M & A

Mergers and acquisitions (M&A) and corporate restructuring are a big part of the
corporate finance world. Every day, Wall Street investment bankers arrange M&A
transactions, which bring separate companies together to form larger ones. When they're
not creating big companies from smaller ones, corporate finance deals do the reverse and
break up companies through spinoffs, carve-outs or tracking stocks.
Not surprisingly, these actions often make the news. Deals can be worth hundreds of
millions, or even billions, of dollars. They can dictate the fortunes of the companies
involved for years to come. For a CEO, leading an M&A can represent the highlight of a
whole career. And it is no wonder we hear about so many of these transactions; they
happen all the time. Next time you flip open the newspaper’s business section, odds are
good that at least one headline will announce some kind of M&A transaction.
Sure, M&A deals grab headlines, but what does this all mean to investors? To answer this
question, this tutorial discusses the forces that drive companies to buy or merge with
others, or to split-off or sell parts of their own businesses. Once you know the different
ways in which these deals are executed, you'll have a better idea of whether you should
cheer or weep when a company you own buys another company - or is bought by one. You
will also be aware of the tax consequences for companies and for investors.
The Main Idea
One plus one makes three: this equation is the special alchemy of a merger or
an acquisition. The key principle behind buying a company is to create shareholder value
over and above that of the sum of the two companies. Two companies together are more
valuable than two separate companies - at least, that's the reasoning behind M&A.
This rationale is particularly alluring to companies when times are tough. Strong
companies will act to buy other companies to create a more competitive, cost-efficient
company. The companies will come together hoping to gain a greater market share or to
achieve greater efficiency. Because of these potential benefits, target companies will often
agree to be purchased when they know they cannot survive alone.
Distinction between Mergers and Acquisitions
Although they are often uttered in the same breath and used as though they were
synonymous, the terms merger and acquisition mean slightly different things.
When one company takes over another and clearly established itself as the new owner, the
purchase is called an acquisition. From a legal point of view, the target company ceases to
exist, the buyer "swallows" the business and the buyer's stock continues to be traded.
In the pure sense of the term, a merger happens when two firms, often of about the same
size, agree to go forward as a single new company rather than remain separately owned
and operated. This kind of action is more precisely referred to as a "merger of equals."
Both companies' stocks are surrendered and new company stock is issued in its place. For
example, both Daimler-Benz and Chrysler ceased to exist when the two firms merged, and
a new company, DaimlerChrysler, was created.

In practice, however, actual mergers of equals don't happen very often. Usually, one
company will buy another and, as part of the deal's terms, simply allow the acquired firm
to proclaim that the action is a merger of equals, even if it's technically an acquisition.
Being bought out often carries negative connotations, therefore, by describing the deal as a
merger, deal makers and top managers try to make the takeover more palatable.
A purchase deal will also be called a merger when both CEOs agree that joining together is
in the best interest of both of their companies. But when the deal is unfriendly - that is,
when the target company does not want to be purchased - it is always regarded as an
acquisition.
Whether a purchase is considered a merger or an acquisition really depends on whether
the purchase is friendly or hostile and how it is announced. In other words, the real
difference lies in how the purchase is communicated to and received by the target
company's board of directors, employees and shareholders.
Synergy
Synergy is the magic force that allows for enhanced cost efficiencies of the new business.
Synergy takes the form of revenue enhancement and cost savings. By merging, the
companies hope to benefit from the following:
• Staff reductions - As every employee knows, mergers tend to mean job losses.
Consider all the money saved from reducing the number of staff members from
accounting, marketing and other departments. Job cuts will also include the former
CEO, who typically leaves with a compensation package.

• Economies of scale - Yes, size matters. Whether it's purchasing stationery or a new
corporate IT system, a bigger company placing the orders can save more on costs.
Mergers also translate into improved purchasing power to buy equipment or office
supplies - when placing larger orders, companies have a greater ability to negotiate
prices with their suppliers.
• Acquiring new technology - To stay competitive, companies need to stay on top of
technological developments and their business applications. By buying a smaller
company with unique technologies, a large company can maintain or develop a
competitive edge.
• Improved market reach and industry visibility - Companies buy companies to reach
new markets and grow revenues and earnings. A merge may expand two companies'
marketing and distribution, giving them new sales opportunities. A merger can also
improve a company's standing in the investment community: bigger firms often
have an easier time raising capital than smaller ones.
That said, achieving synergy is easier said than done - it is not automatically realized once
two companies merge. Sure, there ought to be economies of scale when two businesses are
combined, but sometimes a merger does just the opposite. In many cases, one and one add
up to less than two.
Sadly, synergy opportunities may exist only in the minds of the corporate leaders and the
deal makers. Where there is no value to be created, the CEO and investment bankers - who
have much to gain from a successful M&A deal - will try to create an image of enhanced
value. The market, however, eventually sees through this and penalizes the company by
assigning it a discounted share price. We'll talk more about why M&A may fail in a later
section of this tutorial.
Varieties of Mergers
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:
• Horizontal merger - Two companies that are in direct competition and share the
same product lines and markets.
• Vertical merger - A customer and company or a supplier and company. Think of a
cone supplier merging with an ice cream maker.
• Market-extension merger - Two companies that sell the same products in different
markets.
• Product-extension merger - Two companies selling different but related products in
the same market.
• Conglomeration - Two companies that have no common business areas.
There are two types of mergers that are distinguished by how the merger is
financed. Each has certain implications for the companies involved and for
investors:
• Purchase Mergers - 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. We will discuss this further in part four of this tutorial.
• Consolidation Mergers - With this merger, a brand new company is formed
and both companies are bought and combined under the new entity. The tax
terms are the same as those of a purchase merger.
Acquisitions
As you can see, an acquisition may be only slightly different from a merger. In fact, it may
be different in name only. Like mergers, acquisitions are actions through which companies
seek economies of scale, efficiencies and enhanced market visibility. Unlike all mergers, all
acquisitions involve one firm purchasing another - there is no exchange of stock
or consolidation as a new company. Acquisitions are often congenial, and all parties feel
satisfied with the deal. Other times, acquisitions are more hostile.
In an acquisition, as in some of the merger deals we discuss above, a company can buy
another company with cash, stock or a combination of the two. Another possibility, which
is common in smaller deals, is for one company to acquire all the assets of another
company. Company X buys all of Company Y's assets for cash, which means that
Company Y will have only cash (and debt, if they had debt before). Of course, Company Y
becomes merely a shell and will eventually liquidate or enter another area of business.
Another type of acquisition is a reverse merger, a deal that enables a private company to
get publicly-listed in a relatively short time period. A reverse merger occurs when a private
company that has strong prospects and is eager to raise financing buys a publicly-listed
shell company, usually one with no business and limited assets. The private company
reverse merges into the public company, and together they become an entirely new
public corporation with tradable shares.
Regardless of their category or structure, all mergers and acquisitions have one common
goal: they are all meant to create synergy that makes the value of the combined companies
greater than the sum of the two parts. The success of a merger or acquisition depends
on whether this synergy is achieved.
Mergers and Acquisitions: Valuation Matters
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Investors in a company that are aiming to take over another one must determine whether
the purchase will be beneficial to them. In order to do so, they must ask themselves how
much the company being acquired is really worth.
Naturally, both sides of an M&A deal will have different ideas about the worth of a target
company: its seller will tend to value the company at as high of a price as possible, while
the buyer will try to get the lowest price that he can.
There are, however, many legitimate ways to value companies. The most common method
is to look at comparable companies in an industry, but deal makers employ a variety of
other methods and tools when assessing a target company. Here are just a few of them:
1. Comparative Ratios - The following are two examples of the many comparative
metrics on which acquiring companies may base their offers:
• Price-Earnings Ratio (P/E Ratio) - With the use of this ratio, an acquiring
company makes an offer that is a multiple of the earnings of the target
company. Looking at the P/E for all the stocks within the same industry
group will give the acquiring company good guidance for what the target's
P/E multiple should be.

