Mergers and Acquisitions
Presented By:
Presented to:
Prof. Parsuraman
What is all about?
“The buying, selling and combining of
different companies to grow rapidly without
having to create another business entity.”
What Does Merger Mean?
The combining of two or more companies, generally
by offering the stockholders of one company
securities in the acquiring company in exchange for
the surrender of their stock.
Benefits of merger
Diversification of product and service offerings
Increase in plant capacity
Larger market share
Utilization of operational expertise and research and
development (R&D)
Reduction of financial risk
Why do mergers fail ?
Lack of human integration
Mismanagement of cultural issues
Lack of communication
Acquisition
When one company takes over another and clearly
established itself as the new owner, the purchase is
called an acquisition.
Acquisition is generally considered negative in
nature.
SYNERGIES RELATED TO ACQUISITION
Economies of scale
Staff reductions
Acquiring new technology
Improved market reach and industry visibility
Taxation
Corporate Strategies in M&A
Why?
Gain market share
Economies of scale
Enter new markets
Acquire technologies
Strategic Benefit
Complementary resource
Tax shields
Utilization of surplus funds
Managerial Effectiveness
Integrate vertically
Mechanics of a Merger
Legal Procedure
The MOA to be scrutinized
Intimation to Stock Exchanges
Approval of draft amalgamation proposal
Application to the Court
Notice to shareholders and creditors
Filing the order
Transfer of assets and liabilities
Issue of shares and debentures
Mechanics of Merger (Cont..)
Tax Aspects
Section 2(a) of the Income Tax Act defines amalgamation
Depreciation for tax purposes
Accumulated losses
Unabsorbed Depreciation
Capital Gains Tax
Accounting for Amalgamation is done according to Accounting
Standard 14 (AS-14) issued by the Institute of Chartered
Accountants of India
Reasons for Problems in
M &A Achieving Success
Increased Integration
market power difficulties
Overcome Inadequate
entry barriers evaluation of target
Cost of new Large or
product development extraordinary debt
Increased speed Inability to
to market M &A achieve synergy
Lower risk Too much
compared to developing diversification
new products
Increased Managers overly
diversification focused on acquisitions
Avoid excessive
competition Too large
Gains from M&As
Synergy is the additional value created (∆V) :
V VAT -(VA VT )
Where:
VT = the pre-merger value of the target firm
VA - T = value of the post merger firm
VA = value of the pre-merger acquiring firm
Reasons for Acquisitions
Increased Market Power
Acquisition intended to reduce the competitive balance of the industry
Overcome Barriers to Entry
Acquisitions overcome costly barriers to entry which may make “start-ups”
economically unattractive
Lower Cost and Risk of New Product Development
Buying established businesses reduces risk of start-up ventures
Reasons for Acquisitions
Increased Speed to Market
Closely related to Barriers to Entry, allows market entry in a more
timely fashion
Diversification
Quick way to move into businesses when firm currently lacks experience
and depth in industry
Types of Merger
1. Horizontal Merger
2. Vertical Merger
3. Conglomerate Merger
4. Concentric Merger
Horizontal Merger
Horizontal mergers are those mergers where
the companies manufacturing similar kinds of
commodities or running similar type of
businesses merge with each other.
Examples of Horizontal Merger
Lipton India and Brooke Bond.
Bank of Mathura with ICICI Bank.
BSES Ltd with Orissa Power Supply Company.
Associated Cement Companies Ltd Damodar Cement.
Vertical Merger
A merger between two companies producing
different goods or services.
Example of Vertical Merger
Time Warner Incorporated, a major cable operation, and the
Turner Corporation, which produces CNN, TBS, and other
programming.
Pixar-Disney Merger
Conglomerate Merger
A merger between firms that are involved in totally
unrelated business activities.
Two types of conglomerate mergers:
Pure conglomerate mergers involve firms with nothing in
common.
Mixed conglomerate mergers involve firms that are looking
for product extensions or market extensions.
Example of Conglomerate Merger
Walt Disney Company and the
American Broadcasting Company.
Concentric Merger
A merger of firms which are into similar type
of business.
Example of Concentric Merger
Next link is a competitive local exchange carrier offering
services in 57 cities and building a nationwide IP network.
Concentric, a national ISP, offers dedicated and dial-up
Internet access, high-speed DSL and VPN services across
the U.S. and overseas.
Top Acquisitions
Transaction value
Rank Year Purchaser Purchased
(in mil. USD)
America Online
1 2000 Time Warner 164,747
Inc. (AOL)
Glaxo Wellcome SmithKline
2 2000 75,961
Plc. Beecham Plc.
Comcast AT&T Broadband
3 2001 72,041
Corporation & Internet Svcs
Sanofi-Synthelabo
4 2004 Aventis SA 60,243
SA
Pharmacia
5 2002 Pfizer Inc. 59,515
Corporation
JP Morgan Chase &
6 2004 Bank One Corp 58,761
Co
Conclusion
