Chapter 2

Conceptual Frameworks of Merger and Acquisition

Sr. No Particular
2.1 Introduction……………………………………………………
2.2 Mergers and Acquisition: The Concept……………………..
2.3 Definition of Mergers and Acquisitions……………………..
2.4 What are Mergers and Acquisitions?.....................................
2.5 History of Merger waves……………………………………..
2.6 Why do Firms Merge? ...........................................................
2.7 Theories of Merger……………………………………………
2.8 Varieties of Merger…………………………………………...
2.9 Synergies in Merger Acquisitions……………………………
2.10 Merger and Acquisition Process……………………………..
2.11 Mergers and Acquisitions in India…………………………..
2.12 Different Aspects in Merger and Acquisitions……………...
2.13 The Legal and Regulatory Framework……………………...
2.14 Accounting for Merger and Acquisition…………………….
2.15 Impacts of Merger and Acquisitions on Stakeholders……..
2.16 Managing risk in Merger and Acquisition………………….
2.17 Why Do Merger and Acquisition Quite Often Fail? .............

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2.1 Introduction

Mergers and Acquisitions are the most popular form of corporate restructuring for
expanding or increasing the size and volume of business. The corporate would today is
witnessing a sudden surge in this form of corporate restructuring, sweeping across all the
industries which has totally restructured the market place. It has been a prominent trend
in the advanced capitalist countries since the late twentieth century. But only in recent
times it becomes a regular phenomenon in developing countries. The total number of
Mergers and Acquisitions worldwide increased almost four – fold during 1990 to 2001.
This trend is different from earlier scenario where in the Mergers and Acquisitions was
looked upon as a threat and had evoked images of dark shadows and backdoor entries to
the corporate world. However, at present, it has assumed an international dimension due
to global economic integration and dismantling of barriers to trade and investment. Back
to home, Mergers and Acquisitions is not new in the Indian Economy. In the past,
companies have also used this form of restructuring regime; Indian corporate houses are
now refocusing on the lines of core competence, market share, and global
competitiveness. This process of refocusing has been accelerated by the arrival of foreign
competitors. Naturally, this requires companies to grow and expand in businesses that
they understand well. Mergers and Acquisitions is one of the most effective methods of
corporate restructuring and has, therefore, become an integral part of the long – term
business strategy of corporate enterprises. Under this background, the present chapter
attempts to discuss trends, historical evolution, reasons, different forms and aspects of
Mergers and Acquisitions.1

2.2 Mergers and Acquisition: The Concept

 Merger

Merger refers to a situation when two or more existing combine together and form a new
entity. Either a new company may be incorporated for this purpose or one existing
company generally a bigger one survives and another existing company which is smaller
is merged into it. A Merger may occur in two ways.
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- Merger through absorption

Absorption is a combination of two or more companies into an existing company. All

companies except one lose their identity in a merger through absorption. An example of
this type of merger is the absorption of Tata Fertilizers ltd. (TFL) by 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

type of merger, all companies are legally dissolved and a new entity is created. In a
consolidation, the acquired company transfers its assets, liabilities and share to the
acquiring company for cash or exchange of shares. An example of consolidation is the
merger Hindustan Computers Ltd., Hindustan Instruments Ltd., and Indian
Reprographics Ltd., to an entirely new company called HCL Ltd. However, laws in India
use the amalgamation for merger. For that reason a discussion on amalgamation seems to
be pertinent.

 Amalgamation

Amalgamation is an arrangement or reconstruction. It is a legal process by which two or

more companies to be absorbed with another. As a result, the Amalgamating Company
loses its existence and its shareholders become shareholders of new company or the
amalgamated company.

According to Halsbury’s law of England, Amalgamation the is blending of two or more

existing companies into one undertaking, the shareholder of each blending companies
becoming substantially the shareholder of company which will carry on blended
undertaking. There may be Amalgamation by transfer of one or more undertaking to a
new company or to an existing company. Amalgamation signifies the transfer of all or
some part of assets and liabilities of one or more than one existing company or two or
more companies to a new company.
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The Accounting Standard, AS – 14, issued by the institute of Chartered Accountants of
India has defined the term Amalgamation by classifying (i) Amalgamation in the nature
of merger, and (ii) Amalgamation in the nature of purchase

(i) Amalgamation in the nature of merger,

As per AS – 14, an Amalgamation is called in the nature of merger if it satisfies all the
following conditions:-

- All the assets and liabilities of the transferor company should become, after
Amalgamation, the assets and liabilities of the company.

- Shareholder holding not less than 90% of the face value of the equity shares of the
transfer company, other than the equity shares already held therein, immediately
before the Amalgamation, by the transferee company or its subsidiaries or their
nominees, become equity shareholder of the transferee company by virtue of the
Amalgamation.

- The consideration for the Amalgamation receivable by that equity by those

shareholders of the transferor company who agree to become equity shareholders of
the transferee company is discharged by the transferee company wholly by the issue
of equity share in the transferee company, except that cash may be paid in respect of
any fractional shares.

- The business of the transferor company is intended to be carried on, after the
Amalgamation, by the transferee company.

- No, adjustment is intended to be made in the book values of the assets and liabilities
of the transferor company when they are incorporated in the financial statement of the
transferee company except to ensure uniformity of accounting policies.

Amalgamation in the nature of merger is an organic unification of two or more entities or

undertaking or fusion of one with another. It is defined as an Amalgamation which
satisfies the above condition.2

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(ii) Amalgamation in the nature of purchase

Amalgamation in the nature of purchase is that where one company‟s assets and
liabilities are taken over by another and lump sum is paid by the latter to the former. It is
defined as the one which does not satisfy any one or more of the condition satisfied
above. Again, as per Income Tax Act, 1961, Merger is defined as Amalgamation under
Sec.2 (1B), if the following three conditions to be satisfied:

- All the properties of Amalgamating company(s) should vest with the Amalgamated
Company after Amalgamation.

- All the liabilities of the Amalgamating company(s) should vest with the
Amalgamated Company after Amalgamation.

- Shareholders holding not less than 75% in value or voting power in amalgamating
Company(s) should become shareholders of amalgamated companies after
amalgamation.

Amalgamation does not mean acquisition of a company by purchasing its property and
resulting in its winding up. According to income tax Act, exchange of shares with 90% of
shareholders of amalgamating company is required. 3

 Acquisition

 Acquisition refers to the acquiring of ownership right in the property and asset
without any combination of companies. Thus in Acquisition two or more companies
may remain independent and separate legal entity, but there may be change in control
of companies. Acquisition result when one company in any of the following ways:

 By entering into an agreement with a person or persons holding shares of controlling

interest on the other company.

 By subscribing new shares being issued by other company.

 By purchasing shares of the other company at a stock exchange, and

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 By making an offer to buy the shares of other company, to the existing shareholders
of that company.

 Takeover

A takeover may be defined as a series of transactions where by a person, individual,

group of individuals or a company acquires control over the assets of a company, either
directly by becoming of those assets or indirectly by obtaining control of management of
the company.

Takeover may be of different depending upon the purpose of acquiring a company.

1. A takeover may be straight takeover which is accomplished by the management of

the taking – over company by acquiring shares of another company with the intention
of operating taken – over company as an independent legal entity.

2. The second type of takeover is where ownership of company is captured to merge

both companies into one and operate as single legal entity.

3. A third type is takeover by a healthy company of a sick company for its revival. This
is accomplished by an order of Board for industrial and Financial Reconstruction
(BIFR) under the provision of sick industrial companies Act, 1985. In India, Board
for industrial and Financial Reconstruction (BIFR) has also been active for arranging
mergers of financially sick companies with other companies under the package of
rehabilitation. These merger schemes are framed in consultation with the lead bank,
the target firm and the acquiring firm. These mergers are motivated and the lead bank
takes the initiation and decides terms and conditions of merger. The recent takeover
of Modi Cements Ltd. By Gujarat Ambuja Cement Ltd. was an arranged takeover
after the financial reconstruction of Modi Cement Ltd.

4. The Fourth kind is the bailout takeover, which is substantial acquisition of shares in a
financial weak company not being a sick industrial company in pursuance to a
scheme of rehabilitation approved by public financial institution which is responsible

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 for ensuring compliance with provision of substantial acquisition of shares and
takeover Regulations, 1997 issued by SEBI which regulate the bailout takeover.

 Takeover and Merger

“The distinction between a takeover and merger is that in a takeover the direct or indirect
control over the assets of the acquired company passes to the acquirer, however in a
merger the shareholding in the combined enterprises will be spread between the
shareholder of the two companies”

In both cases of takeover and merger the interests of the shareholders of the company are
as follows:

1. Company should takeover or merge with another company only if in doing so, it
improves its profit earning measured by earnings per and

2. The company should agree to be taken if, the shareholders are likely to be better off
with the consideration offered, whether cash or securities of the company then
retaining their shares in the original company. 4

2.3 Definition of Mergers and Acquisitions

Mergers and acquisitions (M&A) is the area of corporate finances, management and
strategy dealing with purchasing and/or joining with other companies. In a merger, two
organizations join forces to become a new business, usually with a new name. Because
the companies involved are typically of similar size and stature, the term "merger of
equals" is sometimes used.

In an acquisition, on the other hand, one business buys a second and generally smaller
company which may be absorbed into the parent organization or run as a subsidiary. A
company under consideration by another organization for a merger or acquisition is
sometimes referred to as the target.5

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Mergers and Acquisitions have always played a vital role in corporate history, ranging
from „greed is good‟ corporate raiders buying companies in a hostile manner and
breaking them apart, to today‟s trend to use mergers and acquisition for external and
industry consolidation.( Sherman & Hart, 2006)

The terms mergers and acquisition are often used interchangeably but it is important to
understand the differences between the two. In the academic literature, there are number
of authors, who define merger, acquisition and takeover differently.

According to Sudarsanam (1995), a merger takes place when two or more corporations
come together to combine and share their resources to achieve common objectives. The
shareholders of the combining firms often remain as joint owners of the combined entity.6

According to Sherman and Hart (2006), a merger is a combination of two or more

companies in which the assets and liabilities of the selling firms are absorbed by the
buying firm.

According to Gaughan (2002), a merger is a process in which two corporations

combines and only one survives and the merged corporation ceases to exist. Sometimes
there is a combination of two companies where both the companies cease to exist and an
entirely new company is created.

An acquisition on the other hand, is the purchase of an asset such as a plant, a division or
an entire company. Sudarsanam (1995) defines acquisition as an „arms- length deal‟,
where one company purchases the shares of another company and the acquired company
is no longer the owner of the firm.

The term „takeover‟ is sometimes used to refer a hostile situation. According to

Gaughan (2002), this happens when one company tried to acquire another company
against the will of the company‟s management. But according to Sudarsanam (1995), a
takeover is similar to an acquisition and also implies that the acquirer is much larger than
the acquired.