• Enterprise-Value-to-Sales Ratio (EV/Sales) - With this ratio, the acquiring
company makes an offer as a multiple of the revenues, again, while being
aware of the price-to-sales ratio of other companies in the industry.
Replacement Cost - In a few cases, acquisitions are based on the cost of replacing the target
company. For simplicity's sake, suppose the value of a company is simply the sum of all its
equipment and staffing costs. The acquiring company can literally order the target to sell
at that price, or it will create a competitor for the same cost. Naturally, it takes a long time
to assemble good management, acquire property and get the right equipment. This method
of establishing a price certainly wouldn't make much sense in a service industry where the
key assets - people and ideas - are hard to value and develop.
Discounted Cash Flow (DCF) - A key valuation tool in M&A, discounted cash flow analysis
determines a company's current value according to its estimated future cash flows.
Forecasted free cash flows (net income + depreciation/amortization - capital expenditures -
change in working capital) are discounted to a present value using the company's weighted
average costs of capital (WACC). Admittedly, DCF is tricky to get right, but few tools can
rival this valuation method.
Synergy: The Premium for Potential Success
For the most part, acquiring companies nearly always pay a substantial premium on the
stock market value of the companies they buy. The justification for doing so nearly always
boils down to the notion of synergy; a merger benefits shareholders when a company's
post-merger share price increases by the value of potential synergy.
Let's face it, it would be highly unlikely for rational owners to sell if they would benefit
more by not selling. That means buyers will need to pay a premium if they hope to acquire
the company, regardless of what pre-merger valuation tells them. For sellers, that premium
represents their company's future prospects. For buyers, the premium represents part of
the post-merger synergy they expect can be achieved. The following equation offers a good
way to think about synergy and how to determine whether a deal makes sense. The
equation solves for the minimum required synergy:
In other words, the success of a merger is measured by whether the value of the buyer is
enhanced by the action. However, the practical constraints of mergers, which we discuss in
part five, often prevent the expected benefits from being fully achieved. Alas, the synergy
promised by deal makers might just fall short.
What to Look For
It's hard for investors to know when a deal is worthwhile. The burden of proof should fall
on the acquiring company. To find mergers that have a chance of success, investors should
start by looking for some of these simple criteria:

• A reasonable purchase price - A premium of, say, 10% above the market price
seems within the bounds of level-headedness. A premium of 50%, on the other hand,
requires synergy of stellar proportions for the deal to make sense. Stay away from
companies that participate in such contests.
• Cash transactions - Companies that pay in cash tend to be more careful when
calculating bids and valuations come closer to target. When stock is used as the
currency for acquisition, discipline can go by the wayside.
• Sensible appetite – An acquiring company should be targeting a company that is
smaller and in businesses that the acquiring company knows intimately. Synergy is
hard to create from companies in disparate business areas. Sadly, companies have a
bad habit of biting off more than they can chew in mergers.
Mergers are awfully hard to get right, so investors should look for acquiring
companies with a healthy grasp of reality.
Mergers and Acquisitions: Doing The Deal

Start with an Offer
When the CEO and top managers of a company decide that they want to do a merger or
acquisition, they start with atender offer. The process typically begins with the acquiring
company carefully and discreetly buying up shares in the target company, or building a
position. Once the acquiring company starts to purchase shares in the open market, it is
restricted to buying 5% of the total outstanding shares before it must file with the SEC. In
the filing, the company must formally declare how many shares it owns and whether it
intends to buy the company or keep the shares purely as an investment. Working with
financial advisors and investment bankers, the acquiring company will arrive at an overall
price that it's willing to pay for its target in cash, shares or both. The tender offer is then
frequently advertised in the business press, stating the offer price and the deadline by
which the shareholders in the target company must accept (or reject) it.
The Target's Response
Once the tender offer has been made, the target company can do one of several things:
• Accept the Terms of the Offer - If the target firm's top managers and shareholders
are happy with the terms of the transaction, they will go ahead with the deal.
• Attempt to Negotiate - The tender offer price may not be high enough for the target
company's shareholders to accept, or the specific terms of the deal may not be
attractive. In a merger, there may be much at stake for the management of the
target - their jobs, in particular. If they're not satisfied with the terms laid out in the
tender offer, the target's management may try to work out more agreeable terms
that let them keep their jobs or, even better, send them off with a nice, big
compensation package.
Not surprisingly, highly sought-after target companies that are the object of several
bidders will have greater latitude for negotiation. Furthermore, managers have
more negotiating power if they can show that they are crucial to the merger's future
success.
• Execute a Poison Pill or Some Other Hostile Takeover Defense – A poison
pill scheme can be triggered by a target company when a hostile suitor acquires a
predetermined percentage of company stock. To execute its defense, the target
company grants all shareholders - except the acquiring company - options to buy
additional stock at a dramatic discount. This dilutes the acquiring company's share
and intercepts its control of the company.
• Find a White Knight - As an alternative, the target company's management may
seek out a friendlier potential acquiring company, or white knight. If a white knight
is found, it will offer an equal or higher price for the shares than the hostile bidder.
Mergers and acquisitions can face scrutiny from regulatory bodies. For example, if the two
biggest long-distance companies in the U.S., AT&T and Sprint, wanted to merge, the deal
would require approval from the Federal Communications Commission (FCC). The FCC
would probably regard a merger of the two giants as the creation of amonopoly or, at the
very least, a threat to competition in the industry.
Closing the Deal
Finally, once the target company agrees to the tender offer and regulatory requirements
are met, the merger deal will be executed by means of some transaction. In a merger in
which one company buys another, the acquiring company will pay for the target company's
shares with cash, stock or both.
A cash-for-stock transaction is fairly straightforward: target company shareholders receive
a cash payment for each share purchased. This transaction is treated as a taxable sale of
the shares of the target company.
If the transaction is made with stock instead of cash, then it's not taxable. There is simply
an exchange of share certificates. The desire to steer clear of the tax man explains why so
many M&A deals are carried out as stock-for-stock transactions.
When a company is purchased with stock, new shares from the acquiring company's stock
are issued directly to the target company's shareholders, or the new shares are sent to a
broker who manages them for target company shareholders. The shareholders of the target
company are only taxed when they sell their new shares.
When the deal is closed, investors usually receive a new stock in their portfolios - the
acquiring company's expanded stock. Sometimes investors will get new stock identifying a
new corporate entity that is created by the M&A deal.
Mergers and Acquisitions: Break Ups

As mergers capture the imagination of many investors and companies, the idea of getting
smaller might seem counterintuitive. But corporate break-ups, or de-mergers, can be very
attractive options for companies and their shareholders.
Advantages
The rationale behind a spinoff, tracking stock or carve-out is that "the parts are greater
than the whole." These corporate restructuring techniques, which involve the separation of
a business unit or subsidiary from the parent, can help a company raise additional equity
funds. A break-up can also boost a company's valuation by providing powerful incentives
to the people who work in the separating unit, and help the parent's management to focus
on core operations.
Most importantly, shareholders get better information about the business unit because it
issues separate financial statements. This is particularly useful when a company's
traditional line of business differs from the separated business unit. With separate financial
disclosure, investors are better equipped to gauge the value of the parent corporation. The
parent company might attract more investors and, ultimately, more capital.
Also, separating a subsidiary from its parent can reduce internal competition for corporate
funds. For investors, that's great news: it curbs the kind of negative internal wrangling that
can compromise the unity and productivity of a company.

