CREATION OF VALUE THROUGH MERGERS AND ACQUISITIONS

ACKNOWLEDGEMENT
It would be unfair on my part if I do not pay due gratitude to the people who have been supportive till the end and have finally helped my project to come to an end. With this I would like to thank all those who have been the support system throughout the duration of my internship and for the completion of this project. I would like to thank who gave me this opportunity to work on this project and helping us in correcting our mistakes whenever made any. He has been a source of inspiration and knowledge throughout and has made me learn a lot.

OBJECTIVE OF THE STUDY

The whole purpose of the project was to analyze the Mergers and acquisitions taking place. This also covers whether M&As actually give value to a company or not both qualitative and quantitative. Collect information regarding major mergers or acquisitions in different sectors and to comment on how successful it proved to be. To analyze different M&As happened in the recent past with its impact on the economy. To finally conclude about the future of Mergers and Acquisitions and their past trend and expected trend in the future.

INTRODUCTION
Merger and acquisition decision is an investment decision. This is the most important decision, which influences both the acquiring firm and the target firm, which is to be acquired. An organization cannot make that crucial decision without incisive analysis by financial planners and corporate managers. The acquiring firm must correctly value the firm to be acquired and the acquired firm must get the returns for the goodwill they have created over the years in the market. Growth through acquisition is occurring in an unprecedented number of companies today as strategic acquisitions replace the once-prevalent hostile takeovers by corporate raiders. In the current business environment, it is vital to understand how to blend strategic and financial concepts to evaluate potential acquisitions.

MERGERS AND ACQUISITIONS AN OVERVIEW

The phrase mergers and acquisitions (abbreviated M&A) refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling and combining of different companies that can aid, finance, or help a growing company in a given industry grow rapidly without having to create another business entity. In merger two corporations combine and share their resources in order to accomplish mutual objectives and both companies bring their own shareholders, employees, customers and the community at large. An acquisition is a combination of two corporations in which only one corporation survives and the merged corporation goes out of subsistence. Acquisition takes place when one firm is purchasing the assets or shares of another company. The scale and the pace at which merger activities are coming up are remarkable. The recent booms in merger and acquisitions suggest that the organizations are spending a significant amount of time and money either searching for firms to acquire or worrying about whether some other firm will acquire them. Also, mergers are regarded as one of the activities the purpose of business expansion or a measure of external growth in contrast to internal growths. The recent phenomenon booms in mergers and acquisitions would increase at a much faster rate in near future because the world markets are becoming more integrated because of open trade policies and hence more and more companies are adopting and forming strategic alliances in order to compete in the competitive world and to maintain there market shares. Mergers are often categorized as horizontal, vertical, or conglomerate. A horizontal merger is one that takes place between two firms in the same line of business whereas vertical merger involves companies at different stages of production. The buyer expands backwards in the direction of the source of the raw material or forward in the direction of the customer. The last one, i.e., conglomerate merger involves companies in unrelated line of business. This distinction is very much necessary to make and understand the reasons for the mergers.

MERGERS AND ACQUISITIONS (INDIA)

The practice of mergers and acquisitions has attained considerable significance in the contemporary corporate scenario which is broadly used for reorganizing the business entities. Indian industries were exposed to plethora of challenges both nationally and internationally, since the introduction of Indian economic reform in 1991. The cut-throat competition in international market compelled the Indian firms to opt for mergers and acquisitions strategies, making it a vital premeditated option.

WHY MERGERS AND ACQUISITIONS IN INDIA?

The factors responsible for making the merger and acquisition deals favorable in India are:

Dynamic government policies Corporate investments in industry Economic stability ready to experiment attitude of Indian industrialists

Sectors like pharmaceuticals, IT, ITES, telecommunications, steel, construction, etc, have proved their worth in the international scenario and the rising participation of Indian firms in signing M&A deals has further triggered the acquisition activities in India. In spite of the massive downturn in 2009, the future of M&A deals in India looks promising. Indian telecom major Bharti Airtel is all set to merge with its South African counterpart MTN, with a deal worth USD 23 billion. According to the agreement Bharti Airtel would obtain 49% of stake in MTN and the South African telecom major would acquire 36% of stake in Bharti Airtel.

TEN BIGGEST MERGERS AND ACQUISITIONS DEALS IN INDIA

Tata Steel acquired 100% stake in Corus Group on January 30, 2007. It was an all cash deal which cumulatively amounted to $12.2 billion. Vodafone purchased administering interest of 67% owned by Hutch-Essar for a total worth of $11.1 billion on February 11, 2007. India Aluminium and copper giant Hindalco Industries purchased Canada-based firm Novelis Inc in February 2007. The total worth of the deal was $6-billion.

 Indian pharma industry registered its first biggest in 2008 M&A deal through the acquisition of Japanese pharmaceutical company Daiichi Sankyo by Indian major Ranbaxy for $4.5 billion. The Oil and Natural Gas Corp purchased Imperial Energy Plc in January 2009. The deal amounted to $2.8 billion and was considered as one of the biggest takeovers after 96.8% of London based companies' shareholders acknowledged the buyout proposal. In November 2008 NTT DoCoMo, the Japan based telecom firm acquired 26% stake in Tata Teleservices for USD 2.7 billion. Indias financial industry saw the merging of two prominent banks - HDFC Bank and Centurion Bank of Punjab. The deal took place in February 2008 for $2.4 billion. Tata Motors acquired Jaguar and Land Rover brands from Ford Motor in March 2008. The deal amounted to $2.3 billion. 2009 saw the acquisition Asarco LLC by Sterlite Industries Ltd for $1.8 billion making it ninth biggest agreement ever involving an Indian company. In May 2007, Suzlon Energy obtained the Germany-based wind turbine producer Repower. The 10th largest in India, the M&A deal amounted to $1.7 billion.

