %!3!# and %!3!#!

3.2.1 Merger through Abor!t"o#

A"sorptiq6q7 .amalgamation pursuant to the provisions of the )ompanies Act, #/=0 or an

other statute that ma "e applica"le to companies6

An amalgamation satisfies' all the following conditions6

> After amalgamation, all the assets and lia"ilities of the transferor compan

"ecome the assets and lia"ilities of the transferee compan!> 2hareholder s holding not less than /?@ of the face valu e of the equit

6oh areA o'f the transferor -compa. (ather than the ec u'it 6; ha re ; B lread held


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%2 Merger and Acquisitions

therein, immediatel "efore the amalgamation, CD the

transferee compan, its su"sidiaries, or their nominees

"ecome equit shareholders of the Etrans feree compan

" virtue of the amalgamation!

> The consideration for the amalgamation receiva"le " those

equit share

holders of the transferor compan who agree to "ecome

equit shareholders of the transferee compan is

discharged " the transferee compan wholl " the

issue of equit shares in the transferee compan,

except that cash

J ma "e paid in respect of an fractional shar s!> The "usiness of the transferor compan is intended to "ecarried on, after

the amalgamation, "

thetransferee corr!pan! E

> Fo ad7ustment is intended to "e made to the "oo+

values of the assets and lia"ilities of the transferor

compan when the are incorporated in the financial

statements of the transferee compan, except to ensure

uniformit of accounting policies!The principal idea "ehind M&As is to create shareholder

value that is over and a"ove the sum of the two merging

companies! This is achieved " creating a more competitive

and cost-efficient compan " gaining greater mar+et

share!


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3.& CONCEPT OF AC'UISITION


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Mergers and Acquisitions /%

the acquiring firm "ecomes the legal owner and controller

of the "usiness of the target firm! The acquiring firm pas

for the net assets, goodwill, and "rand name of the

compan "ought!

Acquisitions are actions through which companies see+

to achieve economies of scale, increased efficienc, and

enhanced mar+et visi"ilit! n an acquisition, unli+e in a

merger, there is no exchange of stoc+ or consolidation as a

new com pan even though it involves one compan

purchasing another!

2ome prominent acquisitions include the following6

> oogle's largest acquisition in March 3??$ when it

acquired Ista"lishment of a parent-su"sidiar relationship

> A strateg of "rea+ing up the target firm and

disposing off part or all its assets

> )onversion of the target firm into a private firm


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3.1 ( DISTINCTION )ET*EEN MERGERS AND AC'UISITIONS

Heople ver often tal+ of mergers and acquisitions in the same "reath and treat

them as snonms! owever, the two terms are slightl different! The differ

ences "etween a merger and an acquisition are important to value, negotiate,

and structure a client's transaction! 5oth mergers and acquisitions involve one

or multiple companies purchasing all or part of another compan! The main

distinction "etween a merger and an ac(p!Disition is how the are financed!

Jhen a compan ta+es over another compan and esta"lishes itself as a new

entit, the process is called acquisition! ere the target compan ceases to exist

while the "uer compan continues!

A merger, on the other hand, is a process where two entities agree to move

forward as a single entit as against remaining separatel owned and operated

entities! Mergers are tpicall more expensive than acquisitions, with the parties

incurring higher legal costs!

The stoc+ of the acquiring compan continues to "e !traded in an acquisition,

whereas in case of a merger, the stoc+s of "oth the entities are surrendered and

the stoc+s of the new compan are issued in its place!

n realit, one entit "us another and allows the acquired firm to proclaimthat the action is merger and not acquisition! This is done to ward off the nega

tivit often associated with acquisitions!

Ker often, it is noticed that companies prefer mergers over acquisitions though

it ma sound unusual! 2ome of the more frequentl encountered reasons are as

follows (Mastracchio and Lunitch 3??36

A merger does not require cash!

> A merger ma "e accomplished tax-free for "oth parties!

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08 Mergers and Acquisitions

> A merger lets the target compan reali*e the appreciation potential of th6!

merged entit, instead of "eing limted to sales proceeds!

> A merger allows the shareholders of smaller entities to own a smaller pieceof a lare r pie, increasing their overall net worth!

> A merger of a privatel held compan into a pu"licl held compan allows

the target compan shareholders to receive a pu"lic compan's stoc+!

> A merger allows the acquirer to avoid man of the costl and time-consuming

aspects of asset purchases, such as the assignment of leases and "ul+-sales

notifications! -

J • Merger is of consid ra"le importance when there are minorit stoc+holders!The transaction "ecomes effective and dissenting shareholders are o"liged

to go along once the "uer o"tains the required num"er of votes in support

of the merger !

ne ver often finds that sometimes the deal is ver unfriendl- the

acquiring compan manipulates events and forcefull ta+es over the target!

2uch a deal is called a hostile ta+eover! t would therefore not "e wrong to sa

that a purchase is considered a merger or an acquisition on the "asis of

whether the purchase is friendl or hostile, and how it is announced! owever,

the fact remains that M&As are strategies targeted at snerg!

.11 MOTI+ES )E,IND MERGERS AND AC'UISITIONS

Jhile one often hears )Is saing that M&As are inspired " a desire to diversif

or achieve higher growth rate, the reasons could "e varied! 2ome of the com

monl identified reasons are as follows6

3.11.1 S-#erg-

2nerg Gs the most essential component of mergers! n mergers, snerg

"etween t'he participating firms determines the increase in value of the com

"ined entit! n other words, it refers to the difference "etween the value of

the com"ined firm and the value of the sum of the participants (


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Mergers and Acquisitions ?/

firm and the com"ined firm can set off such losses against its profits, a

financial snerg, +n ·as tax sh Eield, occurs! The following are some

examples6

'P en Q. acquired .a+me, it helped Q. to enter the cosmetics

mar+et

·-P'· through an esta"lished "rand!