For employees of the new separate entity, there is a publicly traded stock to motivate and
reward them. Stock optionsin the parent often provide little incentive to subsidiary
managers, especially because their efforts are buried in the firm's overall performance.
Disadvantages
That said, de-merged firms are likely to be substantially smaller than their parents,
possibly making it harder to tap credit markets and costlier finance that may be affordable
only for larger companies. And the smaller size of the firm may mean it has less
representation on major indexes, making it more difficult to attract interest from
institutional investors.
Meanwhile, there are the extra costs that the parts of the business face if separated. When a
firm divides itself into smaller units, it may be losing the synergy that it had as a larger
entity. For instance, the division of expenses such as marketing, administration
and research and development (R&D) into different business units may cause redundant
costs without increasing overall revenues.
Restructuring Methods
There are several restructuring methods: doing an outright sell-off, doing an equity carve-
out, spinning off a unit to existing shareholders or issuing tracking stock. Each has
advantages and disadvantages for companies and investors. All of these deals are quite
complex.
Sell-Offs
A sell-off, also known as a divestiture, is the outright sale of a company subsidiary.
Normally, sell-offs are done because the subsidiary doesn't fit into the parent company's
core strategy. The market may be undervaluing the combined businesses due to a lack of
synergy between the parent and subsidiary. As a result, management and the board decide
that the subsidiary is better off under different ownership.
Besides getting rid of an unwanted subsidiary, sell-offs also raise cash, which can be used to
pay off debt. In the late 1980s and early 1990s, corporate raiders would use debt to finance
acquisitions. Then, after making a purchase they would sell-off its subsidiaries to raise cash
to service the debt. The raiders' method certainly makes sense if the sum of the parts is
greater than the whole. When it isn't, deals are unsuccessful.
Equity Carve-Outs
More and more companies are using equity carve-outs to boost shareholder value. A parent
firm makes a subsidiary public through an initial public offering (IPO) of shares,
amounting to a partial sell-off. A new publicly-listed company is created, but the parent
keeps a controlling stake in the newly traded subsidiary.
A carve-out is a strategic avenue a parent firm may take when one of its subsidiaries is
growing faster and carrying higher valuations than other businesses owned by the parent.
A carve-out generates cash because shares in the subsidiary are sold to the public, but the
issue also unlocks the value of the subsidiary unit and enhances the parent's shareholder
value.
The new legal entity of a carve-out has a separate board, but in most carve-outs, the parent
retains some control. In these cases, some portion of the parent firm's board of directors
may be shared. Since the parent has a controlling stake, meaning both firms have common
shareholders, the connection between the two will likely be strong.
That said, sometimes companies carve-out a subsidiary not because it's doing well, but
because it is a burden. Such an intention won't lead to a successful result, especially if a
carved-out subsidiary is too loaded with debt, or had trouble even when it was a part of the
parent and is lacking an established track record for growing revenues and profits.
Carve-outs can also create unexpected friction between the parent and subsidiary.
Problems can arise as managers of the carved-out company must be accountable to their
public shareholders as well as the owners of the parent company. This can create divided
loyalties.
Spinoffs
A spinoff occurs when a subsidiary becomes an independent entity. The parent firm
distributes shares of the subsidiary to its shareholders through a stock dividend. Since this
transaction is a dividend distribution, no cash is generated. Thus, spinoffs are unlikely to
be used when a firm needs to finance growth or deals. Like the carve-out, the subsidiary
becomes a separate legal entity with a distinct management and board.
Like carve-outs, spinoffs are usually about separating a healthy operation. In most cases,
spinoffs unlock hidden shareholder value. For the parent company, it sharpens
management focus. For the spinoff company, management doesn't have to compete for the
parent's attention and capital. Once they are set free, managers can explore new
opportunities.
Investors, however, should beware of throw-away subsidiaries the parent created to
separate legal liability or to off-load debt. Once spinoff shares are issued to parent
company shareholders, some shareholders may be tempted to quickly dump these shares
on the market, depressing the share valuation.
Tracking Stock
A tracking stock is a special type of stock issued by a publicly held company to track the
value of one segment of that company. The stock allows the different segments of the
company to be valued differently by investors.
Let's say a slow-growth company trading at a low price-earnings ratio (P/E ratio) happens
to have a fast growing business unit. The company might issue a tracking stock so the
market can value the new business separately from the old one and at a significantly higher
P/E rating.
Why would a firm issue a tracking stock rather than spinning-off or carving-out its fast
growth business for shareholders? The company retains control over the subsidiary; the
two businesses can continue to enjoy synergies and share marketing, administrative
support functions, a headquarters and so on. Finally, and most importantly, if the tracking
stock climbs in value, the parent company can use the tracking stock it owns to make
acquisitions.
Still, shareholders need to remember that tracking stocks are class B, meaning they don't
grant shareholders the same voting rights as those of the main stock. Each share of
tracking stock may have only a half or a quarter of a vote. In rare cases, holders of
tracking stock have no vote at all.
Mergers and Acquisitions: Why They Can Fail
It's no secret that plenty of mergers don't work. Those who advocate mergers will argue
that the merger will cut costs or boost revenues by more than enough to justify the price
premium. It can sound so simple: just combine computer systems, merge a few
departments, use sheer size to force down the price of supplies and the merged giant should
be more profitable than its parts. In theory, 1+1 = 3 sounds great, but in practice, things
can go awry.
Historical trends show that roughly two thirds of big mergers will disappoint on their own
terms, which means they will lose value on the stock market. The motivations that drive
mergers can be flawed and efficiencies from economies of scale may prove elusive. In many
cases, the problems associated with trying to make merged companies work are all too
concrete.
Flawed Intentions
For starters, a booming stock market encourages mergers, which can spell trouble. Deals
done with highly rated stock as currency are easy and cheap, but the strategic thinking
behind them may be easy and cheap too. Also, mergers are often attempt to imitate:
somebody else has done a big merger, which prompts other top executives to follow suit.
A merger may often have more to do with glory-seeking than business strategy. The
executive ego, which is boosted by buying the competition, is a major force in M&A,
especially when combined with the influences from the bankers, lawyers and other assorted
advisers who can earn big fees from clients engaged in mergers. Most CEOs get to where
they are because they want to be the biggest and the best, and many top executives get a big
bonus for merger deals, no matter what happens to the share price later.
On the other side of the coin, mergers can be driven by generalized fear. Globalization, the
arrival of new technological developments or a fast-changing economic landscape that
makes the outlook uncertain are all factors that can create a strong incentive for defensive
mergers. Sometimes the management team feels they have no choice and must acquire a
rival before being acquired. The idea is that only big players will survive a more
competitive world.
The Obstacles to Making it Work
Coping with a merger can make top managers spread their time too thinly and neglect
their core business, spelling doom. Too often, potential difficulties seem trivial to managers
caught up in the thrill of the big deal.
The chances for success are further hampered if the corporate cultures of the companies
are very different. When a company is acquired, the decision is typically based on product
or market synergies, but cultural differences are often ignored. It's a mistake to assume
that personnel issues are easily overcome. For example, employees at a target company
might be accustomed to easy access to top management, flexible work schedules or even a
relaxed dress code. These aspects of a working environment may not seem significant, but
if new management removes them, the result can be resentment and shrinking
productivity.
More insight into the failure of mergers is found in the highly acclaimed study from
McKinsey, a global consultancy. The study concludes that companies often focus too
intently on cutting costs following mergers, while revenues, and ultimately, profits, suffer.
Merging companies can focus on integration and cost-cutting so much that they neglect
day-to-day business, thereby prompting nervous customers to flee. This loss of revenue
momentum is one reason so many mergers fail to create value for shareholders.
But remember, not all mergers fail. Size and global reach can be advantageous, and strong
managers can often squeeze greater efficiency out of badly run rivals. Nevertheless, the
promises made by deal makers demand the careful scrutiny of investors. The success of
mergers depends on how realistic the deal makers are and how well they can integrate two
companies while maintaining day-to-day operations.
Mergers and Acquisitions: Conclusion
One size doesn't fit all. Many companies find that the best way to get ahead is to expand
ownership boundaries through mergers and acquisitions. For others, separating the public
ownership of a subsidiary or business segment offers more advantages. At least in theory,
mergers create synergies and economies of scale, expanding operations and cutting costs.
Investors can take comfort in the idea that a merger will deliver enhanced market power.
By contrast, de-merged companies often enjoy improved operating performance thanks to
redesigned management incentives. Additional capital can fund growth organically or
through acquisition. Meanwhile, investors benefit from the improved information flow
from de-merged companies.
M&A comes in all shapes and sizes, and investors need to consider the complex issues
involved in M&A. The most beneficial form of equity structure involves a complete analysis
of the costs and benefits associated with the deals.
Let's recap what we learned in this tutorial:
• A merger can happen when two companies decide to combine into one entity or
when one company buys another. An acquisition always involves the purchase of
one company by another.
• The functions of synergy allow for the enhanced cost efficiency of a new entity made
from two smaller ones - synergy is the logic behind mergers and acquisitions.
• Acquiring companies use various methods to value their targets. Some of these
methods are based on comparative ratios - such as the P/E and P/S ratios
- replacement cost or discounted cash flow analysis.
• An M&A deal can be executed by means of a cash transaction, stock-for-
stock transaction or a combination of both. A transaction struck with stock is not
taxable.
• Break up or de-merger strategies can provide companies with opportunities to raise
additional equity funds, unlock hidden shareholder value and sharpen management
focus. De-mergers can occur by means of divestitures, carve-outs spinoffs or
tracking stocks.
• Mergers can fail for many reasons including a lack of management foresight, the
inability to overcome practical challenges and loss of revenue momentum from a
neglect of day-to-day operations.