PART I:

QUALITATIVE ASPECTS RELATED TO M&As

PURPOSE OF MERGER AND ACQUISITION

The company which proposes to acquire another company is knows differently in different modes of acquisition, the familiar ones are; predator, corporate raider (for takeover bids), etc. The transferee company is also denoted as victim, acquired or target etc. The purpose for a company for acquiring another company shall be reflected in the corporate objective. It has to decide the specific objectives to be achieved through acquisition. The basic purpose of merger or business combination is to achieve faster growth of the corporate business. Faster growth may be had through product improvement and competitive position i.e. enhanced profitability through enhanced production and efficient distribution of goods and services or by expanding the scope of the enterprise through empire building through acquisition of other corporate units. Other possible purposes for acquisition are short listed below:

1. PROCUREMENT OF SUPPLIES
To safeguard the source of supplies of raw material or intermediary product; To obtain economies of purchases in the form of discount, savings in transportation costs, overhead costs in buying department, etc. To share the benefits of suppliers economies by standardizing the materials.

2. REVAMPING PRODUCTION FACILITIES

To achieve economies of scale by amalgamating production facilities through more intensive utilization of plan and resources; To standardize product specifications, improvement of quality of product, expanding market and aiming at consumers satisfaction through strengthening after sale services; To obtain improved production technology and know how from the acquired company to reduce cost, improve quality and produce competitive products to retain and improve market share.

3. MARKET EXPANSION AND STRATEGY

To eliminate competition and protect existing market To obtain new market outlets in possession of the target company To obtain new product for diversification or substitution of existing products and to enhance the product range; strengthening retail outlets and sale depots to rationalize distribution To reduce advertising cost and improve public image of the target company; strategic control of patents and copyrights.

4. FINANCIAL STRENGTH

To improve liquidity and have direct access to cash resources To dispose of surplus and outdated assets for cash out of combined enterprise To enhance gearing capacity, borrow on better strength and greater assets backing To avail of tax benefits To improve EPS

5. GENERAL GAINS
To improve its own image and attract superior managerial talents to manage its affairs To offer better satisfaction to consumers or users of the product.

6. OWN DEVELOPMENTAL PLANS

The purpose of acquisition is basked by the acquiring companys own development plans. A company thinks in terms of acquiring the other company only when it has arrived at its own development plan to expand its operations having examined its own internal strength where it might not have any problem of taxation, accounting valuation, etc. but might feel resources constraints with limitation of funds and lack of skilled managerial personnel. It has to aim at a suitable combination where it could have opportunities to supplement its funs by issuance of securities; secure additional financial facilities eliminate competition and strengthen its market position

7. STRATEGIC PURPOSE
The Acquirer Company views the merger to achieve strategic objectives through alternative type of combinations which may be horizontal, vertical, product expansion, market extensional or other specified unrelated objectives depending upon the corporate

strategy. Thus, various types of combinations distinct with each other in nature are adopted to pursue this objective like vertical or horizontal combination.

8. CORPORATE FRIENDLINESS
Although it is rare but it is true that business houses exhibit degrees of cooperative spirit despite competitiveness in providing rescues to each other from hostile takeovers and cultivate situations of collaborations sharing goodwill of each other to achieve performance heights through business combinations.

9. DESIRED LEVEL OF INTEGRATION

Mergers and acquisitions are pursued to obtain the desired level of integration between the two combining business houses. Such integration could be operational or financial. This gives birth to conglomerate combinations. The purpose and the requirements of the acquirer company go a long way in selecting a suitable partner for merger or acquisition in business combinations.

TYPES OF MERGERS
Merger or acquisition depends upon the purpose of the acquiring company it wants to achieve. Based on the acquiring companys objectives profile combination could be vertical, horizontal, circular and conglomeratic as precisely described below with reference to the purpose in view of the acquiring company.

I. VERTICAL COMBINATION
A company would like to takeover another company or seek its merger with that company to expand espousing backward integration to assimilate the sources of supply and forward integration towards market outlets. The acquiring company through merger of another unit attempts on reduction of inventories of raw material and finished goods, implements it production plans as per objectives and economizes on working capital investments. In other words, in vertical combinations, the merging undertaking would be either a supplier or a buyer using its product as intermediary material for final production. The following main benefits accrue from the vertical combination to the acquirer company i.e. (1) It gains a strong position because of imperfect market of the intermediary products, scarcity of resources and purchased products; (2) Has control over product specifications.

II. HORIZONTAL COMBINATIONS

It is a merger of two competing firms which are at the same stage of industrial process. The acquiring firm belongs to the same industry as the target company. The main purpose of such mergers is to obtain economies of scale in production by eliminating duplication of facilities and operations and broadening the product line, reduction in investment in working capital, elimination of competition concentration in product, reduction of advertising costs and increase in market segments and exercise of better control on market.

III. CIRCULAR COMBINATION

Companies producing distinct products seek amalgamation to share common distribution and research facilities to obtain economies by elimination of cost of duplication and promoting market enlargement. The acquiring company obtains benefits in the form of economies of resource sharing and diversification.

IV. CONGLOMERATE COMBINATION

It is amalgamations of two companies engaged in unrelated industries like DCM and Modi Industries. The basic purposes of such amalgamations remains utilization of financial resources and enlarge debt capacity through re-organizing their financial structure so as to service the shareholders by increased leveraging and EPS, lowering average cost of capital and thereby raising present worth of the outstanding shares. Merger enhances the overall stability of the acquirer company and creates balance in the companys total portfolio of diverse products and production processes.

V. WITHIN STREAM MERGERS

Such mergers take place when subsidiary company merges with parent company or parent company merges with subsidiary company. The former arrangement is called down stream merger whereas the latter is called up stream merger. For example, recently, the ICICI Ltd. a parent company has merged with its subsidiary ICICI Bank signifying down stream merger. Such mergers are very common in the

corporate world. Another instance of up stream merger is the merger of Bhadrachalam Paper Board, subsidiary company with the parent ITC Ltd.

