Merger Acquisition and Corporate Restructuring Quiz

Question 1: Merger waves took place between 1890s – 2000s. The causes for the same are
economic, regulatory and technological. Empirical research also identifies capital liquidity,
valuation errors and defense attack as the probable causes. Apart from the above-mentioned
reasons, which other factors can contribute towards beginning of a merger wave?
Answer: One of the major cause of merger waves is Globalization in 1990s. This applies not
only to typical globalization industries such as chemicals, motor vehicles, and non-electrical and
electrical machinery, but increasingly also to certain service industries such as retail trade,
banking, and business services. In addition, privatization of state-owned monopolies has enabled
the respective firms to take part in international merger activities which had been prevented by
government rules in the past. As a result of a dominant impact of globalization, the share of
cross-border activities accounts for one 10 quarter up to one third of the total transaction volume
in worldwide mergers and acquisitions. Moreover, increased competition from globalization is
also responsible for national merger activities because it also alters competition intensity in
national markets. Many national mergers in the European banking sector, for instance, can be
explained by increased competition intensity in their international environment. The rising
importance of mergers and acquisitions in the process of globalization also shows up in the
structure in foreign direct investment. Until the mid-1990s, cross-border mergers and
acquisitions accounted for about 50 per cent of total FDI outflows, whereas this share
significantly increased in the most recent years. In 1999, a ratio of cross-border mergers and
acquisitions to foreign direct investment increased to a level of 84 per cent, and in the year 2000
it reached almost 100 per cent (M&As: 1144 billion U.S-$; FDI outflows: 1150 billion U.S.-$).
The development demonstrates that mergers and acquisitions have become a dominant strategy
in adopting the pressures of globalization. European firms were highly active in cross-border
merger activities both on the acquiring and on the selling side. They did not only engage in intra-
European mergers. Hence, the increase of European merger activities cannot exclusively be
explained as a result of the completion of the European Single Market. The share of intra-
European mergers remained rather stable since the early 1990s, whereas the share of mergers of
third countries increased.
Though the question discusses about the merger waves caused by regulatory practices the
opposite of it is also a cause of merger waves i.e. deregulation. In the course of the creation of a
single Market, a number of member states are forced to reconsider their traditional regulation
policy. Deregulation activities which were strongly supported by the government, are mostly
concentrated on network industries, on transport, and on financial markets. For example, a
substantial part of the economy within the European Union was re-exposed to market-oriented
mechanisms which effectuated severe adjustment requirements. Mergers are one activity among
others to cope with these requirements. And this response was actually chosen by a large number
of firms in deregulated industries.
Question 3: Discuss about the emergence of merger waves in a country of your choice. (Except
for US and India).
Answer:
Merger waves in UK:
1920 (FIRST MERGER WAVE): These were small merger waves characterized by widespread
introduction of production technologies following the end of First World War, which resulted in
sharp increase in share prices. This wave is also called as Britain's First Merger Intensive
Decade, as the level of consolidation activity reached its peak.
1960 (SECOND MERGER WAVE): The second merger wave began in the middle of the 1950s,
a new generation of financial entrepreneurs or corporate predators peaked in 1960s and
coincided with the globalization. The wave was further followed by the Industrial
Reorganization Corporation (IRC), to encourage the development of companies through
horizontal mergers which made the majority of mergers in this wave
1970 (THIRD MERGER WAVE): The third United Kingdom merger wave started at the early
1970s, characterized by the hostile bids from a new generation of predators like Jim Salter and
James Goldsmith. Although the conglomerate deals grew rapidly during this period but the
popularity of horizontal deals still remained active. For the above reason, the legal framework
changed in 1973, with the passing of the Fair Trading Act, 1973, that formalized the procedure
for regulating merger and acquisition activity in United Kingdom and created Office of Fair
Trading, which examined each deal and decided, whether it should be referred to the Mergers
and Monopolies Commission (now known as the Competition Commission) or not.