Mergers and Acquisitions in India
The practice of mergers and acquisitions has attained considerable significance in the
contemporary corporate scenario which is broadly used for reorganizing the business
entities. Indian industries were exposed to plethora of challenges both nationally and
internationally, since the introduction of Indian economic reform in 1991. The cut-throat
competition in international market compelled the Indian firms to opt for mergers and
acquisitions strategies, making it a vital premeditated option.
Why Mergers and Acquisitions in India?
The factors responsible for making the merger and acquisition deals favorable in India are:
• Dynamic government policies
• Corporate investments in industry
• Economic stability
• “ready to experiment” attitude of Indian industrialists
Sectors like pharmaceuticals, IT, ITES, telecommunications, steel, construction, etc, have
proved their worth in the international scenario and the rising participation of Indian
firms in signing M&A deals has further triggered the acquisition activities in India.
In spite of the massive downturn in 2009, the future of M&A deals in India looks
promising. Indian telecom major Bharti Airtel is all set to merge with its South African
counterpart MTN, with a deal worth USD 23 billion. According to the agreement Bharti
Airtel would obtain 49% of stake in MTN and the South African telecom major would
acquire 36% of stake in Bharti Airtel.
Ten biggest Mergers and Acquisitions deals in India
• Tata Steel acquired 100% stake in Corus Group on January 30, 2007. It was an all
cash deal which cumulatively amounted to $12.2 billion.
• Vodafone purchased administering interest of 67% owned by Hutch-Essar for a total
worth of $11.1 billion on February 11, 2007.
• India Aluminium and copper giant Hindalco Industries purchased Canada-based
firm Novelis Inc in February 2007. The total worth of the deal was $6-billion.
• Indian pharma industry registered its first biggest in 2008 M&A deal through the
acquisition of Japanese pharmaceutical company Daiichi Sankyo by Indian major
Ranbaxy for $4.5 billion.
• The Oil and Natural Gas Corp purchased Imperial Energy Plc in January 2009. The
deal amounted to $2.8 billion and was considered as one of the biggest takeovers after
96.8% of London based companies' shareholders acknowledged the buyout proposal.
• In November 2008 NTT DoCoMo, the Japan based telecom firm acquired 26% stake
in Tata Teleservices for USD 2.7 billion.

