Theories of mergers &

acquisitions
 Beyond inorganic growth
Apart from the motive of quantum grown in the shortest possible time,
there are several other motives or theories for which companies resort
to M&A. The commonly understood theories are:

1. Monopoly theory
2. Efficiency theory
3. Raider theory
4. Valuation theory
5. Empire building theory
 Monopoly theory
Focus on gaining market share, market power,
pricing power.
Works in three ways:
• Market leaders trying to consolidate their
position further
• Mittal Steel, already a global market leader acquiring
Arcelor, the second largest, made Mittal steel reach
almost 10% of global steel making capacity.
• RIL, after acquisition of IPCL gained control over 2/3rd
of total petro-chemicals market overall and 80 to 90%
in specific products.
 Monopoly theory
 Profitable & cash rich companies trying to
gain market leadership.
 Tata steel, with a capacity of around 5 mill.t,
acquired Corus having a capacity of 22 mill.t,
which pushed its global ranking from 56 th to
5th.
 Grasim, with a capacity of 13 mill.t moved
from 3rd largest after L&T(18 mill.t) and ACC
(15mill.t), to largest in India and 8 th globally
after acquiring L&T’s cement division.
 Monopoly theory
 Market entry strategy
 Vodafone, as a part of its global expansion strategy to
enter Indian market, acquired Hutchison Essar, rather
than set-up a greenfield operation, due to non
availability of bandwidth to new aspirants and other
licencing issues.
 Daiichi Sankyo’s acquisition of Ranbaxy, Monster
worldwide acquiring Jobsahead.com are examples of
MNC’s strategy to enter indian markets.
 Tata tea acquiring Tetley, Hindalco Acquiring Novelis
are examples of Indian companies wanting to enter
global markets.
 Efficiency theory

 Focus on gaining synergies, boosting enterprise

valuation, thru pooling resources, revenue
growth and cost reduction. Synergies could be in
the areas of manufacturing, operations,
marketing, financial or tax.
 Merger of ICICI with ICICI bank to enhance fee based
income. Pre merger ICICI not being a bank could not
offer fee-based services to its clients, and ICICI
bank’s limited balance sheet size restricted the
amount of non-fund based facilities.
 Manufacturing synergy
 M&M acquired Jiangling motors of china to
combine M&M’s design & development
strength with low manufacturing cost of
Jiangling.
 Tata motors acquisition of Daewoo’s
commercial vehicles unit armed it with
capacity to produce 200-400 bhp range of
vehicles.
 Operations synergy
 Kingfisher acquired Deccan Aviation to
rationalise routes, reduce duplication of
flights on same route, sharing manpower,
reducing number of aircraft etc. Cost
saving of Rs 300 crs was expected in 1st
year itself.
 VSNL’s acquisition of Tyco gave it a
higher data transfer capacity.
 Marketing synergy
 HLL’s acquisition of Lakme was aimed at
using HLL’s vast distribution network to
leverage on Lakme’s strong brand equity.
 Blow plast acquired Universal luggage to
use common distribution channel and
sales force to push both products in same
market segments but at different prices,
saving costs and gaining pricing power
thru complementary rather than
competitive marketing strategies.
 Financial & tax synergy
 Involves combining the balance sheets of both
companies to achieve lower cost of capital,
better leverage, or other financial parameters.
 Only acquisition is not enough. There must be
subsequent merger of the firms.
 Merging loss making firm with profitable one to
gain tax benefits of writing off accumulated
losses of loss making company against the
profits of the profit making company.
 Valuation theory
 Belief that the acquirer has better knowledge of
the target’s intrinsic value than the market, thus
is willing to pay a higher price.
 This could be due to:
 Acquirer has insider information.
 Acquirer has different view about publicly available
information.
 Target’s assets are under-utilised, resulting in lower
firm value.
 End of recessionary cycle
 Strong brands of underperforming companies.
 Raider theory
 Typically followed by PE funds to transfer
wealth of cash needy companies to
themselves at a lower than market/intrinsic
value without any strategic intent to run
the companies.
 Raider theory does not work in India due
to stringent SEBI guidelines on acquisition
price for listed companies. However it is
possible for unlisted companies.
 Empire building theory
 Belief that ‘size matters’.
 Usually planned and executed by top
management to satisfy ‘ego’ of heading
large organisations.
 Shareholders interest is ignored in favour
of creating perception of being better
because of being bigger.
 This motive is seldom publicly known