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According to Gaughan (2002), mergers and acquisition are friendly transactions in
which the senior management of the companies negotiates the terms of the deal and the
terms are then put in front of the shareholders of the target company for their approval.
Whereas in a takeover, a different set of communication takes place between the target
and the bidder, which involves att6orney and courts. Bidders here try to appeal directly to
the shareholders often against the recommendations of the management.

According to Sudarsanam (1995), the differences between merging and acquiring are
very important to consider valuing, negotiating and structuring the client‟s transactions.

„In line with common practice‟ (Chiplin and Wright, 1988), terms „mergers‟,
„acquisitions‟ and „takeovers‟ will be used synonymously in this dissertation. According
to Sherman and Hart (2006), at the end, the differences in the meaning may not really
matter since the result of these processes is often the same i.e. two companies that had
separate ownership are operating under the same roof, usually to obtain some strategic
and financial objective.7

2.4 What are Mergers and Acquisitions?

Mergers and acquisitions are both changes in control of companies that involve
combining the operations of multiple entities into a single company.

In a merger, two companies agree to combine their operations into a single entity.

In an acquisition, one company purchases another company, and has the right to sell off
operations, merge them into similar groups in the purchasing company, or close facilities
or cancel products altogether.

Why Merge?

Companies would choose to merge together for different reasons:

 The combined entity would be larger, and have corresponding larger resources for
marketing, product expansion, and obtaining financing. This could help them better
compete in the marketplace.
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 The combined entity could merge similar operations to reduce costs. Corporate and
administrative functions, such as human resources and marketing, are often targets for
combinations. They might also combine the production areas if the companies
produce similar products and reduce costs by having fewer plants or facilities in
operation.
 The combined entity might have less competition in the marketplace. If the products
of the two companies competed for customers, they could combine their offerings and
use resources for improving the product, rather than marketing against each other.
 The combined entity might have synergy in operations. Synergy is when combined
operations show lower costs or higher profits than would be expected by just adding
their financial information together on paper. This could be due to economies of
scale, where costs are lower due to higher volume of production, or due to vertical
integration, where greater control over the production process is achieved due to
owning more steps in the production process.

Why Acquire?

Acquisitions are undertaken for strategic reasons. For example:

 A company might acquire another company to obtain a specific product. It can be less
expensive to purchase a company offering a product you'd like to sell than building
the product yourself. Software companies often purchase smaller companies that offer
extensions to their product line if they become popular with customers, so they can
add the functionality to their primary offering.
 A company might acquire other companies to increase its size. A larger company may
have more visibility in the marketplace, and also better access to credit and other
resources.
 A company might acquire another to obtain control over a critical resource. For
example, a jewelry company might acquire a gold mine, to ensure they have access to
gold without market price fluctuations.8

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2.5 History of Merger Waves

In much of finance there is very little attention paid to the history of the field. Rather the
focus usually is on the latest developments and innovations. This seems to be particularly
the case in the United States, where there is less respect for that which is not new. It is
not surprising then that we see that many of the mistakes and types of failed deals that
occurred in earlier years tend to be repeated. The market seems to have a short memory
and we see that a pattern of flawed mergers and acquisitions (M&As) tends to reoccur. It
is for this reason that we need to be aware of the history of the field. Such awareness will
help us identify the types of deals that have been problematic in the past.

There have been many interesting trends in recent M&A history. These include the fact
that M&A has become a worldwide phenomenon as opposed to being mainly centered in
the United States. Other trends include the rise of the emerging market acquirer, which
has brought a very different type of bidder to the takeover scene. For these reasons we
will devote special attention in this chapter to these important trends in recent M&A
history.

What Causes Merger Waves?

Research has showed that merger waves tend to be caused by a combination of economic,
regulatory, and technological shocks.9 the economic shock comes in the form of an
economic expansion that motivates companies to expand to meet the rapidly growing
aggregate demand in the economy. M&A is a faster form of expansion than internal,
organic growth. Regulatory shocks can occur through the elimination of regulatory
barriers that might have prevented corporate combinations. Examples include the changes
in U.S. banking laws that prevented banks from crossing state lines or entering other
industries. Technological shocks can come in many forms as technological change can
bring about dramatic changes in existing industries and can even create new ones.
Harford showed that these various shocks by themselves are generally not enough to
bring about a merger wave.10 He looked at industry waves, rather than the overall level of
M&A activity, over the period 1981–2000. His research on 35 industry waves that

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occurred in this period showed that capital liquidity was also a necessary condition for a
wave to take hold. His findings also found that misevaluation or market timing efforts by
managers was not a cause of a wave, although it could be a cause in specific deals. The
misevaluation findings, however, were contradicted by Rhodes-Kropf, Robinson, and
Viswanathan, who found that misevaluation and valuation errors do motivate merger
activity.11 they measure these by comparing market to book ratios to true valuations.
These authors do not say that valuation errors are the sole factor in explaining merger
waves but that they can play an important role that gains in prominence the greater the
degree of misevaluation.

i. FIRST WAVE, 1897–1904

The first merger wave occurred after the Depression of 1883; peaked between 1898 and
1902, and ended in 1904 (Table 2.1). Although these mergers affected all major mining
and manufacturing industries, certain industries clearly demonstrated a higher incidence
of merger activity. According to a National Bureau of Economic Research study by
Professor Ralph Nelson, eight industries primary metals, food products, petroleum
products, chemicals, transportation equipment, fabricated metal products, machinery, and
bituminous coal experienced the greatest merger activity. These industries accounted for
approximately two-thirds of all mergers during this period. The mergers of the first wave
were predominantly horizontal combinations. The many horizontal mergers and industry
consolidations of this era often resulted in a near monopolistic market structure. For this
reason, this merger period is known for its role in creating large monopolies. This period
is also associated with the first billion-dollar megamerger when U.S. Steel was founded
by J. P. Morgan, who combined Carnegie Steel, founded by Andrew Carnegie and run by
he and Henry Clay Frick, with Federal Steel, which Morgan controlled. However,
Morgan also added other steel companies, such as American Tin Plate, American Steel
Hoop, American Steel Sheet, American Bridge, American Steel and Wire, International
Mercantile Marine, National Steel, National Tube, and Shelby Steel Tube.12

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 Table no. 2.1 The First Merger wave: – 1897 – 1904
Year No. of Mergers
1897 69
1898 303
1899 1208
1900 340
1901 423
1902 379
(Source: Merrill Lynch Business Brokerage and Valuation, Mergerstat Review,
1989)

The merger activity peaked in 1899, began its downturn in 1901(see, table 2.1) as some
combinations failed to realize their expectations and ended in 1903, when severe
economic recession set in. The first merger wave during 1897 to 1904 was characterized
by Horizontal Mergers, which increased concentration in a number of industries. This
merger period is known for its role in creating large monopolies. The main motivational
factors attributed to the first merger movement are:
 Obtaining economies of scale
 Merging for monopoly, and
 Promotion of failing firms

According to Livermore 1935, success is mainly attributable to “astute business

leadership” and particularly to rapid technological and managerial development,
developments of new products, promotion of quality brand names, and commercial
exploitation of research. On the other hand, attributes of failure include lack of efforts for
realizing the economies of scale, increase in overhead costs, and lack of flexibility due
large and lack of talent to manage a large group of plants. 13

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ii. The Second Merger Wave:- 1922 – 1929

The second period of business combination activity, fostered by the federal government
during World War I, continued through the 1920s. Like the first one, the Second Merger
wave also began with upturn in the business activity in 1922 and ended with the onset of
a severe economic slowdown in 1929.

Between 1926 and 1930, a total of 4,600 mergers took place, and from 1919 to 1930,
12,000 manufacturing, mining, public utility, and banking firms disappeared. According
to Earl Kintner, during the period from 1921 to 1933, $13 billion in assets were acquired
through mergers, representing 17.5% of the nation‟s total manufacturing assets. The
continued development of a nationwide rail transportation system, combined with the
growth of motor vehicle transportation, continued to transform local markets into national
markets.

Competition among firms was enhanced by the proliferation of radios in homes as a

major form of entertainment. This led to the increased use of advertising as a form of
product differentiation. Marketers took advantage of this new advertising medium to start
national brand advertising. The era of mass merchandising had begun. The public utility
industry in particular experienced marked concentration. Many of these mergers involved
public utility holding companies that were controlled by a relatively small number of
stockholders. These utilities were often organized with a pyramidal corporate structure to
provide profits for these stockholders and, according to the Federal Trade Commission
(FTC), did not serve the public interest. The utility trusts were eventually regulated by the
Public Utility Holding Company Act (PUHCA) of 1935. This law, which was designed to
curb abuses, empowered the Securities and Exchange Commission (SEC) to regulate the
corporate structure and voting rights of public utility stockholders. The act also gave the
SEC the right to regulate the issuance of securities by utilities as well as their acquisition
of assets or securities of other firms. The utilities‟ abuses of corporate power and
fiduciary responsibilities were far more common at that time than they are today. This is

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why PUHCA was eliminated in 2005. Although mergers affected industries across the
board, the following industries experienced a disproportionate number of mergers:

o Primary metals
o Petroleum products
o Food products
o Chemicals
o Transportation equipment

Mergers were facilitated not only by the limited enforcement of antitrust laws but also by
the federal government‟s encouragement of the formation of business cooperatives to
enhance the nation‟s productivity as part of the war effort. Rather than compete with each
other during a time of war, the nation‟s firms, particularly those in manufacturing and
mining, were urged to work together. Even after the war ended, however, the government
maintained these policies through the 1920s.

The second merger wave ended with the stock market crash on October 29, 1929. “Black
Thursday” would mark the largest stock market drop in history until the crash of October
1987. Although this collapse was not per se the cause of the Great Depression, it played a
large role in it, for in contributing to a dramatic drop in business and investment
confidence, business and consumer spending was further curtailed, thereby worsening the
depression. After the crash, the number of corporate mergers declined dramatically. No
longer focusing on expansion, firms sought merely to maintain solvency amid the rapid
and widespread reduction in demand.14

iii. The merger wave during 1940s

Before we proceed to a discussion of the third merger period, we will briefly examine the
mergers of the 1940s. During this decade, larger firms acquired smaller, privately held
companies for motives of tax relief. In this period of high estate taxes, the transfer of
businesses within families was very expensive; thus, the incentive to sell out to other
firms arose. These mergers did not result in increased concentration because most of

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them did not represent a significant percentage of the total industry‟s assets. Most of the
family business combinations involved smaller companies.

