Motive Behind M&A

 Mergers and acquisitions are strategic decisions leading to the

maximization of a company’s growth by enhancing its production and
marketing operations.

 They have become popular in the recent times because of the

enhanced competition, breaking of trade barriers, free flow of capital
across countries and globalization of business as a number of
economies are being deregulated and integrated with other
economies.

 A number of motives are attributed for the occurrence of mergers and

Motive behind
M&A
acquisitions.
Purchase of Increased External
Synergies through Accelerated Increased Market
Diversification Assets at Bargain Financial
Consolidation Growth Power
Price Capability
 Synergies through Consolidation
 Synergy implies a situation where the combined firm is more valuable than the sum of the
individual combining firms.

 It is defined as ‘two plus two equal to five’ (2+2=5) phenomenon. Synergy refers to benefits other
than those related to economies of scale.

 Operating economies are one form of synergy benefits. But apart from operating economies,
synergy may also arise from enhanced managerial capabilities, creativity, innovativeness, R&D
and market coverage capacity due to the complementarily of resources and skills and a widened
horizon of opportunities.

 An under valued firm will be a target for acquisition by other firms.

 However, the fundamental motive for the acquiring firm to takeover a target firm may be the
desire to increase the wealth of the shareholders of the acquiring firm.
 Diversification
 A commonly stated motive for mergers and acquisitions is to achieve risk reduction through
diversification. The extent, to which risk is reduced, depends upon on the correlation between the
earnings of the merging entities. While negative correlation brings greater reduction in risk,
positive correlation brings lesser reduction in risk.

 Diversification into new areas and new products can also be a motive for a firm to merge another
with it. A firm operating in North India, if merges with another firm operating primarily in South
India, can definitely cover broader economic areas. Individually these firms could serve only a
limited area.

 Moreover, products diversification resulting from merger can also help the new firm fighting the
cyclical/seasonal fluctuations. For example, firm A has a product line with a particular cyclical
variations and firm B deals in product line with counter cyclical variations. Individually, the
earnings of the two firms may fluctuate in line with the cyclical variations. However, if they merge,
the cyclically prone earnings of firm A would be set off by the counter cyclically prone earnings of
firm B.
 Accelerated Growth
 Growth is essential for sustaining the viability, dynamism and value-enhancing capability
of company.
 A growth- oriented company is not only able to attract the most talented executives but it
would also be able to retain them.
 Growing operations provide challenges and excitement to the executives as well as
opportunities for their job enrichment and rapid career development. This helps to
increase managerial efficiency. Other things being the same, growth leads to higher
profits and increase in the shareholders value.

 A company can achieve its growth objective by:

1. Expanding its existing markets
2. Entering in new markets.
 Increased Market Power
 A merger can increase the market share of the merged firm. The increased concentration or
market share improves the profitability of the firm due to economies of scale.
 The bargaining power of the firm with labor, suppliers and buyers is also enhanced. The merged
firm can also exploit technological breakthroughs against obsolescence and price wars. Thus, by
limiting competition, the merged firm can earn super normal profit and strategically employ the
surplus funds to further consolidate its position and improve its market power.
 Merger is not only route to obtain market power. A firm can increase its market share through
internal growth or ventures or strategic alliances. Also, it is not necessary that the increased
market power of the merged firm will lead to efficiency and optimum allocation of resources.
Market power means undue concentration which could limit the choice of buyers as well as
exploit suppliers and labor.
 Purchase of Assets at Bargain Price
 Mergers may be explained by the opportunity to acquire assets, particularly land, mined rights,
plant and equipment at lower cost than would be incurred if they were purchased or constructed
at current market prices.
 If market prices of many stocks have been considerably below the replacement cost of the assets
they represent, expanding firm considering constructing plants developing mines, or buying
equipment. Often it has found that the desired asset could be obtained cheaper by acquiring a
firm that already owned and operated the asset.
 Risk could be reduced because the assets were already in place and an organization of people
knew how to operate them and market their products.
 Many of mergers can be financed by cash tender offers to the acquired firm’s shareholders at
price substantially above the current market. Even, so, the assets can be acquired for less than
their current cost of construction. The basic factor underlying this is that inflation in construction
costs not fully reflected in stock prices because of high interest rates and limited optimism (or
downright pessimism) by stock investors regarding future economic conditions.
 Increased External Financial Capability
 Many mergers, particularly those of relatively small firms into large ones, occur when the acquired
firm simply cannot finance its operations. This situation is typical in a small growing firm with
expanding financial requirements. The firm has exhausted its bank credit and has virtually no access
to long term debt or equity markets.