MERGERS AND ACQUISITIONS FROM DIFFERENT STANDPOINTS

Mergers and acquisitions are caused with the support of shareholder, managers and promoters of the combining companies. The factors which motivate the shareholders and managers to lend support to these combinations and the resultant consequences they have to bear are briefly noted below based on the research work done by various scholars globally.

I. FROM THE STANDPOINT OF SHAREHOLDERS

Investments made by shareholders in the companies subject to merger should enhance in value. The sale of shares from one companys shareholders to another and holding investment in shares should give rise to greater values i.e. the opportunity gains in alternative investments. Shareholders may gain from merger in different ways viz. from the gains and achievements of the company i.e. through (a) Realization of monopoly profits (b) Economies of scale (c) Diversification of product line (d) Acquisition of human assets and other resources not available otherwise (e) Better investment opportunity in combinations

Realization of gains from the merger and acquisition to shareholder in the above form might not be generalized but one or more features would generally be available in each merger where shareholders may have attraction and favor merger.

II. FROM STANDPOINT OF MANAGERS

Managers are concerned with improving operations of the company managing the affairs of the company effectively for all round gains and growth of the company which will provide them better deals in raising their status, perks and fringe benefits. Mergers where all these things are the guaranteed outcome get support from managers. At the same time, where managers have fear of displacement at the hands of new management in amalgamated company and also resultant depreciation from the merger then support from them becomes difficult.

III. FROM STANDPOINT OF PROMOTERS

Mergers do offer to company promoters the advantage of increasing the size of their company and the financial structure and strength. They can convert a closely-held and private limited company into a public company without contributing much wealth and without losing control. In the above example of HCL, only Hindustan Reprographics Ltd. was public company whereas the other three merging entities were private limited companies. The promoters of Hindustan Computers were allotted shares worth Rs.1.27 crores on merger in a new company called HCL equity of Rs.1.48 crores shares. This gain was against their original investment of meager Rs.40 lakhs in Hindustan Computers and they did not invest any money extra in getting shares worth Rs.1.48 crores. Another recent example is of Jaiprakash Industries which was formed out of merger of Jaiprakash Associates and Jay Pee Rewa Cement. Jaiprakash Associates was a closelyheld company. The merger enabled the promoters to have stake at 60% (Rs.39.85 crores) in Jaiprakash Industries Ltd. against an investment of Rs.4.5 crore in Jaiprakash Associates. Thus, merger invariably results into monetary gains for the promoters and their associates in the surviving company.

IMPACT ON GENERAL PUBLIC

Impact of mergers on general public could be viewed as aspect of benefits and costs to: (1) Consumers of the product of services (2) Workers of the companies under combination (3) General public affected in general having not been user or consumer of the worker in the companies under merger plan.

I. CONSUMERS
The economic gains realized from mergers (i.e. enhanced economies and diversification leading to lower costs and better quality products) are passed on to consumers in the form of lower prices and better quality of the product which directly raise their standard of living and quality of life. The balance of benefits in favor of consumers will depend upon the fact whether or not the mergers increase or decrease competitive economic and Productive activity which directly affect the degree of welfare of the consumers through changes in price levels, quality of products, after sales service, etc.

II. WORKERS COMMUNITY

The benefit or loss from mergers to worker community will depend upon the level of satisfaction of their demands, merger of companies provides in the form of employment, increased wages, environmental improvements, better living conditions and amenities. The merger or acquisition of a company by a conglomerate or other acquiring company may have the effect on both the sides of increasing the welfare in the form of enhanced quality of life or decrease the welfare by creating unemployment through retrenchment and resultant lack of purchasing power and other miseries of life. Two sides of the impact as discussed by the researchers and academicians are: first, merges with cash payment to shareholders provide opportunities for them to invest this money in other companies which will generate further employment and growth to the uplift of the economy in general. Secondly, any restrictions placed on such mergers will decrease the growth and investment activity with corresponding decrease in employment. Both workers and communities will suffer on lessening job opportunities, preventing the distribution of benefits resulting from diversification of production activity. Diversification fosters and provides opportunities for advancement in career, training in new skills amount may give other benefits.

III. GENERAL PUBLIC

Mergers result into centralized concentration of power in small number of corporate leaders which results in the concentration of an enormous aggregation of economic power

in their hands. Economic power is to be understood in specific limited sense as the ability to control prices and industries output as monopolists. Such monopolists affect social and political environment to tilt everything in their favor to maintain their power and expand their business empire. These advances result into deceleration of level of welfare and well being of the general public which are subjected to economic exploitation. But in a free economy a monopolist does not stay for a longer period as other companies enter into the field to reap the benefits of high prices set in by the monopolist. This enforces competition in the market as consumers are free to substitute the alternative products. Therefore, it is difficult to generalize that mergers affect the welfare of general public adversely or favorably. Every, merger of two or more companies has to be viewed from different angles in the business practices which protects the interest of the shareholders in the merging company and also serves the national purpose to add to the welfare of the employees, consumers and does not create hindrance in administration of the Government policies.

REASONS FOR MERGERS AND TAKEOVER

There is not one single reason for a merger or takeover but a multitude of reasons cause mergers and acquisitions which are precisely discussed below:

I. SYNERGISTIC OPERATING ECONOMIES

It is assumed that existing undertakings are operating at a level below optimum. But when two undertakings combine their resources and efforts they may with combined efforts produce better results than two separate undertakings because of savings in operating costs viz. combined sales offices, staff facilities, plants management, etc. which lower the operating costs. Thus, the resultant economies are known as synergistic operating economies. The worth of the combined undertaking should be greater than the sum of the worth of the two separate undertakings i.e. 2+2 = 5. Synergy means working together. The gains obtained by working together by amalgamated undertakings result into synergistic operating gains. These gains are most likely to occur in horizontal mergers in which there are more chances for eliminating duplicate facilities. Vertical and conglomerate mergers do not offer these economies. Among others, synergy is possible in areas viz. production, finance and technology. Merger of Hindustan Computers, Hindustan Reprographics, Hindustan Telecommunications and Indian Computer Software Company into HCL Limited

exhibited synergy in transfer of technology and resources to enable the company to cut down imports of components at a fabulous duty of 198%. Similarly, Eicher had the synergy advantage in merging with subsidiaries Eicher Good Earch, Eicher Farm technology and finance as the company could borrow increased funds from banks and institutions.

