External Growth Strategies:

Mergers and Acquisitions

Prof. Supriti Mishra
 M & A Trends
• Occur in waves
• Have increased over time
• Become more and more valuable
M&A Trends
M&A Trends
M&A Trends
 Mergers
A
New
Firm
B

• Often stocks are withdrawn and new stocks

are issued in their place
• True mergers of equals are seldom
• Nevertheless many are communicated as such
 Merger (Amalgamation)
Transfers Assets &
Liabilities

HLL TOMCO

Shareholders of TOMCO
Merger: Absorption and Consolidation
• In absorption one company survives after
the merger.
• BBLIL merging with HUL
• In consolidation, all the companies merge to
create a new business entity.

Hindustan Hindustan Indian Indian

+ + Reprographics
Computers + Instruments Software

= H C L Limited
 Acquisitions
Target looses its
legal identity
Acquirer
Target

Acquirer

Target
• Unlike with mergers, here the two firms are not equal
• There is usually an acquirer and a target
• The acquirer is the more powerful company and the
target is the weaker one
• In the acquisition process, the acquirer purchases the
property rights (shares/assets) of the target and obtains
control over it
 Acquisition (Takeover)

• One firm buys a controlling stake in another

firm
• Many times with the intent of making the
acquired firm a subsidiary business within its
portfolio (at least 51% stake needed)
– Friendly vs Unfriendly (Hostile)
• Hostile Takeover: Unfriendly takeover that is
unexpected and undesired by the target firm
 Acquisition (Takeover)
India Cements Raasi Cements
Bidding Co. Target Co.

Shareholders of
Shareholders of Raasi Cements
India Cements
 Acquisitions Examples
• In 2009, US food company Kraft Foods launched a hostile bid
for Cadbury, the UK-listed chocolate maker
– The deal in January 2010 led to consumer protests in Britain and
boycotts of Kraft-branded products

• In 2018, Walmart acquired Flipkart for $ 16 billion

– Walmart will own around 77 per cent of Flipkart
– Targeting common enemy Amazon
– Flipkart has absorbed billions of dollars of investor money to grow
its business, its main bait has been deep discounts. Walmart also
has a deep discount (low cost) model
– Walmart's investment would give Flipkart not just additional funds
to fight Amazon, but also come together with a formidable ally
Walmart with experience in retailing, logistics and supply chain
management.
 Reverse Merger

Abhishek Cements + Radico Khaitan Abhishek Cements

=
Loss Making Co Profit Making Co. Loss Making Co

ICICI Ltd + ICICI Bank ICICI Bank

=
 Reasons for M & A
• 1. Increased market power
– Sources of market power include
• Size of the firm, resources and capabilities to compete in the
market and share of the market
– Horizontal Acquisitions
• Acquirer and acquired companies compete in the same industry
• i.e., McDonald’s acquisition of Boston Chicken
• Acquisition of Times Bank by HDFC Bank, Bank of Madura by
ICICI Bank
– Vertical Acquisitions
• Firm acquires a supplier or distributor of one or more of its
goods or services; leads to additional controls over parts of the
value chain
• i.e., Walt Disney Company’s acquisition of Fox Family Worldwide.
• Luxotica that makes components for the optical industry
including lenses acquiring Ray Ban, Sunglass Hut, Oakley
– Related Acquisitions
• Firm acquires another company in a highly related industry
• Flipkart acquiring Myntra
 Reasons for M & A (Cont’d)

• 2. Overcoming entry barriers

– Cross-border acquisition: headquarters in
different country
• 3. Sharing cost of new product development
and increased speed to market
• 4. Lower risk compared to developing new
products
• 5. Increased diversification
• 6. Reshaping firm’s competitive advantage
• 7. Learning and developing new capabilities