MERGERS ‘N’ ACQUISITIONS

By ARJUN MATHUR

The Main Idea One plus one makes three: this equation is the special alchemy of a merger or an acquisition. The key principle behind buying a company is to create shareholder value over and above that of the sum of the two companies. Two companies together are more valuable than two separate companies - at least, that's the reasoning behind M&A.

merger happens when two firms, often of about the same size, agree to go forward as a single new company rather than remain separately owned and operated. This kind of action is more precisely referred to as a "merger of equals." e.g diamler-chrysler

ACQUISITION: When one company takes over another and clearly established itself as the new owner, the purchase is called an acquisition. From a legal point of view, the target company ceases to exist, the buyer "swallows" the business and the buyer's stock continues to be traded.

MERGERS ARE CLASSIFIED INTO FOLLOWING:

Horizontal merger- Two companies that are in direct competition and share the same product lines and markets i.e. it results in the consolidation of firms that are direct rivals. E.g. Exxon and Mobil, Ford and Volvo, Volkswagen and Rolls Royce and Lamborghini

Vertical merger- A customer and company or a supplier and company i.e. merger of firms that have actual or potential buyer-seller relationship eg. Ford- Bendix, Time Warner-TBS.

Conglomerate merger- generally a merger between companies which do not have any common business areas or no common relationship of any kind. Consolidated firm may sell related products or share marketing and distribution channels or production processes.

THE FOLLOWING MOTIVES ARE CONSIDERED TO IMPROVE FINANCIAL PERFORMANCE:

Economy of scaleEconomy of scopeCross-sellingSynergyTaxationGeographical or other diversificationResource transferVertical integrationAbsorption of Similar Businesses under Single Mangement

Ultimate success rests with smart treatment of the talent that comes with the property.

In practice, however, actual mergers of equals don't happen very often. Usually, one company will buy another and, as part of the deal's terms, simply allow the acquired firm to proclaim that the action is a merger of equals, even if it's technically an acquisition. Being bought out often carries negative connotations, therefore, by describing the deal as a merger, deal makers and top managers try to make the takeover more palatable.

Merger wavesThe economic history has been divided into Merger Waves based on the merger activities in the business world as:

Period Name Facet

1889 - 1904 First Wave Horizontal mergers

1916 - 1929 Second Wave Vertical mergers

1965 - 1989 Third WaveDiversified conglomerate mergers

1992 - 1998 Fourth WaveCongeneric mergers; Hostile takeovers; Corporate Raiding

2000 - Fifth WaveCross-border mergers

Mergers and Acquisitions in India:

company acquired deal

Hindalco Novelis $5,982 million

Tata Steel Corus Group plc $12,000 million

Dr. Reddy's Labs Betapharm $597 million

Ranbaxy Labs Terapia SA $324 million.

Suzlon Energy Hansen Group $565 million

Videocon Daewoo Electronics Corp.

$729 million

HPCL Kenya Petroleum Refinery Ltd..

$500 million

VSNL Teleglobe $239 million.

When it comes to mergers and acquisitions deals in India , the total number was 287 from the month of January to May in 2007. It has involved monetary transaction of US $47.37 billion. Out of these 287 merger and acquisition deals, there have been 102 cross country deals with a total valuation of US $28.19 billion.

The United Nations' “World Investment Report 2000”suggests that the recent increase in cross-border mergers and acquisitions is mainly due to increase in the globalization of markets

CASE STUDY

JPMorgan Chase & Co.

JPMorgan Chase & Co.

JPMorgan Chase(merged 2000)

Chase(merged 2000)

Chase Manhattan Bank(merged 1996)

J.P. Morgan & Co.(formerly Morgan Guaranty Trust)(merged 1959)

Bank One(acq. 2004)

Banc One Corp.(merged 1968)

First Chicago NBD(merged 1995)

HIERARCHY

JPMorgan Chase & Co. has operations in 60 countries. It is a major provider of financial services with assets of $2 trillion, and the largest market capitalization and third largest deposit base U.S. banking institution behind Wells Fargo and Bank of America. The hedge fund unit of JPMorgan Chase is the largest hedge fund in the United States with $53.5 billion in assets as of the end of 2009.

JP Morgan Chase is one of the Big Four banks of the United States with Bank of America, Citigroup and Wells Fargo

JPMorgan Chase’s activities are organized, for management reporting purposes, into six business segments :

Investment BankRetail Financial ServicesCard ServicesCommercial BankingTreasury & Securities ServicesAsset Management

Bank One is the nation's sixth-largest bank holding company, with assets of $290 billion. It had more than 51 million credit cards issued, and serves nearly 7 million retail households and more than 20,000 middle market customers. It also manages $175 billion of clients' investment assets.

July 1stmarked the official “Day 1” for the competed merger between JP Morgan Chase and Bank One.

Prior to this day, at midnight, these two companies officially merged to form an integrated new financial giant.

Every day, internal newsletters came out to all of the employees of JP Morgan Chase in order to inform everyone of the new steps being taken by senior management towards the completion of the merger with Bank One

Furthermore, a discussion board was created on JP Morgan Chase’s website, in order for anyone internal to the firm to be able to ask questions, or to voice any concerns with regard to the merger.