The 1940s did not feature any major technological changes or dramatic development in
the nation‟s infrastructure. Thus, the increase in the number of mergers was relatively
small. Nonetheless, their numbers were still a concern to Congress, which reacted by
passing the Celler-Kefauver Act in 1950. This law strengthened Section 7 of the Clayton
Act.

iv. The Third Merger wave: - 1963 – 1970

The third merger wave featured a historically high level of merger activity. This was
brought about in part by a booming economy. During these years, often known as the
conglomerate merger period, it was not uncommon for relatively smaller firms to target
larger companies for acquisition. In contrast, during the two earlier waves, the majority of
the target firms were significantly smaller than the acquiring firms. Peter Steiner reports
that the “acquisition of companies with assets over $100 million, which averaged only
1.3 per year from 1948 to 1960, and 5 per year from 1961 to 1966, rose to 24 in 1967, 31
in 1968, 20 in 1969, 12 in 1970 before falling to 5 each year in 1971 and 1972.”15

The number of mergers and acquisitions during the 1960s is shown in Table 2.3. These
data were compiled by W. T. Grimm and Company (now provided by Houlihan Lokey
Howard & Zukin), which began recording M&A announcements on January 1, 1963. As
noted, a larger percentage of the M&As that took place in this period were conglomerate
transactions. The FTC reported that 80% of the mergers that took place in the ten-year
period between 1965 and 1975 were conglomerate mergers.16

The conglomerates formed during this period were more than merely diversified in their
product lines. The term diversified firms is generally applied to firms that have some
subsidiaries in other industries but a majority of their production within one industry
category. Unlike diversified firms, conglomerates conduct a large percentage of their
business activities in different industries. Good examples were Ling-Temco-Vought
(LTV), Litton Industries, and ITT. In the 1960s, ITT acquired such diverse businesses as
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Avis Rent a Car, Sheraton Hotels, Continental Baking, and other far-flung enterprises
such as restaurant chains, consumer credit agencies, home building companies, and
airport parking firms. Although the third merger wave is associated with well-known
conglomerate firms such as ITT and LTV, many corporations of varying sizes engaged in
a diversification strategy.

Table no. 2.2 Third Merger wave during: – 1963 – 1970

Year No. of Mergers
1963 1361
1964 1950
1965 2125
1966 2377
1967 2975
1968 4462
1969 6107
1970 5152
Source: Compiled from different sources

Throughout this period, the majority of deals were friendly arrangements and stock was
the preponderance of conglomerate deals as companies actively sought to expand into
new markets and areas. The strength of this trend is illustrated by the fact that the number
of conglomerate firms increased from 8.3% of fortune 500 firms in 1959 to 18.7% in
1969. This change is almost certainly due to the provisions of the Celler – Kefauver Act,
which made horizontal mergers unpopular. The oil crisis of 1973 resulted in a sharp
increase in inflation and a worldwide economic downturn, which marked the end of this
merger wave. Around 6,000 mergers took place in the U.S. economy during this period
and lead to disappearance of around 25,000 firms.

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v. The Fourth Merger wave:- 1981 – 1989

The downward trend that characterized M&As in the 1970s through 1980 reversed
sharply in 1981. Although the pace of mergers slowed again in 1982 as the economy
weakened, a strong merger wave had taken hold by 1984. Table 2.3 shows the number of
M&A announcements for the period from 1970 to 1989. Here we merely highlight the
major trends that differentiate this wave from the other three; the characteristics unique to
each wave are discussed separately and in detail in various chapters of this book. The
unique characteristic of the fourth wave is the significant role of hostile mergers. As
noted previously, hostile mergers had become an acceptable form of corporate expansion
by 1908, and the corporate raid had gained status as a highly profitable speculative
activity. Consequently, corporations and speculative partnerships played the takeover
game as a means of enjoying very high profits in a short time. Whether takeovers are
considered friendly or hostile generally is determined by the reaction of the target
company‟s board of directors. If the board approves the takeover, it is considered
friendly, if the board is opposed, the takeover is deemed hostile.

Table no. 2.3 Fourth Merger wave during: – 1981 – 1989

Year No. of Mergers
1981 2395
1982 2346
1983 2533
1984 2543
1985 3001
1986 3336
1987 2032
1988 2258
1989 2366
(Source: Merger stat Review, 1998)

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Although the absolute number of hostile takeovers is not high with respect to the total
number of takeovers, the relative percentage of hostile takeovers in the total value of
takeovers is large. The fourth merger period may also be distinguished from the other
three waves by the size and prominence of the M&A targets. Some of the nation‟s largest
firms became targets of acquisition during the 1980s. The fourth wave became the wave
of the megamerger. The total dollar value paid in acquisitions rose sharply during this
decade. In addition to the rise in the dollar value of mergers, the average size of the
typical transaction increased significantly. The number of $100 million transactions
increased more than 23 times from 1974 to 1986. This was a major difference from the
conglomerate era of the 1960s, in which the acquisition of small and medium-sized
businesses predominated. The 1980s became the period of the billion-dollar M&As. The
leading megamergers of the fourth wave are shown in Table 2.3. M&A volume was
clearly greater in certain industries. The oil industry, for example, experienced more than
its share of mergers, which resulted in a greater degree of concentration within that
industry. The oil and gas industry accounted for 21.6% of the total dollar value of M&As
from 1981 to 1985. 17

vi. The Fifth Merger (Mega Merger) wave: - 1992 onwards

The most recent merger wave in the 1990s was the biggest one of all, vastly exceeding all
of the previous waves in both number of transactions and value. Whilst the trend towards
horizontal deals continued, in every other respect the 1990s merger wave was very
different to its predecessor. This wave was almost entirely friendly with just 4% of deals
being denoted as hostile and the popularity of stock as the medium of exchange increased
by approximately 50% compared to the previous merger wave. With the level and
effectiveness of monitoring increasing greatly, it became much more difficult for
managers to enter in to highly risky deals and forced them to consider more carefully
whether to enter the market for corporate control at all and, in the event that they decided
to proceed, how they would enter the market. Faced with these sorts of constraints, many
managers would think very carefully before attempting a merger or acquisition.

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 Table no. 2.4 Fifth Merger wave during: – 1990 Onwards
Year No. of Mergers
1990 2074
1991 1877
1992 2574
1993 2663
1994 2997
1995 3510
1996 5848
1997 7800
1998 7809
1999 9278
2000 9566
2001 7528
Source: Compiled from different sources

Merger waves in the U.K.

Merger waves in the U.K. have a far shorter history than those occurring in the U.S.
Nothing akin to substantial merger wave transpired before the 1960s although there was a
small wave in the 1920s that was inspired by the widespread introduction of mass
production technologies in the U.K. following the end of the First World War. The first
real merger wave in the U.K. was in the 1960s and coincided with the internationalization
of the World economy. The British government decided that large firms were needed to
complete effectively on the international stage and to achieve this goal the industrial
Reorganization Corporation (IRC) was created with a brief to encourage the development
of such companies though horizontal mergers which made up the majority of mergers in
this wave. Amongst the top 200 manufacturing companies in 1964, 39(19.5%) were
involved in merger or acquisition activity within the next five years.

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The next period of excessive merger and acquisition activity took place in the 1980s and
marked a change in emphasis when compared to the previous waves. Prior to this time
the waves had been mostly about increasing the size of companies but in the 1980s the
emphasis changed to the control of corporate assets as a commodity. During this period,
the most recent development in merger and acquisition policy took place. Between the
introduction of the Merger and Monopolies Act in 1965 and 1985 there were 3,540
mergers and acquisitions. Throughout the early part of the 1980s the stock market was
rising sharply reflecting growing profits and business confidence. The financial services
industry had just been deregulated which further contributed to the growth of the wave.
This period of excessive restructuring also incorporated some features of merger and
acquisition activity previously unseen in the U.K. and imported from the U.S. increased
hostility, the use of leverage and a large number of buyouts all of which took place in this
wave but had not previously been notable features of the market for corporate control in
the U.K. The London Stock Exchange suffered a major crash in 1987 but this was not
enough to stop the wave, however, which had sufficient momentum to keep going until
1989.

The most recent merger wave in the U.K. took place in the 1990s and was again spurred
on by deregulation of more British industries coupled with the policy of privatizing
Government owned assets which took place through the last years of the 1980s and the
early 1990s, as typified by the sales of British Telecom (1984), British Gas (1986) and
British Rail (1993). These changes resulted in the need for extensive restructuring on
many difference levels of British industry and prompted the merger wave. Unlike the
1980s there was relatively little hostility during this period and many companies changed
their perspective on merger and acquisitions to take a more balanced approach when
compared to the excesses of the previous decade.

In the UK, horizontal mergers were the dominant form between 1954 and 1965 and since
then there has been a trend towards diversified merger. The value of assests acquired
through diversified merger rose to 33 percent in 1972 from 5 percent in 1966. The merger

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wave since 1980s witnessed divestment on a large scale. In 1992 it was accounted for 31
18
percent of all acquisition and mergers.

Merger waves: The Indian experience

In earlier years, India was a highly regulated economy. To set – up an industry various
licenses and registration under various enactments were required. The scope and mode of
corporate restructuring was, therefore, very limited due to restrictive government policies
Consequent upon the raid of DCM Limited and Escorts Limited launched by Swaraj Paul,
the role of the financial institutions became quite important. In fact, Swaraj Paul‟s bids
were a forerunner and constituted a „watershed‟ in the corporate history of India. The
Swaraj Paul episode also gave rise to a whole new trend. Financially, strong
entrepreneurs made their presence felt as industrialists Ram Prasad Goneka, M.R.
Chhabria, Sudarshan Birla, Srichand Hinduja, Vijay Mallya and Dhirubhai Ambani and
were instrument in corporate restructuring.

The real opening up of the economy started with the industrial policy, 1991 whereby
„continuity with change‟ was emphasized and main thrust was relaxations in industrial
licensing, foreign investments, and transfer of foreign investments, and transfer of foreign
technology, etc. for instance, amendments were made in MRTP Act, within all restrictive
sections discouraging growth of industrial sector. With the economic liberalization,
globalization and opening up of economies, the Indian corporate sector started
restructuring to meet the opportunities and challenged of competition.

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 Table no. 2.5
Merger & Takeover announcement in India From 1988 to1998
Year Number Change (%)
1988 15 -
1989 18 20.0
1990 25 38.9
1991 71 184.0
1992 135 90.1
1993 288 113.3
1994 363 26.0
1995 430 18.5
1996 541 25.8
1997 636 17.6
1998 730 14.8
Source: Compiled from different sources

Table- 2.5 show the number of merger and takeovers “announcements” over a period of
11 years from 1988 and 1998. While there were only 58 mergers and takeovers from
1988 to 1990, the number raised to 730 in 1998. There was a jump in the number of
merger and takeover activities in India from 1988 to 1993, the average rate of increase
being around 89% for the five – year period. Since then the rate of rise had maintained an
average of 20.5% Khanna (1998:10) has referred this situation in India as the “first
merger wave” in India.

