introduction to mergers and acquisitions

8/4/2019 Introduction to Mergers and Acquisitions

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MANAGING CHANGE

IN THE ERA OFMERGERS AND ACQUISITIONS

Aditi Chauhan

Aanchal Sharma

Bhawna Mourya

Deepika AggarwalDivya Jangid

Garima Dubey


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MERGERS

A merger happens when two firms, often of about the same size,

agree to go forward as a single new company rather than remainseparately owned and operated. This kind of action is moreprecisely referred to as a "merger of equals." Both companies'stocks are surrendered and new company stock is issued in itsplace. For example, both Daimler-Benz and Chrysler ceased to existwhen the two firms merged, and a new company, DaimlerChrysler,

was created.

A purchase deal will also be called a merger when both CEOs agreethat joining together is in the best interest of both of theircompanies. But when the deal is unfriendly - that is, when the

target company does not want to be purchased - it is alwaysregarded as an acquisition.
http://www.investopedia.com/terms/c/ceo.asphttp://www.investopedia.com/terms/c/ceo.asp


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Varieties of Mergers

From the perspective of business structures, there is a whole host of differentmergers. Here are a few types, distinguished by the relationship between the twocompanies that are merging:

Horizontal merger - Two companies that are in direct competition and share thesame product lines and markets.

Vertical merger - A customer and company or a supplier and company. Think of acone supplier merging with an ice cream maker.

Market-extension merger - Two companies that sell the same products in differentmarkets.

Product-extension merger - Two companies selling different but related productsin the same market.

Conglomeration - Two companies that have no common business areas.


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There are two types of mergers that are distinguished by howthe merger is financed

Purchase Mergers - As the name suggests, this kind of mergeroccurs when one company purchases another. Thepurchase is made with cash or through the issue of somekind of debt instrument; the sale is taxable.

Consolidation Mergers - With this merger, a brand newcompany is formed and both companies are bought andcombined under the new entity. The tax terms are thesame as those of a purchase merger.


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ACQUISITIONS

An acquisition is the purchase of one business or company byanother company or other business entity.

It usually refers to a purchase of a smaller firm by a larger one.Sometimes, however, a smaller firm will acquire managementcontrol of a larger and/or longer-established company and retainthe name of the latter for the post-acquisition combined entity. Thisis known as a reverse takeover.

Another type of acquisition is the reverse merger, a form oftransaction that enables a private company to be publicly listed in arelatively short time frame. A reverse merger occurs when a

privately held company (often one that has strong prospects and iseager to raise financing) buys a publicly listed shell company,usually one with no business and limited assets.[]


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Motives behind M & A Economies of Scale: This generally refers to a method in

which the average cost per unit is decreased throughincreased production, since fixed costs are shared overan increased number of goods.

In a laymans language, more the products, more is thebargaining power. This is possible only when the

companies merge/ combine/ acquired, as the same canoften obliterate duplicate departments or operation,thereby lowering the cost of the company relative totheoretically the same revenue stream, thus increasingprofit. It also provides varied pool of resources of both

the combining companies along with a larger share in themarket, wherein the resources can be exercised.


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Taxes : A profitable can buy a loss maker to use the

targets tax right off i.e. wherein a sick company is boughtby giants.

Geographical or other diversification: this is designed to

smooth the earning results of a company, which over thelong term smoothens the stock price of the company

giving conservative investors more confidence in

investing in the company. However, this does not always

deliver value to shareholders.


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Corporate Synergy: Better use of complimentary resources. Itmay take the form of revenue enhancement (to generate

more revenue than its two predecessor standalonecompanies would be able to generate) and cost savings (toreduce or eliminate expenses associated with running abusiness

Cross selling: For example, a bank buying a stock broker could

then sell its banking products to the stock brokers customers,while the broker can sign up the bank customers forbrokerage account. Or, a manufacturer can acquire and sellcomplimentary products

Increased revenue /Increased Market Share: This motive

assumes that the company will be absorbing the majorcompetitor and thus increase its power (by capturing

increased market share) to set prices.


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Resource transfer: Resources are unevenly distributed

across firms and interaction of target and acquiring firm

resources can create value through either overcominginformation asymmetry or by combining scarce resources.

Eg: Laying of employees, reducing taxes etc.

