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Chapter # 1 Introduction

1.1 CONCEPTUAL FRAMEWORK OF MERGERS ACQUISITION


Introduction : -

Mergers and acquisitions (abbreviated M&A) refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling, dividing and combining of different companies and similar entities that can help an enterprise grow rapidly in its sector or location of origin, or a new field or new location, without creating a subsidiary, other child entity or using a joint venture. The distinction between a "merger" and an "acquisition" has become increasingly blurred in various respects (particularly in terms of the ultimate economic outcome), although it has not completely disappeared in all situations.

Mergers and acquisitions (M&A) and corporate restructuring are a big part of the corporate finance world. Every day, Wall Street investment bankers arrange M&A transactions, which bring separate companies together to form larger ones. When they're not creating big companies from smaller ones, corporate finance deals do the reverse and break up companies through spinoffs, carve-outs or tracking stocks.

Not surprisingly, these actions often make the news. Deals can be worth hundreds of millions, or even billions, of dollars. They can dictate the fortunes of the companies involved for years to come. For a CEO, leading an M&A can represent the highlight of a whole career. And it is no wonder we hear about so many of these transactions; they happen all the time. Next time you flip open the newspapers business section, odds are good that at least one headline will announce some kind of M&A transaction.

Sure, M&A deals grab headlines, but what does this all mean to investors? To answer this question, this tutorial discusses the forces that drive companies to buy or merge with others, or to split-off or sell parts of their own businesses. Once you know the different ways in which these deals are executed, you'll have a better idea of whether you should cheer or weep when a company you own buys another company - or is bought by one. You will also be aware of the tax consequences for companies and for investors.

1.2 ACQUISITION :An acquisition is the purchase of one business or company by another company or other business entity. Consolidation occurs when two companies combine together to form a new enterprise altogether, and neither of the previous companies survives independently. Acquisitions are divided into "private" and "public" acquisitions, depending on whether the acquiree or merging company (also termed a target) is or is not listed on public stock markets. An additional dimension or categorization consists of whether an acquisition is friendly or hostile. Achieving acquisition success has proven to be very difficult, while various studies have shown that 50% of acquisitions were unsuccessful. The acquisition process is very complex, with many dimensions influencing its outcome. Whether a purchase is perceived as being a "friendly" one or a "hostile" depends significantly on how the proposed acquisition is communicated to and perceived by the target company's board of directors, employees and shareholders. It is normal for M&A deal communications to take place in a so-called 'confidentiality bubble' wherein the flow of information is restricted pursuant to confidentiality agreements. In the case of a friendly transaction, the companies cooperate in negotiations; in the case of a hostile deal, the board and/or management of the target is unwilling to be bought or the target's board has no prior knowledge of the offer. Hostile acquisitions can, and often do, ultimately become "friendly", as the acquirer secures endorsement of the transaction from the board of the acquiree company. This usually requires an improvement in the terms of the offer and/or through negotiation. "Acquisition" usually refers to a purchase of a smaller firm by a larger one. Sometimes, however, a smaller firm will acquire management control of a larger and/or longer-established company and retain the name of the latter for the post-acquisition combined entity. This is known as a reverse takeover. Another type of acquisition is the reverse merger, a form of transaction that enables a private company to be publicly listed in a relatively short time frame. A reverse merger occurs when a privately held company (often one that has strong prospects and is eager to raise financing) buys a publicly listed shell company, usually one with no business and limited assets.

There are also a variety of structures used in securing control over the assets of a company, which have different tax and regulatory implications:

The buyer buys the shares, and therefore control, of the target company being purchased. Ownership control of the company in turn conveys effective control over the assets of the company, but since the company is acquired intact as a going concern, this form of transaction carries with it all of the liabilities accrued by that business over its past and all of the risks that company faces in its commercial environment.

The buyer buys the assets of the target company. The cash the target receives from the sell-off is paid back to its shareholders by dividend or through liquidation. This type of transaction leaves the target company as an empty shell, if the buyer buys out the entire assets. A buyer often structures the transaction as an asset purchase to "cherry-pick" the assets that it wants and leave out the assets and liabilities that it does not. This can be particularly important where foreseeable liabilities may include future, unquantified damage awards such as those that could arise from litigation over defective products, employee benefits or terminations, or environmental damage. A disadvantage of this structure is the tax that many jurisdictions, particularly outside the United States, impose on transfers of the individual assets, whereas stock transactions can frequently be structured as like-kind exchanges or other arrangements that are tax-free or tax-neutral, both to the buyer and to the seller's shareholders.

The terms "demerger", "spin-off" and "spin-out" are sometimes used to indicate a situation where one company splits into two, generating a second company separately listed on a stock exchange. As per knowledge-based views, firms can generate greater values through the retention of knowledge-based resources which they generate and integrate. Extracting technological benefits during and after acquisition is ever challenging issue because of organizational differences. Based on the content analysis of seven interviews authors concluded five following components for their grounded model of acquisition: 1. Improper documentation and changing implicit knowledge makes it difficult to share information during acquisition. 2. For acquired firm symbolic and cultural independence which is the base of technology and capabilities are more important than administrative independence. 3. Detailed knowledge exchange and integrations are difficult when the acquired firm is large and high performing.

4. Management of executives from acquired firm is critical in terms of promotions and pay incentives to utilize their talent and value their expertise. 5. Transfer of technologies and capabilities are most difficult task to manage because of complications of acquisition implementation. The risk of losing implicit knowledge is always associated with the fast pace acquisition. Preservation of tacit knowledge, employees and literature are always delicate during and after acquisition. Strategic management of all these resources is a very important factor for a successful acquisition. Increase in acquisitions in our global business environment has pushed us to evaluate the key stake holders of acquisition very carefully before implementation. It is imperative for the acquirer to understand this relationship and apply it to its advantage. Retention is only possible when resources are exchanged and managed without affecting their independence. Acquisitions and Takeovers :An acquisition may be defined as an act of acquiring effective control by one company over assets or management of another company without any combination of companies. Thus, in an acquisition two or more companies may remain independent, separate legal entities, but there may be a change in control of the companies. When an acquisition is 'forced' or 'unwilling', it is called a takeover. In an unwilling acquisition, the management of 'target' company would oppose a move of being taken over. But, when managements of acquiring and target companies mutually and willingly agree for the takeover, it is called acquisition or friendly takeover. Under the Monopolies and Restrictive Practices Act, takeover meant acquisition of not less than 25 percent of the voting power in a company. While in the Companies Act (Section 372), a company's investment in the shares of another company in excess of 10 percent of the subscribed capital can result in takeovers. An acquisition or takeover does not necessarily entail full legal control. A company can also have effective control over another company by holding a minority ownership.

1.3 MERGERS OR AMALGAMATIONS.

A merger is a combination of two or more businesses into one business. Laws in India use the term 'amalgamation' for merger. The Income Tax Act,1961 [Section 2(1A)] defines amalgamation as the merger of one or more companies with another or the merger of two or more companies to form a new company, in such a way that all assets and liabilities of the amalgamating companies become assets and liabilities of the amalgamated company and shareholders not less than nine-tenths in value of the shares in the amalgamating company or companies become shareholders of the amalgamated company. Thus, mergers or amalgamations may take two forms:

Merger through Absorption:- An absorption is a combination of two or more companies into an 'existing company'. All companies except one lose their identity in such a merger. For example, absorption of Tata Fertilisers Ltd (TFL) by Tata Chemicals Ltd. (TCL). TCL, an acquiring company (a buyer), survived after merger while TFL, an acquired company (a seller), ceased to exist. TFL transferred its assets, liabilities and shares to TCL.

Merger through Consolidation:- A consolidation is a combination of two or more companies into a 'new company'. In this form of merger, all companies are legally dissolved and a new entity is created. Here, the acquired company transfers its assets, liabilities and shares to the acquiring company for cash or exchange of shares. For example, merger of Hindustan Computers Ltd, Hindustan Instruments Ltd, Indian Software Company Ltd and Indian Reprographics Ltd into an entirely new company called HCL Ltd.

A fundamental characteristic of merger (either through absorption or consolidation) is that the acquiring company (existing or new) takes over the ownership of other companies and combines their operations with its own operations. Besides, there are three major types of mergers:-

Horizontal merger:- is a combination of two or more firms in the same area of business. For example, combining of two book publishers or two luggage manufacturing companies to gain dominant market share.

Vertical merger:- is a combination of two or more firms involved in different stages of production or distribution of the same product. For example, joining of a TV manufacturing (assembling) company and a TV marketing company or joining of a spinning company and a weaving company. Vertical merger may take the form of forward or backward merger. When a company combines with the supplier of material, it is called backward merger and when it combines with the customer, it is known as forward merger.

Conglomerate merger:- is a combination of firms engaged in unrelated lines of business activity. For example, merging of different businesses like manufacturing of cement products, fertilizer products, electronic products, insurance investment and advertising agencies. L&T and Voltas Ltd are examples of such mergers. Horizontal and Vertical Mergers

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DISTINCTION BETWEEN MERGERS AND ACQUISITIONS


Although often used synonymously, the terms merger and acquisition mean slightly different things.This paragraph does not make a clear distinction between the legal concept of a merger (with the resulting corporate mechanics, statutory merger or statutory consolidation, which have nothing to do with the resulting power grab as between the management of the target and the acquirer) and the business point of view of a "merger", which can be achieved independently of the corporate mechanics through various means such as "triangular merger", statutory merger, acquisition, etc. When one company takes over another and clearly establishes itself as the new owner, the purchase is called an acquisition. From a legal point of view, the target company ceases to exist, the buyer "swallows" the business and the buyer's stock continues to be traded. In the pure sense of the term, a merger happens when two firms agree to go forward as a single new company rather than remain separately owned and operated. This kind of action is more precisely referred to as a "merger of equals". The firms are often of about the same size. Both companies' stocks are surrendered and new company stock is issued in its place.For example, in the 1999 merger of Glaxo Wellcome and SmithKline Beecham, both firms ceased to exist when they merged, and a new company, GlaxoSmithKline, was created. In practice, however, actual mergers of equals don't happen very often. Usually, one company will buy another and, as part of the deal's terms, simply allow the acquired firm to proclaim that the action is a merger of equals, even if it is technically an acquisition. Being bought out often carries negative connotations; therefore, by describing the deal euphemistically as a merger, deal makers and top managers try to make the takeover more palatable. An example of this would be the takeover of Chrysler by Daimler-Benz in 1999 which was widely referred to as a merger at the time. A purchase deal will also be called a merger when both CEOs agree that joining together is in the best interest of both of their companies. But when the deal is unfriendly (that is, when the target company does not want to be purchased) it is always regarded as an acquisition.