• India's financial industry saw the merging of two prominent banks - HDFC Bank
and Centurion Bank of Punjab. The deal took place in February 2008 for $2.4 billion.
• Tata Motors acquired Jaguar and Land Rover brands from Ford Motor in March
2008. The deal amounted to $2.3 billion.
• 2009 saw the acquisition Asarco LLC by Sterlite Industries Ltd's for $1.8 billion
making it ninth biggest-ever M&A agreement involving an Indian company.
• In May 2007, Suzlon Energy obtained the Germany-based wind turbine producer
Repower. The 10th largest in India, the M&A deal amounted to $1.7 billion.
Mergers and Acquisition - A Case Study and Analysis of HP-Compaq Merger
By Rohit Agrawal
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Brief Description
The following is a brief description of the two companies:
HP
It all began in the year 1938 when two electrical engineering graduates from Stanford
University called William Hewlett and David Packard started their business in a garage in
Palo Alto. In a year's time, the partnership called Hewlett-Packard was made and by the
year 1947, HP was incorporated. The company has been prospering ever since as its profits
grew from five and half million dollars in 1951 to about 3 billion dollars in 1981. The pace
of growth knew no bounds as HP's net revenue went up to 42 billion dollars in 1997.
Starting with manufacturing audio oscillators, the company made its first computer in the
year 1966 and it was by 1972 that it introduced the concept of personal computing by a
calculator first which was further advanced into a personal computer in the year 1980. The
company is also known for the laser-printer which it introduced in the year 1985.
Compaq
The company is better known as Compaq Computer Corporation. This was company that
started itself as a personal computer company in the year 1982. It had the charm of being
called the largest manufacturers of personal computing devices worldwide. The company
was formed by two senior managers at Texas Instruments. The name of the company had
come from-"Compatibility and Quality". The company introduced its first computer in the
year 1983 after at a price of 2995 dollars. In spite of being portable, the problem with the
computer was that it seemed to be a suitcase. Nevertheless, there were huge commercial
benefits from the computer as it sold more than 53,000 units in the first year with a revenue
generation of 111 million dollars.
Reasons for the Merger
A very simple question that arises here is that, if HP was progressing at such a tremendous
pace, what was the reason that the company had to merge with Compaq? Carly Fiorina,
who became the CEO of HP in the year 1999, had a key role to play in the merger that took
place in 2001. She was the first woman to have taken over as CEO of such a big company
and the first outsider too. She worked very efficiently as she travelled more than 250,000
miles in the first year as a CEO. Her basic aim was to modernize the culture of operation of
HP. She laid great emphasis on the profitable sides of the business. This shows that she was
very extravagant in her approach as a CEO. In spite of the growth in the market value of
HP's share from 54.43 to 74.48 dollars, the company was still inefficient. This was because
it could not meet the targets due to a failure of both company and industry. HP was forced
to cut down on jobs and also be eluded from the privilege of having Price Water House
Cooper's to take care of its audit. So, even the job of Fiorina was under threat. This meant
that improvement in the internal strategies of the company was not going to be sufficient
for the company's success. Ultimately, the company had to certainly plan out something
different. So, it was decided that the company would be acquiring Compaq in a stock
transaction whose net worth was 25 billion dollars. Initially, this merger was not planned.
It started with a telephonic conversation between CEO HP, Fiorina and Chairman and
CEO Compaq, Capellas. The idea behind the conversation was to discuss on a licensing
agreement but it continued as a discussion on competitive strategy and finally a merger. It
took two months for further studies and by September, 2001, the boards of the two
companies approved of the merger. In spite of the decision coming from the CEO of HP,
the merger was strongly opposed in the company. The two CEOs believed that the only
way to fight the growing competition in terms of prices was to have a merger. But the
investors and the other stakeholders thought that the company would never be able to have
the loyalty of the Compaq customers, if products are sold with an HP logo on it. Other than
this, there were questions on the synchronization of the organization's members with each
other. This was because of the change in the organization culture as well. Even though
these were supposed to serious problems with respect to the merger, the CEO of HP,
Fiorina justified the same with the fact that the merger would remove one serious
competitor in the over-supplied PC market of those days. She said that the market share of
the company is bound to increase with the merger and also the working unit would double.
(Hoopes, 2001)
Advantages of the Merger
Even though it seemed to be advantageous to very few people in the beginning, it was the
strong determination of Fiorina that she was able to stand by her decision. Wall Street and
all her investors had gone against the company lampooning her ideas with the saying that
she has made 1+1=1.5 by her extravagant ways of expansion. Fiorina had put it this way
that after the company's merger, not only would it have a larger share in the market but
also the units of production would double. This would mean that the company would grow
tremendously in volume. Her dream of competing with the giants in the field, IBM would
also come true. She was of the view that much of the redundancy in the two companies
would decrease as the internal costs on promotion, marketing and shipping would come
down with the merger. This would produce the slightest harm to the collection of revenue.
She used the ideas of competitive positioning to justify her plans of the merger. She said
that the merger is based on the ideologies of consolidation and not on diversification. She
could also defend allegations against the change in the HP was. She was of the view that the
HP has always encouraged changes as it is about innovating and taking bold steps. She said
that the company requires being consistent with creativity, improvement and modification.
This merger had the capability of providing exactly the same. (Mergers and Acquisitions,
2010)
Advantages to the Shareholders
The following are the ways in which the company can be advantageous to its shareholders:
Unique Opportunity: The position of the enterprise is bound to better with the merger. The
reason for the same was that now the value creation would be fresh, leadership qualities
would improve, capabilities would improve and so would the sales and also the company's
strategic differentiation would be better than the existing competitors. Other than this, one
can also access the capabilities of Compaq directly hence reducing the cost structure in
becoming the largest in the industry. Finally, one could also see an opportunity in
reinvesting.
Stronger Company: The profitability is bound to increase in the enterprise, access and
services sectors in high degrees. The company can also see a better opportunity in its
research and development. The financial conditions of the company with respect to its
EBIT and net cash are also on the incremental side.
Compelling Economics: The expected accumulation in IIP gains would be 13% in the first
financial year. The company could also conduct a better segmentation of the market to
forecast its revenues generation. This would go to as much as 2 and a half billion dollars of
annual synergy.
Ability to Execute: As there would be integration in the planning procedures of the
company, the chances of value creation would also be huge. Along with that the experience
of leading a diversified employee structure would also be there. (HP to buy Compaq, 2001)
Opposition to the Merger
In fact, it was only CEO Fiorina who was in favor of going with the merger. This is a
practical application of Agency problem that arises because of change in financial
strategies of the company owners and the management. Fiorina was certain to lose her job
if the merger didn't take effect. The reason was that HP was not able to meet the demand
targets under her leadership. But the owners were against the merger due to the following
beliefs of the owners:
The new portfolio would be less preferable: The position of the company as a larger
supplier of PCs would certainly increase the amount of risk and involve a lot of investment
as well. Another important reason in this context is that HP's prime interest in Imaging
and Printing would not exist anymore as a result diluting the interest of the stockholders.
In fact the company owners also feel that there would be a lower margin and ROI (return
on investment).
Strategic Problems would remain Unsolved: The market position in high-end servers and
services would still remain in spite of the merger. The price of the PCS would not come
down to be affordable by all. The requisite change in material for imaging and printing
also would not exist. This merger would have no effect on the low end servers as Dell would
be there in the lead and high-end servers either where IBM and Sun would have the lead.
The company would also be eluded from the advantages of outsourcing because of the
surplus labor it would have. So, the quality is not guaranteed to improve. Finally, the
merger would not equal IBM under any condition as thought by Fiorina.
Huge Integrated Risks: There have been no examples of success with such huge mergers.
Generally when the market doesn't support such mergers, don't do well as is the case here.
When HP could not manage its organization properly, integration would only add on to the
difficulties. It would be even more difficult under the conditions because of the existing
competitions between HP and Compaq. Being prone to such risky conditions, the company
would also have to vary its costs causing greater trouble for the owner. The biggest factor
of all is that to integrate the culture existing in the two companies would be a very difficult
job.
Financial Impact: This is mostly because the market reactions are negative. On the other
hand, the position of Compaq was totally different from HP. As the company would have a
greater contribution to the revenue and HP being diluted at the same time, the problems
are bound to develop. This would mean that drawing money from the equity market would
also be difficult for HP. In fact this might not seem to be a very profitable merger for
Compaq as well in the future.
The basic problem that the owners of the company had with this merger was that it would
hamper the core values of HP. They felt that it is better to preserve wealth rather than to
risk it with extravagant risk taking. This high risk profile of Fiorina was a little
unacceptable for the owners of the company in light of its prospects.
So, as far as this merger between HP and Compaq is concerned, on side there was this
strong determination of the CEO, Fiorina and on the other side was the strong opposition
from the company owners. This opposition continued from the market including all the
investors of the company. So, this practical Agency problem was very famous considering
the fact that it contained two of the most powerful hardware companies in the world. There
were a number of options like Change Management, Economic wise Management, and
Organizational Management which could be considered to analyze the issue. But this case
study can be solved best by a strategy wise analysis. (HP-Compaq merger faces stiff
opposition from shareholders stock prices fall again, 2001)
Strategic Analysis of the Case
Positive Aspects
A CEO will always consider such a merger to be an occasion to take a competitive
advantage over its rivals like IBM as in this case and also be of some interest to the
shareholders as well. The following are the strategies that are related to this merger
between HP and Compaq:
* Having an eye over shareholders' value: If one sees this merger from the eyes of Fiorina,
it would be certain that the shareholders have a lot to gain from it. The reason for the same
is the increment in the control of the market. So, even of the conditions were not suitable
from the financial perspective, this truth would certainly make a lot of profits for the
company in the future.
* Development of Markets: Two organizations get involved in mergers as they want to
expand their market both on the domestic and the international level. Integration with a
domestic company doesn't need much effort but when a company merges internationally as
in this case, a challenging task is on head. A thorough situation scanning is significant
before putting your feet in International arena. Here, the competitor for HP was Compaq
to a large degree, so this merger certainly required a lot of thinking. Organizations merge
with the international companies in order to set up their brands first and let people know
about what they are capable of and also what they eye in the future. This is the reason that
after this merger the products of Compaq would also have the logo of HP. Once the market
is well-known, then HP would not have to suffer the branding created by Compaq. They
would be able to draw all the customers of Compaq as well.
* Propagated Efficiencies: Any company by acquiring another or by merging makes an
attempt to add to its efficiencies by increasing the operations and also having control over
it to the maximum extent. We can see that HP would now have an increased set of
employees. The only factor is that they would have to be controlled properly as they are of
different organizational cultures. (Benefits of Mergers:, 2010)
* Allowances to use more resources: An improvised organization of monetary resources,
intellectual capital and raw materials offers a competitive advantage to the companies.
When such companies merge, many of the intellects come together and work towards a
common mission to excel with financial profits to the company. Here, one can't deny the
fact that even the top brains of Compaq would be taking part in forming the strategies of
the company in the future.
* Management of risks: If we particularly take an example of this case, HP and Compaq
entering into this merger can decrease the risk level they would have diversified business
opportunities. The options for making choice of the supply chain also increase. Now even
though HP is a pioneer in inkjet orienting, it would not have to use the Product based
Facility layout which is more expensive. It can manage the risk of taking process based
facility layout and make things cheaper. Manufacturing and Processing can now be done in
various nations according to the cost viability as the major issue.
* Listing potential: Even though Wall Street and all the investors of the company are
against the merger, when IPOs are offered, a development will definitely be there because
of the flourishing earnings and turnover value which HP would be making with this
merger.
* Necessary political regulations: When organizations take a leap into other nations, they
need to consider the different regulations in that country which administer the policies of
the place. As HP is already a pioneer in all the countries that Compaq used to do its
business, this would not be of much difficulty for the company. The company would only
need to make certain minor regulations with the political parties of some countries where
Compaq was flourishing more than HP.
* Better Opportunities: When companies merge with another company, later they can put
up for sale as per as the needs of the company. This could also be done partially. If HP feels
that it would not need much of warehouse space it can sell the same at increased profits. It
depends on whether the company would now be regarded a s a make to stock or a make to
order company.
* Extra products, services, and facilities: Services get copyrights which enhances the level
of trade. Additional Warehouse services and distribution channels offer business values.
Here HP can use all such values integrated with Compaq so as to increase its prospects.
(Berry, 2010)
Negative Aspects
There are a number of mergers and acquisitions that fail before they actually start to
function. In the critical phase of implementation itself, the companies come to know that it
would not be beneficial if they continue as a merger. This can occur in this merger between
HP and Compaq due to the following reasons.
Conversations are not implemented: Because of unlike cultures, ambitions and risk
profiles; many of the deals are cancelled. As per as the reactions of the owners of HP, this
seems to be extremely likely. So, motivation amongst the employees is an extremely
important consideration in this case. This requires an extra effort by the CEO, Fiorina.
This could also help her maintain her position in the company.
Legal Contemplations: Anti-competitive deals are often limited by the rules presiding over
the competition rules in a country. This leads to out of order functioning of one company
and they try to separate from each other. A lot of unnecessary marketing failures get
attached to these conditions. If this happens in this case, then all that money which went in
publicizing the venture would go to be a waste. Moreover, even more would be required to
re-promote as a single entity. Even the packaging where the entire inventory from Compaq
had the logo of HP would have to be re-done, thus hampering the finance even further.
(Broc Romanek, 2002)