II. DIVERSIFICATION
Mergers and acquisitions are motivated with the objective to diversify the activities so as to avoid putting all the eggs in one basket and obtain advantage of joining the resources for enhanced debt financing and better serviceability to shareholders. Such amalgamations result in creating conglomeratic undertakings. But critics hold that diversification caused by merger of companies does not benefit the shareholders as they can get better returns by having diversified portfolios by holding individual shares of these companies.

III. TAXATION ADVANTAGE

Mergers take place to have benefits of tax laws and company having accumulated losses may merge with a profit earning company that will shield the income from taxation. Section 72A of Income Tax Act, 1961 provides this incentive for reverse mergers for the survival of sick units.

IV. GROWTH ADVANTAGE

Mergers and acquisitions are motivated with a view to sustain growth or to acquire growth. To develop new areas becomes costly, risky and difficult than to acquire a company in a growth sector even though the acquisition is on premium rather than investing in a new assets or new establishments.

V. PRODUCTION CAPACITY REDUCTION

To reduce capacity of production merger is sometimes used as a tool particularly during recessionary times as was in early 1980 in USA. The technique is used to nationalize traditional industries.

VI. MANAGERIAL MOTIVATES

Managers benefit in rank, status and perquisites as the enterprise grows and expands because their salaries, perquisites and status often increase with the size of the enterprise. The acquirer may motivate managerial support by assuring benefits of larger size of the company to the managerial staff. The resultant large company can offer better security for salary earners.

VII. ACQUISITION OF SPECIFIC ASSETS

Surviving company may purchase only the assets of the other company in merger. Sometimes vertical mergers are done with the motive to secure source of raw material but acquirer may purchase the specific assets of the target rather than acquiring the whole undertaking with assets and liabilities. The assets may also be acquired at a discount to obtain a going concern cheaply. There can be many situations to take over the assets of a company at discount (i) The target may be in possession of valuable land and property shown at depreciated value/historical costs in books of account which underestimates the current replacement value. Thus, acquirer shall be benefited by acquiring the assets of the company and selling them off subsequently; To acquire non-profit making company, close down its loss making activities and sell off the profitable sector to make gains; The existing management is incapable of utilizing the assets, the acquirer might take over ungeared company and increase its debt secured on target companys assets.

(ii) (iii)

VIII. ACQUISITION BY MANAGEMENT OR LEVERAGED BUYOUTS

The acquisition of a company can be had by the management personnel. It is known as management buyout. This practice is common in USA for over 25 years and quite in vogue in UK. Management may raise capital from the market or institutions to acquire the company on the strength of its assets, known as leveraged buyouts.

IX. OTHER REASONS

There may be many other reasons motivating mergers in addition to the above ones viz. profit enhancement for the company, achieving efficiency, increasing market power, tax and accounting opportunities, growth as a goal and many speculative goals etc.

depending upon the circumstances and prevailing conditions within the company and the economy of the country.

REASONS FOR FAILURE OF MERGERS AND ACQUISITIONS

Though the M&As basically aim at enhancing the shareholders value or wealth, the results of several empirical studies reveal that M&As consistently benefit the target company's shareholders but not the acquirer company shareholders. A majority of corporate mergers fail. Failure occurs on average, in every sense, acquiring firm stock prices likely to reduce when mergers are announced; many acquired companies sold off; and profitability of the acquired company is lower after the merger relative to comparable non-merged firms. Consulting firms have also estimated that from one half to two thirds of M&As do not come up to the expectations of those transacting them, and many resulted in divestitures. Statistics show that roughly half of acquisitions are not successful. M&As fails quite often and fails to create value or wealth for shareholders of the acquirers. A definite answer as to why mergers fail to generate value for acquiring shareholders cannot be provided because mergers fail for a host of reasons. Some of the important reasons for failures of mergers are discussed below:

1. EXCESSIVE PREMIUM In a competitive bidding situation, a company may tend to pay more. Often highest bidder is one who overestimates value out of ignorance. Though he emerges as the winner, he happens to be in a way the unfortunate winner. This is called winners curse hypothesis. When the acquirer fails to achieve the synergies required compensating the price, the M&As fails. More you pay for a company, the harder you will have to work to make it worthwhile for your shareholders. When the price paid is too much, how well the deal may be executed, the deal may not create value. 2. SIZE ISSUES A mismatch in the size between acquirer and target has been found to lead to poor acquisition performance. Many acquisitions fail either because of 'acquisition indigestion' through buying too big targets or failed to give the smaller acquisitions the time and attention it required. 3. LACK OF RESEARCH

Acquisition requires gathering a lot of data and information and analyzing it. It requires extensive research. A carelessly carried out research about the acquisition causes the destruction of acquirer's wealth. 4. DIVERSIFICATION Very few firms have the ability to successfully manage the diversified businesses. Unrelated diversification has been associated with lower financial performance, lower capital productivity and a higher degree of variance in performance for a variety of reasons including a lack of industry or geographic knowledge, a lack of focus as well as perceived inability to gain meaningful synergies. Unrelated acquisitions, which may appear to be very promising, may turn out to be big disappointment in reality. 5. PREVIOUS ACQUISITION EXPERIENCE While previous acquisition experience is not necessarily a requirement for future acquisition success, many unsuccessful acquirers usually have little previous acquisition experience. Previous experience will help the acquirers to learn from the previous acquisition mistakes and help them to make successful acquisitions in future. It may also help them by taking advice in order to maximize chances of acquisition success. Those serial acquirers, who possess the in house skills necessary to promote acquisition success as well trained and competent implementation team, are more likely to make successful acquisitions.