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ADVANTAGES OF MERGERS & ACQUISITIONS The most common motives and advantages of mergers and acquisitions are:

Accelerating a company's growth, particularly when its internal growth is constrained due to paucity of resources. Internal growth requires that a company should develop its operating facilities- manufacturing, research, marketing, etc. But, lack or inadequacy of resources and time needed for internal development may constrain a company's pace of growth. Hence, a company can acquire production facilities as well as other resources from outside through mergers and acquisitions. Specially, for entering in new products/markets, the company may lack technical skills and may require special marketing skills and a wide distribution network to access different segments of markets. The company can acquire existing company or companies with requisite infrastructure and skills and grow quickly.

Enhancing profitability because a combination of two or more companies may result in more than average profitability due to cost reduction and efficient utilization of resources. This may happen because of:-

Economies of scale:- arise when increase in the volume of production leads to a reduction in the cost of production per unit. This is because, with merger, fixed costs are distributed over a large volume of production causing the unit cost of production to decline. Economies of scale may also arise from other indivisibilities such as production facilities, management functions and management resources and systems. This is because a given function, facility or resource is utilized for a large scale of operations by the combined firm.

Operating economies:- arise because, a combination of two or more firms may result in cost reduction due to operating economies. In other words, a combined firm may avoid or reduce over-lapping functions and consolidate its management functions such as manufacturing, marketing, R&D and thus reduce operating costs. For example, a combined firm may eliminate duplicate channels of distribution, or crate a centralized training center, or introduce an integrated planning and control system.

Synergy:- implies a situation where the combined firm is more valuable than the sum of the individual combining firms. It 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

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capabilities, creativity, innovativeness, R&D and market coverage capacity due to the complementarity of resources and skills and a widened horizon of opportunities.

Diversifying the risks of the company, particularly when it acquires those businesses whose income streams are not correlated. Diversification implies growth through the combination of firms in unrelated businesses. It results in reduction of total risks through substantial reduction of cyclicality of operations. The combination of management and other systems strengthen the capacity of the combined firm to withstand the severity of the unforeseen economic factors which could otherwise endanger the survival of the individual companies.

A merger may result in financial synergy and benefits for the firm in many ways:

By eliminating financial constraints By enhancing debt capacity. This is because a merger of two companies can bring stability of cash flows which in turn reduces the risk of insolvency and enhances the capacity of the new entity to service a larger amount of debt

By lowering the financial costs. This is because due to financial stability, the merged firm is able to borrow at a lower rate of interest.

Limiting the severity of competition by increasing the company's market power. A merger can increase the market share of the merged firm. This improves the profitability of the firm due to economies of scale. The bargaining power of the firm vis--vis labour, suppliers and buyers is also enhanced. The merged firm can exploit technological breakthroughs against obsolescence and price wars.

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DISADVANTAGES OF MERGERS AND ACQUISITION Grasping for a company simply because its on the market , or because a competitor wants to buy it. Overpayment or misguided purchase. Inability to integrate well Diverse Business ;Unmanageable. Leaping without looking at the value

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MERGERS AND ACQUISITIONS: VALUATION MATTERS


Investors in a company that are aiming to take over another one must determine whether the purchase will be beneficial to them. In order to do so, they must ask themselves how much the company being acquired is really worth. Naturally, both sides of an M&A deal will have different ideas about the worth of a target company: its seller will tend to value the company at as high of a price as possible, while the buyer will try to get the lowest price that he can. There are, however, many legitimate ways to value companies. The most common method is to look at comparable companies in an industry, but deal makers employ a variety of other methods and tools when assessing a target company. Here are just a few of them: 1. Comparative Ratios - The following are two examples of the many comparative metrics on which acquiring companies may base their offers:

Price-Earnings Ratio (P/E Ratio) - With the use of this ratio, an acquiring company makes an offer that is a multiple of the earnings of the target company. Looking at the P/E for all the stocks within the same industry group will give the acquiring company good guidance for what the target's P/E multiple should be.

Enterprise-Value-to-Sales Ratio (EV/Sales) - With this ratio, the acquiring company makes an offer as a multiple of the revenues, again, while being aware of the priceto-sales ratio of other companies in the industry.

Replacement Cost - In a few cases, acquisitions are based on the cost of replacing the target company. For simplicity's sake, suppose the value of a company is simply the sum of all its equipment and staffing costs. The acquiring company can literally order the target to sell at that price, or it will create a competitor for the same cost. Naturally, it takes a long time to assemble good management, acquire property and get the right equipment. This method of establishing a price certainly wouldn't make much sense in a service industry where the key assets - people and ideas - are hard to value and develop. Discounted Cash Flow (DCF) - A key valuation tool in M&A, discounted cash flow analysis determines a company's current value according to its estimated future cash flows. Forecasted free cash flows (net income + depreciation/amortization - capital expenditures - change in working capital) are discounted to a present value using the company's weighted average costs of capital (WACC).
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SYNERGY: THE PREMIUM FOR POTENTIAL SUCCESS For the most part, acquiring companies nearly always pay a substantial premium on the stock market value of the companies they buy. The justification for doing so nearly always boils down to the notion of synergy; a merger benefits shareholders when a company's post-merger share price increases by the value of potential synergy. Let's face it, it would be highly unlikely for rational owners to sell if they would benefit more by not selling. That means buyers will need to pay a premium if they hope to acquire the company, regardless of what pre-merger valuation tells them. For sellers, that premium represents their company's future prospects. For buyers, the premium represents part of the post-merger synergy they expect can be achieved. The following equation offers a good way to think about synergy and how to determine whether a deal makes sense. The equation solves for the minimum required synergy:

In other words, the success of a merger is measured by whether the value of the buyer is enhanced by the action. However, the practical constraints of mergers, which we discuss in part five, often prevent the expected benefits from being fully achieved. Alas, the synergy promised by deal makers might just fall short.

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WHAT TO LOOK FOR It's hard for investors to know when a deal is worthwhile. The burden of proof should fall on the acquiring company. To find mergers that have a chance of success, investors should start by looking for some of these simple criteria:

A reasonable purchase price - A premium of, say, 10% above the market price seems within the bounds of level-headedness. A premium of 50%, on the other hand, requires synergy of stellar proportions for the deal to make sense. Stay away from companies that participate in such contests.

Cash transactions - Companies that pay in cash tend to be more careful when calculating bids and valuations come closer to target. When stock is used as the currency for acquisition, discipline can go by the wayside.

Sensible appetite An acquiring company should be targeting a company that is smaller and in businesses that the acquiring company knows intimately. Synergy is hard to create from companies in disparate business areas. Sadly, companies have a bad habit of biting off more than they can chew in mergers.

Mergers are awfully hard to get right, so investors should look for acquiring companies with a healthy grasp of reality.

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BUSINESS VALUATION
The five most common ways to valuate a business are

asset valuation, historical earnings valuation, future maintainable earnings valuation, relative valuation (comparable company & comparable transactions), discounted cash flow (DCF) valuation

Professionals who valuate businesses generally do not use just one of these methods but a combination of some of them, as well as possibly others that are not mentioned above, in order to obtain a more accurate value. The information in the balance sheet or income statement is obtained by one of three accounting measures: a Notice to Reader, a Review Engagement or an Audit. Accurate business valuation is one of the most important aspects of M&A as valuations like these will have a major impact on the price that a business will be sold for. Most often this information is expressed in a Letter of Opinion of Value (LOV) when the business is being valuated for interest's sake. There are other, more detailed ways of expressing the value of a business. While these reports generally get more detailed and expensive as the size of a company increases, this is not always the case as there are many complicated industries which require more attention to detail, regardless of size.

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REGULATIONS FOR MERGERS & ACQUISITIONS


Mergers and acquisitions are regulated under various laws in India. The objective of the laws is to make these deals transparent and protect the interest of all shareholders. They are regulated through the provisions of :

The Companies Act, 1956 The Act lays down the legal procedures for mergers or acquisitions :

Permission for merger:- Two or more companies can amalgamate only when the amalgamation is permitted under their memorandum of association. Also, the acquiring company should have the permission in its object clause to carry on the business of the acquired company. In the absence of these provisions in the memorandum of association, it is necessary to seek the permission of the shareholders, board of directors and the Company Law Board before affecting the merger.

Information to the stock exchange:- The acquiring and the acquired companies should inform the stock exchanges (where they are listed) about the merger.

Approval of board of directors:- The board of directors of the individual companies should approve the draft proposal for amalgamation and authorise the managements of the companies to further pursue the proposal.

Application in the High Court:- An application for approving the draft amalgamation proposal duly approved by the board of directors of the individual companies should be made to the High Court.

Shareholders' and creators' meetings:- The individual companies should hold separate meetings of their shareholders and creditors for approving the amalgamation scheme. At least, 75 percent of shareholders and creditors in separate meeting, voting in person or by proxy, must accord their approval to the scheme.

Sanction by the High Court:- After the approval of the shareholders and creditors, on the petitions of the companies, the High Court will pass an order, sanctioning the amalgamation scheme after it is satisfied that the scheme is fair and reasonable. The date of the court's hearing will be published in two newspapers, and also, the regional director of the Company Law Board will be intimated.

Filing of the Court order:- After the Court order, its certified true copies will be filed with the Registrar of Companies.
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Transfer of assets and liabilities:- The assets and liabilities of the acquired company will be transferred to the acquiring company in accordance with the approved scheme, with effect from the specified date.

Payment by cash or securities:- As per the proposal, the acquiring company will exchange shares and debentures and/or cash for the shares and debentures of the acquired company. These securities will be listed on the stock exchange.

The Competition Act, 2002 The Act regulates the various forms of business combinations through Competition Commission of India. Under the Act, no person or enterprise shall enter into a combination, in the form of an acquisition, merger or amalgamation, which causes or is likely to cause an appreciable adverse effect on competition in the relevant market and such a combination shall be void. Enterprises intending to enter into a combination may give notice to the Commission, but this notification is voluntary. But, all combinations do not call for scrutiny unless the resulting combination exceeds the threshold limits in terms of assets or turnover as specified by the Competition Commission of India. The Commission while regulating a 'combination' shall consider the following factors :

Actual and potential competition through imports; Extent of entry barriers into the market; Level of combination in the market; Degree of countervailing power in the market; Possibility of the combination to significantly and substantially increase prices or profits;

Extent of effective competition likely to sustain in a market; Availability of substitutes before and after the combination; Market share of the parties to the combination individually and as a combination; Possibility of the combination to remove the vigorous and effective competitor or competition in the market;

Nature and extent of vertical integration in the market; Nature and extent of innovation; Whether the benefits of the combinations outweigh the adverse impact of the combination.
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Thus, the Competition Act does not seek to eliminate combinations and only aims to eliminate their harmful effects. The other regulations are provided in the:- The Foreign Exchange Management Act, 1999 and the Income Tax Act,1961. Besides, the Securities and Exchange Board of India (SEBI) has issued guidelines to regulate mergers and acquisitions. The SEBI (Substantial Acquisition of Shares and Take-overs) Regulations,1997 and its subsequent amendments aim at making the take-over process transparent, and also protect the interests of minority shareholders

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FINANCING M&A
Mergers are generally differentiated from acquisitions partly by the way in which they are financed and partly by the relative size of the companies. Various methods of financing an M&A deal exist: Cash Payment by cash. Such transactions are usually termed acquisitions rather than mergers because the shareholders of the target company are removed from the picture and the target comes under the (indirect) control of the bidder's shareholders. Stock Payment in the form of the acquiring company's stock, issued to the shareholders of the acquired company at a given ratio proportional to the valuation of the latter. Which method of financing to choose? There are some elements to think about when choosing the form of payment. When submitting an offer, the acquiring firm should consider other potential bidders and think strategically. The form of payment might be decisive for the seller. With pure cash deals, there is no doubt on the real value of the bid (without considering an eventual earnout). The contingency of the share payment is indeed removed. Thus, a cash offer preempts competitors better than securities. Taxes are a second element to consider and should be evaluated with the counsel of competent tax and accounting advisers. Third, with a share deal the buyers capital structure might be affected and the control of the buyer modified. If the issuance of shares is necessary, shareholders of the acquiring company might prevent such capital increase at the general meeting of shareholders. The risk is removed with a cash transaction. Then, the balance sheet of the buyer will be modified and the decision maker should take into account the effects on the reported financial results. For example, in a pure cash deal (financed from the companys current account), liquidity ratios might decrease. On the other hand, in a pure stock for stock transaction (financed from the issuance of new shares), the company might show lower profitability ratios (e.g. ROA). However, economic dilution must prevail towards accounting dilution when making the choice. The form of payment and financing options are tightly linked. If the buyer pays cash, there are three main financing options:

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Cash on hand: it consumes financial slack (excess cash or unused debt capacity) and may decrease debt rating. There are no major transaction costs.