> Jhen laxo and 2mith+line 5eecham merged, the not onl gained

mar+et share, "ut also eliminated competition "etween each other!

> Tata Tea acquired Tetle to leverage Tetle's international

mar+eting strengths!

3.11.2 A/u"r"#g Ne0Teh#olog-

To remain competitive, companies need to constantl upgrade their

technolog and "usiness applications! To upgrade technolog, a compan

need not alwas acquire technolog! 5 "uing another compan with

unique technolog, the "uing compan can maintain or develop a

competitive edge! A good example is a merger of a logistics compan

such as a land transport entit with an air line cargo compan! Another

example is a merger "etween 5lac+"err and Treo which can

incorporate cell phone capa"ilit and email connectivit in one

device; palm pilots and ta"let laptops can provide "enefits to "oth

the entities!

3.11.3 I!roe$Pro"tab"l"t-

)ompanies explore the possi"ilities of a merger when the anticipate that

it wili improve their profita"ilit! The results of the nternational

5usiness wners 2urve, 3??, carried out " rant Thompson,conducted across 30 countries in I rope, Africa, Asia-Hacific, and the

Q2, showed that %; 9o of "usinesses use M&A to maintain or improve

profita"ilit! 8or example, Iuropean Media roup 5ertelsmann, Hearson,

and others have driven their growth " expanding into the Q2 through

M&As!


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3.11.4 A/u"r"#g aCo!ete#-

)ompanies also opt "r M&As to acquire a competenc or capa"ilit that

the do not have, and which the other firm does! 8or example, the

))-E/ alliance made the retailer networ+ and depositor "aseavaila"le to t'tl'eP ging entit! 2imilarl, 5M merged with


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II0 Merger s and Acquisitions··

3.11.& Ae to Fu#$

ften a compan finds it difficult to access funds from the capital mar+et! This

wea+ness deprives the compan of funds to pursue its growth o" 7ec tives effec

tivel!Dn such case·s; a )ompan ma decide to merge with another companthat is viewed as fund-rich! 8or example, T


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3.13 REASONS FOR FAI9URE OF MERGERS AND AC'UISITIONS

Jhile there is often a great hpe when a merger or acquisition is announced, the

end result is not alwas positive! Ruite often, M&As destro rather than add value

to the acquirer's "usiness! The most common reasons for failure are as follows! -

(.::\"" } 3.13.1 U#real"t" Pr"e Pa"$ or Target . · .

!!!!!!!!E6,!,; The process of M&A involves valuation of the target compan and paing a

price for ta+ing over the assets of the compan! Ruite often, one finds that the price paid to the target compan is much more than what should have "een paid!

Jhile the shareholders of the target compan stand "enefited, the shareholders

of the acquirer end up on the losing side! This is "ecause the have to carr the

"urden of the overpriced assets of the target compan which dilutes the future

earnings of the acquirer! aving "id over-enthusiasticall; the "uer ma find

that the premium paid for the acquired compan's shares (the so-called 'winner 's

curse' wipes out an gains made from the acquisition (enrS3??3!

This phenomenon is generall noticed in the later e·ars when the acquirer has

to revalue the assets and write of goodwill "oo+ed at the time of lG#&A!

3.13.2 D""ult"e "# Cultural I#tegrat"o#

Iver merger involves com"ining of two or more different entities! These enti

ties tef#ect different corporate cultures, stles of leadership, differing emploee

expectations and functional differences! f the merge r is implemented in a wa

that does not deal sensitivel with the companies ' p eople and their different

corporate cultures, the process ma turn out to "e a disaster! There ma "e

acute contrasts "etween the attitudes and values of the two companies, especiall

J


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I 14 Mergers and Acquisitions

if the new partnership crosses national "oundaries!

Jhile the process is "eing executed, these

differences are +nown "ut often ignored! As ears

pass " and the com"ined entit tries to snergi*e

the operations, these differences surface and often

lead to failure of the merger! 8or example, the

merger of


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Mergers and acquisitions are loo+ed upon as an

important instrument of creating snergies through

inoreased revenue, reduced costs, reduction in net

wor+ing capital and improvement in the investment

intensit! verestimation of these can lead to failure

of mergers!

3.13.4 I

#tegr at"o# D" "ul

t"e

)ompanies ver often face integration difficulties,

i!e!, the com"ined entit has to adapt to a new set of

challenges given the changed circumstances! To


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dothis, the compan prepares plans to integrate the

operations of the com"ining enti ties! I the

information availa"le on related issues is inadequate

or inaccurate, integration "ecomes difficult!

3.13.5 I#

o#"te#t Str ateg-

J Mergers and acquisitions that are driven " sound "usiness

strategies are the

ones that succeed! Intities that fail to assess thestrategic "enefits of mergers face

failure! t is therefore important to understand the

strategic intent! This has "een discussed later in the

chapter!


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3.13.& P

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Mergers and acquisitions also fail when the products

or services of the merging entities do not n,aturall fit

into the acquirer's overall "usiness plan! This delas

efficient and effective integration and causes failure! 8or example,

the decision3.

of Q. to ta+e over the "usiness of Modern5a+er!

3.13.1

I#a$e/uateDueD"l"


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financial management sem ii unit-6 mergers and acquisitions

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