Mergers and Acquisition

Merger
• A combination of two or more companies in which the assets and
liabilities of the selling firm(s) are absorbed by the buying firm.
Although the buying firm may be a considerably different
organization after the merger, it retains its original identity.
• The merger of equals between sprint and Nextel is an example
Acquisition
• The purchase of an asset such as a plant, a division or even an entire
company. Example Procter & gamble made a major acquisition in
2005 when it purchased, the Gillette company Inc. in order to extend
its reach in the consumer products in industry
Merger and Acquisition Waves
• The First Wave in 1897 to 1904 – The mergers of the first wave
considered mainly of horizontal mergers, which resulted in a near
monopolistic market structure. This merger period is known for its
role in creating the large monopolies
• The Second Wave 1916 to 1929 - Several industries were
consolidated during second merger wave and the result was an
oligopolistic industry structure rather than monopolies. The most
activities were banking and the public utilities industries. The large
number of merger occurred in Industries like primary metals,
petroleum products, food products, chemical and transportation
equipment
 rd
3 Wave
• The Third Wave during 1965 to 1969 – The merger activity reached its then
historically highest level during this period. This was due to the booming
economy of this period. This period is known as conglomerate(unrelated)
merger period, as small or medium sized firms adopted a diversification
strategy into business activities outside their traditional area of interest.
During this period, relatively smaller firms targeted larger firms for
acquisition. 80% of the mergers that took place were conglomerate
mergers that were more than just diversified in their product lines. For ex
ITT acquired such diversified business like car rental firms, bakeries,
consumer credit agencies, luxury hotels, airport parking firms, construction
firms etc. Conglomerate mergers were due to strong anti-trust
enforcement and the only alternative was to form conglomerates
Fourth Wave
• The Fourth Wave – 1981 to 1989 – Following the recession in 1974 – 1975
the US economy entered a long period of expansion during which the
merger and acquisition trend went upward. The hostile mergers played a
significant role in the fourth wave. Takeovers are considered healthy or
hostile by the reaction of the target company’s board of directors. If the
board of directors accepts the take over it is considered friendly and if it
opposes, it is deemed to be hostile.
• The fourth wave also witnessed the emergence of corporate raider. The
raider’s income came from the takeover attempts. The raider earned
handsome profits without taking control over the management of the
target company. They attempted to takeover a target and later sell the
target shares at a price higher than that which was paid originally
The Fifth Wave
• Companies sought to expand and mergers were seen as a quick and
efficient way to do so. The deals emphasized on strategy more than
quick financial gains. Most of the deals were financed through
increased use of equity.
• Banking, Telecommunications, entertainment and media industry
were some of the leading consolidation industries. There was a
dramatic growth in the banking sector in the 1990’s as the banks
grew larger than the central banks. Banks looked to take advantage of
the economies of scale in this industry by expanding into new
markets and found mergers and acquisitions to be the fastest way to
do so.
The Fifth Wave
• Companies sought to expand and mergers were seen as a quick and
efficient way to do so. The deals emphasized on strategy more than
quick financial gains. Most of the deals were financed through
increased use of equity.
• Banking, Telecommunications, entertainment and media industry
were some of the leading consolidation industries. There was a
dramatic growth in the banking sector in the 1990’s as the banks
grew larger than the central banks. Banks looked to take advantage of
the economies of scale in this industry by expanding into new
markets and found mergers and acquisitions to be the fastest way to
do so.
Types of Mergers
• Horizontal Merger- it is a merger of two or more companies that
compete in the same industry. It is a merger with a direct competitor
and hence expands as the firm’s operations in the same industry.
Horizontal mergers are designed to produce substantial economics of
scale and result in decrease in the number of competitors in the
industry. The merger of Tata Oil mills ltd with the Hindustan Lever ltd
was a horizontal merger.
• In horizontal merger the top management of the company being
meted is generally, replaced, be the management of the transferee
company. One potential repercussion of the horizontal merger is that
it may result in monopolies and restrict the trade
Horizontal Merger
• A takeover or merger is horizontal if it involves the joining together
of two companies which are producing essentially the same
products or services or products or services which compete directly
with each other for example sugar and artificial sweetners
Vertical Merger
• It is a merger which take place upon the combination of two
companies which are operating in the same industry but at different