Compatibility problems: Every company runs on different platforms and ideas.
Compatibility problems often occur because of synchronization issues. In IT companies
such as HP and Compaq, many problems can take place because both the companies have
worked on different strategies in the past. Now, it might not seem necessary for the HP
management to make changes as per as those from Compaq. Thus such problems have
become of greatest concern these days.
Fiscal catastrophes: Both the companies after signing an agreement hope to have some
return on the money they have put in to make this merger happen and also desire
profitability and turnovers. If due to any reason, they are not able to attain that position,
then they develop a abhorrence sense towards each other and also start charging each
other for the failure.
Human Resource Differences: Problems as a result of cultural dissimilarities, hospitality
and hostility issues, and also other behavior related issues can take apart the origin of the
merger.
Lack of Determination: When organizations involve, they have plans in their minds, they
have a vision set; but because of a variety of problems as mentioned above, development of
the combined company to accomplish its mission is delayed. Merged companies set the goal
and when the goal is not accomplished due to some faults of any of the two; then both of
them develop a certain degree of hatred for each other. Also clashes can occur because of
bias reactions. (William, 2008)
Risk management failure: Companies that are involved in mergers and acquisitions,
become over confident that they are going to make a profit out of this decision. This can be
seen as with Fiorina. In fact she can fight the whole world for that. When their self-
confidence turns out into over-confidence then they fail. Adequate risk management
methods should be adopted which would take care of the effects if the decision takes a
downturn. These risk policies should rule fiscal, productions, marketing, manufacturing,
and inventory and HR risks associated with the merger.
Strategic Sharing
Marketing
Hp and Compaq would now have common channels as far as their buying is concerned. So,
the benefits in this concern is that even for those materials which were initially of high cost
for HP would now be available at a cheaper price. The end users are also likely to increase.
Now, the company can re frame its competitive strategy where the greatest concern can be
given to all time rivals IBM. The advantages of this merger in the field of marketing can be
seen in the case of shared branding, sales and service. Even the distribution procedure is
likely to be enhanced with Compaq playing its part. Now, the company can look forward to
cross selling, subsidization and also a reduced cost.
Operations
The foremost advantage in this area is that in the location of raw material. Even the
processing style would be same making the products and services synchronized with the
ideas and also in making a decent operational strategy. As the philosophical and
mechanical control would also be in common, the operational strategy would now be to
become the top most in the market. In this respect, the two companies would now have co-
production, design and also location of staff. So, the operational strategy of HP would now
be to use the process based facility layout and function with the mentioned shared values.
Technology
The technical strategy of the company can also be designed in common now. There is a
disadvantage from the perspective of the differentiation that HP had in the field of inkjet
printers but the advantages are also plentiful. With a common product and process
technology, the technological strategy of the merged company would promote highly
economical functioning. This can be done through a common research and development
and designing team.
Buying
The buying strategy of the company would also follow a common mechanism. Here, the
raw materials, machinery, and power would be common hence decreasing the cost once
again. This can be done through a centralized mechanism with a lead purchaser keeping
common policies in mind. Now Hp would have to think with a similar attitude for both
inkjet printers as well as personal computers. This is because the parameters for
manufacturing would also run on equal grounds.
Infrastructure
This is the most important part of the strategies that would be made after the merger. The
companies would have common shareholders for providing the requisite infrastructure.
The capital source, management style, and legislation would also be in common. So, the
infrastructure strategies would have to take these things into account. This can be done by
having a common accounting system. HP does have an option to have a separate
accounting system for the products that it manufactures but that would only arouse an
internal competition. So, the infrastructural benefits can be made through a common
accounting, legal and human resource system. This would ensure that the investment
relations of the company would improve. None of the Compaq investors would hesitate in
making an investment if HP follows a common strategy.

HP would now have to ensure another fact that with this merger they would be able to
prove competitors to the present target and those of competitors like IBM as well. Even the
operations and the output market needs to be above what exists at present. The company
needs to ensure that the corporate strategy that it uses is efficient enough to help such a
future. The degree of diversification needs to be managed thoroughly as well. This is
because; the products from the two companies have performed exceptionally well in the
past. So, the most optimum degree of diversification is required under the context so that
the company is able to meet the demands of the customers. This has been challenged by the
owners of HP but needs to be carried by the CEO Fiorina. (Bhattacharya, 2010)
I am a pre final year student at the Indian Institute of Information Technology and
Management, Gwalior, India pursuing a five year integrated course (dual degree) leading
to the award of B.Tech (Information Technology) and MBA. I am currently in the 9th
Semester. ABV-IIITM Gwalior, a Deemed University, is an apex Institute, established by
the ministry of HRD (Human Resource Development), Government of India.
The competitive environment at my Institute coupled with my inherent trait of trying to
learn something new from each experience has made me come a long way in these four
years. I have not only learnt to work under pressure and intense competition with some of
the brightest students in the country but have also worked with an esteemed KPO called
CBI Solutions in the meanwhile. This has given me the experience to get exposed to some of
the most challenging marketing traits in the business. Moreover, I have been awarded first
rank for IT and Entrepreneurship at the end of my 7th Semester.
I have been privileged to work at Polaris Retail Infotech Limited, Gurgaon from May to
July'08. This taught me the practical application of relationship marketing as I saw the
preparation of customer interfaces through their software Smart Store. This is visible at
billing counters at retail stores of the fame of Shopper's Stop. Also, I've been in the
editorial board of my college magazine, La Vista for the past 3 years and eventually I hold
the responsibility of the Chief Editor.
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HP-Compaq - A Failed Merger?
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Technologyand Rel Mergers | Acquisitions | Str
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Abstract:
The case gives an overview of
the merger between two G
leading players in the global a
computer industry - Hewlett d
-Packard Company (HP) and g
Compaq Computer e
Corporation (Compaq). The t
case explores the reasons for s
HP's failure to realize the
synergies identified prior to p
the merger. It highlights that o
the leadership, legacy and w
cultural issues play an e
important role in mergers. r
The case describes in detail e
the rationale for HP -Compaq d
merger, problems faced in
integrating the merged entities b
and whether the merger made y
business and economic sense.
It also describes the product G
profile of the merged entity o
and how the new HP o
compares with its major g

competitors, IBM and Dell l
Computers. e
» Business Strategy Case
Finally, the case presents the challenges faced by the new
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CEO of HP, Mark Hurd, in mid -2005. The case is
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compatibility. The case also provides an insight into the
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» The importance of cultural compatibility in making
mergers successful Search
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Contents:
Page
No.
A Mega-Merger 1
Background Note 2
The Rationale for the Merger 4
The Merger Integration 6 Please note:
Does the Merger Make Business Sense 6
Does the Merger Make Economic Sense 8
The Challenges Ahead 10
Exhibits This case study was compiled
from published sources, and is
intended to be used as a basis
for class discussion. It is not
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effective or ineffective handling
of a management situation.
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Case Details:
"The HP-Compaq merger was a big bet that didn't
pay off, that didn't even come close to attaining what

Case Code : BSTR202
Fiorina and HP's board said was in store. At bottom, Case Length : 20 Pages
they made a huge error in asserting that the merger of Pages Period : 1999-2005
two losing computer operations, HP's and Compaq's, Organization : HP, Compaq
would produce a financially fit computer business." 1 Pub Date : 2006
- Fortune, February 07, 2005. Teaching Note : Available

Countries : US
A Mega-Merger
Industry : Diversified
On September 04, 2001, two leading players in the
global computer industry - Hewlett-Packard

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Merger? case study (Case Code:
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The merged entity would have operations in more
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products and services.
However, the stock

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days, HP and Compaq
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respectively. Together, the
pair lost US$ 13 billion in

G
market capitalization in a
a
couple of days. In the next
d
two weeks, HP's stock went
g
down by another 17%,
e
amidst a lot of negative
t
comments about the
s
merger from analysts and
the company's competitors.

p
Industry analysts
o
wondered what benefits
w
HP, a global market leader
e
in the high margin printers
r
business, would reap in
e
acquiring a personal
d
computer (PC)
manufacturer like Compaq

b
at a time when PCs were
y
fast emerging as low-
margin commodity
G
products.
o
Though the merger helped HP in achieving o
economies of scale in the PC business, it faced fierce g
competition from Dell Computers (Dell),2 a low-cost, l
direct-marketer of PCs. e
» Business Strategy Case Studies
The merger also did not » Case Studies Collection
help HP to compete with » Business Strategy Short Case
IBM, which not only sold Studies
PCs3 but was also a market » View Detailed Pricing Info
leader in the high-margin » How To Order This Case

consulting and service » Business Case Studies
businesses. In June 2005, » Case Studies by Area
HP's shares hovered » Case Studies by Industry
around US$ 23 per share, » Case Studies by Company
below the price just before
the merger was announced.
This indicated that the
merger had failed to create

