Unit-V: Merger and Acquisition

The main learning objectives of M&A is to

provide students with an understanding of: The
highly practical “planning-based” approach to
managing the acquisition process and the issues
associated with each phase of the M&A process.
To make students learn that how to implement
provisions put in a nutshell in the mergers and
acquisitions agreement in the event of non-
compliance.
 Merger and Acquisition
Mergers and acquisitions (M&A) involve the consolidation
of companies. It is a strategic business decision following
which two or more companies become a single entity.
Also students will learn that why the companies pursue
M&A for reasons and what may be the outcomes such
as achieving economies of scale, expanding market share,
and improving financial performance.
As M&A helps gain a competitive edge, increase market
share, expand into new regions or markets, and access
new customer bases.
 M&A: Meaning
• Merger and acquisition (M&A) is a corporate
strategy that involves the combination of two
or more companies into a single entity.
• This strategy is typically used by companies
looking to expand their operations, increase
market share, or gain access to new products
or technologies.
 Merger and Acquisition
• Merger refers to a strategic process whereby
two or more companies mutually form a new
single legal venture.
• Mergers and acquisitions are usually
undertaken to extend the size of a business,
grow into new markets or gain market share.
 Merger: Meaning
• A merger is an agreement that unites two
existing companies into one new company.
• A merger is a corporate strategy to combine
with another company and operate as a single
legal entity.
• Finally, it is a kind of deal that unifies two
existing firms into one new company.
 Types of Mergers
There are various types of mergers, depending on
the goal of the companies involved. Below are some
of the most common types of mergers.
The three main types of mergers are:
1. Congeneric/Product extension merger
2. Conglomerate merger
3. Market extension merger
4. Horizontal merger
5. Vertical merger
Congeneric/Product extension merger
• Such mergers happen between companies
operating in the same market. The merger
results in the addition of a new product to the
existing product line of one company. As a
result of the union, companies can access a
larger customer base and increase their
market share.
 Conglomerate merger
• Conglomerate merger is a union of companies
operating in unrelated activities. The union
will take place only if it increases the wealth of
the shareholders.
 Market extension merger
• Companies operating in different markets, but
selling the same products, combine in order to
access a larger market and larger customer
base.
 Horizontal merger
• A horizontal merger is a type of consolidation of
companies selling similar products or services. It
results in the elimination of competition; hence,
economies of scale can be achieved.
• Horizontal mergers occur when two companies that
already offer the same products or services combine.
These mergers help companies reduce competition
and dominate the market.
• For example, Exxon combined with Mobil back in
1998 to form ExxonMobil.
 Vertical merger
• A vertical merger occurs when companies
operating in the same industry, but at different
levels in the supply chain, merge. Such
mergers happen to increase synergies, supply
chain control, and efficiency.
 Advantages of Merger
• 1. Increases market share: When companies merge, the new company
gains a larger market share and gets ahead in the competition.
• 2. Reduces the cost of operations: Companies can achieve economies of
scale, such as bulk buying of raw materials, which can result in cost
reductions.
• 3. Avoids replication: Some companies producing similar products may
merge to avoid duplication and eliminate competition. It also results in
reduced prices for the customers.
• 4. Expands business into new geographic areas: A company seeking to
expand its business in a certain geographical area may merge with
another similar company operating in the same area to get the business
started.
• 5. Prevents closure of an unprofitable business: Mergers can save a
company from going bankrupt and also save many jobs.
 Disadvantages of Merger
• 1. Raises prices of products or services: A merger results in reduced
competition and a larger market share. Thus, the new company can gain a
monopoly and increase the prices of its products or services.
• 2. Creates gaps in communication: The companies that have agreed to
merge may have different cultures. It may result in a gap in communication
and affect the performance of the employees.
• 3. Creates unemployment: In an aggressive merger, a company may opt to
eliminate the underperforming assets of the other company. It may result
in employees losing their jobs.
• 4. Prevents economies of scale: In cases where there is little in common
between the companies, it may be difficult to gain synergies. Also, a bigger
company may be unable to motivate employees and achieve the same
degree of control. Thus, the new company may not be able to achieve
economies of scale.
 Types of Acquisitions
• Companies consolidate for a variety of reasons
and in a number of ways. The most common
types of acquisitions include:
• Horizontal Acquisition
• Vertical Acquisition
• Congeneric Acquisition
• Conglomerate Acquisition
 Pros and Cons of Acquisitions
• There are many reasons why a company might
decide to acquire another company — or to
allow another company to acquire it.
Understanding these reasons, along with the
potential drawbacks of an acquisition, are
important if you’re interested in pursuing a
career in M&A.
 Pros of Acquisitions
 Acquisitions are often one of the quickest
ways to enter a new market & to increase the
market share.
 They can lower costs. Acquisitions help
companies reach economies of scale because
production increase results in cost reduction.
 Acquisitions are often helpful in reducing or
eliminating the competition.
 Cons of Acquisitions
• Acquisition is a time consuming process: Acquisition is still
complex legal arrangements, subject to internal and
external negotiations, investigations, audits, and reviews,
and takes months or, even, a few years to complete.
• Acquisition is expensive: The acquirer has to pay for the
target company in cash, stock, and/or borrowed funds
(known as a leveraged buyout). There are also legal fees
and tax implications associated with each deal.
• Acquisition can be mispriced. While M&A professionals
rely on a variety of business valuation methods, it still can
be tricky to pinpoint how much exactly a company is worth.
 Acquisition vs. Merger
• The term acquisition is also sometimes used
synonymously with merger, but both words technically
have different meanings. In an acquisition, the two
companies continue to function as separate legal
entities.
• A merger, conversely, occurs when two existing
companies combine to form a new legal entity.
• Think Exxon and Mobil coming together to form
ExxonMobil back in 1999.
• Price Waterhouse merging with Coopers and Lybrand to
form PricewaterhouseCoopers (PwC) in 1998.
 Exchange Ratio
• In mergers and acquisitions (M&A), the exchange ratio is the relative number of
new shares that will be given to existing shareholders of a company that has been
acquired or that has merged with another.
• Exchange Ratio = Offer Price for Target’s Shares / Acquirer’s Share Price
• Exchange ratio typically refers to the ratio used to determine how many shares of
one company’s stock will be exchanged for a certain number of shares of another
company’s stock in a merger or acquisition.
• For example, if Company A acquires Company B and the exchange ratio is 1:2,
it means that for every one share of Company A stock, Company B stockholders
will receive two shares of Company A stock.
• The exchange ratio can have a significant impact on the value of the deal for
both companies’ shareholders. A favorable exchange ratio can make the deal
more attractive to the shareholders of the acquired company, while an
unfavorable exchange ratio can lead to opposition to the deal.
 Exchange Ratio example
• Suppose; Rohit Shetty & Co. is the acquirer and Dharma
Productions Pvt. Ltd. is the target firm. DPPL has 10,000
outstanding shares and is trading at a current price of
Rs.16, and RSC is willing to pay a 25% takeover
premium. This means the offer price for DPPL is Rs.20.
Firm RSC is currently trading at Rs.10 per share.
• To calculate the exchange ratio, we take the offer price
of Rs.20 and divide it by RSC’s share price of Rs.10.
• Exchange Ratio = Offer Price for Target’s Shares / Acquirer’s Share Price
• The result is 2.
• Means; RSC has to issue 2 of its own shares for every 1
share of the Target it plans to acquire.
 Synergy
• Synergy is a process in which individuals or companies
combine their resources and efforts to achieve more
productivity, efficacy, and performance than they
could alone.
• Synergy is the concept that the value and
performance of two companies combined will be
greater than the sum of the separate individual parts.
• Mergers and acquisitions are the best example-
• If the two companies merge, they can accomplish
more together than they could apart.
 Synergy & its benefits
Term Synergy refers to the benefit that results from the merger of two
agents who want to achieve something that neither of them would be able
to achieve on their own.
If the two companies merge, they can accomplish more together than they
could apart.
Some examples of synergy benefits include:
 Revenue benefits,
 Cost benefits, and
 Improved Financial & Operational benefits