Improved market reach and industry visibility - Companies

buy companies to reach new markets and grow revenuesand earnings. A merge may expand two companies'

marketing and distribution, giving them new sales

opportunities. A merger can also improve a company's

standing in the investment community: bigger firms oftenhave an easier time raising capital than smaller ones.


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Mergers And AcquisitionProcess

Process is probably the most important thing in

mergers or acquisition deal as it influences the

benefit and profitability of merger and acquisitions .

The process can be divided into some steps which

are as follows.


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STEP 1-PRELIMINARY ASSESSMENT

OR BUSINESS VALUATION

In this first step the market value of the target

company is assessed. In this assessment not only the current

financial position of the company is examined

but also the estimated future market value isconsidered.


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STEP 2 PHASE OF PROPOSAL After complete analysis of target firms market

performance the proposal for merger oracquisition is given.

Generally this proposal is given through issuing annon-binding offer document

STEP 3- EXIT PLAN When a company decides to buy out the target

firm and the target firm agrees than latterinvolves in exit planning.

The target firm plans the right time for exit ,which considers all the alternatives like full salepartial sale n others.


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STEP 4 STRUCTURED MARKETING After finalizing the exit plan,target firm involves in the

marketing process and tries to achieve highest selling price. In this step business firm concentrates on structuring the

business deal

STEP 5

ORIGINATION OF PURCHASEAGREEMENT OR MERGER AGREEMENT

In this step, the purchase agreement is made in case of anacquisition deal.

In case of merger also the final agreement paper isgenerated in this stage.


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STEP 6

STAGE OF INTEGRATION In this final stage, the two firms are integrated

through mergers and acquisiton.

It is ensured that the new joint companycarries same rules and regulations through

out the organization.


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Mergers and Acquisitions

Need for changing strategiesThe organization need the strategies to mange the some of

the difficulties at the time of mergers and acquisitions:

Loss of skilled employees other than employees inleadership positions. This type of loss inevitably involvesloss of business know-how that may be difficult to replaceor can only be replaced at great cost.

Retrenchment of employees causing panic anda loss inmotivation, which could in turn also lead to a loss ofproductivity anda reduction in revenues.

Improper or incomplete alignment of employmentterms, conditions andbenefits leading to anger,resentment anda drop in motivation.


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Rushed or improper population of new organisational

structures.

Increase in costs could result if the

proper managementofchangeandthe implementation of

the M&A transaction are delayed.

Unhappy customers andthe eventual loss of customers.

Build up of resistance to any future change initiatives.

Managing change in the highly complex world of M&As is

not easy andresearch has found that so much as 70%

ofchange initiatives are unsuccessful. The fact that the

M&A process can sometimes takes as long as 3 to 5 years to

be fully effected, adds to the levels of uncertainty,

ambiguity or confusion that accompanies such transactions


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CHANGE MANAGEMENT Change management plays an important role in An

organization since the task of managing change is not aneasy one. When we say managing change we mean to say

that making changes in a planned and systemic fashion.

With reference to the IT projects we can say the change in

the versions of a project and managing these versionsproperly. Changes in the organization or a project can be

initiated from within the organization or externally. For

example a product that is popular among the customers

may undergo a change in design based on the triggering

factor like a competitive product from some other

manufacturer


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Four Basic Change ManagementStrategies

Empirical-Rational

People are rational and will follow their self-interest once it is revealed

to them. Change is based on the communication of information and theproffering of incentives.

Normative-Reeducative

People are social beings and will adhere to cultural norms and values.Change is based on redefining and reinterpreting existing norms andvalues, and developing commitments to new ones.

Power-Coercive

People are basically compliant and will generally do what they are told orcan be made to do. Change is based on the exercise of authority and theimposition of sanctions.

Environmental-Adaptive People oppose loss and disruption but they adapt readily to new

circumstances. Change is based on building a new organization andgradually transferring people from the old one to the new one.


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Managing change at Mergers and

Acquisitions

The first thing to do is jump in. You can't do anything about itfrom the outside.

A clear sense of mission or purpose is essential. The simplerthe mission statement the better. "Kick ass in themarketplace" is a whole lot more meaningful than "Respondto market needs with a range of products and services thathave been carefully designed and developed to compare sofavorably in our customers' eyes with the products andservices offered by our competitors that the majority ofbuying decisions will be made in our favor.

