Mergers and

Acquisitions

Why Mergers and Acquisitions?

Growth

Four Stages in Human Development

Gazing

Observation
Scientific
Enquiry

Contemplation

No Questions Asked

Correlate things without reason

leading to superstition
Learn to connect cause &
unearth laws.

Question these laws

Three types of organizations

Organizations that
Change by themselves: Proactive
Change when told by others or due to pressure: Reactive
Do not change even when told by others: Rigid

External Change Forces

Technological change
Globalization and free trade
Deregulation
Economies of scale,economies of scope
Changes in industry organization
Individual entrepreneurship
Rising stock prices,low interest rates, strong
economic growth

Sensible Reasons for Mergers

Economies of Scale
A large firm may be able to reduce its per unit cost by
using excess capacity or spreading fixed costs across
more units.
Units produced
Fixed cost
Fixed cost per unit

1000

1200

1500

1600

2000

10,000

10,000

10,000

10,000

10,000

10

Reduces costs

What is economies of scale ?

Economies of scale refers to the ability of a
company to lower the average cost per unit by
spreading the fixed cost over large number of units
produced. This refers to increase in production
efficiency
There are two types of economies of scale:
-External economies - the cost per unit depends on
the size of the industry, not the firm.
-Internal economies - the cost per unit depends on
size of the individual firm.

Diseconomies of scale
What Does Diseconomies Of Scale Mean?
An economic concept referring to a situation in
which economies of scale no longer function for a
firm.
Rather than experiencing continued decreasing
costs per increase in output, firms see an increase
in marginal cost when output is increased.

Let us try to understand the principle of

fixed cost and variable cost.
Total fixed cost will remain constant up to a
particular level, but fixed cost per unit varies
according to the out put.
Variable cost per unit will remain constant, but the
total variable cost varies according to the out put.

How does a firm achieve economies

of scale ?
Economies of scale is achieved when a
company is able to lower the average cost
per unit by spreading the fixed cost over
large number of units produced.

Internal economies

External economies

Horizontal merger

What are the recent issues of

brokerage firms in India?

MSCI World Index (Since 1969)

ACWI
MSCI India Index

SGX Nifty futures are preferred by foreign traders on the back

of ease of trading, easier reporting standards and its being
dollar-denominated, which reduces the currency volatility.

What was the reaction of broking firms?

Large Indian financial services firms plan to apply to the Monetary Authority of
Singapore (MAS) for a licence to trade in Nifty futures on the Singapore Exchange,
where these index contracts have gained popularity in the past three months.

Edelweiss, ICICI Securities, Kotak Securities and IDFC Securities are

evaluating such a move to serve foreign institutions, which are
increasingly trading in Nifty futures on the bourse due to uncertainty over
the government's General Anti-Avoidance Rules ( GAAR) and proposals
to tax international transactions of domestic assets .

Mergers and Acquisitions as a

growth strategy

ORGANIC GROWTH

INORGANIC GROWTH

Organic Vs Inorganic Growth

RIL Case Discussion

Mergers and Acquisitions as a

growth strategy

1. Intensive growth

2.Integrative growth

3.Diversification
growth

Classes of Growth Opportunities and M & A

Market Penetration
Market Development

1. Intensive Growth

Product Development
Backward Integration
Forward Integration

2. Integrative Growth

Horizontal Integration
Concentric Diversification

Horizontal Diversification
Conglomerate Diversification

3. Diversification Growth

Intensive growth

Integrative
growth

Market
penetration

Increased sales
from existing
products

Market
development

Increased sales
from new
market

Product
development

Increased sales
by developing
improved
products

Backward
integration

Seeking
ownership or
increased
control of

Forward
integration

Increased
control of its
distribution
system

Horizontal
integration

Seeking control
of competitors

Integrative
growth

Diversification
growth

Concentric
add new
diversification products that
have
technological or
marketing
synergies with
the existing
products.

Diversification growth

Horizontal
diversification

Add new products

that could appeal to
its present customers
though, technically
unrelated to its
present product line.

Conglomerate
diversification

Add new products for

new classes of
customers, with no
relationship to the
companys current
technology, products
or markets.

Mergers and Acquisitions

Merger
Merger refers to negotiation between friendly parties
who arrive at a mutually agreeable decision to
combine their companies because together they may
create a stronger competitive advantage
A transaction where two firms agree to integrate their
operations on a relatively coequal basis.
A forced merger or a merger necessary for survival is
normally known as amalgamation

Merger

Absorption

Amalgamation

Large firm

Small firm

Amalgamation
The combination of one or more companies into a new
entity.
An amalgamation is distinct from a merger because neither
of the combining companies survives as a legal entity.
A completely new entity is formed to house the combined
assets and liabilities of both companies.

Acquisition
Acquisition is an attempt or a process by which a
company or an individual or a group of individuals
acquires control over another company called target
company.
Acquiring control over a company means acquiring
the right to control its management and policy
decisions.
It also means the right to appoint (and remove)
majority of the directors of a company.
In acquisition, the target companys identity remains
intact.

Ways to acquire control over a company (target company)

By acquiring ,i.e. purchasing a substantial percentage of

the voting capital of the target company.

By acquiring voting rights of the target company through

power of attorney or through a proxy voting arrangement.

By acquiring control over an investment or holding

company, whether listed or unlisted, that in turn holds
controlling interest in the target company.

By simply acquiring management control through a

formal or informal understanding or agreement with the
existing person (s) in control of the target company.

