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Corporate Restructuring Related To M & A, Amalgamations, Takeovers, Etc
Corporate Restructuring Related To M & A, Amalgamations, Takeovers, Etc
Corporate Restructuring Related To M & A, Amalgamations, Takeovers, Etc
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Presented by
TS Senthil Kumar at the
National Seminar on
"Emerging Trends in Financial Management"
Organized by the
Department of Management Studies,
Adiyamaan College of Engineering,
Dr. MGR Nagar, Hosur
on
th
27 January 2006
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Prof R Ramakrishnan, Head, Dept of Management Studies,
Muthayammal College of Engineering, Rasipuram 637408
Cell9865812476 email: lalithark@eth.net
Mergers & Acquisitions are an integral part of market oriented free enterprise economic system. Merger or
Amalgamation is a combination of two or more companies into one company. Acquisition does not involve
combination of companies. The control can be acquired though a friendly manner or through forced manner.
The former is called Acquisition while the later is called Take over
There are many reasons for mergers like
Economics of scale
Operating economies
Synergy
Growth
Diversification
Tax shields
Increase in value
Elimination of competition
Better Financial Planning
Economic necessity
There are three different types of take over arrangements
Acquire controlling interest and run the unit as a separate company
Acquire controlling interest and merge it with the present company
Purchase assets with or without liabilities without purchasing the company as a whole
There are many issues to be considered in mergers and acquisitions like
How does it help the parent company?
Why this unit is to be acquired?
What are the current problems with the existing unit?
What are the post merger issues seen from different angles?
What would be the impact of the share price of the parent company on account of the
merger/ acquisitions?
What is the right price?
How are the values of the shares done? There are different methods by which this can be
done.
This article would look conceptually into all these aspects with suitable examples from Indian corporates.
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2 of 9
Prof R Ramakrishnan, Head, Dept of Management Studies,
Muthayammal College of Engineering, Rasipuram 637408
Cell9865812476 email: lalithark@eth.net
Hostile Takeover: The control when acquired though a forced manner is called Take over. A
hostile takeover may follow a preliminary attempt at a friendly takeover.
The term acquisition means an attempt by one firm, called the acquiring firm, to gain a majority interest in
another firm, called target firm. The effort to control may be a prelude
To a subsequent merger or
To establish a parent-subsidiary relationship or
To break-up the target firm, and dispose off its assets or
To take the target firm private by a small group of investors.
Acquisitions and disposals of companies as well as strategic co-operations are fundamental opportunities for
the future of any company. They are among the most important and critical of corporate decisions.
In everyday language, the term acquisition tends to be used when a larger firm absorbs a smaller firm, and
merger tends to be used when the combination is portrayed to be between equals. In a merger of firms that
are approximate equals, there often is an exchange of stock in which one firm issues new shares to the
shareholders of the other firm at a certain ratio.
4 of 9
Prof R Ramakrishnan, Head, Dept of Management Studies,
Muthayammal College of Engineering, Rasipuram 637408
Cell9865812476 email: lalithark@eth.net
Different types of Mergers are
Horizontal Mergers: involves two firms that operate and compete in a similar kind of business. The
merger is based on the assumption that it will provide economies of scale from the larger combined
unit.
Example: Glaxo Wellcome Plc. and SmithKline Beecham Plc. Mega merger
Vertical Mergers: Vertical mergers take place between firms in different stages of
production/operation, either as forward or backward integration. Forward integration take place
when a raw material supplier finds a regular procurer of its products while backward integration
takes place when a manufacturer finds a cheap source of raw material supplier.
Vertical mergers take place when both firms plan to integrate the production process and capitalize
on the demand for the product. The basic reason is to eliminate costs of searching for prices,
contracting, payment collection and advertising and may also reduce the cost of communicating and
coordinating production. On account of efficient information flow within the organisation Production
and inventory can be improved.
Example: Merger of Usha Martin and Usha Beltron
Market-extension merger: Two companies that sell the same products in different
markets.
Product-extension merger: Two companies selling different but related products in the
same market.
Conglomerate Mergers: Conglomerate mergers are affected among firms that are in different or
unrelated business activity. Firms opting for conglomerate merger control a range of activities in
various industries that require different skills in the specific managerial functions of research, applied
engineering, production, marketing and so on.
They plan to increase their product lines by this. This type of diversification can be achieved mainly
by external acquisition and mergers and is not generally possible through internal development.
These types of mergers are also called concentric mergers. Firms operating in different geographic
locations also proceed with these types of mergers.
5 of 9
Prof R Ramakrishnan, Head, Dept of Management Studies,
Muthayammal College of Engineering, Rasipuram 637408
Cell9865812476 email: lalithark@eth.net
Conglomerate mergers have been sub-divided into:
Financial Conglomerates provide a flow of funds to every segment of their operations,
exercise control and are the ultimate financial risk takers. They not only assume financial
responsibility and control but also play a chief role in operating decisions.
Managerial Conglomerates provide managerial counsel and interaction on decisions thereby,
increasing potential for improving performance. When two firms of unequal managerial
competence combine, the performance of the combined firm will be greater than the sum of
equal parts that provide large economic benefits.
Concentric Companies: The merger is termed as concentric when there is a carry-over of
specific management functions or any complementarities in relative strengths between
management functions. The primary difference between managerial conglomerate and
concentric company is its distinction between respective general and specific management
functions.