It consumes financial slack, may decrease debt rating and increase cost of debt. Transaction costs include underwriting or closing costs of 1% to 3% of the face value.

Issue of stock: it increases financial slack, may improve debt rating and reduce cost of debt. Transaction costs include fees for preparation of a proxy statement, an extraordinary shareholder meeting and registration.

If the buyer pays with stock, the financing possibilities are:


Issue of stock (same effects and transaction costs as described above). Shares in treasury: it increases financial slack (if they dont have to be repurchased on the market), may improve debt rating and reduce cost of debt. Transaction costs include brokerage fees if shares are repurchased in the market otherwise there are no major costs.

In general, stock will create financial flexibility. Transaction costs must also be considered but tend to have a greater impact on the payment decision for larger transactions. Finally, paying cash or with shares is a way to signal value to the other party, e.g.: buyers tend to offer stock when they believe their shares are overvalued and cash when undervalued

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MOTIVES BEHIND M&A


The dominant rationale used to explain M&A activity is that acquiring firms seek improved financial performance. The following motives are considered to improve financial performance:

Economy of scale: This refers to the fact that the combined company can often reduce its fixed costs by removing duplicate departments or operations, lowering the costs of the company relative to the same revenue stream, thus increasing profit margins.

Economy of scope: This refers to the efficiencies primarily associated with demand-side changes, such as increasing or decreasing the scope of marketing and distribution, of different types of products.

Increased revenue or market share: This assumes that the buyer will be absorbing a major competitor and thus increase its market power (by capturing increased market share) to set prices.

Cross-selling: For example, a bank buying a stock broker could then sell its banking products to the stock broker's customers, while the broker can sign up the bank's customers for brokerage accounts. Or, a manufacturer can acquire and sell complementary products.

Synergy: For example, managerial economies such as the increased opportunity of managerial specialization. Another example are purchasing economies due to increased order size and associated bulk-buying discounts.

Taxation: A profitable company can buy a loss maker to use the target's loss as their advantage by reducing their tax liability. In the United States and many other countries, rules are in place to limit the ability of profitable companies to "shop" for loss making companies, limiting the tax motive of an acquiring company.

Geographical or other diversification: This is designed to smooth the earnings results of a company, which over the long term smoothens the stock price of a company, giving conservative investors more confidence in investing in the company. However, this does not always deliver value to shareholders (see below).

Resource transfer: resources are unevenly distributed across firms (Barney, 1991) and the interaction of target and acquiring firm resources can create value through either overcoming information asymmetry or by combining scarce resources.

Vertical integration: Vertical integration occurs when an upstream and downstream firm merge (or one acquires the other). There are several reasons for this to occur. One reason is to internalise an externality problem. A common example of such an externality is double
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marginalization. Double marginalization occurs when both the upstream and downstream firms have monopoly power and each firm reduces output from the competitive level to the monopoly level, creating two deadweight losses. Following a merger, the vertically integrated firm can collect one deadweight loss by setting the downstream firm's output to the competitive level. This increases profits and consumer surplus. A merger that creates a vertically integrated firm can be profitable.

Hiring: some companies use acquisitions as an alternative to the normal hiring process. This is especially common when the target is a small private company or is in the startup phase. In this case, the acquiring company simply hires the staff of the target private company, thereby acquiring its talent (if that is its main asset and appeal). The target private company simply dissolves and little legal issues are involved.

Absorption of similar businesses under single management: similar portfolio invested by two different mutual funds (Ahsan Raza Khan, 2009) namely united money market fund and united growth and income fund, caused the management to absorb united money market fund into united growth and income fund.

However, on average and across the most commonly studied variables, acquiring firms' financial performance does not positively change as a function of their acquisition activity. Therefore, additional motives for merger and acquisition that may not add shareholder value include:

Diversification: While this may hedge a company against a downturn in an individual industry it fails to deliver value, since it is possible for individual shareholders to achieve the same hedge by diversifying their portfolios at a much lower cost than those associated with a merger. (In his book One Up on Wall Street, Peter Lynch memorably termed this "diworseification".)

Manager's hubris: manager's overconfidence about expected synergies from M&A which results in overpayment for the target company.

Empire-building: Managers have larger companies to manage and hence more power. Manager's compensation: In the past, certain executive management teams had their payout based on the total amount of profit of the company, instead of the profit per share, which would give the team a perverse incentive to buy companies to increase the total profit while decreasing the profit per share (which hurts the owners of the company, the shareholders).

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BRAND CONSIDERATIONS
Mergers and acquisitions often create brand problems, beginning with what to call the company after the transaction and going down into detail about what to do about overlapping and competing product brands. Decisions about what brand equity to write off are not inconsequential. And, given the ability for the right brand choices to drive preference and earn a price premium, the future success of a merger or acquisition depends on making wise brand choices. Brand decision-makers essentially can choose from four different approaches to dealing with naming issues, each with specific pros and cons: 1. Keep one name and discontinue the other. The strongest legacy brand with the best prospects for the future lives on. In the merger of United Airlines and Continental Airlines, the United brand will continue forward, while Continental is retired. 2. Keep one name and demote the other. The strongest name becomes the company name and the weaker one is demoted to a divisional brand or product brand. An example is Caterpillar Inc. keeping the Bucyrus International name.[13] 3. Keep both names and use them together. Some companies try to please everyone and keep the value of both brands by using them together. This can create a unwieldy name, as in the case of PricewaterhouseCoopers, which has since changed its brand name to "PwC". 4. Discard both legacy names and adopt a totally new one. The classic example is the merger of Bell Atlantic with GTE, which became Verizon Communications. Not every merger with a new name is successful. By consolidating into YRC Worldwide, the company lost the considerable value of both Yellow Freight and Roadway Corp. The factors influencing brand decisions in a merger or acquisition transaction can range from political to tactical. Ego can drive choice just as well as rational factors such as brand value and costs involved with changing brands. Beyond the bigger issue of what to call the company after the transaction comes the ongoing detailed choices about what divisional, product and service brands to keep. The detailed decisions about the brand portfolio are covered under the topic brand architecture.

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THE GREAT MERGER MOVEMENT


The Great Merger Movement was a predominantly U.S. business phenomenon that happened from 1895 to 1905. During this time, small firms with little market share consolidated with similar firms to form large, powerful institutions that dominated their markets. It is estimated that more than 1,800 of these firms disappeared into consolidations, many of which acquired substantial shares of the markets in which they operated. The vehicle used were so-called trusts. In 1900 the value of firms acquired in mergers was 20% of GDP. In 1990 the value was only 3% and from 19982000 it was around 1011% of GDP. Companies such as DuPont, US Steel, and General Electric that merged during the Great Merger Movement were able to keep their dominance in their respective sectors through 1929, and in some cases today, due to growing technological advances of their products, patents, and brand recognition by their customers. There were also other companies that held the greatest market share in 1905 but at the same time did not have the competitive advantages of the companies like DuPont and General Electric. These companies such as International Paper and American Chicle saw their market share decrease significantly by 1929 as smaller competitors joined forces with each other and provided much more competition. The companies that merged were mass producers of homogeneous goods that could exploit the efficiencies of large volume production. In addition, many of these mergers were capital-intensive. Due to high fixed costs, when demand fell, these newly-merged companies had an incentive to maintain output and reduce prices. However more often than not mergers were "quick mergers". These "quick mergers" involved mergers of companies with unrelated technology and different management. As a result, the efficiency gains associated with mergers were not present. The new and bigger company would actually face higher costs than competitors because of these technological and managerial differences. Thus, the mergers were not done to see large efficiency gains, they were in fact done because that was the trend at the time. Companies which had specific fine products, like fine writing paper, earned their profits on high margin rather than volume and took no part in Great Merger Movement. Short-run factors One of the major short run factors that sparked The Great Merger Movement was the desire to keep prices high. However, high prices attracted the entry of new firms into the industry who sought to take a piece of the total product. With many firms in a market, supply of the product remains high. A major catalyst behind the Great Merger Movement was the Panic of 1893, which led to a major decline in demand for many homogeneous goods. For producers of homogeneous goods, when
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demand falls, these producers have more of an incentive to maintain output and cut prices, in order to spread out the high fixed costs these producers faced (i.e. lowering cost per unit) and the desire to exploit efficiencies of maximum volume production. However, during the Panic of 1893, the fall in demand led to a steep fall in prices. Another economic model proposed by Naomi R. Lamoreaux for explaining the steep price falls is to view the involved firms acting as monopolies in their respective markets. As quasi-monopolists, firms set quantity where marginal cost equals marginal revenue and price where this quantity intersects demand. When the Panic of 1893 hit, demand fell and along with demand, the firms marginal revenue fell as well. Given high fixed costs, the new price was below average total cost, resulting in a loss. However, also being in a high fixed costs industry, these costs can be spread out through greater production (i.e. Higher quantity produced). To return to the quasi-monopoly model, in order for a firm to earn profit, firms would steal part of another firms market share by dropping their price slightly and producing to the point where higher quantity and lower price exceeded their average total cost. As other firms joined this practice, prices began falling everywhere and a price war ensued. One strategy to keep prices high and to maintain profitability was for producers of the same good to collude with each other and form associations, also known as cartels. These cartels were thus able to raise prices right away, sometimes more than doubling prices. However, these prices set by cartels only provided a short-term solution because cartel members would cheat on each other by setting a lower price than the price set by the cartel. Also, the high price set by the cartel would encourage new firms to enter the industry and offer competitive pricing, causing prices to fall once again. As a result, these cartels did not succeed in maintaining high prices for a period of no more than a few years. The most viable solution to this problem was for firms to merge, through horizontal integration, with other top firms in the market in order to control a large market share and thus successfully set a higher price. Long-run factors In the long run, due to desire to keep costs low, it was advantageous for firms to merge and reduce their transportation costs thus producing and transporting from one location rather than various sites of different companies as in the past. Low transport costs, coupled with economies of scale also increased firm size by two- to fourfold during the second half of the nineteenth century. In addition, technological changes prior to the merger movement within companies increased the efficient size of plants with capital intensive assembly lines allowing for economies of scale. Thus improved
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technology and transportation were forerunners to the Great Merger Movement. In part due to competitors as mentioned above, and in part due to the government, however, many of these initially successful mergers were eventually dismantled. The U.S. government passed the Sherman Act in 1890, setting rules against price fixing and monopolies. Starting in the 1890s with such cases as Addyston Pipe and Steel Company v. United States, the courts attacked large companies for strategizing with others or within their own companies to maximize profits. Price fixing with competitors created a greater incentive for companies to unite and merge under one name so that they were not competitors anymore and technically not price fixing. Merger waves The economic history has been divided into Merger Waves based on the merger activities in the business world as Period Name Facet Horizontal mergers