6. UNWIELDY AND INEFFICIENT Conglomerate mergers proliferated in 1960s and 1970. Many conglomerates proved unwieldy and inefficient and were wound up in 1980s and 1990s. The unmanageable conglomerates contributed to the rise of various types of divestitures in the 1980s and 1990s. 7. POOR CULTURAL FITS Cultural fit between an acquirer and a target is one of the most neglected areas of analysis prior to the closing of a deal. However, cultural due diligence is every bit as important as careful financial analysis. Without it, the chances are great that M&As will quickly amount to misunderstanding, confusion and conflict. Cultural due diligence involve steps like determining the importance of culture, assessing the culture of both target and acquirer. It is useful to know the target management behavior with respect to dimensions such as centralized versus decentralized decision making, speed in decision making, time horizon for decisions, level of team work, management of conflict, risk orientation, openness to change, etc. It is necessary to assess the cultural fit between the acquirer and

target based on cultural profile. Potential sources of clash must be managed. It is necessary to identify the impact of cultural gap, and develop and execute strategies to use the information in the cultural profile to assess the impact that the differences have. 8. POOR ORGANIZATION FIT Organizational fit is described as "the match between administrative practices, cultural practices and personnel characteristics of the target and acquirer. It influences the ease with which two organizations can be integrated during implementation. Mismatch of organization fit leads to failure of mergers. 9. POOR STRATEGIC FIT A Merger will yield the desired result only if there is strategic fit between the merging companies. Mergers with strategic fit can improve profitability through reduction in overheads, effective utilization of facilities, the ability to raise funds at a lower cost, and deployment of surplus cash for expanding business with higher returns. But many a time lack of strategic fit between two merging companies especially lack of synergies results in merger failure. Strategic fit can also include the business philosophies of the two entities (return on investment v/s market share), the time frame for achieving these goals (short-term v/s long term) and the way in which assets are utilized. For example, P&G Gillette merger in consumer goods industry is a unique case of acquisition by an innovative company to expand its product line by acquiring another innovative company, which was, described analysts as a perfect merger.

10. STRIVING FOR BIGNESS Size no doubt is an important element for success in business. Therefore there is a strong tendency among managers whose compensation is significantly influenced by size to build big empires. Size maximizing firms may engage in activities, which have negative net present value. Therefore when evaluating an acquisition it is necessary to keep the attention focused on how it will create value for shareholders and not on how it will increase the size of the company. 11. FAULTY EVALUATION At times acquirers do not carry out the detailed diligence of the target company. They make a wrong assessment of the benefits from the acquisition and land up paying a higher price. 12. POORLY MANAGED INTEGRATION

Integration of the companies requires a high quality management. Integration is very often poorly managed with little planning and design. As a result implementation fails. The key variable for success is managing the company better after the acquisition than it was managed before. Even good deals fail if they are poorly managed after the merger. 13. FAILURE TO TAKE IMMEDIATE CONTROL Control of the new unit should be taken immediately after signing of the agreement. ITC did so when they took over the BILT unit even though the consideration was to be paid in 5 yearly installments. ABB put new management in place on day one and reporting systems in place by three weeks. 14. FAILURE TO SET THE PACE FOR INTEGRATION The important task in the merger is to integrate the target with acquiring company in every respect. All function such as marketing, commercial; finance, production, design and personnel should be put in place. In addition to the prominent persons of acquiring company the key persons from the acquired company should be retained and given sufficient prominence opportunities in the combined organization. Delay in integration leads to delay in product shipment, development and slow down in the company's road map. Acquisition of Scientific Data Corporation by Xerox in 1969 and AT&T's acquisition of computer maker NCR Corporation in 1991 were troubled deals, which resulted in large write offs. The speed of integration is extremely important because uncertainty and ambiguity for longer periods destabilizes the normal organizational life.

15. INCOMPLETE AND INADEQUATE DUE DILIGENCE Lack of due diligence is lack of detailed analysis of all important features like finance, management, capability, physical assets as well as intangible assets results in failure. ISPAT Steel is a corporate acquirer that conducts M&A activities after elaborate due diligence. 16. EGO CLASH Ego clash between the top management and subsequently lack of coordination may lead to collapse of company after merger. The problem is more prominent in cases of mergers between equals. 17. MERGER BETWEEN EQUALS Merger between two equals may not work. The Dunlop Pirelli merger in 1964, which created the world's second largest tier company, ended in an expensive divorce.

Manufacturing plants can be integrated easily, human beings cannot. Merger of equals may also create ego clash. 18. OVER LEVERAGE Cash acquisitions lead to too much debt. Future interest cost consumes too great a portion of the acquired company's earnings (Business India 2005). 19. INCOMPATIBILITY OF PARTNERS Alliance between two strong companies is a safer bet than between two weak partners. Frequently many strong companies actually seek small partners in order to gain control while weak companies look for stronger companies to bail them out. But experience shows that the weak link becomes a drag and causes friction between partners. A strong company taking over a sick company in the hope of rehabilitation may itself end up in liquidation. 20. LIMITED FOCUS If merging companies have entirely different products, markets systems and cultures, the merger is doomed to failure. Added to that as core competencies are weakened and the focus gets blurred the fallout on bourses can be dangerous. Purely financially motivated mergers such as tax driven mergers on the advice of accountant can be hit by adverse business consequences. The Tatas for example, sold their soaps business to Hindustan Lever.