• What can you do with one hand?

• What can you do with both of your hands? Twice as much?
• No! You can do much, much more! You can do
absolutely new things.
• For example, play the violin.
• That's synergy!
 Post-Merger EPS
Post-merger EPS (earnings per share) is a financial metric
used to evaluate the impact of a merger or acquisition on
a company’s earnings per share after the transaction is
completed. EPS is calculated by dividing a company’s net
income by the number of outstanding shares of its
common stock.
It is important to note that post-merger EPS is just one of
several financial metrics used to evaluate the success of a
merger or acquisition, and should be considered in
conjunction with other metrics such as revenue growth,
cost savings, and return on investment.
 Post Merger Price of Share
The post-merger price of a share is the price of a
company’s stock after a merger or acquisition has been
completed.
The post-merger price of a share is not always directly
correlated with the success of a merger or acquisition, as
there may be other factors that can influence the stock
price such as overall market conditions and investor
sentiment. It is important to conduct a thorough analysis
of the merged company’s financials and business
prospects to determine the potential impact on the post-
merger share price.
 Required Rate of Return of Merged
Company
The required rate of return of a merged company or a de-
merged company depends on various factors such as the
risk profile of the merged company or the de-merged
companies, the expected cash flows, and the prevailing
market conditions.
For a merged company, the required rate of return can be
calculated by taking the weighted average cost of capital
(WACC) of the combined entity. WACC is the average rate
of return required by investors to invest in a company,
taking into account the relative weights of the company’s
debt and equity capital.
 Required Rate of Return of De-Merged
Company
For a de-merged company, the required rate of
return of each company can be calculated
separately based on their respective risk profiles
and expected cash flows. The required rate of
return of each company can be determined by
applying the capital asset pricing model (CAPM)
or other models that consider the company’s
risk profile and expected returns.
 Required Rate of Return for both
In general, a merged company or a de-merged
company is expected to have a higher required rate
of return if it is perceived to be riskier by investors, or
if the expected cash flows are lower. Conversely, a
company with lower perceived risk or higher
expected cash flows may have a lower required rate
of return. The required rate of return is an important
factor in determining the valuation of a company and
can impact the decisions of investors, analysts, and
other stakeholders.
 Questions
1. What is meant by merger? Discuss the types & benefits of mergers:
2. What is an Acquisition? Definition, Types, and Examples.
3. What is merger & how it differs from acquisition?

4. An acquisition is a business transaction that occurs when one company purchases and gains
control over another company.
5. A business acquisition occurs when one company (the acquirer) buys most or all shares in
another company (the target) to assume control of its assets and operations.
6. Acquisitions are often amicable, meaning both companies are on-board with and negotiate the
terms of the transaction. However, the word “acquisition” is sometimes used interchangeably
with “takeover,” which can be hostile.
7. Acquisitions are often coordinated by investment bankers or lawyers. Large companies,
including private equity firms, often have internal teams that manage the process.
8. What is Exchange Ratio? explain with help of an example.
9. What are the synergy benefits of merger & acquisition?
10. How the Post Merger EPS & Post Merger Price of Share are computed?
11. Explain the Required Rate of Return of Merged & De-Merged Company separately.
12. What is de_merger?
13. What is the post-merger EPS? Explain clearly
14. What will be the post-merger relationship between EPS, MPS & K e? Explain with help of suitable
example.