Top of Form
shareholder value. In
Search
contrast, the share price of
US-based Lexmark, HP's

Bottom of Form
major competitor and the
second largest company in
the printers business, rose
by 60%, while Dell's share

price moved up by 90% in Please note:
the same period. With the
PC and other hardware This case study was compiled from
businesses of HP making published sources, and is intended to
miniscule profits, analysts be used as a basis for class discussion.
opined that the company's It is not intended to illustrate either
printer business should be effective or ineffective handling of a
spun off into a stand-alone management situation. Nor is it a
company... primary information source.
Top of Form
++ Font | Font --
• Case Details
Bottom of Form
• Case Intro 1
• Case Intro 2
Collection
<< Previous
Case Details:
A Mega-Merger Contd...
Commenting on the dilemma faced by HP, George Case Code : BSTR202

Day (Day), Professor of Marketing at Wharton Case Length : 20 Pages
School of Business, University of Pennsylvania, said, Pages Period : 1999-2005
"HP is trying to be cost competitive with Dell and be Organization : HP, Compaq
the same kind of integrated-solutions provider that Pub Date : 2006
IBM has become. If that doesn't work - if it's clear Teaching Note : Available
IBM has too big a lead - then HP, which has this Countries : US
hugely profitable printer business, has to think Industry : IT - Hardware
about breaking up."4
Background Note To download HP-Compaq - A Failed

HP

Stanford engineers Bill
available cases:
Hewlett and David
Packard started HP in
California in 1938 as an
electronic instruments
company. Its first product

Price:
was a resistance-capacity
audio oscillator, an
electronic instrument used
400;
to test sound equipment.
During the 1940s, HP's
India): Rs. 400 + Rs. 25 for Shipping
products rapidly gained
acceptance among
engineers and scientists. & Handling Charges
HP's growth was aided by
heavy purchases made by
the US government during

G
the Second World War.
a
During the 1950s, HP
d
developed strong
g
technological capabilities
e
in the rapidly evolving
t
electronics business. HP
s
came out with its first
public issue in 1957. HP

p
entered the medical field in
o
1961 by purchasing
w
Sanborn Company.
e
In 1963, HP entered into a joint venture agreement
r
with Yokogawa Electric Works of Japan to form
e
Yokogawa-Hewlett-Packard. In 1966, the company
d
established HP Laboratories, to conduct research
activities relating to new technologies and products.

b
During the same year, HP designed its first
y
computer for controlling some of its test-and-
measurement instruments.
G
During the 1970s, HP o

continued its tradition of o
innovation. In 1974, HP g
launched its first l
minicomputer that was e

based on 4K dynamic
random access
semiconductors (DRAMs)
Studies
instead of magnetic cores.
In 1977, John Young was
named HP president,
marking a transition from
the era of the founders to a
new generation of
» Case Studies by Company
professional managers.
During the 1980s, HP
emerged as a major player
in the computer industry,
offering a full range of Top of Form
computers from desktop Search
machines to powerful
minicomputers. This Bottom of Form
decade also saw the
development of successful
products like the Inkjet

and LaserJet printers. HP Please note:
introduced its first PC in
1981, followed by an This case study was compiled from
electronic mail system in published sources, and is intended to
1982... be used as a basis for class discussion.
It is not intended to illustrate either
effective or ineffective handling of a
management situation. Nor is it a
primary information source.
Top of Form
++ Font | Font --
• Case Details
Bottom of Form
• Case Intro 1
• Case Intro 2
Collection
<< Previous
Case Details:
EXCERPTS
The Rationale for the Merger

Case Code : BSTR202
In the late 1990s, the PC industry slipped into its Case Length : 20 Pages
worst-ever recessionary phase, resulting in losses of Pages Period : 1999-2005
US$ 1.2 billion and 31,000 layoffs by September Organization : HP, Compaq
2001. According to analysts, with the computer Pub Date : 2006
industry commoditizing and consolidating very fast, Teaching Note : Available
mergers had become inevitable. Countries : US
Industry : IT - Hardware
The HP-Compaq merger
thus did not come as a

major surprise to industry
observers. The details of
the merger were revealed
in an HP press release
available cases:
issued soon after the
merger was announced.
The new company was to
retain the HP name and
would have revenues of
US$ 87.4 billion - almost Price:
equivalent to the industry
leader IBM (US$ 88.396 For delivery in electronic format: Rs.
billion in 2000). 400;
Under the terms of the India): Rs. 400 + Rs. 25 for Shipping
deal, Compaq shareholders & Handling Charges
would receive 0.6325 share

of the new company for
each share of Compaq. HP

G
shareholders would own
a
approximately 64% and
d
Compaq shareholders 36%
g
of the merged company.
e
Fiorina was to remain
t
Chairman and CEO of the
s
new company while
Capellas was to become the

p
President...
The Merger Integration o
w
The new HP developed a white paper giving
e
complete details of its post-merger product strategy.
r
The HP and Compaq brand names were retained for
e
desktop PCs and notebooks for both consumers and
d
commercial segments. The merged entity supported
Compaq's brand name for its servers while it

b
continued with HP for workstations. The electronic
y
shopping sites of both the companies were also
integrated.
G
To make the merger work, o
the new HP initially o

focused on two areas - g
avoiding culture clashes l
internally and reducing e

any problems to the
customers. The company
devoted a significant
Studies
amount of time in planning
to minimize any instance of
culture clashes that usually
happened in such mega-
mergers. The task of
ensuring this was given to
» Case Studies by Company
Susan Bowick, HP's Senior
VP of HR. She put all
employees through a
training workshop named
as 'Fast Start,' designed to Top of Form
explain the merged entity's Search
new organizational
structure and allow Bottom of Form
employees overcome
concerns about their new
co-workers. HP also made
efforts to strengthen its

Please note:
image as a single unified
company... This case study was compiled from
published sources, and is intended to
be used as a basis for class discussion.
effective or ineffective handling of a
management situation. Nor is it a
primary information source.
Top of Form
++ Font | Font --
• Case Details
Bottom of Form
• Case Intro 1
• Case Intro 2
Collection
<< Previous
Case Details:
EXCERPTS Contd...
Does the Merger Make Business Sense

Case Code : BSTR202
Soon after the HP-Compaq merger deal was Case Length : 20 Pages
approved by the HP's board and its shareholders in Pages Period : 1999-2005
March 2002, industry analysts termed the deal as a Organization : HP, Compaq
strategic blunder. Critics ridiculed Fiorina by saying Pub Date : 2006
that one bad PC business merged with another bad Teaching Note : Available
PC business does not make a good PC company. Countries : US
Industry : IT - Hardware
Many analysts felt that the
synergies HP foresaw
would not materialize
easily. They said that the
merged company would
have to cut costs drastically
available cases:
in order to beat Dell in
PCs, while constantly
investing money in
research and development
and consulting to compete
with IBM and Sun Price:
Microsystems.
In the high-end server 400;
markets, IBM and Sun For delivery through courier (within
Microsystems were India): Rs. 400 + Rs. 25 for Shipping
constantly introducing new & Handling Charges
products. Since more than
half of the new HP's sales
came from low-margin

G
PCs, analysts expressed
a
concerns that it would not
d
have enough cash to invest g
in R&D in order to e
compete in the high-end t
market... s
Does the Merger Make Economic Sense
p
A few HP divisions that were big revenue earners
o
were not able to contribute correspondingly to
w
profits. An analysis of the company's business
e
segment revenues in the fiscal 2004 revealed that the
r
Enterprise Storage & Servers and the Personal
e
Systems divisions, the erstwhile Compaq
d
strongholds, brought in revenues of US$ 39.774
billion, comprising approximately 50% of HP's total

b
revenues (Refer Table II for HP's business segment
y
information for the fiscal 2002 to 2004).
However, the operating

G
profits from both these
o
divisions combined were
o
US$ 383 million, less
g
than 1% of the divisions'
l
revenues. Moreover, the
e
total contribution of » Business Strategy Case Studies
these two divisions in the » Case Studies Collection
overall operating profits » Business Strategy Short Case

of HP of US$ 5.473 Studies
billion was just 7%. » View Detailed Pricing Info
Another major business » How To Order This Case
of the erstwhile Compaq, » Business Case Studies
HP services which » Case Studies by Area
generated revenues of » Case Studies by Industry
US$ 13.778 billion, » Case Studies by Company
witnessed a fall in
operating profits from
US$ 1.362 billion in fiscal
2003 to US$ 1.263 billion