18971904 First Wave

19161929 Second Wave Vertical mergers 19651969 Third Wave Diversified conglomerate mergers 19811989 Fourth Wave Congeneric mergers; Hostile takeovers; Corporate Raiding 19922000 Fifth Wave 20032008 Sixth Wave Cross-border mergers Shareholder Activism, Private Equity, LBO

Deal objectives in more recent merger waves During the third merger wave (19651989), corporate marriages involved more diverse companies. Acquirers more frequently bought into different industries. Sometimes this was done to smooth out cyclical bumps, to diversify, the hope being that it would hedge an investment portfolio. Starting in the fourth merger wave (19921998) and continuing today, companies are more likely to acquire in the same business, or close to it, firms that complement and strengthen an acquirers capacity to serve customers. Buyers arent necessarily hungry for the target companies hard assets. Some are more interested in acquiring thoughts, methodologies, people and relationships. Paul Graham recognized this in his 2005 essay "Hiring is Obsolete", in which he theorizes that the free market is better at identifying talent, and that traditional hiring practices do not follow the principles of free market because they
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depend a lot upon credentials and university degrees. Graham was probably the first to identify the trend in which large companies such as Google, Yahoo or Microsoft were choosing to acquire startups instead of hiring new recruits. Many companies are being bought for their patents, licenses, market share, name brand, research staffs, methods, customer base, or culture. Soft capital, like this, is very perishable, fragile, and fluid. Integrating it usually takes more finesse and expertise than integrating machinery, real estate, inventory and other tangibles.

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MERGERS AND ACQUISITIONS: DOING THE DEAL


Start with an Offer When the CEO and top managers of a company decide that they want to do a merger or acquisition, they start with a tender offer. The process typically begins with the acquiring company carefully and discreetly buying up shares in the target company, or building a position. Once the acquiring company starts to purchase shares in the open market, it is restricted to buying 5% of the total outstanding shares before it must file with the SEC. In the filing, the company must formally declare how many shares it owns and whether it intends to buy the company or keep the shares purely as an investment Working with financial advisors and investment bankers, the acquiring company will arrive at an overall price that it's willing to pay for its target in cash, shares or both. The tender offer is then frequently advertised in the business press, stating the offer price and the deadline by which the shareholders in the target company must accept (or reject) it The Target's Response Once the tender offer has been made, the target company can do one of several things:

Accept the Terms of the Offer - If the target firm's top managers and shareholders are happy with the terms of the transaction, they will go ahead with the deal.

Attempt to Negotiate - The tender offer price may not be high enough for the target company's shareholders to accept, or the specific terms of the deal may not be attractive. In a merger, there may be much at stake for the management of the target - their jobs, in particular. If they're not satisfied with the terms laid out in the tender offer, the target's management may try to work out more agreeable terms that let them keep their jobs or, even better, send them off with a nice, big compensation package.

Not surprisingly, highly sought-after target companies that are the object of several bidders will have greater latitude for negotiation. Furthermore, managers have more negotiating power if they can show that they are crucial to the merger's future success.

Execute a Poison Pill or Some Other Hostile Takeover Defense A poison pill scheme can be triggered by a target company when a hostile suitor acquires a predetermined percentage of company stock. To execute its defense, the target company grants all shareholders - except the acquiring company - options to buy additional stock at a dramatic
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discount. This dilutes the acquiring company's share and intercepts its control of the company.

Find a White Knight - As an alternative, the target company's management may seek out a friendlier potential acquiring company, or white knight. If a white knight is found, it will offer an equal or higher price for the shares than the hostile bidder.

Mergers and acquisitions can face scrutiny from regulatory bodies. For example, if the two biggest long-distance companies in the U.S., AT&T and Sprint, wanted to merge, the deal would require approval from the Federal Communications Commission (FCC). The FCC would probably regard a merger of the two giants as the creation of a monopoly or, at the very least, a threat to competition in the industry. Closing the Deal Finally, once the target company agrees to the tender offer and regulatory requirements are met, the merger deal will be executed by means of some transaction. In a merger in which one company buys another, the acquiring company will pay for the target company's shares with cash, stock or both.

A cash-for-stock transaction is fairly straightforward: target company shareholders receive a cash payment for each share purchased. This transaction is treated as a taxable sale of the shares of the target company. If the transaction is made with stock instead of cash, then it's not taxable. There is simply an exchange of share certificates. The desire to steer clear of the tax man explains why so many M&A deals are carried out as stock-for-stock transactions. When a company is purchased with stock, new shares from the acquiring company's stock are issued directly to the target company's shareholders, or the new shares are sent to a broker who manages them for target company shareholders. The shareholders of the target company are only taxed when they sell their new shares. When the deal is closed, investors usually receive a new stock in their portfolios - the acquiring company's expanded stock. Sometimes investors will get new stock identifying a new corporate entity that is created by the M&A deal

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MERGERS AND ACQUISITIONS: BREAK UPS


As mergers capture the imagination of many investors and companies, the idea of getting smaller might seem counterintuitive. But corporate break-ups, or de-mergers, can be very attractive options for companies and their shareholders. Advantages The rationale behind a spinoff, tracking stock or carve-out is that "the parts are greater than the whole." These corporate restructuring techniques, which involve the separation of a business unit or subsidiary from the parent, can help a company raise additional equity funds. A break-up can also boost a company's valuation by providing powerful incentives to the people who work in the separating unit, and help the parent's management to focus on core operations.

Most importantly, shareholders get better information about the business unit because it issues separate financial statements. This is particularly useful when a company's traditional line of business differs from the separated business unit. With separate financial disclosure, investors are better equipped to gauge the value of the parent corporation. The parent company might attract more investors and, ultimately, more capital. Also, separating a subsidiary from its parent can reduce internal competition for corporate funds. For investors, that's great news: it curbs the kind of negative internal wrangling that can compromise the unity and productivity of a company. For employees of the new separate entity, there is a publicly traded stock to motivate and reward them. Stock options in the parent often provide little incentive to subsidiary managers, especially because their efforts are buried in the firm's overall performance. Disadvantages That said, de-merged firms are likely to be substantially smaller than their parents, possibly making it harder to tap credit markets and costlier finance that may be affordable only for larger companies. And the smaller size of the firm may mean it has less representation on major indexes, making it more difficult to attract interest from institutional investors. Meanwhile, there are the extra costs that the parts of the business face if separated. When a firm divides itself into smaller units, it may be losing the synergy that it had as a larger entity. For instance, the division of expenses such as marketing, administration and research and development (R&D) into different business units may cause redundant costs without increasing overall revenues
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Restructuring Methods There are several restructuring methods: doing an outright sell-off, doing an equity carve-out, spinning off a unit to existing shareholders or issuing tracking stock. Each has advantages and disadvantages for companies and investors. All of these deals are quite complex.

Sell-Offs A sell-off, also known as a divestiture, is the outright sale of a company subsidiary. Normally, selloffs are done because the subsidiary doesn't fit into the parent company's core strategy. The market may be undervaluing the combined businesses due to a lack of synergy between the parent and subsidiary. As a result, management and the board decide that the subsidiary is better off under different ownership. Besides getting rid of an unwanted subsidiary, sell-offs also raise cash, which can be used to pay off debt. In the late 1980s and early 1990s, corporate raiders would use debt to finance acquisitions. Then, after making a purchase they would sell-off its subsidiaries to raise cash to service the debt. The raiders' method certainly makes sense if the sum of the parts is greater than the whole. When it isn't, deals are unsuccessful. Equity Carve-Outs More and more companies are using equity carve-outs to boost shareholder value. A parent firm makes a subsidiary public through an initial public offering (IPO) of shares, amounting to a partial sell-off. A new publicly-listed company is created, but the parent keeps a controlling stake in the newly traded subsidiary. A carve-out is a strategic avenue a parent firm may take when one of its subsidiaries is growing faster and carrying higher valuations than other businesses owned by the parent. A carve-out generates cash because shares in the subsidiary are sold to the public, but the issue also unlocks the value of the subsidiary unit and enhances the parent's shareholder value. The new legal entity of a carve-out has a separate board, but in most carve-outs, the parent retains some control. In these cases, some portion of the parent firm's board of directors may be shared. Since the parent has a controlling stake, meaning both firms have common shareholders, the connection between the two will likely be strong.

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That said, sometimes companies carve-out a subsidiary not because it's doing well, but because it is a burden. Such an intention won't lead to a successful result, especially if a carved-out subsidiary is too loaded with debt, or had trouble even when it was a part of the parent and is lacking an established track record for growing revenues and profits. Carve-outs can also create unexpected friction between the parent and subsidiary. Problems can arise as managers of the carved-out company must be accountable to their public shareholders as well as the owners of the parent company. This can create divided loyalties.

Spinoffs A spinoff occurs when a subsidiary becomes an independent entity. The parent firm distributes shares of the subsidiary to its shareholders through a stock dividend. Since this transaction is a dividend distribution, no cash is generated. Thus, spinoffs are unlikely to be used when a firm needs to finance growth or deals. Like the carve-out, the subsidiary becomes a separate legal entity with a distinct management and board. Like carve-outs, spinoffs are usually about separating a healthy operation. In most cases, spinoffs unlock hidden shareholder value. For the parent company, it sharpens management focus. For the spinoff company, management doesn't have to compete for the parent's attention and capital. Once they are set free, managers can explore new opportunities. Investors, however, should beware of throw-away subsidiaries the parent created to separate legal liability or to off-load debt. Once spinoff shares are issued to parent company shareholders, some shareholders may be tempted to quickly dump these shares on the market, depressing the share valuation.