 Sometimes the small firms have encountered operating difficulty and the bank has served notice
that its loans will not be renewed. In this type of situation, a large firm with sufficient cash and
credit to finance the requirements of the smaller one probably can obtain a good situation by
making a merger proposal to the small firm.

 The only alternative the small firm may have been to try to interest two or more larger firms in
proposing merger to introduce completion into their bidding for the acquisition.

 The smaller firm’s situation might not be so bleak. It may not be threatened by nonrenewable of a
maturing loan. But its management may recognize that continued growth to capitalize on its
markets will require financing beyond its means.
 M&A –Theories
1. Operational Synergy
• Economies of scale
• Economies of scope
• Complementary technical assets and skills

2. Financial synergy
• Lower cost of capital
• Coinsurance effect
• Lower transaction or floatation cost

3. Diversification
• New product / current markets
• New product/ new market
• Current product/new market
 M&A –Theories
4. Strategic realignment
• Technological change
• Regulatory and political change

5. Hubris (Managerial pride) : The theory of managerial hubris (Roll, 1986) was proposed by Richard Roll,
who postulated that managers may have good intentions in increasing their firm’s value but, being over-confident;
they over-estimate their abilities to create synergies.

6. Buying undervalued assets (low Q ratio) : A low Q ratio—between 0 and 1—means that the cost to replace
a firm's assets is greater than the value of its stock. This implies that the stock is undervalued.

7. Managerialism (Agency problem)

8. Tax consideration

9. Market power
 M&A Process
1. Acquisition Strategy
 What is the buyer seeking to achieve?
 What are their business goals?
 High level strategic: Market/ products/Geography/ Market Share/ Eliminate Competitors

2. Search Criteria
 The more details the better
 Business Criteria: scale, location, ownership, Business positioning, customers, partners/suppliers
 Financial Criteria: revenues, profit, cash flow, balance sheet, valuation and price

3. Long List
 Advisers/ Acquirer screen the market for potentially interesting targets.
 Initial scope and valuation
 M&A Process
4. Initial Approach
 Initialise discussions with short list of potential targets best fit to acquisition criteria.
 Information.
 Confidentiality if necessary.
 Evaluate their interest in a deal.

5. Valuation
 Obtain detailed current and forecast information.
 Value on stand alone basis.
 What are the acquisitions benefits (synergies) you don’t pay for synergies.
 Use a range of valuation techniques- ownership / public / private / VC will influence value.
 M&A Process
6. Negotiate to LOI
 Detailed discussions
 Table offer and conditions
 Establish sellers’ key criteria
 Get to signed letter of intent

7. Due Diligence
 Details review of all aspects of the business
 Submit detailed information request.
 Use specialist advisers to conduct review and report back: Accountants / Lawyers/ Management
consultants / Environmentalists.
 Confirm the value of the business and detailed terms
 Disclosure is key- skeletons in the cupboard
 Finance
 Assets and liabilities
 Customers and suppliers
 Management, staff and HR issues etc.
 M&A Process
8. Sale and purchase Contract
 Prepared concurrently with Detailed Disclosure
 Assets or share purchase
 Conditions
 Detailed disclosure by sellers
 Negotiate working capital agreement
 Always large number of other contracts and report- shareholder agreements if seller retain a position
or a financial interest

9. Acquisition Finance
 This needs to be organised well in advance
 Payment for the deal
 Cash / shares
 Fundraising? Debt?
 M&A Process
10. Closing and post deal implementation
 Deal signed
 Consideration passes from buyers to sellers
 Post deal implementation starts
 Fast Track Merger
 The provisions of Section 233 of the Companies Act, 2013 (Act) provides a simplified procedure for Merger
and Amalgamation of certain companies wherein these companies need not follow the lengthy and
complicated procedure as provided under Sections 230 to 232 of the Act.