Top of Form
in fiscal 2004. HP's own
Search
imaging and printing
was the only business

Bottom of Form
division that posted
respectable operating
profits of US$ 3.847
billion...
The Challenges Ahead Please note:
Due to her inability to revive the performance of

This case study was compiled from
hardware businesses, HP's board asked Fiorina to
published sources, and is intended to
step down as the company's Chairman and CEO on
be used as a basis for class discussion.
February 09, 2005. The day Fiorina resigned; the
shares of HP increased by 6.9 percent on the New
York Stock Exchange. Commenting on this, Robert effective or ineffective handling of a
Cihra, an analyst with Fulcrum Global Partners management situation. Nor is it a
said, "The stock is up a bit on the fact that nobody primary information source.
liked Carly's leadership all that much. The Street
had lost all faith in her and the market's hope is that
anyone will be better..."
Exhibits
Exhibit I: HP's Stock Price Chart (June 2000 - May
2005)
Exhibit II: Compaq's Stock Price Chart (2001)
Exhibit III: HP - Corporate Organization (Old)
Exhibit III: HP - Corporate Organization (New)
Exhibit IV: HP's Consolidated Statements of
Operations (1998-2001)
Exhibit V: HP's Product Segment Information
(1999-2000)
Exhibit VI: Compaq's Consolidated Statements of
Operations (1998-2000)
Exhibit VII: The New HP's Consolidated Statements
of Operations (2002-04)
http://lifewavebr.com/post-merger-acquisition-challenges-solutions-a-contemporary-
perspective.html
Indian Mergers and Acquisitions: The changing face of Indian Business
by ARUN PRABHUDESAI
email print share
Until upto a couple of years back, the news that Indian companies having
acquiredAmerican-European entities was very rare. However, this scenario has taken a
sudden U turn. Nowadays, news of Indian Companies acquiring a foreign businesses are
more common than other way round.
Buoyant Indian Economy, extra cash with Indian corporates, Government policies and
newly found dynamism in Indian businessmen have all contributed to this new acquisition
trend. Indian companies are now aggressively looking at North American and European
markets to spread their wings and become the global players.
The Indian IT and ITES companies already have a strong presence in foreign markets,
however, other sectors are also now growing rapidly. The increasing engagement of the
Indian companies in the world markets, and particularly in the US, is not only an
indication of the maturity reached by Indian Industry but also the extent of their
participation in the overall globalization process.

Here are the top 10 acquisitions made by Indian companies worldwide:
Deal
Country
Acquirer Target Company value ($ Industry
targeted
ml)
Tata Steel Corus Group plc UK 12,000 Steel
Hindalco Novelis Canada 5,982 Steel
Daewoo
Videocon Electronics Korea 729 Electronics
Corp.
Dr. Reddy’s
Betapharm Germany 597 Pharmaceutical
Labs
Suzlon 565
Hansen Group Belgium Energy
Energy
Kenya
HPCL Petroleum Kenya 500 Oil and Gas
Refinery Ltd.
Ranbaxy 324
Terapia SA Romania Pharmaceutical
Labs
Tata Steel Natsteel Singapore 293 Steel
Videocon Thomson SA France 290 Electronics
239
VSNL Teleglobe Canada Telecom
If you calculate top 10 deals itself account for nearly US $ 21,500 million. This is more than
double the amount involved in US companies’ acquisition of Indian counterparts.Graphical
representation of Indian outbound deals since 2000.

Have a look at some of the highlights of Indian Mergers and Acquisitions scenario as it
stands (Source: http://ibef.org)
Indian outbound deals, which were valued at US$ 0.7 billion in 2000-01, increased to US$ 4.3
billion in 2005, and further crossed US$ 15 billion-mark in 2006. In fact, 2006 will be
remembered in India’s corporate history as a year when Indian companies covered a lot of
new ground. They went shopping across the globe and acquired a number of strategically
significant companies. This comprised 60 per cent of the total mergers and acquisitions
(M&A) activity in India in 2006. And almost 99 per cent of acquisitions were made with cash
payments.
Mergers and Acquisitions
The total M&A deals for the year during January-May 2007 have been 287 with a value of
US$ 47.37 billion. Of these, the total outbound cross border deals have been 102 with a value
of US$ 28.19 billion, representing 59.5 per cent of the total M&A activity in India.
The total M&A deals for the period January-February 2007 have been 102 with a value of
US$ 36.8 billion. Of these, the total outbound cross border deals have been 40 with a value of
US$ 21 billion.
There were 111 M&A deals with a total value of about US$ 6.12 billion in March and April
2007. Of these, the number of outbound cross border deals was 32 with a value of US$ 3.41
billion.
There were 74 M&A deals with a total value of about US$ 4.37 billion in May 2007. Of these,
the number of outbound cross border deals was 30 with a value of US$ 3.79 billion.
The sectors attracting investments by Corporate India include metals, pharmaceuticals,
industrial goods, automotive components, beverages, cosmetics and energy in manufacturing;
and mobile communications, software and financial services in services, with
pharmaceuticals, IT and energy being the prominent ones among these.
It is merry time for Indian corporations!
Related posts:
1. Amongst BRIC Nations, India second most targeted country for Mergers &
Acquisitions
2. Indian Mergers & Acquisitions touches USD 42.76 Billion
3. Mergers & Acquisitions back with a Bang – Telecom Sector leads…
4. Would 2010 be the year of Acquisitions ?
5. Top 10 Indian Mergers & Acquisitions of the 2010!

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Mergers and acquisitions (M&A) and corporate restructuring are a big part of the

break up companies through spinoffs, carve-outs or tracking stocks.

The Main Idea

agree to be purchased when they know they cannot survive alone.

Distinction between Mergers and Acquisitions

a new company, DaimlerChrysler, was created.

Whether a purchase is considered a merger or an acquisition really depends on whether

company's board of directors, employees and shareholders.

companies hope to benefit from the following:

CEO, who typically leaves with a compensation package.

prices with their suppliers.

• Acquiring new technology - To stay competitive, companies need to stay on top of

technological developments and their business applications. By buying a smaller

company with unique technologies, a large company can maintain or develop a

improve a company's standing in the investment community: bigger firms often

have an easier time raising capital than smaller ones.

up to less than two.

section of this tutorial.

same product lines and markets.

• Vertical merger - A customer and company or a supplier and company. Think of a

cone supplier merging with an ice cream maker.

• Product-extension merger - Two companies selling different but related products in

the same market.

• Conglomeration - Two companies that have no common business areas.

the issue of some kind of debt instrument; the sale is taxable.

• Consolidation Mergers - With this merger, a brand new company is formed

terms are the same as those of a purchase merger.

acquisitions involve one firm purchasing another - there is no exchange of stock

public corporation with tradable shares.

on whether this synergy is achieved.

Mergers and Acquisitions: Valuation Matters

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Market Beating Stocks.

much the company being acquired is really worth.

is to look at comparable companies in an industry, but deal makers employ a variety of

metrics on which acquiring companies may base their offers:

company makes an offer that is a multiple of the earnings of the target

P/E multiple should be.

company makes an offer as a multiple of the revenues, again, while being

aware of the price-to-sales ratio of other companies in the industry.

Forecasted free cash flows (net income + depreciation/amortization - capital expenditures -

rival this valuation method.

Synergy: The Premium for Potential Success

post-merger share price increases by the value of potential synergy.

equation solves for the minimum required synergy:

promised by deal makers might just fall short.

What to Look For

start by looking for some of these simple criteria:

companies that participate in such contests.

currency for acquisition, discipline can go by the wayside.

• Sensible appetite – An acquiring company should be targeting a company that is

companies with a healthy grasp of reality.

Mergers and Acquisitions: Doing The Deal

Printer friendly version (PDF format)

Market Beating Stocks.

The Target's Response

• Execute a Poison Pill or Some Other Hostile Takeover Defense – A poison

predetermined percentage of company stock. To execute its defense, the target

and intercepts its control of the company.

• Find a White Knight - As an alternative, the target company's management may

very least, a threat to competition in the industry.

Closing the Deal

shares with cash, stock or both.

M & A

M & A