Tracking Stock A tracking stock is a special type of stock issued by a publicly held company to track the value of one segment of that company. The stock allows the different segments of the company to be valued differently by investors. Let's say a slow-growth company trading at a low price-earnings ratio (P/E ratio) happens to have a fast growing business unit. The company might issue a tracking stock so the market can value the new business separately from the old one and at a significantly higher P/E rating.

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Why would a firm issue a tracking stock rather than spinning-off or carving-out its fast growth business for shareholders? The company retains control over the subsidiary; the two businesses can continue to enjoy synergies and share marketing, administrative support functions, a headquarters and so on. Finally, and most importantly, if the tracking stock climbs in value, the parent company can use the tracking stock it owns to make acquisitions. Still, shareholders need to remember that tracking stocks are class B, meaning they don't grant shareholders the same voting rights as those of the main stock. Each share of tracking stock may have only a half or a quarter of a vote. In rare cases, holders of tracking stock have no vote at all.

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MERGERS AND ACQUISITIONS: WHY THEY CAN FAIL

It's no secret that plenty of mergers don't work. Those who advocate mergers will argue that the merger will cut costs or boost revenues by more than enough to justify the price premium. It can sound so simple: just combine computer systems, merge a few departments, use sheer size to force down the price of supplies and the merged giant should be more profitable than its parts. In theory, 1+1 = 3 sounds great, but in practice, things can go awry. Historical trends show that roughly two thirds of big mergers will disappoint on their own terms, which means they will lose value on the stock market. The motivations that drive mergers can be flawed and efficiencies from economies of scale may prove elusive. In many cases, the problems associated with trying to make merged companies work are all too concrete.

Flawed Intentions For starters, a booming stock market encourages mergers, which can spell trouble. Deals done with highly rated stock as currency are easy and cheap, but the strategic thinking behind them may be easy and cheap too. Also, mergers are often attempt to imitate: somebody else has done a big merger, which prompts other top executives to follow suit. A merger may often have more to do with glory-seeking than business strategy. The executive ego, which is boosted by buying the competition, is a major force in M&A, especially when combined with the influences from the bankers, lawyers and other assorted advisers who can earn big fees from clients engaged in mergers. Most CEOs get to where they are because they want to be the biggest and the best, and many top executives get a big bonus for merger deals, no matter what happens to the share price later. On the other side of the coin, mergers can be driven by generalized fear. Globalization, the arrival of new technological developments or a fast-changing economic landscape that makes the outlook uncertain are all factors that can create a strong incentive for defensive mergers. Sometimes the management team feels they have no choice and must acquire a rival before being acquired. The idea is that only big players will survive a more competitive world.

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The Obstacles to Making it Work Coping with a merger can make top managers spread their time too thinly and neglect their core business, spelling doom. Too often, potential difficulties seem trivial to managers caught up in the thrill of the big deal. The chances for success are further hampered if the corporate cultures of the companies are very different. When a company is acquired, the decision is typically based on product or market synergies, but cultural differences are often ignored. It's a mistake to assume that personnel issues are easily overcome. For example, employees at a target company might be accustomed to easy access to top management, flexible work schedules or even a relaxed dress code. These aspects of a working environment may not seem significant, but if new management removes them, the result can be resentment and shrinking productivity. More insight into the failure of mergers is found in the highly acclaimed study from McKinsey, a global consultancy. The study concludes that companies often focus too intently on cutting costs following mergers, while revenues, and ultimately, profits, suffer. Merging companies can focus on integration and cost-cutting so much that they neglect day-to-day business, thereby prompting nervous customers to flee. This loss of revenue momentum is one reason so many mergers fail to create value for shareholders. But remember, not all mergers fail. Size and global reach can be advantageous, and strong managers can often squeeze greater efficiency out of badly run rivals. Nevertheless, the promises made by deal makers demand the careful scrutiny of investors. The success of mergers depends on how realistic the deal makers are and how well they can integrate two companies while maintaining day-to-day operations.

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Specialist M&A advisory firms


Although at present the majority of M&A advice is provided by full-service investment banks, recent years have seen a rise in the prominence of specialist M&A advisers, who only provide M&A advice (and not financing). These companies are sometimes referred to as Transition companies, assisting businesses often referred to as "companies in transition." To perform these services in the US, an advisor must be a licensed broker dealer, and subject to SEC (FINRA) regulation. More information on M&A advisory firms is provided at corporate advisory.

Cross-border M&A
In a study conducted in 2000 by Lehman Brothers, it was found that, on average, large M&A deals cause the domestic currency of the target corporation to appreciate by 1% relative to the acquirers. The rise of globalization has exponentially increased the necessity for MAIC Trust accounts and securities clearing services for Like-Kind Exchanges for cross-border M&A. In 1997 alone, there were over 2333 cross-border transactions, worth a total of approximately $298 billion. Due to the complicated nature of cross-border M&A, the vast majority of cross-border actions have unsuccessful anies seek to expand their global footprint and become more agile at creating highperforming businesses and cultures across national boundaries.[18] Even mergers of companies with headquarters in the same country are very much of this type and require MAIC custodial services (cross-border Mergers). After all, when Boeing acquires McDonnell Douglas, the two American companies must integrate operations in dozens of countries around the world. This is just as true for other supposedly "single country" mergers, such as the $29 billion dollar merger of Swiss drug makers Sandoz and Ciba-Geigy (now Novartis).

M&A in popular culture


In the novel American Psycho the protagonist Patrick Bateman, played by Christian Bale in the film adaptation, works in mergers and acquisitions, which he once referred to as "murders and executions" to a potential victim. In the film The Thomas Crown Affair, Thomas Crown is the CEO of a fictional mergers and acquisitions firm, called Crown Acquisitions.

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Chapter # 3 Data Analysis

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In the sitcom How I Met Your Mother, Marshall Eriksen and Barney Stinson work at a large bank, Goliath National Bank (GNB), involved in M&A transactions.

Major M&A
1990s
Top 10 M&A deals worldwide by value (in mil. USD) from 1990 to 1999 Rank Year 1 2 3 4 5 6 7 8 9 1999 1998 1998 1999 1998 1998 Purchaser Pfizer Exxon Citicorp Vodafone Group Bell Atlantic BP Worldcom Purchased Mannesmann Warner-Lambert Mobil Travelers Group Ameritech Corporation AirTouch Communications GTE Amoco US WEST MCI Communications Transaction value (in mil. USD) 183,000 90,000 77,200 73,000 63,000 60,000 53,360 53,000 48,000 42,000

1999 Vodafone Airtouch PLC

1999 SBC Communications

1999 Qwest Communications

10 1997 2000s

Top 10 M&A deals worldwide by value (in mil. USD) from 2000 to 2010 Rank Year 1 2 3 4 5 6 7 8 9 2000 2000 2004 2006 2001 2009 2000 2002 2004 Purchaser Fusion: AOL Inc. (America Online Glaxo Wellcome Plc. Royal Dutch Petroleum Company AT&T Inc. Comcast Corporation Pfizer Inc. Spin-off: Nortel Networks Corporation Pfizer Inc. JPMorgan Chase & Co InBev Inc. Pharmacia Corporation Bank One Corporation Anheuser-Busch Companies, Inc. Purchased Time Warner SmithKline Beecham Plc. "Shell" Transport & Trading Co. BellSouth Corporation AT&T Broadband Wyeth Transaction value (in mil. USD) 164,747 75,961 74,559 72,671 72,041 68,000 59,974 59,515 58,761 52,000
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10 2008

Top 10 Tech Acquisitions Of 2011


Among the trends that drove the biggest M&A deals: software as a service, mobility, big data, and social networking.

While 2011 wasn't a year of historically huge tech merger and acquisition deals, activity was nonetheless vigorous. Google alone bought more than 20 companies, while the likes of HP, Oracle, SAP, Dell, and Microsoft rounded out their mature product portfolios with acquisitions. Among the strongest riptides in enterprise IT M&A: software as a service (SaaS), mobility, big data, and social networking. What follows, in reverse order, is one editor's take on the 10 most important (though not necessarily the largest) enterprise IT acquisitions of the year. Not included on this list are the big OEM-oriented deals: Western Digital's $4.3 billion deal to buy Hitachi Global Storage Technologies, for instance, or Texas Instruments' $6.5 billion acquisition of National Semiconductor. 10. VMware and Socialcast: Virtualization market leader VMware isn't immune to social business fever, acquiring Socialcast, a maker of cloud-based communications and collaboration software that mimics "the interaction style of social networks, but with the security, management, and integration functions of an enterprise system," as my colleague David Carr reported in May. The Socialcast deal (terms weren't disclosed) followed two other cloud acquisitions by VMware: slideware maker SlideRocket in April and open source email software maker Zimbra in January 2010. 9. SAS Institute and Assetlink: This acquisition (no price tag was disclosed) isn't top 10 tech M&A material unto itself, but it's important in the context of the red hot trend it represents: the move by CMOs to apply analytics to their ad campaigns, promotions, social outreaches, and other marketing programs in order to prove and refine their effectiveness. Assetlink makes "marketing resource management" software, used to plan and budget ad spending, manage the content, create workflows, and manage leads. Its acquisition by SAS, announced in February, follows like-minded deals by IBM (it shelled out $480 million for Unica in October 2010) and Teradata ($525 million for Aprimo in December 2010).

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8. Dell and Force10: Dell's acquisition of switching vendor Force10 Networks (financial terms weren't disclosed), following its $960 million deal in December 2010 to acquire storage virtualization vendor Compellent Technologies, enhances its credibility as a big league data center supplier, alongside Cisco, HP, and Brocade. Force10's market share is small--just 1%, according to Dell'Oro estimates around the time of the July 2011 deal--but its technology is considered first rate and Dell will bring it to many more customers. 7. Microsoft and Skype: Among the biggest tech deals of 2001, Microsoft's $8.5 billion acquisition of Skype is also emblematic of one of the biggest CIO trends: the consumerization of enterprise IT. The lines between business and consumer IT are blurring, and Microsoft is looking to capitalize on that trend by integrating the consumer-oriented Skype videochat software with its enterprise unified communications and messaging platforms. Speaking of consumerization, will 2012 be the year Microsoft finally lands Yahoo? 6. Oracle and RightNow: It's almost as if Larry Ellison plunked down $1.5 billion of Oracle's money to get back at a former protege, Marc Benioff, whose Salesforce.com and its cloud-based services have been stealing most of the thunder in enterprise software. Within weeks of his orchestrated rebuff of Benioff at the Oracle OpenWorld conference at San Francisco's Moscone Center, Ellison announced Oracle would be acquiring RightNow, a leading maker of SaaS-based customer service and management apps and a semi-competitor to Salesforce. As my colleague Chris Murphy noted in a story on the RightNow deal, "Oracle, one of the tech industry's most acquisitive companies, isn't too concerned about overlapping products when it comes to buying into hot markets." Oracle had previously introduced its suite of enterprise software, Fusion, with a cloud-based option for CRM, as well as a hosted version of its PeopleSoft software licensed on a per-user, per-month basis. 5. Salesforce.com and Radian6: It wasn't among the biggest of tech acquisitions in 2011, a cash and stock deal valued at about $320 million, but it's strategically important to one of the industry's hottest vendors, as Salesforce.com pushes its "social enterprise" agenda, including its Twitter-like Chatter service. Radian6, a maker of social media monitoring and analytics services, has since become the basis of Salesforce's Social Marketing Cloud, a collection of services it rolled out in November to help companies manage their brands and engage with customers across the likes of Facebook, Twitter, and YouTube.