stages of production or distribution system.
• If a company takes over its supplier/ producers of raw material,
then it may result in backward integration of its activities.
• On the other hand, forward integration may result if a company
decides to take over the retailer or customer company. Vertical
merger may result in may operating and financial economies. The
transferee firm will get a stronger position in the market as its
production distribution chain will be more integrated than that of the
competitors
Co generic Merger
• In these mergers the acquirer and target companies are related
through basic technologies, production processes or markets. The
acquired company represents an extension of product line, market
participants or technologies of the acquiring companies. These
mergers represent an outward movement by the acquiring company
from its current set of business to adjoining business.
• The acquiring company derives benefits by exploitation of strategic
resources and business
Conglomerate Merger
• These mergers involves firms engaged in unrelated type of business
activities i.e. business of two companies are not related to each other
horizontally (in the sense of producing the same or competing
product), nor vertically (in the sense of standing towards each other
in the relationship of buyer and supplier or potential buyer and
suppler). In a pure conglomerate, there are no important common
factors between the companies in production, marketing, research
and development and technology (Even Relevant Market is also
different)
• Purpose of conglomerate merger is to utilization of financial resource,
enlarged debt capacity and synergy of managerial functions
Financial Conglomerates
• Financial Conglomerates – provides a flow of funds to each segment of the
operations, exercise controls and are the ultimate risk takers. Financial
conglomerates undertake strategic planning but do not participate in
operating decisions
• Managerial Conglomerates – Managerial Conglomerates not only assume
financial responsibility but also play a role in Operating decisions and
provide staff services to operating entities. By providing managerial
counsel and interactions on decisions, the managerial conglomerates
increase the potential for improving performance. When any two firms of
unequal management competence are combined; the performance of
combined firm will benefit from the impact of the superior management
and total performance of combined firm will be greater than the sum of
individual parts
Consolidation Merger
• Consolidation Merger involves a merger of a subsidiary company with
parent company. The reason behind such mergers are stabilize cash
flows and make funds available for subsidiary. In consolidation
Mergers, economic gains are not readily apparent as merging firms
are under the same management. Flow of funds between parent and
subsidiary is obstructed by other consideration of laws such as
taxation laws, companies act etc.
• If a subsidiary company merger with parent company, such
arrangement is called downstream merger and if parent company
mergers with subsidiary company. It is called the “Upstream Merger”
Reverse Mergers
• Normally a sick company mergers with a large company or a sick
company merges with a health company.
• However in some cases, reverse merger is done. When a health
company mergers with a sick or small company is called reverse
merger. This may be for various reasons. Some reasons for reverse
merger are:
• The transferee company is a sick company and has carry forward losses and
transferor company is profit making company. If a transferor company
mergers with the sick company transferee company, it gets advantage of
setting off carry forward losses without any conditions. If sick company
mergers with health company, many restriction are applicable for allowing
setoff
Reverse Merger
• The transferee company be listed company. In such case, if transferor
company mergers with the listed company, it gets advantages of listed
company without following the strict norms of listing of stock exchange
• Godrej Soaps Ltd (GSL) with pre merger turnover of 436.77 crores entered
into scheme of reverse merger with loss making Gujarat Godrej Innovation
Chemicals Ltd. (GGICL) (with pre merger turnover of Rs 60 crores) in 1994.
The scheme involved reduction of share capital of GGICL from rs 10 per
shares to Re 1 per share and later GSL would be merged with 1 share of
GGICL to be allotted to every shareholder of GSL. The post merger
company, Godrej Soaps ltd (with post merger turn over of Rs 611.12)
restricted its gross profit of 49.08 crores higher turnover GSC’s pre-merger
profits of Rs 30 crores.
Triangular Merger
• A triangular merger is the acquisition of a local company through a
share swap with a local subsidiary that is wholly owned by a foreign
buyer. A triangular merger is a merger where the foreign company
buys a local company by exchanging the shares of the subsidiary
company located in local company’s country
• Forward Triangular Merger – it occurs when the subsidiary of the
acquiring company mergers with the target firm. The subsidiary’s
equity mergers with the target firm’s equity. The target company
becomes the part of the subsidiary of the acquirer
Forward Triangular Merger