The many reasons for M & A are
Economics of scale: An amalgamated company will have
more resources at its disposal than the individual
companies. Scale of operations would be increased.
Production facilities can be more fully utilized. More
efforts can be put on Research and development. Better
distribution of the products also would take place. All this
would result in economies of scale.
Example: Recent merger of Jet airways and Sahara
Operating economies: Many operating economies would be
available, as duplicating facilities in operations, purchasing,
marketing, accounting etc would be eliminated.
Example: Recent merger of Sahara with Jet airways
Synergy: Synergy means a greater combined value of the
firms merged than the sum of the individual firms {1 +1 =
11 and not 2}. The strengths of the individual units would
result in giving a thrust.
Example: Corporate restructuring of Hindalco and Indo Gulf to create non ferrous metal powerhouse and
an Indian corporate giant
6 of 9
Prof R Ramakrishnan, Head, Dept of Management Studies,
Muthayammal College of Engineering, Rasipuram 637408
Cell9865812476 email: lalithark@eth.net
Growth: Growth would be more pronounced with Merger
or amalgamation
Diversification: When the merging companies are operating
in different lines it would result in diversification for the
resulting company which reduces the risks
Tax shields: By merging a company with accumulated
losses with one making good profits, the accumulated
losses are set against the future profits of the other. Thus the
company would be able avail tax benefits.
Increase in value: The value of the resulting company is
greater than the sum of the independent values of the
merged companies
Elimination of competition: The merger or acquisition
would wipe out the competition between them. Further the
resulting company would have a larger market share.
Better Financial Planning: The merged companies would be
able to plan their resources in a better way due to the
differences in gestation periods etc.,
Economic necessity: The merger may also take place due to
economic necessity like two sick units are merged or they
are merged with one health unit to ensure better utilization
of resources.
Improved market reach and industry visibility: Companies
buy companies to reach new markets and grow revenues
and 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 often
have an easier time raising capital than smaller ones.
Acquiring new technology: To stay competitive, companies
need to stay on top of technological developments and their
business applications. By buying a smaller company with
unique technologies, a large company can keep or develop a
competitive edge.
7 of 9
Prof R Ramakrishnan, Head, Dept of Management Studies,
Muthayammal College of Engineering, Rasipuram 637408
Cell9865812476 email: lalithark@eth.net
The immediate objective for an acquisition is usually growth and expansion of the acquirer's assets, sales
and market share. Managers may undertake acquisitions for
Growth in the size of their form which would improve their remunerations, prerequisites, status,
power etc as these are closely related with the size of the firm
To use their underused managerial talents
To diversify risk and minimize cost of financial distress
Toa void being taken over by someone else.
There are three different types of take over arrangements
Acquire controlling interest and run the unit as a separate company
Acquire controlling interest and merge it with the present company
Purchase assets with or without liabilities without purchasing the company as a whole
There are many issues to be considered in mergers and acquisitions like
How does it help the parent company?
Why this unit is to be acquired?
What are the current problems with the existing unit?
What are the post merger issues seen from different angles?
What would be the impact of the share price of the parent company on account of the
merger/ acquisitions?
What is the right price?
How are the values of the shares done? There are different methods by which this can be
done.
An acquisition or merger involves three stages
Preparation: The first stage consists of development of acquisition strategy, value creation logic
and acquisition criteria. The company to be acquired is identified after searching and screening in
this stage. After identification of the target company, strategic evaluation and justification of
acquisition is done.
Negotiation: In this second stage, the bidding strategy is developed followed by financial
evaluation and pricing of the target company. Based on that negotiations financing and closing
the deal is undertaken.
Integration: In this third and final stage the evaluation of organisational and cultural
fit is done and integration approach is developed. This is followed by matching strategy,
organisation and culture between the acquirer and acquired followed by the post acquisition
integration process.
8 of 9
Prof R Ramakrishnan, Head, Dept of Management Studies,
Muthayammal College of Engineering, Rasipuram 637408
Cell9865812476 email: lalithark@eth.net
The aim of an acquisition is to make the merged entity more valuable than the sum of the values of pre-
merger entities. The success of a merger is measured by whether the value of the acquiring firm is enhanced
by it. The practical aspects of mergers often prevent the forecasted benefits from being fully realized and the
expected synergy may fall short of expectations.
Mergers and acquisitions (M&A) is an important area of capital market activity within corporate structuring
and has lately become one of the favoured routes for growth and consolidation. All mergers and acquisitions
have one common goal: they are all meant to create synergy that makes the value of the combined
companies greater than the sum of the two parts. The success of a merger or acquisition depends on how
well this synergy is achieved.
Select Bibliography
1.Sudarsanam P S -The essence of Mergers and Acquisitions- prentice Hall India
2.Edward de Bono and Robert Heller Thinking Managers
3. Yasaswy : Finance and Profits- The Manger's Handbook Vision Books
Websites
http://econpapers.repec.org/ www.solvency.com/ www.bain.com
www.themanagementor.com www.karvy.com
9 of 9
Prof R Ramakrishnan, Head, Dept of Management Studies,
Muthayammal College of Engineering, Rasipuram 637408
Cell9865812476 email: lalithark@eth.net