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4. AT&T and T-Mobile: The biggest tech deal of 2011 ($39 billion) is actually the biggest nonstarter, as competitors, regulators, trustbusters, lobbyists, and politicians dig in to stop this merger of the No. 2 and No. 4 U.S. mobile carriers. AT&T said in November that it's withdrawing its merger application from the FCC to focus instead on winning the antitrust lawsuit the Department of Justice had filed against it in August. Meantime, AT&T is reportedly trying to sell a sizable portion of T-Mobile's assets to a smaller mobile carrier in order to sway the DOJ. AT&T's incentive to compromise: It will owe T-Mobile parent Deutsche Telekom $6 billion in cash and compensation should the deal fall apart. Two telecom M&A deals in 2011 with more immediate implications for enterprise customers are Verizon's $1.4 billion acquisition of cloud pioneer Terremark and CenturyLink's $3.7 billion acquisition of cloud and hosted service provider Savvis. (CenturyLink is the nation's third-largest telecom carrier, having merged with Qwest in April.) 3. Google and Motorola Mobility: Google's $12.5 billion deal to acquire this Motorola spinoff, a maker of smartphones and set-top boxes, was the second-largest tech deal of 2011. As my colleague Paul McDougall reported in August, the deal, which still must pass regulatory muster, is a clear sign that Google intends to take on Apple--and to a lesser extent RIM and Microsoft/Nokia--as a supplier of tightly integrated mobile devices, namely its Android operating system on Motorola smartphone and tablet hardware. Motorola's extensive patent portfolio also appealed to Google, as it seeks to fend off Apple and Microsoft lawsuits claiming Android squats on some of its intellectual property. 2. HP and Autonomy: This $10.3 billion deal was the biggest enterprise software acquisition of the year--too big, according to many pundits, as the price tag was almost 12 times Autonomy's 2010 revenue. But HP's CEO at the time, Leo Apotheker, since ousted and replaced by Meg Whitman, needed to make a splash amid investor concerns that the hottest IT markets were passing HP by. And no question, Autonomy's no slouch. It's a leader in enterprise content management software-search, archiving, e-discovery, and more--helping customers make sense of their big (unstructured) data. 1. SAP and SuccessFactors: SAP co-CEO Bill McDermott told InformationWeek in October that SAP was ready to "let the tiger out of the cage" when it comes to cloud computing. Its $3.4 billion deal to buy SuccessFactors, a maker of cloud-based HR, recruitment, and collaboration software, announced a month later, opened that cage. And by naming SuccessFactors' dynamic CEO, Lars Dalgaard, to head up its cloud business, SAP is finally moving beyond its roots as an on-premises
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software company and its half-hearted early attempt at SaaS, Business ByDesign, aimed at midsize customers. Expect SAP to move even more aggressively into the cloud, through acquisition or internal development--probably both

CASELET 1 MERGER & ACQUISITION (HINDALCO & NOVELIS)

Features of Indian Aluminium Industry Highly concentrated industry with only five primary plants in the country. Bayer-Hall- Heroult technology used by all producers. Energy cost is 40% of manufacturing cost for metal and 30% for rolled products. High cost of technology is the main barrier in achieving high energy efficiency. Energy conservation and reduced consumption is main motive. Increased competition from imports of aluminium.

Hindalco Industries Ltd. Structured into two strategic businesses Aluminium and Copper. It enjoyed domestic market share of 42% In primary aluminium, 63 % in rolled products, 20 % In extrusion , 44 % in Foils & 31% in wheels. Annual revenue of US $14 billion. market capitalization in excess of US $ 23 billion.

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The aluminum division's product range includes alumina chemicals, primary aluminium ingots, and billets, wire rods, rolled products, extrusions, foils and alloy.

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NOVELIS
It was born in early 2005 as a result of a forced spin-off from its parent, the $ 23.6billion aluminium giant and Canada-based Alcan. The US and European anti-trust proceedings ruled that the rolled products business of either Alcan or Pechiney had to be divested from the merged entity. The company is No. 1 rolled products producer in Europe, South America and Asia, and the No. 2 producer in North America. This involved extensive operations in over 35 plants in 11 countries and four continents. Novelis is the world leader in aluminium rolling, producing an estimated 19 percent of the world's flat-rolled aluminium products. The company recycles more than 35 billion used beverage cans annually. Industry-leading assets and technology. Alcan cast out its rolled products business to form Novelis.

Troubled Novelis
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It had a simple business model. It buys primary aluminium, processes it into rolled products like stock for soft drink cans, automotive parts, etc., and sells it to customers such as Coke and Ford.

In a bid to win more business from soft drink manufacturers, it promised four customers not to increase product prices even if raw material aluminium prices went up beyond a point.

But the managements wrong judgement led to losses of $350 million (in 2006). Inefficiency of the management and finance team.

The rationale: The merger of Novelis into Hindalco will establish a global integrated aluminium producer with low-cost alumina and aluminium production facilities combined with high -end aluminium rolled product capabilities. After merger Hindalco will emerge as the biggest rolled aluminium products maker and fifth -largest integrated aluminium manufacturer in the world. Immediate global reach and scale along with technological expertise. access to customers such as General Motors Corp. and Coca-Cola Co Downstream business derives its margin through conversion mark-up, should act as a natural hedge for LME-driven, volatile, upstream commodity business. Industry leading technology, assets and expertise can be leveraged to grow high-valueadded, flat rolled products in fast-growing markets such as India and China Indian Deal makers o Team Members o Kumar Mangalam Birla o Debu Bhattacharya, Managing Director, Hindalco o Sumant Sinha, Group CFO o Rounds of negotiation went for 18 months before the deal was finalized o Acquisition needs the approval of at least two thirds of Novelis' shareholders o A day after the deal was announced, the Hindalco share plunged 13.74 per cent, Novelis Financials: Pre acquisition After spinoff (Alcan and Pechiney) Novelis inherited a debt mountain of almost $2.9 billion on a capital base of less than $500 million.
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On a net worth of $322 million, Novelis has a debt of $2.33 billion (most of it high cost). Debt/Equity =7.23:1 Novelis made a loss of $170 million for the first nine months of 2006 and it could take a while to turn the company around Novelis for the first nine months of 2006, had a loss of $170 million (Rs 765 crore) on revenues of $7.4 billion (Rs 33,300 crore).

Hindalco Health: Pre Acquisition Health prior to Acquisition o Hindalco had over $800 million (Rs 3,520 crore) in cash and equivalents o Debt to Equity Ratio almost Zero

Deal structure Divided into 2 parts1)100% of Novelis equity @44.93$ per share which add up to $3.6b 2)$2.4b debt on Novelis balance sheet - No Option of Leverage buyout unlike TATA Corus FUNDING A MEGA-DEAL: 2007 $2.4 billion will be raised on the balance sheet of Novelis AV Minerals (Netherlands) a indirect subsidiary of Hindalco raised bridge loans of $2.13 billion [CR @ 7.2%] & 900 million Hindalco raised a debt of $2.8 billion. $450 million from its cash reserves Essel Mining, another A V Birla group company, chipped in with $300 million from its reserves.
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Tied up with ABN Amro Bank, Bank of America and UBS for the Asian leg of the transaction, The non-recourse debt raised on Novelis' books funded through ABN Amro and UBS

Deal Financing :2008 Hindalco issued equity shares of Re. 1 each on rights basis @ Rs. 96 per share Ratio of 3:7 in September, Aggregating to 525,802,403 shares. Total Amount receivable of Rs. 5,047.70 Cr Company has received Rs. 4,545 Cr Rs. 124.90 Cr spent on related expenses of the rights issue Balance amount utilized to repay the bridge loan taken for acquisition of Novelis.

Banks involved 2007 :Hindalco-Novelis deal, UBS (along with ABN AMRO & Bank of America) threw the Birla company a $2.8 billion debt lifeline. 2008: waiver due to default in Debt/EBITA ratio for novelis 2008: $1-billion loan was taken on Hindalcos books, and the banks that participated in the exercise included ABN Amro, Barclays Capital, Bank of Tokyo-Mitsubishi UFJ, Calyon, Citigroup, Deutsche Bank, HSBC, Mizuho Financial and Sumitomo Mitsui Financial. 2009:Hindalco took a syndicated loan of $982 million (Rs 4,910 crore at current rate) from 11 foreign banks to repay the bridge loan taken two years ago for the Novelis acquisition. Valuation @ Premium If we earn $10 for every $100 of aluminum we sell, we will now be able to earn another $10 for every $100 worth of aluminum that Novelis processes into rolled products. --Debu Bhattacharya. MD
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"Acquisitions are not geography dependent. They depend on value-creation and will have to be in sync with existing businesses Kumar Mangalam Birla, 2007

The valuation depends on the intrinsic capability of an asset. He points out that it would have taken Hindalco at least 10 years to create that kind of capacity on the downstream front. The acquisition is a good strategic fit and the way we see it, there is a lot of upside potential in aluminum as a commodity. He speaks of areas like transportation, architecture, packaging and pharmaceuticals which will be big markets in the future for aluminum. Sunirmal Hindalco Talukdar, CFO,

Why pay 44.36$ a share for a 30$ share Analysts

Objective Hindalco was an upstream player before it acquired Novelis, so its profits varied every year. It decided to add downstream operations for a few good reasons: First, the company wanted to steady the profit stream. Second, it realized that it had to be globally competitive at home since India was not a protected market anymore .And third, to move away from the commodity business ,Hindalco had to manufacture value added products. Making aluminium at competitive prices requires economies of scale, process skills, and cheap raw materials .Selling value added aluminium products demands attention to quality, service and brands; product development skills ;and a knack for forging customer relationships- capabilities that Hindalco did not possess. To learn them it decided to acquire the downstream companies:Indal in India and Novelis overseas.The objective was to gain new competencies not to get big fast or reduce costs. Integration Process Hindalcos management allowed the post merger process to take place naturally and rarely intervenes Four step Process:
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1. Financial 2. Organizational 3. Business Process 4. Markets. Financial Integration Same Financial Language. Standardization : Prior to June 2007 , Hindalcos financial year ended on March, 31st, whereas Novelis period ended on December, 31st Guidelines of SEBI & SEC were met. Plan to optimize tax bills of both countries. Sharing best practices.