On April 22, 2004 the article heading “JP Morgan Chase reports 38% increase in earnings” made its way into the business section of the New York Times.

STEPS…

The net income was reported to be “$1.9 billion, or 92 cents a share, at this point, compared with $1.4 billion, or 69 cents a share,” a year earlier

Revenue for the first quarter was reported at “$8.98 billion, which was up 7 percent from $8.41 billion” a year earlier.

This positive change in earnings, as well as an increase in share value, also shows the stockholders’ and stakeholders’ support of the merger

On June 3, 2004, the article headline now read “JP Morgan vice president Donald Layton says he will retire.”

After the merger, he would have overseen the finance, risk management and technology divisions, and would have reported to the chief operating officer, James L. Dimon, now Bank One's chief executive.

Last but not least, on September 1, 2004, The New York Times article heading in the business sections read “JP Morgan and Bank One to merge mutual fund units.”

JP Morgan Funds and One Group Mutual Funds became fully integrated into a single fund in February 2005.

It is necessary to note that the words “merger” and “acquisition” are often interchanged, and in some instances, the “merger” between Bank One and JP Morgan Chase is referred to as JP Morgan Chase buying Bank One.

The $58 billion deal was officially closed and empowered in July. Before this event could take place, the balance sheets and the financial statements of JP Morgan Chase and Bank One needed to be integrated into single accounting statements

REASONS OF ACQUISITION:-

A JP Morgan Chase press release dated January 14, 2004 announced that JP Morgan Chase and Bank One had agreed to merge in a “strategic business combination establishing the second largest banking franchise in the United States, based on core deposits.”

With earnings contributions that are balanced out between retail and 31 wholesale banking, the combined company is expected to be “well-positioned to achieve strong and stable financial performance

And increase shareholder value through its balanced business mix, greater scale, and enhanced efficiencies and competitiveness.”

The combined company will be headed by William B. Harrison, 60, as the chairman and chief executive officer

And by James Dimon, 47, as the president and chief operating officer, with Dimon to succeed Harrison as CEO in 2006 and Harrison continuing to serve as the chairman.

OWNERSHIP

POST-MERGER

The merged company will be known as JP Morgan Chase & Co.

It would continue to trade on the New York Stock Exchange, under the symbol JPM, and its corporate headquarters will still be located in New York.

The JP Morgan brand will continue to be used for the wholesale business; and the combined company will continue to use both brands (JP Morgan Chase and Bank One) in their respective markets and products.

"[The merger] will create one of the world's great financial services companies”

-Harrison

"the merger of Bank One and JP Morgan Chase makes tremendous sense strategically, operationally and financially” -Dimon

BENEFITS :-

Bank One opened up to JP Morgan Chase a retail banking market

JP Morgan Chase gained over 2000 branches and client exposure in areas in which it had not been as well known before

As known in the financial industry, Citigroup it the biggest competitor of JP Morgan Chase. After the merger, JP Morgan Chase with Bank One as its ally, has a much bigger chance at beating its competition.

Cut out potential competitor in its area

TWO GREAT BANKING COMPANIES

JP Morgan Chase (as of 9/30/03 )

92,900 employees 3rd largest bank

holding company in U.S.

$793 billion assets Operations in

virtually every state and more than 50 countries

Bank One (as of 9/30/03)

71,200 employees 6th largest bank

holding company in U.S. $290 billion assets 1,800 branches in

14 states

JP Morgan Chase

Bank One combined

Loans $236,201 $141,710 $ 377,911

Assets 792,700 290,006 1,082,706

Managed assets

827,015 326,769 1,153,784

Deposits $313,626 $163,411 $ 477,037

Total Liabilities 747,743 267,595 1,015,338

Total Equity 44,957 22,411 67,368

Second Largest Banking Company in the U.S.

All data in million dollars

Financial data in $ millions

Year 2004 2005 2006 2007 2008 2009

Revenue 43,097 54,533 61,437 71,372 67,252 100,434

EBITDA 7,140 13,740 22,218

Net Income

4,466 8,483 14,444 15,365 5,605 11,728

Employees

160,968 168,847 174,360 180,667 224,961 222,316

Financial data in $ millions

risk of monopolies. Consumers then become exploited and resources become misallocated if these mergers create major entry barriers restricting competition, which can potentially lead to market failure and a decline in economic welfare. companies make predictions for growth, increased efficiency, and greater profits. However, more often then not, those predictions prove to be over inflated, and this also leads to disappointments on the side of investors, shareholders and the management involved in the merger. There are certain imperfections in the capital markets which contribute to imperfect information and at times even merger failures. The reasons for market imperfections include the fact that often corporate control does not work optimally, and that unsuccessful management is in place for a long time. 

FAILURES

conclusionDespite negative studies and resistance from the economists, M&A’s continue to be an important tool behind growth of a company. Reason being, the expansion is not limited by internal resources, no drain on working capital - can use exchange of stocks, is attractive as tax benefit and above all can consolidate industry - increase firm's market power.

Two thirds of the respondents say that high acquisition activity positively impacts a company’s market perception.

Just as counselors say that marriages based on the premise that ‘she can change him’ do not have a stellar record, mergers and acquisitions are not that diferent.

Thanks a lot