The unleashing of Indian economy has opened up lucrative and dependable opportunities
to business community as a whole. The absence of strict regulations about the size and
volume of business encouraged the enterprises to opt for mergers and amalgamations so
as to produce on a massive scale, reduce costs of production, make prices internationally
competitive, etc. Today, Indian economy is passing though recession. In such a situation,
corporate which are capable of restructuring can contribute towards economic revival and

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growth. Despite the sluggish economic scenario in India, merger and amalgamation deals
have been on the increase. The obvious reason is as the size of the market shrinks, it
becomes extremely difficult for all the companies to survive, unless they cut costs and
maintain prices. In such a situation, merger eliminates duplication of administrative and
marketing expenses. The other important reason is that it prevents price war in a
shrinking market. Companies, by merging, reduce the number of competitors and
increase their market share. 19

2.6 Why do Firms Merge?

Usually mergers occur in a consensual entering into by mutual consent setting where
executives from the target company help those from the purchaser in process to ensure
that the deal is beneficial to both parties. Acquisition can also happen by purchasing the
majority of outstanding shares of a company in the open against the wishes of the target‟s
board. The motives for the merger and Acquisition activities differ across the industries
and over time. However, certain motives stand out as the main drivers as are discussed
below:
a. Motives which add to Shareholder’ Value
 Economies of Scale
 Increased Revenue increased market share
 Synergy
 Taxes
 Geographical or other Diversification
 Resource transfer
 Vertical integration
 Increased market share to increase market power

b. Motives which do not add to shareholder value

 Diversification
 Overextension
 Manager‟s Hubris
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  Manager‟s compensation
 Empire building 20

2.7 Theories of Merger

Evaluating the performance of corporations involved in mergers or acquisitions has been

the subject of a great of research. Large, and sometimes spectacular, mergers and
acquisitions have attracted media coverage that has simulated the interest of both
researchers and the general public. Attempts were made to shed light on the motives
behind these transactions and to determine their consequence by evaluating the costs and
benefits for both the corporations and the countries in which they were located.

The variety of reasons for mergers and acquisitions and the diversity of their
consequences have given rise to a range of hypotheses, each of which attempts to explain
part of this phenomenon. These hypotheses can be subsumed into three major theories.

(i) Internalization Theory

The Internalisation Theory is based on the idea of intangible assets in order to attract
mergers or acquisitions, corporations must have intangible assets corporations make them
profitable. These assets can include knowledge of a particular market, know – how in a
particular technology or an enviable reputation for product quality. Usually, these assets
have two major characteristics they must have the attributes of a public good (i.e., their
running costs within the corporation must be zero) and they must have high transaction
costs so the most profitable way of acquiring them is through merger or acquisitions
rather than purchase or rental. The internalization theory assumes that the purchases of
the targeted corporations want to obtain their intangible assets. These assets will produce
a competitive advantage that should eventually find expression in increased profit. When
intangible assets are recognized, it is usually by competitors. As a result, the
internalization theory best explains horizontal mergers.

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(iii) Technological Competence Theory

The mounting importance of technology has given rise to a new theory that is an
extension of the internalization theory, namely the technological competence theory
recently developed by John Cantwell and based on the internalization of intangible
technological assets. It assumes that technology consists of two factors one that cannot be
codified (e.g., written information about the technology, plans, etc.) and another that
cannot be codified (e.g., certain abilities needed to operate it, particular knowledge, the
ways in which it operates, etc.) it is this latter constitutes technological competence, that
is to say, an intangible asset. Technological competence is thought, moreover, to be of
cardinal importance for corporate success. This theory has certain consequences. First,
when targeted corporations are in industries with high technological coefficients,
potential purchasers will be more inclined to install research and development capacity
there, thus enhancing local innovation. Second, when local corporations have low
technological capacities, mergers and acquisitions may increase the technological content
of production. Third, in intermediary cases when corporations engage in research but are
not on the cutting edge of technology, mergers and acquisitions may result in the
complete absorption of the targeted industry.

(iii) Transaction cost theory

A corporation may decide to acquire an important supplier in order to ensure that a

particular input is available, to reduce supply uncertainties or to reduce the cost of this
input. This is the basis of the transaction cost theory which applies primary to vertical
transactions. It is more likely to come into play if the number of buyers and sellers in the
market are limited, information about costs and prices is limited and the cost of changing
suppliers is not negligible.

(iv) Other Theory

Following are some other important theories of mergers and acquisitions.

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 Efficiency theory

This concept held that acquisitions were executed to achieve synergies. These types of
synergies are indentified. First, financial synergy aimed for achieving lower costs of
capital through lowering the systematic risk of the acquirer. Second, operational synergy
targeted achieving operational excellence from a combined firm‟s operations. Third,
managerial synergy was used to enhance a target‟s competitive position by transferring
management expertise from the bidder to the target. The view of financial synergy has
been attacked by saying that there is no evidence for a lower systematic risk or an
advantage of internal capital market. It was determined that operational and managerial
synergies are rarely motivations for acquisitions.

 Monopoly theory

This theory viewed that acquisition were executed to achieve market power. The
implication of this type of acquisition of this type of acquisition is that conglomerates use
it to cross- subsidies products, to limit competition in more than one market
simultaneously, and to deter the potential entrance of competitors into its market. These
three advantages of the monopoly theory supported the idea of a collusive synergy or
competitor inters – relationships.

 Valuation theory

This philosophy viewed acquisitions as being executed by managers who have superior
information than the stock market about their exact target‟s unrealized potential value.
The assumption here is that the acquirer possesses valuable and unique information to
enhance the value of a combined firm through purchasing an undervalued target or
deriving benefits from combining the target‟s business with its own. The leveraged
buyout can be categorized into this theory.

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 Empire – building theory

This theory holds that managers maximize their personal goals, rather their shareholder
value maximization through acquisition. Trautwein concluded that “the empire – building
theory has to be given the most credit of theories investment up to this point.”

 Process theory

This approach indicates that strategic decisions are outcomes of processes governed by
bounded rational theory. Central role of organisation routines, or political power in the
decision process, rather than completely rational choices. The manager‟s behavior is
overoptimistic in the acquisition decision process. Political and structural matters affect
the acquisition process and outcome, whereas cultural distances between two companies
have enormous impacts on acquisition integration process.

 Raider theory

Raider is a person who causes wealth transfers from the shareholders of a target firm to
the shareholders of the acquiring firm. One of the wealth transfer media is abundant
compensation after a successful acquisition transaction, called “golden parachute”

 Disturbance theory

This approach holds that the motives of acquisitions occur as a result of economic
disturbances. Economic disturbances cause changes in individual‟s expectation and
increase the general degree of uncertainty. These theories show the variation in reasons
for a merger or acquisition. Khemani expressed this very well there are multiple reasons,
motives, economic forces and institutional factors that can be taken together or in
isolation, influences corporate decisions to engage in mergers or acquisitions. Over the
last few years, the pressures originating from international competition, financial
innovation, economic growth and expansion, heightened political and economic
integration, and technological change have all contributed to the increased pace of
mergers and acquisitions. Finally new or modified tax regimes, the cost of capital, and

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policy on such things as foreign property, economic regulations and privatization also
have an effect on the intersectional – international variations in the number of mergers
and acquisition.21

2.8 Varieties of Merger

From the perspective of business structures, there is a whole host of different mergers.
Here are a few types, distinguished by the relationship between the two companies that
are merging.

1. Horizontal merger

Horizontal mergers raise three basic competitive problems. The first is the elimination of
competition between the merging firms, which, depending on their size, could be
significant. The second is that the unification of the merging firms' operations might
create substantial market power and might enable the merged entity to raise prices by
reducing output unilaterally. The third problem is that, by increasing concentration in the
relevant market, the transaction might strengthen the ability of the market's remaining
participants to coordinate their pricing and output decisions. The fear is not that the
entities will engage in secret collaboration but that the reduction in the number of
industry members will enhance tacit coordination of behavior.

2. Vertical Merger

Vertical mergers take two basic forms: forward Integration, by which a firm buys a
customer, and backward integration, by which a firm acquires a supplier. Replacing
market exchanges with internal transfers can offer at least two major benefits. First, the
vertical merger internalizes all transactions between a manufacturer and its supplier or
dealer, thus converting a potentially adversarial relationship into something more like a
partnership. Second, internalization can give management more effective ways to monitor
and improve performance.

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Vertical integration by merger does not reduce the total number of economic entities
operating at one level of the market, but it might change patterns of industry behavior.
Whether a forward or backward integration, the newly acquired firm may decide to deal
only with the acquiring firm, thereby altering competition among the acquiring firm's
suppliers, customers, or competitors. Suppliers may lose a market for their goods; retail
outlets may be deprived of supplies; or competitors may find that both supplies and
outlets are blocked. These possibilities raise the concern that vertical integration will
foreclose competitors by limiting their access to sources of supply or to customers.
Vertical mergers also may be anticompetitive because their entrenched market power
may impede new businesses from entering the market.

3. Conglomerate Merger

Conglomerate transactions take many forms, ranging from short-term joint ventures to
complete mergers. Whether a conglomerate merger is pure, geographical, or a product-
line extension, it involves firms that operate in separate markets. Therefore, a
conglomerate transaction ordinarily has no direct effect on competition. There is no
reduction or other change in the number of firms in either the acquiring or acquired firm's
market. Conglomerate mergers can supply a market or "demand" for firms, thus giving
entrepreneurs liquidity at an open market price and with a key inducement to form new
enterprises. The threat of takeover might force existing managers to increase efficiency in
competitive markets. Conglomerate mergers also provide opportunities for firms to
reduce capital costs and overhead and to achieve other efficiencies.

Conglomerate mergers, however, may lessen future competition by eliminating the

possibility that the acquiring firm would have entered the acquired firm's market
independently. A conglomerate merger also may convert a large firm into a dominant one
with a decisive competitive advantage, or otherwise make it difficult for other companies
to enter the market. This type of merger also may reduce the number of smaller firms and
may increase the merged firm's political power, thereby impairing the social and political
goals of retaining independent decision-making centers, guaranteeing small business
opportunities, and preserving democratic processes.22
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4. Triangular Merger

A triangular merger refers to the acquisition of a local company through a share swap
with a local subsidiary that is owned by a foreign buyer. Simple words, a foreign
company buys a local company by exchanging the shares of its subsidiary located in
country of local company.

A. Forward Triangular merger

A Type of merger that occurs when the subsidiary of the acquiring corporation merger
with the target firm. As a result of the merger, the target becomes a part of the original
subsidiary of the acquirer. This form of acquisition is often used for regulatory reasons.