SUBSTANTIAL ACQUISITION OF SHARES

SEBI TAKEOVER CODE
2011

Acquisition
A transaction where one firm buys another firm through
tender offers.
Tender offer : means one firm or person is making an offer
directly to the shareholders of the target firm to sell (tender)
their price at specified price(offer price)
Tenders offers can be friendly or hostile

Mergers and acquisitions

Mergers and acquisitions are two forms of
takeovers
In either mergers or tender offers, the
negotiations may start friendly and become
hostile
Conversely negotiations may start out
hostile and become friendly.

Problems in
Achieving Success

Reasons for
Acquisitions
Increased
market power

Integration
difficulties

Overcome
entry barriers

Inadequate
evaluation of target

Cost of new
product development

Large or
extraordinary debt

Increased speed
to market

Acquisitions

Inability to
achieve synergy

Lower risk
compared to developing
new products

Too much
diversification

Increased
diversification

Managers overly
focused on acquisitions

Avoid excessive
competition

Too large

How Indigo Airlines Achieve Economies of Scale

How Indigo Airlines Achieve Economies of Scale

1. Single Class

Indigo's whole fleet consists

of A-320-232 aircraft
Air India, Jet Airways and
Spice Jet use 10, 9 and 3
different makes of aircraft
respectively

Greater flexibility by making

use of the same crew from
pilots to flight attendants to
the ground force thereby
cutting hiring, training and
up gradation costs.

2. Single Class

only Economy class

does not have to spend time,

money and crew on privilege
passengers.
don't need to maintain
expensive lounges

3. Low average fleet age

Indigo has an average fleet age

of less than 3 years
Indigo plans to maintain a
lower fleet age as all its aircraft
are leased for a period of 5-6
years.

A younger fleet means less

maintenance costs.
This way they avoid the DCheck which is done after 8
years of operation of an
airplane.
A D-check may take up to 2
months during which the
aircraft remains out of service.)

4. Fuel

fuel for Indian airlines

accounts for about 45 per cent
of total operating costs,
compared to the global average
of 30 per cent.

Indigo uses software to

optimize flight planning for
minimum fuel burning routes
and altitudes and also by
making use of latest fuel saving
technology
first airlines to place order for
the Airbus A320neo family
which claims to deliver 15%
less fuel consumption and 8%
lower operating costs.
first airlines to have the
aircraft taxi to the terminal
with one engine, shutting down
the second engine to save fuel.

5. Route Planning

Indigo operates over a lesser

number of destinations than
its competitors but with a
higher frequency - with a
fleet of 78 planes for 36
destinations while Spice Jet
flies to 46 destinations with
58 planes.

Indigo has a high aircraft

utilization rate of more
than 11.5 hours per day
per plane.

6. Tightly framed
maintenance contracts

Indigo has a
Power by the Hour contract
with
International Aero Engines
(IAE), which provides the
engines, that put the onus of
performance delivery on the
manufacturer.

Indigo does not have to

pull out planes from service
for repairs and also does
not have to maintain a large
inventory of spares.

7. Other cost-cutting
measures

Turnaround time - An airline is

charged for the duration its
aircraft stays at the airport.

Indigo has a faster

turnaround time of 30 mts

Employee Aircraft ratio

Lower employee aircraft ratio

of 102 compared to Jet
Airways's 130 and Air India's
262.

7. Other cost-cutting measures

Stage Length - Average Stage

length (flying time per flight)
of 1.5 hours

which means not having to

stock and serve hot meals in
most flights.
This again contributes to the
low turnaround time.

Most Indian airlines take

delivery of aircraft by sending
their own pilots and engineers
(to Toulouse in the case of
Airbus).
Indigo prefers to get them
delivered to Delhi,

This is costlier but it also leads

to better utilization of the
available pilots and the
engineering crew.

Horizontal Merger
Horizontal Merger
Involves two firms that operate and compete in
the same kind of business activity.
Ex : Bharti and MTNL, Tata steel and Corus
Forming a large firm may have the benefit of
economies of scale achieved through large scale
operations.
Synergy
Economies of scale

Economies of scope
This refers to the ability of the firm to
reduce the average cost per unit as a result
of increasing the number of different goods
produced.

Sensible Reasons for Mergers

Economies of Scope or Vertical Integration
Vertical mergers occur between firms in different
stages of production
Pre-integration
(less efficient)

Post-integration
(more efficient)

Company
S

S
S

Company

S
S

Sensible Reasons for Mergers

Combining Complementary Resources
Merging may result in each firm filling in the missing
pieces of their firm with pieces from the other firm.
Firm A

Firm B

Sensible Reasons for Mergers

Combining Complementary Resources
Merging may result in each firm filling in the missing
pieces of their firm with pieces from the other firm.

Firm A

Firm B

Sensible Reasons for Mergers

Mergers as a Use for Surplus Funds
If your firm is in a mature industry with few, if
any, positive NPV projects available, acquisition
may be the best use of your funds.

STAGES OF MERGER

Post Merger

Transition
6 m - 2 years
Immediate
Transition
3 - 6 months

Pre Merger

Evaluation
Negotiation
Up to 1 year
Courtship
4 months

STAGES OF MERGER
Courtship
Develop shared vision and objectives
Build business and personal relationship

Evaluation/Negotiation
Due diligence
Regulatory clearance
Price and terms

STAGES OF MERGER
Immediate transition

New appointments
Redundancy announcements
Restructuring
Divestment

Transition

Fine tuning
Further restructuring
job transfers
cultural integration