21. FAILURE TO GET FIGURES AUDITED It would be serious mistake if the takeovers were concluded without a proper audit of financial affairs of the target company. Though the company pays for the assets of the target company, it also assumes responsibility to pay all the liabilities. Areas to look for are stocks, salability of finished products, receivables and their collectibles, details and location of fixed assets, unsecured loans, claims under litigation, loans from the promoters, etc. When ITC took over the paperboard making unit of BILT near Coimbatore, it arranged for comprehensive audit of financial affairs of the unit. Many a times the acquirer is mislead by window-dressed accounts of the target. 22. FAILURE TO GET AN OBJECTIVE EVALUATION OF THE TARGET COMPANY' CONDITION Risk of failure will be minimized if there is a detailed evaluation of the target company's business conditions carried out by the professionals in the line of business. Detailed

examination of the manufacturing facilities, product design features, rejection rates, and distribution systems, profile of key people and productivity of the workers is done. Acquirer should not be carried away by the state of the art physical facilities like a good head quarters building, guest house on a beach, plenty of land for expansion, etc. 23. FAILURE OF TOP MANAGEMENT TO FOLLOW-UP After signing the M&A agreement the top management should not sit back and let things happen. First 100 days after the takeover determine the speed with which the process of tackling the problems can be achieved. Top management follow-up is essential to go with a clear road map of actions to be taken and set the pace for implementing once the control is assumed. 24. MERGERS BETWEEN LAME DUCKS Merger between two weak companies does not succeed either. The example is the Stud backer- Packard merger of 1955 when two ailing carmakers joined hands. By 1964 both companies were closed down. 25. LACK OF PROPER COMMUNICATION Lack of proper communication after the announcement of M&As will create lot of uncertainties. Apart from getting down to business quickly companies have to necessarily talk to employees and constantly. Regardless of how well executives communicate during a merger or an acquisition, uncertainty will never be completely eliminated. Failure to manage communication results in inaccurate perceptions, lost trust in management, morale and productivity problems, safety problems, poor customer service, and defection of key people and customers. It may lead to the loss of the support of key stakeholders at a time when that support is needed the most. 26. FAILURE OF LEADERSHIP ROLE Some of the role leadership should take seriously are modeling, quantifying strategic benefits and building a case for M&A activity and articulating and establishing high standard for value creation. Walking the talk also becomes very important during M&As. 27. INADEQUATE ATTENTION TO PEOPLE ISSUES Not giving sufficient attention to people issues during due diligence process may prove costly later on. While lot of focus is placed on the financial and customer capital aspects, not enough attention is given to aspects of human capital and cultural audit. Well conducted HR due diligence can provide very accurate estimates and can be very critical to strategy formulation and implementation. 28. STRATEGIC ALLIANCE AS AN ALTERNATIVE STRATEGY

Another feature of 1990s is the growth in strategic alliances as a cheaper, less risky route to a strategic goal than takeovers. 30. LOSS OF IDENTITY Merger should not result in loss of identity, which is a major strength for the acquiring company. Jaguar's car image dropped drastically after its merger with British Leyland. 31. DIVERGING FROM CORE ACTIVITY In some cases it reduces buyer's efficiency by diverting it from its core activity and too much time is spent on new activity neglecting the core activity. 32. EXPECTING RESULTS TOO QUICKLY Immediate results can never be expected except those recorded in red ink. Whirlpool ran up a loss $100 million in its Philips white goods purchase. R.P.Goenk's takeovers of Gramophone Company and Manu Chhabria's takeover of Gordon Woodroffe and Dunlops fall under this category.

PART 2: QUANTITATIVE ASPECTS RELATED TO M&AS

HOW MERGERS AND ACQUISITIONS CREATE VALUE

The main quantitative aspect of a merger or an acquisition is the value created by the deal. If the combined value of the merged companies is greater than their actual individual values it is a positive sign represented as synergies. "Synergy" refers to the phenomenon that occurs when the value of the combined enterprise exceeds the value of the companies taken separately. Synergies have a real impact on many transactions. The question for buyers and sellers is: "How much value will be created by the proposed transaction, and how do I ensure that I am appropriately compensated for such value? Common synergies include: Elimination of duplicate staffing, particularly in administration, accounting, and human resources. Sale of excess plants, property, and equipment by combining manufacturing facilities. This may also lead to additional reductions in labor and overhead. Reduced risk management, benefit, and compensation costs. Economies of scale and expanded opportunities in purchasing, marketing, distribution, and research and development. Greater access to capital, at a lower cost. Increased market power.

ISSUES IN ACQUISITION VALUATION

Acquisition valuations are complex, because the valuation often involved issues like synergy and control, which go beyond just valuing a target firm. It is important on the right sequence, including When should you consider synergy? Where does the method of payment enter the process?

The questions that come in the mind are: Can synergy be valued, and if so, how? What is the value of control? How can you estimate the value?

STEPS INVOLVED IN AN ACQUISITION VALUATION

Step 1: Establish a motive for the acquisition Step 2: Choose a target Step 3: Value the target with the acquisition motive built in. Step 4: Decide on the mode of payment - cash or stock, and if cash, arrange for financing - debt or equity. Step 5: Choose the accounting method for the merger/acquisition - purchase or pooling. The above steps are explained herein below:

STEP 1 and STEP 2 which include motive and target might be one of the following
cases

STEP 3 Value target firm

STEP 4 Payment mechanism (Cash versus Stock)

Generally speaking, firms which believe that their stock is under valued will not use stock to do acquisitions. Conversely, firms which believe that their stock is over or correctly valued will use stock to do acquisitions. Not surprisingly, the premium paid is larger when an acquisition is financed with stock rather than cash. There might be an accounting rationale for using stock as opposed to cash. You are allowed to use pooling instead of purchase. There might also be a tax rationale for using stock. Cash acquisitions create tax liabilities to the selling firms stockholders.

STEP 5 Choosing an accounting method

PURCHASE METHOD The acquiring firm records the assets and liabilities of the acquired firm at market value, with goodwill capturing the difference between market value and the value of the assets acquired. This goodwill will then be amortized, though the amortization is not tax deductible. If a firm pays cash on an acquisition, it has to use the purchase method to record the transaction. POOLING OF INTERESTS The book values of the assets and liabilities of the merging firms are added to arrive at values for the combined firm. Since the market value of the transaction is not recognized, no goodwill is created or amortized. This approach is allowed only if the acquiring firm exchanges its common stock for common stock of the acquired firm. Since earnings are not affected by the amortization of goodwill, the reported earnings per share under this approach will be greater than the reported earnings per share in the purchase approach.