Chart No. 2.1 Forward Triangular mergers Structure

ACQUIRER TARGET

ACQUSITION
SUBSIDIARY

(Source: Computed by researcher)

The stock of the acquiring parent corporation is issued in the transaction. No stock of the
subsidiary may be issued and the subsidiary must be at least 80 % owned by the acquirer.

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B. Reverse Triangular merger

Chart No. 2.2 Reverse Triangular mergers Structure

ACQUIRER TARGET

ACQUISION
SUBSIDIARY

(Source: computed by researcher)

In reverse Triangular merger, the merger proceeds in the same manner as a Triangular
merger except the subsidiary is merged into the target corporation. The outstanding
shares of stock of the subsidiary, all of which are owned by the acquiring corporation, are
converted into shares of stock of the target corporation. The shares of stock of the target
corporation are converted into securities of the acquiring corporation. The advantage of
this merger is that the target corporation will become a wholly- owned subsidiary of the
acquiring corporation without any change in its corporate existence.

 Purchase Merger

As the name suggests, this kind of merger occurs when one company purchases another.
The purchase is made with cash or through the issue of some kind of debt instrument the
sale is taxable. Acquiring companies often prefer this type of merger because it can
provide them with a tax benefit. Acquired assets can be written up to the actual purchase
price, and the difference between the book value and the purchase price of the assets can
depreciate annually, reducing taxes payable by the acquiring company. 23

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2.9 Synergies in Merger Acquisitions

Synergy refers to the combination of two firms that yield a more valuable entity than the
value of the sum of the two firms if they were to stay independent. The synergies that
arise from merger and acquisition are:

(A) Financial synergies

According to Ross, Westerfield, and Jaffe, there are many sources of financial synergy in
merger and acquisition, which include:

i) Lower taxes
ii) Cost reduction
iii) Get rid of inefficient and costly management
iv) Revenue enhancement
v) Marketing gains
vi) Strategic benefits
vii) The cost of capital

(B) Human Capital Synergies

In addition to the purely financial synergies that we have discussed to this time, there
could also be what we call human capital synergies. This is when the two firms can take
advantage of the knowledge, the so – called intellectual capital, possessed by the
employees in both firms. This intellectual capital could be expert knowledge in a
particular area, as well as technological superiority and a range of other specific skills.
The end goal of a Merger and acquisition is almost always to become more successful in
terms of earning money. The synergies gained through human capital should, in the long
run, lead to increased efficiency and profitability.

There are, however, many problems associated with the human capital. Human beings are
not like machines, their actions cannot be predicted and therefore it is very risk to
estimate the human synergies in financial terms when first initiating the Merger and

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acquisition. It has to be taken into account that people are creatures of habit and they are
likely to oppose change if they do not fell that it is beneficial to them. 24

2.10 Merger and Acquisition Process

Merger and Acquisition Process is probably the most important thing in a merger or
acquisition deal as it influences the benefits and profitability of the merger or acquisition.
The Merger and Acquisition Process are carried out in some steps which are discussed in
the following page.

Merger and Acquisition Process is a great concern for all the companies who intend to go
for a merger or an acquisition. This is so because, the process of merger and acquisition
can heavily affect the benefits derived out of the merger or acquisition. So, the Merger
and Acquisition Process should be such that it would maximize the benefits of a merger
or acquisition deal. The Merger and Acquisition Process can be divided in to some steps.
The stepwise implementation of any merger process ensures its profitability.

i. Preliminary Assessment or Business Valuation

In this first step of Merger and Acquisition Process, the market value of the target
company is assessed. In this process of assessment not only the current financial
performance of the company is examined but also the estimated future market value is
considered. The company which intends to acquire the target firm, engages itself in an
thorough analysis of the target firm‟s business history. The products of the firm, its‟
capital requirement, organizational structure, brand value everything are reviewed
strictly.

ii. Phase of Proposal

After complete analysis and review of the target firm‟s market performance, in the
second step, the proposal for merger or acquisition is given. Generally, this proposal is
given through issuing a non-binding offer document.

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iii. Exit Plan

When a company decides to buy out the target firm and the target firm agrees, then the
latter involves in Exit Planning. The target firm plans the right time for exit. It considers
all the alternatives like Full Sale, Partial Sale and others. The firm also does the tax
planning and evaluates the options of reinvestment.

iv. Structured Marketing

After finalizing the Exit Plan, the target firm involves in the marketing process and tries
to achieve highest selling price. In this step, the target firm concentrates on structuring
the business deal.

v. Origination of Purchase Agreement or Merger Agreement

In this step, the purchase agreement is made in case of an acquisition deal. In case of
Merger also, the final agreement papers are generated in this stage.

vi. Stage of Integration

In this final stage, the two firms are integrated through Merger or Acquisition. In this
stage, it is ensured that the new joint company carries same rules and regulations
throughout the organization.25

2.11 Mergers and Acquisitions in India

Mergers and acquisitions in India are on the rise. Volume of mergers and acquisitions in
India in 2007 are expected to grow two fold from 2006 and four times compared to
2005.India has emerged as one of the top countries with respect to merger and acquisition
deals. In 2007, the first two months alone accounted for merger and acquisition deals
worth $40 billion in India. The estimated figures for the entire year projected a total of
more than $ 100 billion worth of mergers and acquisitions in India. This is twofold
growth from 2006 and a growth of almost four times from 2005.

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 Mergers and Acquisitions in different sectors in India

Sector wise, large volumes of mergers and mergers and acquisitions in India have
occurred in finance, telecom, FMCG, construction materials, automotives and metals. In
2005 finance topped the list with 20% of total value of mergers and acquisitions in India
taking place in this sector. Telecom accounted for 16%, while FMCG and construction
materials accounted for 13% and 10% respectively.

In the banking sector, important mergers and acquisitions in India in recent years include
the merger between IDBI (Industrial Development bank of India) and its own subsidiary
IDBI Bank. The deal was worth $ 174.6 million (Rs. 7.6 billion in Indian currency).
Another important merger was that between Centurion Bank and Bank of Punjab. Worth
$82.1 million (Rs. 3.6 billion in Indian currency), this merger led to the creation of the
Centurion Bank of Punjab with 235 branches in different regions of India.

In the telecom sector, an increase of stakes by SingTel from 26.96 % to 32.8 % in Bharti
Telecom was worth $252 million (Rs. 10.9 billion in Indian currency). In the Foods and
FMCG sector a controlling stake of Shaw Wallace and Company was acquired by United
Breweries Group owned by Vijay Mallya. This deal was worth $371.6 million (Rs. 16.2
billion in Indian currency). Another important one in this sector, worth $48.2 million (Rs
2.1 billion in Indian currency) was the acquisition of 90% stake in Williamson Tea
Assam by McLeod Russell India In construction materials 67 % stake in Ambuja Cement
India Ltd was acquired by Holcim, a Swiss company for $634.9 million (Rs 27.3 billion
in Indian currency). Top listed merger and acquisition in India in 2014:

1. Flipkart- Myntra

Bangalore based domestic e-retailer Flipkart acquired the online fashion portal Myntra
for an undisclosed amount in May 2014.

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2. Asian Paints- Ess Bathroom Products

Asian paints signed a deal with Ess Bathroom products Pvt Ltd to acquire its front end
sales business.

3. RIL- Network 18 Media and Investments

Reliance Industries Limited (RIL) took over 78% shares in Network for Rs 4,000 crores.

4. Merck- Sigma Deal

Merck KGaA took over US based Sigma-Aldrich Company for $17 billion in cash.

5. Ranbaxy- Sun Pharmaceuticals

Ranbaxy shareholders will get 4 shares of Sun Pharma for every 5 Ranbaxy shares held
by them. The deal, worth $4 billion.

6. TCS- CMC

Tata Consultancy Services (TCS) has announced a merger with the listed CMC.

7. Tata Power- PT Arutmin Indonesia

Tata Power purchased 30% stake in Indonesian coal manufacturing firm for Rs 47.4
billion.

8. Tirumala Milk – Lactalis

Lactalis acquired Tirumala Milk products for Rs 1750 crore.

9. Aditya Birla Minacs- CSP CX

ABNL IT & ITeS Ltd. was sold to a Canadian based technology outsourcing firm CSP
CX.

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10. Yahoo- Book pad

Yahoo acquired the one year old Bangalore based startup Book pad for a little under $15
million, though the amount is not disclosed.

 Mergers and Acquisitions in India in 2007

Some of the important mergers and takeovers in India in 2007 were –Mahindra and
Mahindra acquired 90% stake in the German company Schoneweiss. Corus was taken
over by Tata RSM Ambit based at Mumbai was acquired by PricewaterhouseCoopers.
Vodafone took over Hutchison-Essar in India.26

 Recent company Mergers

We will present the information about the recent mergers that have been happening for
the last six or seven years. Several giants, like AT&T, TATA Steel, HP etc opt for
mergers to increase their profitability. In the recent times, many companies around the
globe involve in merger. The main aim of buying a company is to increase the share
value above the sum total of the two merging companies. The two companies together
become more valuable than two separate entities. Weight Watchers merged with Godiva.
Campbell Soup has been taken by WTW.

In March 2002, The Federal Trade Commission of the United States announced the
merger between Hewlett Packard, one of the leading Imaging and Computing solutions
provider and services, and Compaq Computer Corporation.

In 2005, the famous AT&T Corporation, popularly known as AT&T, and SBC
Communications Inc. completed the merger and the name of the newly established
company was AT&T Inc. However, initially shares of AT&T could be exchanged with
SBC Inc shares.

In 2006, The Federal Communications Commission approved the 86 billion dollar merger
between Bell South Corporation and AT&T. In October, 2006, TATA Steel Ltd agreed a
8.04 billion dollars merger with the Corus Group, an Anglo-Dutch steel company.