 This simplified procedure is called "Fast Track Merger" and Section 233 was notified by the Ministry of
Corporate Affairs (MCA) on December 7, 2016.

 Further, MCA has notified Companies (Compromise, Arrangements and Amalgamation) Rules, 2016 on
December 14, 2016. The said Rules were further amended in 2021.

 The fast-track merger mechanism offers a cost-effective solution, with no intervention of the National
Company Law Tribunal (NCLT); no requirement of a special audit; and no administrative formalities.

 Furthermore, the process does not require any newspaper advertisement or public advertisement announcing
the merger.
 There is no requirement to submit an auditor’s certificate.
 The estimated period for the fast-track procedure has been allotted to 90-100 days.
 Fast Track Merger
The draft scheme requires approval of
 Board of Directors of both companies.
 90% of shareholders (in number) and 90% of creditors (in value).
 Central Government (power delegated to Regional Director)

The following are the mandatory requirements for the facilitation of the fast-track merger process
 The scheme must be filed with the Jurisdictional Registrar of Companies (ROC) as well as the
official liquidator.
 Convening a meeting of members and creditors to obtain approval. The creditors meeting can be
avoided if they readily provide their consent in writing.
 The filing of a declaration of solvency by both the involving companies.
COMPANIES COVERED UNDER THE FAST-TRACK MERGER ROUTE
A scheme of merger or amalgamation under section 233 of the Act may be entered into between any of
the following class of companies, namely:—

[Link] or more start-up companies; or

[Link] or more start-up company with one or more Small Company;
[Link] between two or more Small Companies;
[Link] between a Holding Company and its Wholly-owned Subsidiary Company

Start-up Company" means a private company incorporated under the Companies Act, 2013 or
Companies Act, 1956 and recognized as such in accordance with Notification number G.S.R. 127 (E),
dated 19th February, 2019 issued by the Department for Promotion of Industry and Internal Trade.

Small Company" means a company other than a public company

1. Paid up share capital of which does not exceed 4 crores rupees or such higher amount as may be
prescribed which shall not be more than ten Crores rupees and
2. Turnover of which as per profit and loss account for the immediately preceding financial year does
not exceed 40 crores rupees or such higher amount as may be prescribed which shall not be more than
one hundred crore rupees.
 Cross Border M&A
A cross-border merger occurs when companies from different nations combine their assets and
operations. This can involve the creation of a new, globally operating company, or the absorption of one
company by another.

It involves two countries according to the applicable legal terminology:-

A.) The state where the origin of the companies that make an acquisition (the acquiring company) in
other countries: – “Home Country”.

B.) A country where the target company is situated refers to as the “Host Country”.
 Benefits Cross Border M&A

 Expansion of markets
 Geographic and industrial diversification
 Technology transfer
 Avoiding entry barriers & Industry consolidation
 Tax planning and benefits
 Foreign exchange earnings & Accelerating growth
 Utilization of material and labor at lower costs
 Increased customers base & Competitive advantage
 Difficulties in Cross Border M&A

 Legal issues in different countries

 Accounting challenges & Taxation aspects
 Technological differences
 Political landscape & Strategic issues
 Overpayment in the deal
 Failure to integrate & HR challenges
 Cross border mergers and acquisitions have been rapidly ascending in quantum and value in
recent years.
 Legal Framework of Cross Border M&A