The whole step by step process is better explained in the following figure:

THE VALUE OF CONTROL

The value of control should be inversely proportional to the perceived quality of that management and its capacity to maximize firm value. Value of control will be much greater for a poorly managed firm that operates at below optimum capacity than it is for a well managed firm. Value of Control = Value of firm, with restructuring - Value of firm, without restructuring. Negligible or firms which are operating at or close to their optimal value.

EMPIRICAL EVIDENCE OF THE VALUE OF CONTROL

VALUING SYNERGY
The key to the existence of synergy is that the target firm controls a specialized resource that becomes more valuable if combined with the bidding firm's resources. The specialized resource will vary depending upon the merger: In horizontal mergers: economies of scale, which reduce costs, or from increased market power, which increases profit margins and sales. (Examples: Bank of America and Security Pacific, Chase and Chemical) In vertical integration: Primary source of synergy here comes from controlling the chain of production much more completely. In functional integration: When a firm with strengths in one functional area acquires another firm with strengths in a different functional area, the potential synergy gains arise from exploiting the strengths in these areas.

PROCEDURE
1) The firms involved in the merger are valued independently, by discounting expected cash flows to each firm at the weighted average cost of capital for that firm. 2) The value of the combined firm, with no synergy, is obtained by adding the values obtained for each firm in the first step. 3) The effects of synergy are built into expected growth rates and cash flows, and the combined firm is re-valued with synergy. 4) Value of Synergy = Value of the combined firm, with synergy - Value of the combined firm, without synergy

MERGERS AND ACQUISITIONS (CASES) 1. RANBAXY LABORATORIES & DAICHI SANKYO

I. ACQUISITIONS BY RANBAXY
i. ii. iii. iv. v. vi. Acquired South Africas 5th largest generic player BE-TAB PHARMACEUTICAL for $70mn (Access to African market valued at almost $2bn) Acquired Romanian Co. Terapia for 1445 crores (further access to European market of about 157 drugs). Acquired German MERCK, deal value to be estimated around $5.2billion. 2003, Alliance for drug discovery with GlaxoSmithKline. 2004, RPG SA acquired which started to work in France in one of the top 10. 2005, acquisition of generics producer EFARMES of Spain. Launched operation in Canada.

II. RANBAXY ACQUIRED BY DAICHI SANKYO

After the successful acquisitions Ranbaxy was acquired by Japanese based pharmaceutical firm Daichi Sankyo. This acquisition paved the way for the Japanese firms into high growth areas of business. This is also indicative of global companies making efforts to get into the strong generics market. After the sale of their stake in Ranbaxy the Singh family moved almost a hundred places in the billionaires list. The deal money was Rs. 9576.29 crores.

III. EFFECT OF THE DEAL

In this acquisition the Japanese firm acquired a majority stake in Ranbaxy and would buy almost 35% stakes from the CEO. After this acquisition Daichi becomes worlds 15th largest pharmaceutical company. The deal also helps Daichi to increase its spread from a current 21 countries to 60 countries over the globe. The deal, which would see one of India's largest industrial giants go to a foreign company, has caused some surprise in India, with many more accustomed to seeing Indian firms making big acquisitions abroad.

IV. DISADVANTAGE INDIA

With this acquisition deal Daichi will stand itself 9th position in the generics market. Japanese might be having more Indian targets and that is for sure. When outsider enter into our market: Their main aim is maximum use of resources and not optimal use. Chances of monopoly might get higher. Indian talent might be at stake. With cheap research and developments the scope of other expenditure (other acquisitions increase)

V. CONCLUSION
China emerged as the largest market in Asia with 1400+ deals worth $54.04 billion. The Asian market holds India in 3rd place with 487 deals worth $22.69billion In conclusion, though the deals are good but more has to be though of national economy than only money. We can only wait and watch for what happens in the industry and hope for the best for it.

2. REEBOK & ADIDAS

One of the successful mergers ever, a combination of Reebok International and AdidasSalomon AG, was announced Aug. 3 2004 by the two companies, is one of those mergers with which it's difficult to find fault. Germany's Adidas-Salomon agreed to buy Reebok International for 3.1 billion euros ($3.78 billion), or $59 a share -- a 34% premium over the $43.95 at which its shares closed the day before the announcement. Adidas has a market capitalization of about $8.4 billion, and reported net income of $423 million last year on sales of $8.1 billion. Reebok reported net income of $209 million on sales of about $4 billion. GROWING SHADOW: The objective of the tie up was clear. The two companies, which jockey for No. 2 and No. 3 slots behind Nike (NKE), viewed their prospects for competing against the Beaverton, Ore., behemoth as better together than apart. In Europe especially, the shadow of Nike grew larger in the last year as the U.S. Company surpassed Adidas in the soccer shoe segment for the first time -- for Adidas, a game-changing event. In the U.S., Nike reigns supreme. In 2004, it had about 36% market share in the athleticfootwear market, according to the Sporting Goods Manufacturers Association International, while Adidas has 8.9% of the U.S. market and Reebok 12.2%. The U.S. ranks as the world's biggest athletic-shoe market, accounting for half the $33 billion spent globally each year on athletic shoes. Investors seemed willing to believe the combined companies can give Nike a challenge. After the merger announcement, Reebok closed up $13.19, or 30%, to $57.14. Adidas shares closed up 7%, to $192.96, in Frankfurt. ECONOMIES OF SCALE: The companies had already identified about $150 million in annual savings from their combined operations. But the real test of success for Adidas' acquisition was how well the company would manage its new portfolio and execute new products and marketing plans that allowed the two big brands to complement each other rather than duplicate efforts. PUMA FACTOR: Adidas felt the heat not only from Nike in its core categories, like soccer, but also from No. 4 sporting-goods brand Puma, which just unveiled aggressive expansion plans through acquisitions and entry into new sportswear categories. This made it all the more logical for Adidas to concentrate on higher-margin, innovationdriven shoes as it leveraged Reebok's distribution and product development resources to increase its presence into basketball, hockey, and fashion/athletic segments like bicycling and skateboarding where consumers had proved willing to pay top dollar for high-end shoes.