Organisational Integration: Existing management structure ,system ,people (Job Roles ) left undisturbed. In the first six months after the take over Hindalco deputed just two of its own executives to Novelis: it sent an expert from its copper division to institutionalize a riskmanagement process and installed a senior executive in Novelis logistics department to help improve its global supply chain No Layoffs ,however hiring activities were kept on hold for sometime.

Business Process Integration Plain and simple techniques to manage business. It set up a company to manage IT functions of Novelis due to availability of inexpensive engineers. Hindalco has set Novelis a target of seven to 12 stock turns per year by 2010,which could free around $300 million in working capital Market Integration Indias demand for aluminium products is projected to double from 1 million tones in 2007 to almost 1.9 million tones in 2012, and half of that increase will be for the kind of
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flat-rolled products Novelis produces. Thus, India could absorb a third of the North American companys output in three years time Procedure for Amalgamation / Merger /Take over. Check MoA (change accordingly). Draft Scheme of Arrangement Consider it in Board Meeting. Apply to Court direction to call General Meeting. Send copy of application made to High Court to Central Gov & send notices of General Meeting to with scheme Notice Period shall not be less than 21 days At General Meeting approve scheme, increase authorized share capital , issue further shares, as required .

SEBI GUIDELINES (TAKEOVER CODE)


The Takeover Code stipulates requirement, depending upon the nature and quantum of the acquisition, making an offer to purchase shares from the public shareholders, including The minimum number of shares for which the offer is to be made The minimum price at which the shares must be Acquired

In the event the public shareholding in the Indian Company falls below the specified 10%, then The acquirer has to make an offer to buy out the outstanding shares remaining with the shareholders, resulting in de-listing of the Company, or for delisting the company process prescribed under delisting guidelines needs to be followed .

The acquirer has to divest, through an offer for sale or by a fresh issue of capital to the public, to keep the public holding at the prescribed levels and prevent a delisting

Benefits Post acquisitions, the company will get a strong global footprint. After full integration, the joint entity will become insulated from the fluctuation of LME Aluminium prices
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The deal will give Hindalco a strong presence in recycling of aluminium business. Novelis has a very strong technology for value added products and its latest technology Novelis Fusion is very unique one Novelis being market leader in the rolling business has invested heavily in developing various production technologies. One of such technology is a fusion technology that

increase formability of aluminium.(Useful in designing products like car)

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CASELET 2 TATA CORUS

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Acquisition TATA-CORUS Tata acquired Corus, which is four times larger than its size and the largest steel producer in the U.K. The deal, which creates the world's fifth-largest steelmaker, is India's largest ever foreign takeover and follows Mittal Steel's $31 billion acquisition of rival Arcelor in the same year. Tata acquired Corus on the 2nd of April 2007 for a price of $12 billion. The price per share was 608 pence, which is 33.6% higher than the first offer which was 455 pence. Acquisition Process

Particulars

Corus Currency: Rupee Millions

TATA Steel Ltd Currency: Rupee Millions 2006 2005 2004

Year

2006

2005

2004

ASSETS

582750.00

533925.00

467775.00

205,450.70

177,033.10

147,988.70

DEBTS

98100.00

105525.00

96000.00

45,932.70

42,073.10

39,982.90

LIABILITIES

231300.00

178425.00

155475.00

30492.10

33146.80

32665.90

REVENUE

760500.00

699900.00

596475.00

202,444.30

159,986.10

111,294.40

NET INCOME

33900.00

33450.00

-22875.00

37,346.20

36,032.60

17,887.80

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Process of Acquisition Finding A Target Business Appointing Advisers Negotiating terms Due Diligence Exchange of Contracts Completion

Finding A Target Business Synergy of Operations Help the Organizations to Achieve Strategic Objectives Enter new markets Vertical Integration

Appointing Advisers The Right Chemistry The Right Experience Size is not Everything Talk Your Language CORUS TATA

J P MORGAN

ABN AMRO

CAZENOVE

DEUTSCHE BANK

HSBC

STANDARD CHARTERED

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Negotiating Terms The nature of the fit Commonality of client base Financial strength Strategic intent Sharing of resources Applicable Benefits

Negotiation By Tata September 20, 2006 : Corus Steel has decided to acquire a strategic partnership with a Company that is a low cost producer October 5, 2006 : The Indian steel giant, Tata Steel wants to fulfill its ambition to Expand its business further. October 6, 2006 : The initial offer from Tata Steel is considered to be too low both by Corus and analysts. October 17, 2006 : Tata Steel has kept its offer to 455p per share. October 18, 2006 : Tata still doesnt react to Corus and its bid price remains the same. October 20, 2006 : Corus accepts terms of 4.3 billion takeover bid from Tata Steel October 23, 2006 : The Brazilian Steel Group CSN recruits a leading investment bank to offer advice on possible counter-offer to Tata Steels bid. October 27, 2006 : Corus is criticized by the chairman of JCB, Sir Anthony Bamford, for its decision to accept an offer from Tata. November 3, 2006 : The Russian steel giant Severstal announces officially that it will not make a bid for Corus November 18, 2006 : The battle over Corus intensifies when Brazilian group CSN approached the board of the company with a bid of 475p per share December 18, 2006 : Within hours of Tata Steel increasing its original bid for Corus to 500 pence per share, Brazil's CSN made its formal counter bid for Corus at 515 pence per share in cash, 3% more than Tata Steel's Offer. January 31, 2007 : Britain's Takeover Panel announces in an e-mailed statement that after an auction Tata Steel had agreed to offer Corus investors 608 pence per share in cash April 2, 2007 : Tata Steel manages to win the acquisition to CSN and has the full voting support from Corus shareholders
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Taxation and Accountancy Considerations Tension between Acquisition / sale of shares or assets. Due Diligence Tricky areas Accounting issues Accounting policies of the Target Accounting for Goodwill Fair value accounting Earnings per share Other Matters

Legal Documentation Share sale Agreement The shares being sold The Price Restrictive Agreements Warranties Conditions to the Deal Transferring tangible assets Transferring Intangible assets Transferring Liabilities Transferring Employees

Financing the Deal TATA- CORUS Deal - $12 billion Equity Contribution from Tata Steel- $3.88 billion Credit Suisse leaded, joined by ABN AMRO and Deutsche Bank in the consortium.

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Of the $ 8.12 billion of financing , Credit Suisse provided 45% and ABN AMRO and Deutsche provided 27.5% each.

DEVELOPING A POST-ACQUISITION STRATEGY: 1. The first 100 days 2. In-house systems synergy

First 100 Days: Conflict Points 1. Time Factor 2. Leadership style differences 3. Whos in charge? (Who won?) 4. Organic vs. bureaucratic cultures 5. Open vs. closed communication 6. Decision making speed & style 7. Structures that dont match

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IMPORTANCE OF DEAL FOR TATA The initial motive behind the deal was not CORUS revenue size but rather its market value.
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To compete on global scale because then TATA was just at 56th rank in steel production. CORUS holds a number of Patents and R & D facility. Acquiring Corus will give Tata access to European customers of steel. Acquisition cost will be lower then setting up new green field plants and marketing channel.

FOR CORUS To extend its Global reach through TATA. To get access to Indian Ore reserves, as well as virgin market for steel. To get access to low cost materials. Total Debt of Corus was GBP 1.6bn Saturated market of Europe. Better facilities and lower cost of production Employee cost was 15 % (TATA- 9%) Profit margin was 3.4% (TATA- 17%)

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Conclusion With Corus in its fold, Tata Steel can confidently target becoming one of the top-3 steel makers globally by 2015. The company would have an aggregate capacity of close to 56 million tones per annum, if all the planned Greenfield capacities go on stream by then.

We can conclude that if the acquisitions well planned , Executed and the necessary precautions taken for the deal a company can achieve its strategic objectives and thus ensure its growth through Acquisition.

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CASELET 3 TATA MOTORS AND JLR Tata motors acquisition of Jaguar

Jaguar: an overview
1922 - Founded in Blackpool as Swallow Sidecar company 1960 - Jaguar name first appeared 1975 - Nationalized in due to financial difficulties 1984 - Floated off as a separate co in the stock market 1990 - Taken over by Ford

Land Rover: an overview


1948: Land Rover is designed by the Rover Car co 1976: One millionth Land Rover leaves the production line 1994: Rover Group is taken over by BMW 2000: Sold to Ford for $2.75 billion

TATA MOTORS: An overview


TATA GROUP is 150 year old, Previously Tata Engineering and Locomotive Company, Telco. India's largest passenger automobile and commercial vehicle. Tata Motors was established in 1945 Listed on the New York Stock Exchange in 2004. It is the 5th largest medium and heavy commercial vehicle manufacturer in the world. listed in BSE, NSE & NYSE.

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Why was Ford selling


The US auto major put the two marquees on the market in 2007 after posting losses of $12.6billion in 2006 - the heaviest in its 103-year history Jaguar was not able to provide any profit for ford because of the high manufacturing costs provided in the United Kingdom. The strong boy Land Rover's profit, on the other hand, was driven by the record sale of 2.26 lakh vehicles, an 18% YoY growth in 2007. Ford was combining both the brands since the products and manufacturing of vehicles for Land Rover and Jaguar was so intertwined.

Why to acquire JLR?


Long term strategic commitment to automotive sector. Opportunity to participate in two fast growing auto segments. Increased business diversity across markets and products. Jaguar offered a range of performance/luxury vehicles to broaden the brand portfolio. Benefits from component sourcing, design services and low cost engineering

The Deal Process


12/06/2007- Announcement from Ford that it plans to sell Land Rover and Jaguar. August 2007 - Major bidders were identified Tata Motors, M&M, Ceribrus capital Management, TPG Capital, Apollo Management Indias Tata Motors and M&M arrived as top bidders ($ 2.05b & $ 1.9b) 03/01/2008 Ford announces Tata as the preferred bidders 26/03/2008 - Ford agreed to sell their Jaguar Land Rover operations to Tata Motors.(2.3b) 02/06/2008 The acquisition was complete
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Tata and the dream


NEED FOR GROWTH In the past few years, the Tata group had led the growing appetite among Indian companies to acquire businesses overseas in Europe, the United States, Australia and Africa - some even several times larger - in a bid to consolidate operations and emerge as the new age multinationals. Tata Motors was India's largest automobile company, with revenues of $7.2 billion in 2006-07.With over 4 million Tata vehicles plying in India, it was the leader in commercial vehicles and the second largest in passenger vehicles. COMPETITIVE ADVANTAGE Tata Motors was vulnerable to greater competition at home. Foreign vehicle makers including Daimler, Nissan Motor, Volvo and MAN AG had struck local alliances for a bigger presence. Tata Motors, which had a joint venture with Fiat for cars, engines and transmissions in India, was also facing heat from top car maker Maruti Suzuki India Ltd, Hyundai Motor, Renault and Volkswagen.

