indian mergers and acqisitions

7/31/2019 Indian Mergers and Acqisitions

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Why they have worked so far?

Presented by,VAIBHAV CHITTORA


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Definitions Mergers

Merger happens when two firms, often of about thesame size, agree to go forward as a single new companyrather than remain separately owned and operated.

Acquisitions

When one company takes over another and clearly

established itself as the new owner, the purchase iscalled an acquisition. From a legal point of view, thetarget company ceases to exist, the buyer "swallows" thebusiness and the buyer's stock continues to be traded.


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Types of Mergers Horizontal mergers

Two firms operating in the same kind of businessactivity, usually in the same stage of production.

Main purpose to obtain economies of Scale. E.g. Glaxo-SmithKline Beecham merger

Vertical mergers

Two or more companies at different stages ofProduction

Main purpose is reduction of inventories and workingcapital investment. E.g. Nocil- Polyolefins


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Types of Mergers Conglomerate mergers

Firms engaged in unrelated business activities

Main purpose is risk reduction through diversificationas well as utilization of financial resources and increasedleverage. E.g. Brook Bond Lipton- HLL

Reverse mergers

Merger between a healthy and a sick unit Main purpose to take advantage of tax savings under the

Income Tax Act (under Section 72 A)


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Why mergers worked in India? Real big mergers have happened within cohesive

business groups. E.g. RCL and RIL, HLL and BBLIL,ICICI and ICICI Bank.

Fewer post merger power struggles and internalclashes


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Why Companies seek to merge?As a fastest route to growth

Achievement of corporate goals and objectives

Cost of building an organisation may exceed the costof acquisition

Fewer risks (leap-frogging effect of Acquisitions)

Tax advantages and increased leverage


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Merger Motives Efficiency Theory

More efficient firms acquire less efficient firms and realizegains though improved managerial efficiency. E.g. Enfield-

Eicher Motors Market Power Theory

Merger to have increased market power leading to collusionand monopoly. E.g. Aban Lloyd- Hitech Drilling

Operating synergies Theory Merger achieves levels of activity at which economies of scale

or scope may be achieved through various synergies. E.g.HLL-Brook Bond Lipton


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Merger Motives Financial Synergies

Merged entity will have lower cost of capital due to lower costof internal funds as also due to higher leveraging capacity. E.g.

Mafatlal Fine Spinning- Mafatlal Industries Tax motivated Mergers

Tax savings achieved by merging a high-tax-bracket companywith a loss making or low-tax-bracket company. E.g.

Murugappa Electronics- EID Party Increasing Promoters Stakes

Increases the promoters stakes and hence helps in verticalintegration. E.g. RPPL-RPEL-RIL (RIL stakes increased from23% to 33%)


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Measuring Post merger Performance Operating synergies

Increase in sales, earnings or margins or reduction in cost.

Studied through increase in operating profit margins (OPM), net

profit margins (NPM), return on capital employed (ROCE) and costof production (COP) as a percentage of sales.

Financial Synergies

Increased cash flows or leverage.

Studied through operating cash flows (OCF) and debt/equity ratio

(D/E). Risk reduction

Studied through variability of earning taken as the average profitafter tax (PAT) fro which standard deviation and coefficient of

variation (COV) are considered as representative measures.


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Measuring Shareholders Returns Parameter used

Return on Equity (ROE)

ROE = Net profit margin x Asset Turnover x EquityMultiplier


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ConclusionThough synergetic motives drive most mergers,

they are not always achieved, they do not

necessary translate into improved shareholders

returns. However there is high probability of

shareholders benefitting if the synergies are

actually realized post merger.


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Customer Specific Pricing Technology has sharpened the pricing tool and has

Expanded the breadth and depth of information aboutconsumers.

Made possible the instantaneous delivery of customizedpricing offers to individual customers.

Recent advances in Information Technology have greatlysharpened the pricing tool, permitting even finerconsumer segmentation.


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The Pricing process Gathering and Analysis of Data

Active data collection: consumers provide personal datain exchange for information or services. E.g. Pepsi andMarlboro.

Passive data collection: underlying technology itselfprovides the information without customers activeparticipation.


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Contd. Designing and Making pricing Offers

Specific price Specific customer Specific time -Triggers

Possible with advanced technology ( internet, personalwireless devices, chip based transmitting devices.)


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AdvantagesGathering and AnalyzingData

Reversing the cycle of the

traditional pricing processand gauging a customerslikely price threshold.

Companies learning to

organize and analyze theirenormous collections ofcustomer data.

Designing and makingpricing offers

Individualized delivery.

Businesses can create anddeliver pricing offers inresponse to an increasingly

wide array of triggers.


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From Promise to Advantage Think big picture

Embrace the right technology

Plan for broad operational challenges Prepare customers

Anticipate regulatory hurdles

Count on a bumpy ride


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