DIFFERENT CULTURES: While the combination of Adidas and Reebok looks terrific on paper, successful mergers need to work between real people who, in this case, will have to break down cultural differences between companies with "two hugely different cultures. Nike, Adidas, and Reebok have been gaining sales and profits from a favorable market in the U.S. and abroad for fashion with strong brands. In the annual Interbrand/Business Week ranking of the Top 100 Global Brands, Nike placed 30th overall in the world, with a value of $10.1 billion, up 9% from last year, while No. 71 Adidas was up 8%, to $4 billion. The ranking, which measures the value of brands over the next five years based on sales and profit outlook, did not include Reebok. SECONDARY BRANDS: Acquiring Reebok also gave Adidas an important asset in growing its brand in developing markets, especially in the fashion-oriented markets of Asia like China, Korea, and Malaysia. Having Reebok meant that Adidas doesn't have to spread the Adidas brand far and wide to cover all China segments, in which Reebok has made great strides with its Yao Ming marketing tie up. Both companies have struggled trying to acquire and develop flanker brands. Adidas sold its Salomon winter sports brand last May for less than half what it paid for it eight years earlier. But Adidas still owns golf brand Taylor Made. Reebok has had unsuccessful diversifications with brands Avia and Frye boots, though it's done well with Rockport and Greg Norman brands. "Adidas is the perfect partner for Reebok," says Paul Fireman, Reebok's chairman-CEO. Fireman, who holds 17% of the sports-shoe maker along with his wife, Phyllis, has already signaled he'll sell his shares.

3. DAIMLER, CHRYSLER - THE FAILED MERGER

In 1998, Daimler-Benz and U.S. based Chrysler Corporation, two leading global car manufacturers, agreed to combine their businesses in what was perceived to be a 'merger of equals'. Jurgen Schrempp, CEO of Daimler-Benz and Robert Eaton, Chairman and CEO of Chrysler Corporation met to discuss the possible merger. The merged entity ranked third (after GM and Ford) in the world in terms of revenues, market capitalization and earnings, and fifth (after GM, Ford, Toyota and Volkswagen) in the number of units (passenger-cars and commercial vehicles combined) sold. In 1998, co-chairmen and co-CEOs, Schrempp and Eaton led the merged company to revenues of $155.3 billion and sold 4 million cars and trucks. But in 2000, it suffered third quarter losses of more than half a billion dollars, and projections of even higher losses in the fourth quarter and into 2001. In early 2001, the merged company announced that it would slash 26,000 jobs at its ailing Chrysler division Daimler, Chrysler and cultural differences The Daimler Chrysler merger proved to be a costly mistake for both the companies. Daimler was driven to despair, and to a loss, by its merger with Chrysler. Last year, the merged group reported a loss of 12 million euros. Analysts felt that though strategically, the merger made good business sense. But contrasting cultures and management styles hindered the realization of the synergies. Daimler-Benz attempted to run Chrysler USA operations in the same way as it would run its German operations. Daimler-Benz was characterized by methodical decision-making. On the other hand, the US based Chrysler encouraged creativity. While Chrysler represented American adaptability and valued efficiency and equal empowerment Daimler-Benz valued a more traditional respect for hierarchy and centralized decisionmaking Mercedes-Benz maker, Daimler AG and the world's second-largest maker of luxury vehicles reported profits in its fourth-quarter results for 2007. The good results this quarter have come after selling the Chrysler division in the U.S. and cutting jobs at Mercedes-Benz Cars. Without Chrysler, Daimler reported profits of 1.7 billion euros (1.3 billion) for the fourth quarter and a net profit of 4 billion euros for the year (3.8 billion euros in 2006). Sales rose to 99.4 billion euros ($144.98 billion) from 99.2 billion euros, with 2.1 million automobiles sold globally. In May last year, after a decade of disappointing results, Daimler finally sold Chrysler to private equity firm Cerberus Capital for 3.74 billion.

GOOGLE & SOCIAL DECK

Internet search giant Google acquired social games website SocialDeck for an undisclosed amount, in a move to strengthen its social networking service. The transaction comes within days of Googles acquisition of Angstro, which makes applications to discover new photos on Facebook and create a real-time social address book. Going by reports, the deal is one of several acquisitions in the past month through which Google is hoping to build a social-networking service to counter rival Facebook. SocialDeck has announced on its website that it has been acquired by Google. SocialDeck has been acquired and we have joined the Google team. We started this company with the goal of connecting friends through social games on all kinds of exciting new mobile devices, the company stated on its website yesterday. SocialDeck, a Canadian start-up, has launched several games titles for Facebook, Apples iPhone and Research in Motions Blackberry devices. The firms games platform technology enables simultaneous game play across multiple mobile devices and social networks. Earlier in the month, Google had bought social widgets maker Slide Inc in a deal that would give the search giant a team of developers with vast experience in social networking.

REASONS: The reason for acquisition is clear. Expansion and competition seem to be
the motivating factors to enter into such deals.

CONCLUSION
In the end we can draw a conclusion with mixed opinions. Some might fear the merger or acquisition with any company considering the financials or rather the inability to experiment but what is life without experiment. If there are hundred reasons to not merge surely a thousand can be found for companies to merge acquire or get acquired. Several motivating factors with exposure and diversification being one of those makes a company want to experiment. Provided a proper research is done and motivators are correctly considered there is no stopping the boom in the amount of business the merged can derive. Also, another important factor was the synergy valuation. A proper valuation of synergy is a necessity and with positive results in that a merger can really work anytime. All the above examples and explanations indicate one and only one thing that if someone is aiming high one has to see mergers and acquisitions as another way to grow and at a faster rate than any other factor. In the end we would like to say that maybe the deal might have a negative impact on one and a positive on the other, maybe, the economy of a country proves to be at stake but in the end the world is just one.