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Financing strategy
Tata Motors could comfortably finance the acquisition of Jaguar and Land Rover. The Indian automaker was sitting on a cash pile of over Rs 6,000 crore and generated free cash of over Rs 1,000 crore during FY07. It could easily use these reserves to raise more funds without endangering its finances. At the end of last financial year, Tata Motors debt-to-equity ratio was a low 0.56, giving it ample head room to raise more funds. Low leverage of the auto biz provided funding flexibility At the time financed the purchase through a $3bn, 15month bridge loan Additional amount of US $ 0.7 billion was for engine and component supply, contingencies and working capital. It intended to refinance the loan through long-term funds valuable stakes in group companies
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Owns $400m of Tata Steel at current prices Owns stake in Tata Sons (Tata Groups holding company) worth at least $600m

Refinancing of the loan


The amount was repaid in following manner Rs 1.92 billion Underwriting agreement with JM financial consultants Rs 1.75 billion was raised through a deposit scheme from the public Additional subscriptions by promoter companies- Tata sons, Tata capital and Tata Investment Ltd. $ 1 billion aid package by British Government .( out of total $ 2.3 billion )

For what Tata motors paid


3 modern plants in UK 2 advance design and engineering center 26 national sell companies Intellectual property: free license to share technology with Ford Support from ford motor credit: Ford motor credit will continue to support the sale of Jaguar and Land rover for next 12 months

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Balance Sheet Of ( Tata Motors And Jaguar )

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Post merger
Following Cost Rationalisation initiatives were taken to improve cash flows:

1.Single shifts and down time at all three UK assembly plants. 2. Supplier payment terms extended from 45 to 60 days in line with industry standard. 3.Receivables reduced by 133 million from 38 to 27 days. 4. Inventory reduced by 217m between June 2008 and March 2009 from 70 to 50 days . 5] Labor actions - Voluntary retirement to 600 employees. - Agency staff reduced by 800. -Offered leaves to 300 workers of Bromwhich and solihull plant. -Additional 450 job cuts including 300 managers. 6] Agreement with Unions to implement pay freeze and longer working hours (equivalent to approximately 20% reduction in labor costs.) 7] Engineering and capital spending efficiencies. 8] Fixed marketing and selling costs reduced in line with sales volume. 9] Reduction in all other non-personnel related overhead costs.

Problems
Drop in share prices Failure of rights issue Huge debt burden Sales volume decreased by 35.2% Lack of consumer loans Issue of timing Operational freedom slows pace of change
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Benefits
Tata wanted to make a global impact and it thinks that buying these brands at a lower rate now, will give better value later on. This acquisition also eases the entry of Tata in European market which it has been eyeing for long. A previous JV with FIAT took place, this will further help them penetrate EU market. Reduce the company dependence on the Indian market which accounted for 90% of its sales Increase sales in emerging markets Reduce dependence on mature markets Opportunity to spread its business across different customer segment At the price staring from 63 lakh and going upto 93 lakh, it seems Tata has just got the right place to compete with the current market leaders BMW, Audi, Mercedes Publicity on an international scale Access to large distribution network JLR had many new models lined up for next 3 years, so no much work just profits Strong R & D culture and facilities Component sourcing, engineering and design benefits

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Problems with deal


Sales of JLR declined by 11.4% during the 2nd quarter ending Sep.2008 Tata motors had to pump in funds to keep JLR on the move By the end of Nov.2008,198 employees opted for voluntary retirement and 400 more decide to leave by Jan 2009 With not much of cash generation internally, additional investments of funds would only add to the debt and interest burden of the company In early Jan 2009,JLR announced 450 jobs cut Announced that managers would not receive any bonuses in 2009 while salary raises would be deferred till Oct 2009 For the quarter ending Dec2008,the sales volumes of JLR decreased by 35.2% to 49,186 Total car sales in the UK in the year 2009 would be at 1.78 million as against 2.4 million in 2008 By the end of 2008,retail vehicle sales were reported at 10.8 million-around 2 million lower than the sales reported in 2007 Consumers were delaying the purchase of new vehicles due to lack of consumer loans

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CASELET 4 P & G AND GILLETTE Introduction


Biggest merger in the history of Consumer goods P&G acquired Gillette for $57b to become the worlds largest consumer goods company Annual Sales of the combined entity:$60.7b After purchase of Gillette P&G will have $21b brands with market cap of $200b P&G paid .975$/share(20% premium),later buyback of shares worth $18-22b over 12-18 months Merging companies: similarity in Corporate history Merger based on a different model where innovation was the focus rather than the scale Regulatory concerns: Product overlaps Consumer goods after 1980s

Why Gillette?
P&G strength: Womens personal care products Gillette strength: Mens grooming category Complementary in strength cultures and vision to create potential for superior sustainable growth Gillette stock climbed 50% since 2003,profits jumped on premium products Acquisition added about 20% to P&G sales, long term sales growth estimate to 5-7% a year Operating margin expected to grow by 25 % by 2015 from 19% in 2003 The companies expected cost savings of $14-16 bn from combining back-room operations and new growth opportunities. more resources to enable intensive collaborative supply chain initiatives in a more costeffective way. merger would also bring down the advertising and media costs owing to greater bargaining power Opportunities in developing markets: Gillette would give exposure to P&G in emerging economies like India and Brazil, while P&G would distribute Gillette products in China
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It will give P&G the much needed boost to further strengthen its product categories where at present it has negligible presence The deal will help Gillette in improving its inventory days.

Integration issues
The merger would result in around 6,000 job cuts, equivalent to 4% of the two companies' combined workforce of 140,000. Most of the downsizing will take place to eliminate management overlaps and consolidation of business support functions. Cultural problems absence because of geographical proximity P&G is considered a promote-from-within company, and already had a lot of executive talent at the top. Therefore, absorbing Gillette's management to their satisfaction could be difficult P&G's ability to handle this massive cultural assimilation would decide the success or failure of this acquisition. Overlaps of some brands

Future Outlook
Pressure for competitors in the industry competitors could launch new products or strengthen their supply chain relationships during this time to gain an edge P&G-Gillette combination could be a transformative deal for the industry because of Gillette's growth potential. Analyst forecasted that this deal could lead to further consolidation in the industry

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CASELET 5 RELIANCE INDUSTRIES LIMITED Reliance Industries Limited


- A Unique Scheme of ArrangementFACTS PRE ARRANGEMENT SCENARIO Reliance Industries Limited was engaged in various businesses: 1. Coal based power business; 2. Gas based power business; 3. Financial services business; 4. Tele-Communication business The family arrangement aims at Segregation between the two Ambani Brothers Provision for Specified Investors was made: o Holdings of RIL and other companies in the control of Mr. Mukesh Ambani were transferred to a wholly owned subsidiary, Reliance Industrial Investments and Holdings Limited (RIIHL) along with a Private Trust (Petroleum Trust). o RIIHL and Petroleum Trust were described as Specified Investors which renounced their rights in the scheme itself. As a result of demerger the shareholders of Reliance Industries Ltd. other than Specified Investors got one share each in the following four resulting companies for each share held in RIL as on the record date: Reliance Energy Venture Ltd. (REVL) Reliance Communication Venture Ltd. (RCOVL) Reliance Capital Venture Ltd. (RCVL) Reliance Natural Resources Limited (RNRL) The shares of all these resulting companies got listed on the stock exchanges under the provisions of Cl 8.5.3.1 of the SEBI (DIP) Guidelines.
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REDUCTION OF CAPITAL

Reduction of Capital- A Strategic Step To clean up the Balance Sheet To rationalize the capital base Revival of sick company

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Direct listing is costly & complicated But Listing of Company provides for.. Unlocking value of business Brings liquidity Attract investors for further growth

Strategy IA
LISTING THROUGH MERGER Small/loss making listed companies are selected by unlisted strong companies Unlisted company is merged with listed company with maximum possible shares to promoters of unlisted Company Promoters of Unlisted Company get shares in a listed entity Strategy IB LISTING THROUGH MERGER

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Strategy II
RAISING PROMOTERS HOLDING Revised provisions of SEBI Takeover Code does not allow promoters to acquire even a single share beyond 55% Specific exemption to Merger/Demerger An Unlisted company is created by Promoters This entity is merged with listed company Promoters holding is raised up to 75%

Strategy III
ACQUISITION OF LISTED COMPANY SEBI Takeover Code does not allow acquisition of shares of a listed company beyond 15% or Change in Control by any outsider without a PA Specific exemption to Merger/Demerger An Unlisted company is created by Acquirer This company is merged with listed company Acquirers holding may go up to 75% of increased capital base The Management may also change.

Strategy IV
INCREASING THE RESOURCES Basic purpose of merger is to Synergy of Resources, but the it also increases the capital base High capital base make servicing of capital difficult Proposed transferee company acquires shares in transferor company Companies are merged Crossholdings get cancelled Resources got clubbed, capital base remain low. Effectively , increases EPS.

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Chapter # 5 Conclusions

One size doesn't fit all. Many companies find that the best way to get ahead is to expand ownership boundaries through mergers and acquisitions. For others, separating the public ownership of a subsidiary or business segment offers more advantages. At least in theory, mergers create synergies and economies of scale, expanding operations and cutting costs. Investors can take comfort in the idea that a merger will deliver enhanced market power. By contrast, de-merged companies often enjoy improved operating performance thanks to redesigned management incentives. Additional capital can fund growth organically or through acquisition. Meanwhile, investors benefit from the improved information flow from de-merged companies.

M&A comes in all shapes and sizes, and investors need to consider the complex issues involved in M&A. The most beneficial form of equity structure involves a complete analysis of the costs and benefits associated with the deals.

Let's recap what we learned in this tutorial:

A merger can happen when two companies decide to combine into one entity or when one company buys another. An acquisition always involves the purchase of one company by another.

The functions of synergy allow for the enhanced cost efficiency of a new entity made from two smaller ones - synergy is the logic behind mergers and acquisitions.

Acquiring companies use various methods to value their targets. Some of these methods are based on comparative ratios - such as the P/E and P/S ratios - replacement cost or discounted cash flow analysis.

An M&A deal can be executed by means of a cash transaction, stock-for-stock transaction or a combination of both. A transaction struck with stock is not taxable.

Break up or de-merger strategies can provide companies with opportunities to raise additional equity funds, unlock hidden shareholder value and sharpen management focus. De-mergers can occur by means of divestitures, carve-outs spinoffs or tracking stocks.

Mergers can fail for many reasons including a lack of management foresight, the inability to overcome practical challenges and loss of revenue momentum from a neglect of day-to-day operations.
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Chapter # 6 Bibliography

www.mce-ama.com/Mergers-Acquisitions-Alliances_summary.aspx http://en.wikipedia http://www.investopedia.com/university/mergers/#axzz1gsWQ1ZlJ http://www.reuters.com/finance/deals/mergers http://www.adityabirla.com/our_companies/indian_companies/hindalco_overview.htm http://www.adityabirla.com/media/press_reports/200401_global_metals.htm http://trak.in/tags/business/2010/12/24/top-10-ma-mergers-acquistions-2010/

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