Purchaser
Target

Target gets merged into SUB of Purchaser

Existing or created for
Sub of purchaser merger
Reverse Triangular Merger
• In this merger the subsidiary mergers with the target company. The
outstanding shares of subsidiary company which are owned by the
acquirer company are converted into stock of the targeted company
 A – purchaser target

• Sub of A mergers with

• Target and dissolves and
• All liabilities of Sub is of
Sub of A
• target
Demerger
• It has been defined as a split or division. Demerger or (spin off), it
involves splitting up of conglomerate (multi division) of company into
separate companies
• This occurs in case where dissimilar business are carried on within the
same company, thus becoming unwieldy and cyclical almost resulting
in a loss situation.
Cash Merger
• In a ‘cash merger’, also known as a ‘cash-out merger’, the
shareholders of one entity receives cash instead of shares in the
merged entity. This is effectively an exit for the cashed out
shareholders.
Take Over – Acquisition
• Take over can be either friendly or hostile.
• In case of friendly take over, the promoter of management of the
target company are also in principle, agreeable to be taken over by
the acquirer and are willing to peacefully cede control over the target
company to the acquirer. This happens when the entire promoter
group is willing to exit.
• Sometimes a company is open to only one specific acquirer, if the
latter agrees to the price and other conditions of takeover such as
non retrenchment of employees, post acquisition of existing
promoters/managers non compete fees, continuation of certain
businesses etc
• At other time, the promoters/management of the target company
are open to any acquirer who offers them an overall best deal. In the
third case, the promoters/management of the target company have a
negative list of acquirers in mind that they donot want to sell out to.
• Outside the negative list, they are open to sell out anyone who offers
them an overall best deal
• Thus, when the promoter group that is collectively in exit mood
receives an offer from the prospective acquirer whom they do not
mind selling out to, the takeover takes a friendly mode.
Hostile Take over
• Sometimes promoter group receives an offer from a prospective
acquirer whom they do not want to sell out. It may even occur that
some of the entities in the promoter group are against the sale out.
On these occasions, the hostile take over battle follows.
• In case of Indian Aluminum Company Limited (Indal), the
management was not ready to sell out to Sterlite, but they had no
objection to Hindalco taking them over
Causes for Merger
• Horizontal Merger –
1. Achieving optimum size
2. Improve Profitability
3. Carve Out greater market share
4. Reduce its administrative and overhead costs
 • Vertical merger
1. Increased Profitability
2. Economic Cost
3. Increased marker power
4. Increased size
 • Conglomerate Merger
1. Synergy arising in the form of economies of scale
2. Cost reduction as a result of integrated operation
3. Risk reduction by avoiding sales and profit instability
4. Achieve optimum size and crave out optimum share in the market
• Reverse Merger
• Claim tax saving account of accumulated losses that increased profit
• Set up merged asset base and shift to accelerate depreciation
Important Steps – Merger Procedure
• Examination of Object Clauses
• Intimation to stock exchange
• Approval of draft amalgamation proposal by the respective boards
of directors
• Application to NCLT
• Dispatch of Notice to the shareholders and creditors
• Holding of meetings of shareholders and creditors
• Petition to the NCLT for confirmation and passing of NCLT orders – once
the amalgamation scheme is passed by the shareholders and creditors, the
companies involved in the amalgamation should present a petition to the
NCLT for confirming the scheme of amalgamation. The NCLT will fix a date
of hearing. A notice about the same has to be published in two
newspapers. After hearing the parties the parties concerned ascertaining
that the amalgamation scheme is fair and reasonable, the NCLT will pass an
order sanctioning the same. However the NCLT is empowered to modify
the scheme and pass orders accordingly
• Filling Order with the registrar
• Transfer of Liabilities and assets
• Issue of shares and debentures