1980 (FOURTH MERGER WAVE): The fourth merger wave which began in 1980s, assumed
that, with market deregulation and privatization of state-owned companies, the national economy
could achieve an overall improvement. So, to provide market efficiency and to reduce the role of
the state in business, the Thatcher government adopted abolition of exchange control and
privatization as its central policy. The outcome from the abolition of exchange control was a
dramatic restructuring of the financial services industry, with the merger and acquisition actions
to involve many interested parties such as brokers, jobbers, banks and other financial institutions.
But, if the abolition of exchange controls forced to severe changes, the same did the
privatization. Major steps included the sale of shares of British Petroleum, the privatization of
British Aerospace and the other public utilities. In this wave, very large companies, which were
invulnerable to takeovers in the past, including United States firms were targets. Throughout the
early part of the 1980s, there was sharp rise in the stock market, reflecting growing profit and
business confidence followed by deregulation of the financial service industry, which further
contributed to the growth of wave. This period of excessive restructuring witnessed certain
peculiar features of merger and acquisition activity, previously unseen in the United Kingdom
and imported from the United States, e.g., increased hostility, the use of leverage and many
buyouts. The London Stock Exchange suffered a major crash in 1987, but this was not enough to
stop the wave, which had sufficient momentum to keep going until 1989.
1990s (FIFTH MERGER WAVE): The most recent merger wave, in the 1980s, was the biggest
wave of all, far exceeding all the previous waves in both the transactions and value. It started
around 1995, and ended in 2000, with the collapse of the ''new economy' being spurred on by
deregulation of more British industries, backed up by the policy of privatization of government
owned assets, which took place through the last years of 1980s, and the early 1990s, as typified
by the sale of British Rail (1993); British Gas (1986); and British Telecom (1984). These
changes resulted in the need for extensive restructuring of British industry which in turn
prompted the merger wave. Unlike 1980s, there existed relatively less hostility during this period
as many companies changed their perspectives on mergers and acquisitions and took a more
balanced approach as compared to the previous decade. This change in perspective was the result
of the findings of Cadbury Report (1992), which was commissioned by the London Stock
Exchange to investigate the state of corporate governance in the United Kingdom

Question 5: Discuss the role of legal firms/experts/attorneys/advisors in the M&A process. It

could be pre, during and post
Answer:
Following is the role of an attorney in M&A process:
1. Advising on regulatory requirements
Lawyers help the companies involved in an M&A to ascertain whether the deal they envision is
possible under competition law and other laws. There also exist regulators such as the Capital
Markets Authority, the Central Bank, and the Insurance Regulatory Authority, among others
which regulate deals depending on the sector of the companies involved. Where the deal is
permitted, lawyers advise on the thresholds set by regulators as well as the approvals or
disclosures required by them for a deal to go through. This step can make or break a deal since
the cost of some regulatory approvals may drastically affect the commercial viability of an
M&A. Moreover, overlooking a necessary approval could render the resulting deal void or
voidable, nullifying the efforts of the parties.
2. Performing Legal Due diligence
During legal due diligence, the buyer’s lawyers look at the various aspects of the seller’s or
target’s business to identify, assets, allocate and mitigate legal risks. In particular, the lawyers
seek to establish who owns the target. He/she also investigates the compliance status of the target
at the Company’s Registry and if the company has met other licensing requirements.
Additionally, the lawyer seeks to discover whether there are any material loans the target is
servicing, the material contracts the target is a party to, the extent and status of the real estate
owned or leased by the target, ongoing or potential litigation involving the target as well as the
employment contracts and any other emerging areas that expose the target to legal risk.
Depending on what the legal due diligence reveals, the buyer can negotiate the price downwards
or oblige the target to give warranties or fulfill conditions before the deal can continue. In the
worst of cases, for example, where the due diligence reveals that the target company claimed that
real estate was its key asset yet the lawyer discovered it to be worth only a fraction of what was
claimed, then the deal could fall through.