Section 234 of the Companies Act, 2013 notified by the Ministry of Corporate Affairs on 13 th April 2017 provides
the legal framework for cross border mergers in India. The following laws govern cross border mergers in India:
1. Companies Act, 2013
2. SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011
3. Foreign Exchange Management (Cross Border Merger) Regulations, 2018
4. Competition Act, 2002
5. Insolvency and Bankruptcy Code, 2016
6. Income Tax Act, 1961
7. The Department of Industrial Policy and Promotion (DIPP)
8. Transfer of Property Act, 1882
9. Indian Stamp Act, 1899
10. Foreign Exchange Management Act, 1999 (FEMA)
11. IFRS 3 Business Combinations
 Inbound vs outbound M&A
Aspect Inbound M&A Outbound M&A
Foreign companies acquiring domestic Domestic companies acquiring foreign
Definition
firms. firms.
Entering a new market, leveraging local Expanding global presence, accessing
Purpose
resources, or expanding operations. new markets, or acquiring technology.
Foreign capital flows into the domestic Domestic capital flows out to foreign
Capital Flow
economy. markets.
Regulatory Subject to local foreign investment laws Subject to international regulations and
Impact and approvals. cross-border compliance.
Economic Boosts domestic employment, Strengthens global footprint, enhances
Impact technology transfer, and capital inflow. competitiveness, and diversifies revenue.
Political, regulatory, and cultural Foreign exchange risks, geopolitical
Risk Factors
challenges in the domestic market. uncertainties, and compliance issues.
Example Walmart acquiring Flipkart (India). Tata Steel acquiring Corus (UK).
Methods of Payment & Financing Options in M&A
 Take Over Strategies

1. Street Sweep: This refers to the technique where the acquiring company accumulates
larger number of shares in a target before making an open offer. The advantage is that the
target company is left with no choice but to agree to the proposal of acquirer for takeover.

2. Bear Hug: When the acquirer threatens the target company to make an open offer, the
board of target company agrees to a settlement with the acquirer for change of control.

3. Strategic Alliance: This involves disarming the acquirer by offering a partnership rather
than a buyout. The acquirer should assert control from within and takeover the target
company.

4. Brand Power: This refers to entering into an alliance with powerful brands to displace the
target’s brands and as a result, buyout the weakened company.
 Take Over defense Strategies
1. Divestiture - In a divestiture the target company divests or spins off some of its businesses in the
form of an independent, subsidiary company. Thus, reducing the attractiveness of the existing
business to the acquirer.
2. Crown jewels - When a target company uses the tactic of divestiture it is said to sell the crown
jewels. In some countries such as the UK, such tactic is not allowed once the deal becomes known
and is unavoidable.
3. Poison pill - Sometimes an acquiring company itself becomes a target when it is bidding for
another company. The tactics used by the acquiring company to make itself unattractive to a
potential bidder is called poison pills. For instance, the acquiring company may issue substantial
number of convertible debentures to its existing shareholders to be converted at a future date when
it faces a takeover threat. The task of the bidder would become difficult since the number of shares
to having voting control of the company increases substantially.
4. Poison Put - In this case the target company issue bonds that encourage holder to cash in at
higher prices. The resultant cash drainage would make the target unattractive.
 Take Over defense Strategies
5. Greenmail - Greenmail refers to an incentive offered by management of the target company
to the potential bidder for not pursuing the takeover. The management of the target company may
offer the acquirer for its shares a price higher than the market price.
6. White knight - In this a target company offers to be acquired by a friendly company to escape
from a hostile takeover. The possible motive for the management of the target company to do so
is not to lose the management of the company. The hostile acquirer may change the management.
7. White squire - This strategy is essentially the same as white knight and involves sell out of
shares to a company that is not interested in the takeover. As a consequence, the management of
the target company retains its control over the company.
8. Golden parachutes - When a company offers hefty compensations to its managers if they get
ousted due to takeover, the company is said to offer golden parachutes. This reduces acquirer’s
interest for takeover.
9. Pac-man defense - This strategy aims at the target company making a counter bid for the
acquirer company. This would force the acquirer to defend itself and consequently may call off
its proposal for takeover.
 Reasons for M&A failure

[Link] Clash – Differences in corporate culture and values lead to integration issues.
[Link] – Paying too much for the target company reduces expected synergies.
[Link] Due Diligence – Hidden liabilities or financial misstatements impact post-merger performance.
[Link] Challenges – Difficulty in merging operations, systems, and teams.
[Link] Issues – Government intervention or antitrust laws blocking the deal.
[Link] of Strategic Fit – Misalignment of business goals and market positioning.
[Link] Resistance – Key talent leaves due to uncertainty and dissatisfaction.
[Link] Downturn – Market conditions change, making the deal unviable.
[Link] Failure – Poor management and lack of a clear post-merger strategy.
[Link] Synergies – Expected cost savings and revenue gains do not materialize