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 In January 2007, one of the leading American forest production company Abitibi-
Consolidated Inc. announced their merger with Bowater Inc. On the 19th of February
2007, merger between XM Satellite Radio and Sirius Satellite Radio have been
completed. The combination of these two radio services formed a single Satellite Radio
network in Canada and US. In October 2007, the merger of the two big beer companies,
Molson Coors and SABMiller, took place. The combination of these two, in which Miller
will have 58% shareholding, will now be known as Miller Coors and offer a challenge to
the other beer production companies of USA. 27 to know more about Recent company
Mergers one may browse through the following:

Table no. 2.6 Recent company Mergers

Recent company Mergers
 at&t and SBC Merger
 at&t and BellSouth Merger
 Alcatel and Lucent Merger
 HP Compaq Merger
 S.A.S Merger
 Mercedes Merger with Chrysler
 Alstom Areva Merger
 Siri and XMSR Merger
 Highmark Blue cross Blue Shield 
Merger
 Coors Miller Merger
 Molson and Coors Merger
 Sony and MGM merger Acquisitions
 United Delta Merger
 Alltel Merger
 Midwest Mergers Management
 Osnaburg Township Merger
 YRC worldwide Merger
 Abitibi Bowater Merger
 Beth Israel Merger
 Chase Manhattan JP Morgan Merger
 Cingular and AT&T merger
 Day and Zimmerman Merger
 Detroit Edison Credit Union Merger
Tata Corus Merger
 Hindalco Novelis Merger
 Videocon Daewoo Merger
 HPCL and Kenya Petroleum Refinery
Mergers
 Vodafone Merger
 Videocon and Thompson Merger
 VSNL and Teleglobe Merger

2.11 Different Aspects in Merger and Acquisitions

It is expected that merger should be quite beneficial for the shareholder of the merging
and the merged company, to the employees of both the companies, to the suppliers of raw

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materials to the companies, to the buyers of the end product of the companies, to the
Government and to the society at large. Mergers, by virtue of pooled economic, material
and manpower resources of both the companies, are expected to yield improved
productivity, enhance profitability, more corporate profits, rich and consistent dividends
to the shareholders and of course, more contribution to the national exchequer in the form
of various taxes, levies, imposts, etc. The different aspects in merger and acquisition
Economic, Financial, Contractual, HR as well as exchange control considerations are
dealt in this section.

1. Economic Aspects

Till some year ago, merger of companies or takeover of one company by another was
viewed as a sign of failure in India. The acquisition was resorted to mostly for the tax
benefits but currently there are more economic reasons and wider choices of takeovers /
mergers.
 Synergies
 Vertical Integration
 Customer Demands
 Know – how
 Re-fashioning
 Increasing Market share
 Diversification

2. Financial Aspects

Each merger is aimed at the following financial aspects:

- To pool the resources of all the companies involved in the exercise of acquisition or
merger so as to achieve economies of production, administrative, financial and
marketing management.

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- To secure the required credit on terms from financial institutions, banks, suppliers, job
workers, etc.

- To reinforce the united research and development activities for product development
to ensure a permanent, dominant and profit making position in the industry.

- To concentrate on the core competence of the merged company.

- To consolidate the resource base and improve generation, mobilization and utilization
of physical, financial, human, knowledge, information and other important tangible
and intangible resources.

3. Human Aspects

The management of the human side of merger and acquisition activity, however, based
upon the failure rates of merger and acquisitions, appears to be a somewhat neglected
focus of the top management‟s attention. Possible reasons include:

- The belief that people are too soft and therefore, hard to manage

- Lack of awareness or consensus that people issues are critical

- No spokesperson to articulate these issues

- No model or framework that can serve as a tool to systematically understand and

mange the people issues and therefore

- The focus of attention in merger and acquisition activity is on other activities such as
finance, accounting, and manufacturing.

While human resource issues are important in merger and acquisition activity throughout
the world, their importance tends to vary by type of merger and acquisition combination.
For example, if it is an acquisition that will allow for separation of the acquired company,
there may be fewer evaluation, selection, and replacement decisions than in acquisitions
that result in complete integration of the two companies. In addition, in the integration
phase of merger and acquisition activity, there are several other people issues that are
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evident in the phases before and after integration. Those become more evident from the
following.

Three – Stage Model of Merger & Acquisition

The experiences of companies in merger and acquisition activity suggest a model of that
has three stages:

i. Pre – Combination

ii. Combination, Integration of the partners

iii. Solidification and advancement of the new entity

While these three stage are applicable to and encompass the larger set of business
functions, such as business strategy, finance, marketing, distribution, IT, and
manufacturing, the issues highlighted here are those that reflect issues most closely
associated with human resource management(HRM). Then to provide further focus and
detail for these human resources (HR) issues in merger and acquisition activity, HR
implications and actions for the several issues in each stage are also indentified.

4. Contractual Aspects

While economic and financial reasons may be the factors behind both merger and
acquisition, contractual considerations involved are rather different. Share sale and
purchase acquisition agreement, asset and business transfer agreements, representations
and completion matters and indemnities formulation of share purchase agreement
towards completion of the merger process.

5. Exchange Control Aspects

Exchange control consideration is another significant aspect in Merger and Acquisitions

dealings. The Foreign Direct Investment (FDI) regime in India has progressively
liberalized and the Government of India recognizes the key role of FDI in economic
development of the country. With very limited exceptions, foreign entities can now invest

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directly in India, either as wholly – owned subsidiaries or as a joint venture. In an
international joint venture, any proposed investment by a foreign entity individual in an
existing entity may be brought in either through equity expansion or by purchase of the
existing equity. 28

2.12 The Legal and Regulatory Framework

In recent years, India has seen a manifold growth in mergers and amalgamations, largely
encouraged by liberalization measures, which have substantially relaxed restrictions on
international mergers and amalgamation transactions. The opening up the Indian
economy and the government‟s decision to disinvest has made corporate restructuring
more relevant to acquisitions are being made so on. It may reasonably be stated that the
quantum of mergers and acquisitions in the last few years must be more than the
corresponding quantum in the four and a half decades post independence.

Laws and Statutes in India

Mergers and acquisitions are regulated by various enactments as amended from time to
time through various prescribed provisions made therein. Various Statutes which
government merger and acquisitions in India are as under:

i) The Companies Act 1956

The relevant provisions dealing with schemes of arrangement, amalgamations and

mergers are contained in seven sections of the Act, namely, sections 390 – 396A, all of
which are included in chapter of companies Act, 1956. While section 390 interprets the
expression company, arrangement and explains unsecured creditors, as used under
sections 391 and 393, the section 391 lays down in detail the power to make compromise
or arrangements with creditors and members. Under this section, a company can enter
into a compromise or arrangement with its creditors or members, or any class thereof
without going into liquidation. Section 392 lays down the power of tribunal substituted
for “Company law Board“ by the companies (second amendment ) Act, 2002. Earlier, the
quoted words were substituted for “High Court” by the companies (Amendment) Act,
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1988, w.e.f. 31st may, 1988 and “High Court” was substituted for “tribunal” by the
companies tribunal (Abolition) Act, 1967 to enforce compromise or arrangements.
Section 393 specifies the information as to compromise or facilitating reconstruction or
amalgamation of companies is contained in section 394. Section 395 prescribed from the
scheme or contract approved by the majority. Powers of central Government to provide
for amalgamation of companies in national interest is laid down under section 396 and
section 396A specifies provisions for preservation of books and papers of amalgamated
company.29

ii) Industries Development and Regulation Act. (IDRA), 1951

This is “An Act to provide for the development and regulation of certain industries” this
Act contains provisions for reconstruction of such companies where management or
control of industrial undertaking is taken over as per direction of Central Government.
The provisions of this Act have a very restricted applicability in case of mergers. An
application under section 391 of companies Act, initiating a merger proposal cannot be
proceeded with, where permission of High Court has been granted under section 18FA of
this Act to appoint any one to take over the management of individual under section the
application of Central Government for the purpose of running or restarting it. However,
the Central Government may review its order at the request of the parties to proceed with
the scheme of merger. There is no requirement to get a new license as license of
amalgamating company is treated adequate for amalgamated company since takeover of
all assets includes license also.

iii) Monopolies and Restrictive Trade Practices (MRTP Act), 1969

This is an “Act to provide that operation of economic system does not result in the
concentration of economic power to the common detriment, for the control of
monopolies, for the prohibition of monopolies and restrictive trade practice and for
matters connected there with or incidental thereto”. Powers of the Act have been curtailed
by the amendments made by MRTP (Amendment) Act, 1991. MRTP Act which allowed
scrutiny and clearance of merger proposals has been deleted to a great extent. Later, in

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the ruling of HLL/TOMCO merger case in 1992, Supreme Court of India stated that prior
approval of government was not required for amalgamations following amendment of
MRTP Act. The commission has now powers post – facto to investigate if mergers have
had any adverse effect.30

iv) Foreign Exchange Regulation Act. (FERA), 1973

This is an “Act to consolidate and amend laws regulating certain payments, dealing in
foreign exchange and securities, transactions indirectly affecting for, foreign exchange
and import and export currency, for the conservation of foreign exchange resource of the
country and proper utilization thereof in the interest of economic development of the
country. “Section 14 of this Act contains provisions regulating export and transfer of
securities.” Permission of RBI is required u/s 19(1) (d) of FERA of the issue of any
security to a person resident outside India. Accordingly, in a merger, Transferee
Company should obtain permission before issuing shares in exchange of shares held in
Transferor Company.31

v) Sick Industrial Companies (Special Provisions) Act. (SICA), 1985

This is an “Act to make in public interest special provision with a view to securing the
timely detection of sick and potentially sick companies owning industrial undertakings,
the speedy determination by board of experts of preventive, ameliorature, remedial and
other measures which need to be taken with respect to such companies and the
expeditious enforcement there with or incidental thereto.” An industrial company will be
deemed to be sick industrial company if it has been registered for at least five years and
has accumulated losses more than or equal to its net worth at the end of any financial
year. Once a company becomes sick, it will be referred to BIFR, which may under
section 18 section its merger with a healthy company for its revival. The sanctioned
scheme must be approved through a special resolution by employees, particularly of
transferor sick company who may anticipate uncertainty on merger, and the scheme once
sanctioned will be binding on them.

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The companies (second amendment) Act, 2002 now incorporates provisions relating to
revival and rehabilitation of sick industrial companies in the companies Act. Part VIA,
consisting of Sections 424A – 424L have been inserted in the Companies Act which
allow for reference to the Tribunal by a sick industrial Undertaking for its revival or
rehabilitation as per the scheme submitted by it to the Tribunal.32

vi) The Competition Act 2002

The competition Act has been enacted “to provide, keeping in view the economic
development of the country, for the establishment of a commission of a Commission to
prevent practices having adverse effect on competition in markets, to protect the interest
of consumers and to ensure freedom of trade carried on by any other participants in
markets, in India, and for matters connected therewith and in incidental thereto.” This
Act, primarily deals with regulation of combinations (more generally, mergers), in order
to prevent anti – competitive practices or the abuse of dominant position of an enterprise
which affects free competition. It contains a prohibition against a combination, which
causes or its likely to cause appreciable adverse effect on competition and also has
provisions requiring notification of combinations formed through acquisition, mergers or
amalgamation.