"Build a team. "Lone wolves" have their uses, but managing

change isn't one of them. On the other hand, the right kind oflone wolf makes an excellent temporary team leader.


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Maintain a flat organizational team structure and rely on minimaland informal reporting requirements.

Pick people with relevant skills and high energy levels. You'll needboth.

Toss out the rulebook. Change, by definition, calls for a configuredresponse, not adherence to prefigured routines.Shift to an action-feedback model. Plan and act in short intervals. Do your analysis onthe fly. No lengthy up-front studies, please. Remember the hare andthe tortoise.

Set flexible priorities. You must have the ability to drop what you'redoing and tend to something more important.

Set flexible priorities. You must have the ability to drop

what you're doing and tend to something more important.

Treat everything as a temporary measure. Don't "lock in"until the last minute, and then insist on the right to changeyour mind


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. Ask for volunteers. You'll be surprised at who shows up. You'll

be pleasantly surprised by what they can do.

Find a good "straw boss" or team leader and stay out of his orher way.

Give the team members whatever they ask for exceptauthority. They'll generally ask only for what they really needin the way of resources. If they start asking for authority,

that's a signal they're headed toward some kind of power-based confrontation and that spells trouble. Nip it in the bud!

Concentrate dispersed knowledge. Start and maintain anissues logbook. Let anyone go anywhere and talk to anyoneabout anything. Keep the communications barriers low, widely

spaced, and easily hurdled. Initially, if things look chaotic,relax they are.


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IMPACT OF MERGERS AND ACQUISITION:

Impact Of Mergers And Acquisitions on workers or

employees:

The mergers and acquisitions impact the employees or the workers the

most.

It is a well known fact that whenever there is a merger or an acquisition,

there are bound to be lay offs.

In the event when a new resulting company is efficient business wise, it

would require less number of people to perform the same task. Under

such circumstances, the company would attempt to downsize the labor

force. If the employees who have been laid off possess sufficient skills,

they may in fact benefit from the lay off.

But it is usually seen that the employees those who are laid off would nothave played a significant role under the new organizational set up.

This accounts for their removal from the new organization set up. These

workers in turn would look for re employment and may have to be

satisfied with a much lesser pay package than the previous one.

I t f d i iti t


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Impact of mergers and acquisitions on toplevel management:

Impact of mergers and acquisitions on top levelmanagement may actually involve a "clash of the egos".

There might be variations in the cultures of the two

organizations. Under the new set up the manager may be

asked to

implement such policies or strategies, which may not be

quite approved by him. When such a situation arises, the

main focus of the

organization gets diverted and executives become busy

either settling matters among themselves or moving on. Ifhowever, the manager is

well equipped with a degree or has sufficient qualification,

the migration to another company may not be

troublesome at all.


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Shareholders of the acquired firm:

The shareholders of the acquired company benefit the most.The reason being, it is seen in majority of the cases that the

acquiring company usually pays a little excess thanit what should. Unless a man lives in a house he has recentlybought, he will not be able to know its drawbacks. So thatthe shareholders forgo their shares, the company has to offeran amount more then the actual price, which is prevailing inthemarket. Buying a company at a higher price can actuallyprove tobe beneficial for the local economy.

IMPACTS OF MERGERS AND ACQUISITION ONSHAREHOLDERS:


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Shareholders of the acquiring firm:

They are most affected. If we measure the benefitsenjoyed by the shareholders of theacquired company in degrees, the degree to which they

were benefited, by the samedegree, these shareholders are harmed. This can beattributed to debt load, whichaccompanies an acquisition.

Ad t A d Di d t f


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Advantages And Disadvantages of

Mergers & Acquisition

ADVANTAGES

1.Economies of scale, which reduces unit costs.

2.Greater market share for horizontal integration, which means the business

can often charge higher prices

3.Spreads risks if products different.

4.Reduces competition if a rival is taken over

5.Other businesses can bring new skills and specialist departments to the

business.

6.It is easier to raise money if a larger business.


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7.A merger may be accomplished tax-free for both parties

8.A merger of a privately held company into a publicly heldcompany allows the target company shareholders to receive a

public company's stock, despite the liquidity.9.Merger allows the acquirer to avoid many of the costly and

time-consuming aspects of asset purchases, such as theassignment of leases and bulk-sales notifications.