3. Preparing Documentation
Lawyers in M&As prepare the documents which in some cases aid the deal while in other cases,
form its basis. The main documents in an M&A are:
a) The Letter of Intent – this document, as the name suggests, only captures the intention of
the parties. It acts as a starting point for further negotiations by capturing the key terms
the parties wish to include in the deal.
b) Non-disclosure agreement (NDA) – in the M&A process, the target reveals confidential
information about its business regardless of whether the M&A process goes through or
not. Without adequate protection, such sensitive information can find its way into the
public domain or into competitors’ hands. Thus, it is in the best interests of the sellers to
have their lawyers prepare an NDA which both parties should sign.
c) The definitive agreement - Ultimately, the parties to an M&A look to signing a document
that encapsulates their commercial agreement. In the case of acquisitions, this is normally
a sophisticated sale agreement called a share purchase or asset purchase agreement.
4. Advising during Completion
Parties can work towards completion for months or even years. Completion is normally effected
through a meeting attended by the authorized representatives of both parties. The parties confirm
that all things which should have been done before signature have been done. They then sign the
definitive agreement.

Question 2 (Section B): Referring to the case study titled as ‘The Buyout at Tru-Foods For You’.
Suggest an alternative ending with the solution to the problem found in this case study.
Answer:
Problems faced:
1. Anxiety among employees regarding job security
2. Big difference in the work culture of both the companies which would cause a lot of friction. 
3. The management was not addressing the issues raised by her employees and communicating
with the Caldwell
4. Employees were taking time to get accustomed to the new salary banding system and were
not happy with the changes as the system created disparity in the distribution of salaries
within employees.
Solution:
The problem at large is that there is lack of communication due to which anxiety is building up
among employees that have led to several other problem. The best way to tackle these problems
is that Marshal Foods adopt a well-planned communication strategy. Effective communication
involves providing information on the shared vision for the new company, the nature and
progress of the integration and the anticipated benefits, and the outcomes and rough timelines for
future decisions.
The following steps highlight the components of a successful communication program:
 Establish multiple routes of communication (e.g., one-on-one meetings, group sessions,
newsletters, intranet updates).
 Focus on the themes of change and progress by highlighting projects that are going well and
action items that are being delivered on time.
 Repeat the common themes of the M&A to increase employee understanding of the rationale
behind the transaction.
 Provide opportunities for employee involvement and feedback.
 Ensure that employees understand there will be problems, but give a commitment that the
problems will be identified and addressed as early as possible.
Another step that Marshal foods can take is that the company needs to be straightforward about
what is happening and what is planned. Even when the news is bad, the one thing employees of
newly acquired companies appreciate most is the truth. That includes being able to say "we don't
know" about certain areas or "we have not yet decided" about others. Being honest also includes
sharing information about when and by what process a decision is expected to be reached. The
truth also means acknowledging some of the stress and other emotions that are undeniably
present.
Caldwell should stop telling employees that everything will be "business as usual." The reality is,
change is occurring. Likewise, employers should resist the urge to tell employees that they have
"a wonderful future" to look forward to, when they are still confused and grieving over the past.
Employers should not attempt to sugar-coat matters with false platitudes such as treating the deal
a deal of equals when Marshall is clearly the majority stakeholder and therefore has the ability to
cast the deciding vote in a split decision. Once decisions are made about functions and people,
the organization must treat those employees who will be negatively affected by the transaction
with dignity, respect and support. Not only is this approach the humane thing to do, but it also is
a powerful way of showing those who remain what kind of company they are now working for
and of helping them begin to develop some positive feelings toward the new organization.
If these steps were adopted by Marshal Foods and Kate Caldwell the alternate ending would be
the following:
1. The employees would be able to adjust and accept the new work culture bought by Marshall
Foods in a positive and sporting manner. This will reduce the fiction between the employees
and the management
2. Marshall foods would be able to retain the trust of the employees and comparatively less
employees would be leaving the organization since now they would have less anxiety about
their job security.
3. Since employees will be made understood the rational of salary banding system they would
be more acceptable and motivated which would consequently increase the efficiency.
4. Since the communication system will be improved and the old practices like not replying to
mails within a week would be disregarded the employees would feel more inclusive and
heard.
Thus the alternate ending would be comparatively very different than it is now. The employees
would be more appreciative of the merger and adapt to it sportingly as communicating clear,
consistent and up-to-date information will not only will give employees a sense of control by
keeping them informed, but it also will increase the coping abilities of employees, minimize the
employee turnout and bring efficiency.