Merger is legitimate means by which firms can grow. Form the view point of competition
policy; horizontal mergers are generally the focus of attention since they tend to be anti –
competitive. A merger leads, to bad outcomes only if it creates dominant enterprise that
subsequently abuses its dominance. Merger should be challenged only if they reduce
competition and adversely affect welfare.33

vii) Income tax Act, 1961

Section 2(IB) of income Tax Act, 1961 defines amalgamation in relation to other
companies to mean merger of one or more companies with another company or merger of
two or more companies to form one company, (the companies so merged are referred as
amalgamating companies and company with which they merge or which is formed as a
result of merger is called amalgamated company) in such a manner that:
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- All the properties of Amalgamation Company‟s immediately before amalgamation
become properties of amalgamated company by virtue of amalgamation.

- All the liabilities of amalgamating company‟s immediately before amalgamation

become liabilities of amalgamated company by virtue of amalgamation.

- Shareholders holding not less than three- fourths in the value of shares in
amalgamating company‟s (other than shares already held therein immediately before
amalgamation become shareholders of the amalgamated company by virtue of
amalgamation otherwise than as a result of acquisition of property of one company by
another company pursuant to purchase of such property by other company or as result
of distribution of such property to other company after winding up of first mentioned
company.

The term amalgamation is widely defined under the Act with the objective to encourage
amalgamation in public interest as such; the meaning of the term includes not only
merger of one or two companies to form a new company but also merger of one or more
companies with another existing company. This amendment was made in the definition
of amalgamation by Finance Act, 1967 favorable to merger of uneconomical units with
other financially sound units in the increased efficiency and productivity and to remove
certain tax liability on amalgamating company and its shareholders. 34

2.13 Accounting for Merger and Acquisition

In recent years, the Indian economy has undergone a number of reforms, resulting in a
more market – oriented economy, particularly, after the Government of India has taken
step towards liberalization and globalization of the economy, the size of Indian corporate
is becoming much bigger. Cross – border acquisitions from India have been increasing at
a rapid pace. According to Bloomberg, the value of inbound, outbound and domestic
merger and acquisition, and „fairness opinion‟ deals was $40 billion during calendar
2006.

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 Accounting Standards Governing Merger and Acquisitions

The institute of Charted Accountants of India has formulated Accounting Standard (AS)
– 14 for accounting requirement of merger and amalgamations. This standard became
effective from April 1, 1995.

Accounting Standards - 14 is based on the international Accounting Standards22,

captioned “Accounting for Business Combinations.” It deals with the Accounting
requirements of amalgamation and mergers as well as treatment of all aspects of the
amalgamation, e.g., valuation of goodwill, assets revaluation reserves, etc. it does not
deal with substantial acquisition of share carrying controlling interest in the target
company.

FRS – 6 “Acquisitions and Mergers” in the U.K. and APB opinion No.16 in the U.S. also
deals with the subject. IFRS – 3, on „business Combinations‟ deals with acquisition of an
entity on the date its acquisition. Hence, some special features of the IAS 22, FRS 6
(U.K.) and APB Opinion 16 (U.S.) are also referred to in this chapter wherever found
suitable.

 Amalgamation Types

According to Accounting Standards – 14, amalgamation has been classified into two
classes, viz.,

i. Amalgamation in the Nature of Merger

In the case of „amalgamation in the nature of merger‟ all the following conditions are to
be satisfied.

- All the assets and liabilities of the transferor company, after amalgamation, become
the assets and liabilities of the transferee company.

- Shareholder holding not less than 90% of the face value of the equity shares of the
transferor company (other than the equity shares already held therein, immediately

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 before the amalgamation, by the transferee company or its subsidiaries or their
nominees) becomes equity shareholders of the transferee company by virtue of the
amalgamation.

- No adjustment is intended to be made to the book value of the assets and liabilities of
the transferee company except to ensure uniformity of accounting policies.

- The consideration for the amalgamation receivable by those equity shareholders of the
transferor company who agree to become equity shareholders of the transferee
company is discharged by the transferee company wholly by the issue of its equity
shares.

- The business of the transferor company is intended to be carried on, after the
amalgamation, by the transferee company.

ii. Amalgamation in the Nature of Purchase

An amalgamation should be considered to be an „amalgamation in the nature of purchase‟

when anyone or more of the conditions specified in Para Amalgamation in the Nature of
Merger above is not satisfied.

 Accounting Classification of Amalgamation

There are two main methods of Accounting for amalgamation:

a) Pooling Interest Method

b) Purchase Method
c) Pooling vs. Purchase Method
While the pooling of interest method is used in case of amalgamation in the nature of
merger, the purchase method is used in accounting for amalgamations in the nature of
purchase.35

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2.14 Impacts of Merger and Acquisitions on Stakeholders

There are many parties who have interest, either direct or indirect, in the success of an
organisation. The Merger and acquisitions of organizations will have significant impact
not only on the direct owners, i.e., shareholders, but also on various other groups like
employees, consumers, government, general public, etc. The impact of Merger and
acquisitions on different stakeholders is discussed below:

a) Impact on Shareholders

Increasing the shareholders value is generally a prime objective of most of Merger and
acquisitions today. The value to shareholders through Merger and Acquisitions could be
increased either by cutting the costs by combining similar assets in the merging concerns
or by enhancing the revenue by focusing on enhancing capabilities and revenues, and
combining complementary competencies.

b) Impact on Employees

Merger and Acquisitions have profound impact employment in all sectors of the
economy. Merger and Acquisitions invariably result in decline in the number of branches
and thus leads to staff retrenchments. Consequently, mergers often lead to higher
workloads being placed on remaining staff, with companies requiring flexibility in terms
of working hours, mobility and skills, excellent and highly motivated employees of the
merged entity may feel frustrated and may resign or they may not give their best to the
organisation.

c) Impact on Customers

They are able to do this because new information and communication technology allows
them to save cost by operating with fewer branches or without a traditional branch
network (e.g. ICICI Bank and HDFC Bank). Customers are provided with new products
and services with time flexibility. Customers need not to stick on to bank working hours

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to conduct their business. Public sector banks have also initiated these steps in order to
meet consumer needs.

d) Impact on Government

The Merger and Acquisitions to be successful should be created by market driven forces
of synergy and other motives. However, the some of the recent Merger and Acquisitions
are not market driven and created for mutual benefit of both acquire and the target
companies ( mergers of Times Bank with HDFC Bank, 2000, Centurion bank with Bank
of Punjab, 2005, etc.).

e) Impact on Organisation Culture

As organisation culture is the part of employee‟s identity, if the cultural issues are not
effectively addressed, it may lead to loss of commitment among employees resulting in
lost opportunities to retain qualified personnel and motivate individuals. A merger deal,
which may appear to be perfectly sound from financial point of view, may fail miserably
if cultural and human issues are not properly addressed in the newly created entity.
Merger of New Bank of India with Punjab National Bank is a classic case of cultural
differences on account of which the merged entity suffered a lot immediately following
the merger.

f) Impact on Public

It is learnt that SBI never thought of merging its associates with itself because each of the
associate banks has its own regional flavour, a clientele with which it is more
comfortable after having nurtured it over many years, and there enjoys a niche presence.
if the regional banks, for instance, State bank of Travancore, or State Bank of Indore, or
State bank Mysore, is merged into a single giant entity it may affect the regional
subsidiary and also the parent bank. Some of these banks have strong local or regional
flavour to their operations that could get eroded if they were to merge with the parent.

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g) Management at the top

Impact of mergers and acquisitions on top level management may actually involve a
“clash of the egos”. There might be variations in the cultures of the two organizations.
Under the new set up the manager may be asked to implement such policies or strategies,
which may not be quite approved by him. When such a situation arises, the main focus of
the organization gets diverted and executives become busy either settling matters among
themselves or moving on. If however, the manager is well equipped with a degree or has
sufficient qualification, the migration to another company may not be troublesome at
all.36

h) Customers

Acquisitions can also affect customers who trusted the acquired firm. This is because the
products of acquired companies may be altered in quality and price. On such occasions,
customers can change their consuming habits, buying more of a cheaper or high-quality
product or less of an expensive or low-quality one. In case an acquiring firm decides to
abandon a product or service altogether, formerly loyal customers have to search
elsewhere to satisfy their needs.37

2.15 Managing risk in Merger and Acquisition

A combination of factors – increased global competition, regulatory changes, fast

changing technology, need for faster growth and industry excess capacity – has fuelled
merger and acquisitions in recent times. The merger and Acquisition phenomenon has
been noticeable not only in developed markets like the US, Europe and Japan but also in
emerging markets like India.

 Why Merger and Acquisitions are Risky?

Major acquisitions have to be handled carefully because they leave little scope for trial
and error and are difficult to reverse. The risks involved are not merely financial ones. A
failed merger can disrupt work processes, diminish customer confidence, damage the
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company‟s reputation, cause employees to leave and result in poor employee motivation
levels. So the old saying, discretion is the better part of valuation, is well and truly
applicable here. A comprehensive assessment of the various risks involved is a must
before striking a merger and acquisition deal. Circumstances, under which the acquisition
may fail, including the worst case scenarios, should be carefully considered. Even if the
probability of a failure is very low, but the consequences of the failure are significant,
one should think carefully before hastening to complete the deal.

The strategic implications of a merger should be understood carefully. Otherwise, the

shareholders‟ wealth will be eroded. As Mark Sirower puts it neatly, “when you make a
bid for the equity of another company, you are issuing cash or claims to the shareholders
of that company. If you issue claims or cash in an amount greater than the economic
value of the assets you purchase, you have merely transferred value from the shareholders
of your firm to the shareholders of target – right from the beginning. “in an acquisition,
the acquirer pays up front for the right to control the assets of the target firm, with the
hope of generating a future stream of cash flows. If demanding standards are not set to
facilitate informed and prudent decision – making, the investment made will not yield
commensurate returns.

There are two main reasons for the failure of merger and acquisition deal. These are:

- One is the tendency to lay too much stress on the strategic, unquantifiable benefits of
the deal. These results in over – valuation of the acquired company.

- The second reason is the use of wrong integration strategies. As a result, actually
realized synergies turn out to be well short of the projected ones.38

 Strategic Issues in Merger and Acquisition

Many companies are confident about generating cost savings before the merger. But they
are unaware of the practical difficulties involved in realizing them. For example, a job
may be eliminated, but the person currently on that job may simply be shifted to another
department. As a result, the head count remains intact and there is no cost reduction.

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Many firms enter a merger hoping that efficiency can be improved by combining the best
practices and core competencies of the acquiring and acquired companies. Cultural
factors may however, prevent such knowledge sharing. The 1998 merger of Daimler
Benz and Chrysler is a good example. Also, it may take much longer it takes to cut costs,
the lesser the value of the synergies generated.