10. Shareholders in acquired firm benefits substantially.


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DISADVANTAGES

1.Diseconomies of scale if business becomes too large, which

leads to higher unit costs.

2.Clashes of culture between different types of businesses can

occur, reducing the effectiveness of the integration.

3.May need to make some workers redundant, especially at

management levels this may have an effect on motivation.

4.May be a conflict of objectives between different businesses,

meaning decisions are more difficult to make and causing

disruption in the running of the business


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LIVE

EXAMPLE


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Merger: A merger refers to a process in which two companies becomeone by coming together. In such a case, no one company rules over the

other. companies. Examples of mergers, GlaxoSmithKline ,Hero HondaSony Ericsson.

Acquisition: Acquisitions on the other hand refer to processes in whichone company buys the other company. Example- On the other hand

Vodafone Group , the world's largest mobile communications network

company recently acquired a 67% stake in Essar Hutchison (one of India's

leading mobile phone network) The purpose of this acquisition was to

enter the highly lucrative Indian mobile phone market.

Joint Venture: Joint Venture is an approach in which two or morecompanies agree to pool their resources together to form a combined

force in the marketplace. Example-the world's largest retailer Wal-Mart

entered into a joint venture with India's Bharti Enterprises to get a toe hold

in the booming Indian retail market


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Deciding Factors

1.Level of competition in the market- One of the fundamental reasons that

companies engage in either M&A or an joint venture is to tackle

competition in any market. Samsung works with Sony, a Sony works with

Ericsson, Intel works with IBM and so on.

Barriers to entry M&A are usually resorted to either for increasing scale or

cutting costs and joint ventures are preferred to enter new markets or

segments. Barrier to entry is low-Merger &acquisition .Barrier to entry is

highjoint venture.

Mergers and joint ventures between companies have been proven to work

efficiently if there is a high level of synergy between companies that come

together. Synergies can be in the corporate culture, product portfolio,

strategic goals, and supply chain or logistic systems.


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Example

In October 2001, Sony Corporation and Ericsson began a joint venture to createa new company that incorporates their respective mobile phone businessesworldwide. The new company, Sony Ericsson Mobile Communications, isequally owned by Ericsson and Sony, utilizing Ericssons leading expertise intelecommunications and Sonys leading expertise in consumers electronicsproducts.

By combining the complementary strengths of Ericsson and Sony, the newcompany is uniquely positioned to become a world leader intelecommunications, as the industry moves rapidly toward Mobile Internet.

CHALLENGES FACED BY SONY ERICSSION- Design

Technology Transfer The initial stage of the alliance was also faced withchallenges in the transfer of technology know-how.

Cultural Gaps


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Management of Change

Both Sony and Ericsson have different and at times conflictingorganizational culture.

The goal for venture was to create synergies between the twocompanies, and become market leaders within their field of

action . The difference in managerial styles and accounting practices

between Sony and Ericsson contributed to tension in theintegration process.

Adoption of Global Thinking

Rather than focusing on the cultural backgrounds of itsparent companies, Sony being Japanese and Ericsson beingSwedish, the management adopted a global thinking.


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BENEFITS


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Merger between BoR and icici bank

Bank of Rajasthan (BoR) is set to merge with ICICI Bank, the countrys

largest private sector lender. Under the deal, ICICI Bank would give 25

shares for 118 shares (1:4.72) of BoR. BoR has a market capitalisation ofRs 1,600 crore compared with ICICI Banks Rs 99,000 crore.

MERGER MATRIX


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MERGER MATRIX

Factor BOR ICICI

EdgeBusiness Operations

Management

Stronghold in north IndiaAll India

Conservative, traditional

banking

stronghold in westernparts

18 countries

Visionary, hunger for

growth

Business strategy Struggling to survive Aggressive, innovative andexpanding

Branches 463 2209

Financial Results Loss in December 2009 Continuous profits

Share price (24.5.2010) Rs 166.70 Rs 832

Share exchange ratio 118 (4.72) 25 (1)

Merger benefit Bank survives, future

growth potential.

Business expansion in

north India.


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Why mergers are breaked- Under the joint venture Hero Group

could not export to international markets (except Sri Lanka) and

the termination would mean that Hero Group can now export.


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introduction to mergers and acquisitions

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