Revenue growth, the reason given to justify many mergers, is in general more difficult to
achieve than cost cutting. In fact, growth may be adversely affected after a merger if
customer or competitor reactions are hostile. When Lockheed Martin acquired Loral, it
lost business from important customers such as McDonnell Douglas, who were
Lockheed‟s competitors. So, companies must also look at the acquisition in terms of the
impact it makes on competitors. The acquisition should minimize the possibility of
retaliation by competitors. Some Merger and Acquisition experts look at revenue
enhancement as a soft synergy and discount it heavily while calculating synergy value.
Companies making an acquisition not only have to meet the performance targets the
market already expects, but also the higher targets implied by the acquisition premium.
When they pay the acquisition premium, managers are essentially committing themselves
to delivering more than what the market expects on the basis of current projections. Thus,
the three primary issues in strategic considerations of Merger and Acquisition are:

 Identifying the synergies

 Valuation
 Integration

The Causes of risk in Merger and Acquisition

It is clear that merger and Acquisition involve risks of different nature. The causes of
such risk can be grouped under following three heads:
a) Over or underestimating the value of firms
1. Information asymmetry
2. Lack of rational evaluation methods
3. The system of assessment is not perfect
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b) Choice of Transaction Method

1. Cash method
2. Common stock payment
3. Leverage payment

c) Adverse Integration in the Post – Merger

In the Integration period, when the role of risk factors comes to a certain extent, that will
lead to the occurrence of financial risks. According to the manifestations, financial risk
can be divided into the mechanism‟s risk, financial risk and operational risk.
Mechanism‟s risk means in the integration period, because of setting up financial
institutions, financial functions, financial management system, and update of financial
organizations, financial synergies, and other factors, the financial income and financial
gains of bidders occurred in a departure from expectations, and thus suffer losses.
Financial risk means financial income and financial revenue will depart from the
expected if there is something wrong with the financial running. In the process of asset
management, bidders control their assets, costs, financial operations, liabilities, profits,
and other financial functions in accordance with the principle of maximizing the synergy
earnings in order to achieve the final purpose of merger and acquisitions. However, the
uncertainty of macro and micro – environment affect the decision – making process in the
financial operation, which lead to financial risk. Operational risk means financial risk
result from inadequate monitoring of financial activities. That shows process ending is
not equals to final succeed, financial integration is the end of financial management in the
Merger and Acquisition, and is also the most important aspect, if it failed it means the
whole Merger and Acquisition has failed.39

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2.16 Why Do Merger and Acquisition Quite Often Fail?

1. Misgauging Strategic Fit

If the acquisition is too far outside the parent company‟s core competency, things aren‟t
likely to work. A company that sells to its business customers chiefly through catalog and
Internet sales ought to be very cautious about acquiring a company that relies on direct
sales – even if the products are, broadly-speaking, in the same industry. Similarly, a
company whose traditional strength lies in selling products to businesses might want to
think twice before making a foray into a consumer-oriented business. Consulting firms
have been known to acquire software companies driven by the rationale that the parent‟s
client companies use these sorts of software apps, and the applications are in the same
broad domain as the consulting firm‟s expertise; then they discover that selling B2B
applications is wholly different from managing consulting engagements. An honest
strategy audit up-front is the answer: don‟t stray beyond your core competencies, and ask
whether the target company fits your strategy, your operations, and your distribution
channels.

2. Getting the Deal Structure or Price Wrong

We all understand that if the acquiring company pays too much in an auction
environment, it‟s going to be tough to get the acquisition to show a positive ROI. To
protect themselves, some acquiring companies like to structure acquisitions with half or
more of the purchase price held back based on achievement of future performance
hurdles. But watch out: such earn-outs can backfire on the acquiring company in
unexpected ways. If, for instance, a major payment milestone is based on post-acquisition
sales performance but 99 percent of the sales people are working for the parent company
– and therefore are neither aware of nor incentivized by the sales milestones – then the
acquired company employees may well feel demoralized due to having scant control over
achieving major payment milestones.

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3. Misreading the New Company’s Culture

Just because your two companies are in the same industry doesn‟t mean you‟ve got the
same culture. It‟s all too easy for the acquiring company‟s integration team to swagger in
with “winner‟s syndrome,” and fulfill the worst fears of the new staff. Far better if they
enter the new company‟s offices carrying themselves with the four H‟s: honesty,
humanity, humility, and humor.

4. Not Communicating Clearly — or Enough

In the absence of information and clear communication, rumors will fly, and people at the
acquiring company will assume the worst. Communicate to the entire team, not just the
top executives. Communicate clearly and honestly and consistently. If there‟s bad news,
be sure to deliver it all it once, not piecemeal, and make it clear that that‟s all there is –
that folks don‟t have to worry waiting for another shoe to drop. And when you think
you‟ve communicated enough, you‟re one-quarter of the way there.

5. Blindly Focusing On Integration for Its Own Sake

Don‟t assume that all integration is good. I‟ve watched all too often as the parent
company insists on fixing things that aren‟t broken: The acquired company has
established a strong brand, but the parent insists on “improving things” by replacing it
with something that blandly blends with the corporate naming conventions. New standard
operating procedures are imposed that suck all the oxygen from the room and demoralize
the team. A small sales team has clear account authority, but the parent knows better and
makes the newly-acquired offering the 1,400th anonymous product in its sales force‟s
price list. The acquired product works perfectly well as-is, but the parent company insists
on rebuilding it so that it fits into the parent‟s technical architecture – thereby punishing
customers and freezing all product enhancements for years. The bottom line is doing be
too heavy-handed. If this company was worth acquiring, it‟s probably worth trusting,
funding and encouraging to thrive.

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6. Not Focusing Enough on Customers and Sales (vs. Cost Synergies)

The most fundamental scorecard of acquisition success is financial performance, and on

that count it‟s far more important to focus on revenue growth than cost control. An
insightful McKinsey study (published a decade ago, but whose conclusions remain
completely valid) pointed out that small changes in revenue can outweigh major changes
in planned cost savings. A merger with a 1% shortfall in revenue growth requires a 25%
improvement in cost savings to stay on-track to create value. Conversely, exceeding your
revenue-growth targets with your newly-acquired company by only 2 to 3 percent can
offset a 50 percent failure on cost-reduction.40

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References:-

1. Bhagaban Das, Debdas Raskhit and Swarpoor Debasinh, (2009), “corporate

restructuring Merger, Acquisition and other forms,” Himalaya Publishing House,
first Edition 2009 page no. 66.
2. N.R. Sridharan and P.H. Arvind Pandian, (1992), “Guide to Takeovers and
Mergers,” Nagpur: Wadhwa and co., 1992.
3. M.A. Weinberg, (1967), “Takeover and Amalgamations,” London: Sweet and
Maxwell Publishers, 1967
4. Ghosh, A. and B. Das, (2003),”Merger and Takeovers”, the Management
Accountant, 38(7), 2003, pp. 543- 545.
5. What%20is%20mergers%20and%20acquisitions%20(M&A)_%20%20Definition
%20from%20WhatIs.com.html
6. Sudarsanam, S., P. Holl and A. Salami, (1996), “Shareholder Wealth Gains in
Mergers: Effect of Synergy and Ownership Structure”, Journal of Business
Finance and Accounting, 23(5-6), 1996, pp. 673-698.
7. Patrick A. Gaughan, (1999), “Merger and Acquisitions, and Corporate
Restructurings,” 2nd ed., New York, John Wiley & Sons, 1999. pp. 21 – 60.
8. What%20Are%20Mergers%20and%20Acquisitions_%20%20Definition%20&%
20Examples%20%20Video%20&%20Lesson%20Transcript%20_%20Study.com.
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9. Mark Mitchell and J. H. Mulherin, “The Impact of Industry Shocks on
Takeover and Restructuring Activity,” Journal of Financial Economics, 41, 1996,
193–229.
10. Jarrad Harford, (2005), “What Drives Merger Waves,” Journal of Financial
Economics, 77(3), September 2005, 529–560.
11. Matthew Rhodes-Kropf, David T. Robinson, and S. Viswanathan, (2005),
“Valuation Waves and Merger Activity: The Empirical Evidence,” Journal of
Financial Economics, 77(3), September 2005, 561–603.
12. Ralph Nelson, Merger Movements in American Industry: 1895–1956 (Princeton,
NJ: Princeton University Press, 1959).
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13. Ibid
14. Earl W. Kintner, Primer on the Law of Mergers (New York: Macmillan, 1973),
p. 9.
15. Peter O. Steiner, Mergers: Motives, Effects and Policies (Ann Arbor: University
of Michigan Press, 1975).
16. Federal Trade Commission, Statistical Report on Mergers and Acquisitions
(Washington, D.C., 1977).
17. Patrick A. Gaughan, (2007), “Mergers, Acquisitions and Corporate
Restructurings,” Fourth Edition, John Wiley & Sons, Inc., Hoboken, New Jersey
Published simultaneously in Canada, page no 29 to 65.
18. Ibid
19. Ibid
20. Ibid
21. Ibid
22. Types%20of%20Mergers%20legal%20definition%20of%20Types%20of%20Mer
gers.html
23. Ibid
24. Sudarsanam, S., P. Holl and A. Salami, (1996), “Shareholder Wealth Gains in
Mergers: Effect of Synergy and Ownership Structure”, Journal of Business
Finance and Accounting, 23(5-6), 1996, pp. 673-698.
25. Merger%20and%20Acquisition%20Process.html
26. Mergers%20and%20Acquisitions%20in%20India.html
27. Recent%20company%20Mergers.html
28. Ibid
29. A. Ramaiya, Companies Act, 16th edition.
30. The Monopolies and Restrictive Trade Practices Act, 1969.Securities and
Contract Regulation Act, 1956.
31. V.S. Datey, “Corporate Laws and Secretarial Practice,” 9th edition, Taxman.
32. The Sick Industrial Companies (Special Provisions) Act, 1985.

99 | P a g e
33. Majumdar, A. K. and Dr. G. K. Kapoor, “Company Law and Practice,“
Taxman Publication, New Delhi.
34. V. K. Sighania, “Direct Taxes Law and Practice”, Taxmann‟s Publication, New
Delhi.
35. Berry Aidan and Jarvis Robin, (1977), “Accounting in Business Context,“
International Thomson Business press, 1977.
36. Impact%20Of%20Mergers%20And%20Acquisitions.html
37. The%20Effects%20of%20Acquisitions%20on%20the%20Stakeholders%20_%20
eHow.html
38. Perry, J. S. and Herd, T. J., “Merger and Acquisitions: Reducing Merger and
Acquisition risk through improved due diligence, Strategy and Leadership,”
32(2), pp.12-19.
39. Ibid
40. James D. Price. Jim, (2012), Price is a serial tech entrepreneur who also teaches
entrepreneurship and innovation at Michigan's Ross School of Business,
University of Michigan.

☆☆☆☆☆

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