JAIIB-PPB-UNIT 9

ALLIANCES
MERGERS
CONSOLIDATION

ALLIANCES
A FORMAL
MUTUALLY AGREED
commercial collaboration between
companies
The partners pool, exchange or
integrate specific business resources
for mutual gain
yet they remain separate businesses.

ALLIANCES
e.g: INDIAN BANK, CORPORATION BANK AND

ORIENTAL BANK OF COMMERCE (PSBs)

formed an alliance in October 2006.

Sharing of ATMs,
Joint Appraisal Cell in Mumbai to undertake
Appraisal of large projects for funding,
participation in each others training
programs &
building up Common Data Centre

ALLIANCES
Alliance is an alternative for
merger / Consolidation.
However, one in two fails due
to the factors such as
Industry Dynamics
(regulatory changes), new
technologies, new entrants or
economic cycles

ALLIANCES - BENEFITS
1.Increase in capital for research and projects
2.Decrease in product lead time and life cycles
3.bringing together Complementary skills and
assets
4.technology transfer
5.bigger is better, helps in economies of scaling
higher
6.opportunity for foreign market entry
7.building credibility & making brand
awareness
8.value addition/value added services to
customers

MERGER
Also known as
Amalgamation,
A Combination of two or
more commercial
companies into a single
company,
One survives with its name
or a combined new name

MERGER
Merger combination of two
commercial companies
Amalgamation combination of more
than two into one.
All ASSETS & LIABILITIES (on and off
Balance sheet items) of merging
companies gets transferred to
surviving company.
e.g. Global Trust Bank merged with
Oriental Bank of Commerce

MERGER - OBJECTIVES
1.Diversification of activities, achieving optimum
size of business
2.Removal of bottlenecks of input supplies
3.Profitability improvement
4.Better Customer service
5.economies of scale and size (internal & external)
6.Acquisition of Assets at Lower price (than market
prices)
7.Bringing separate enterprises under single
control
8.No Gestation period for growing, nursing sick
units and getting tax benefits

TYPES OF MERGERS
4 TYPES - HORIZONTAL, VERTICAL,

CONCENTRIC & CONGLOMERATE

Horizontal merger:
merger of two or more companies where products
and services are similar.
Reduces number of players and reduces
competition.

Vertical merger:
merger of two companies one being the actual /
potential supplier of goods/services to the other.
Ensures a source of supply and improves efficiency

TYPES OF MERGERS
Concentric merger:
merger of two companies related
through basic technologies,
production process or markets.
Helps in extention of product line,
market participations or technology.
Helps in diversifying into relative
market having higher return.

TYPES OF MERGERS
Conglomerate merger:
It involves predominant element of
diversification of activities.
That is, one company derives most of its
revenue from a particular industry, acquiring
companies operating in other industries with a view - to obtain greater stability of earnings through
diversification or
to obtain benefits of economies of scale

ADVANTAGES OF MEREGERS
1.Synergy in operations and economies of scale in
inputs, production and delivery which results in
cost savings for the acquirer.
2.Due to increased size, the growth in TOP LINE &
BOTTOM LINE (i.e SALES VOLUME & PROFITS) are
significant
3.Creates opportunities to penetrate markets
(strategic benefits)
4.Helps build strong marketing front-end, customer
comfort and to leverage expertise in markets.
5.Achieving world class standards in business
6.Product innovation since resources are
complementary

DISADVANTAGES OF MERGERS

Dilution of competition in the

market, affecting consumer
interest
Abuse of market power
possible
Larger potential for systemic
risk

CONSOLIDATION
Combining of two existing companies into a
new company, in which
both existing companies get extinguished
and
a new company is created.
Existing companies lose their identities and
a new entity is created with a different or the
same name.
Assets and Liabilities of both companies get
merged into the new entity

CONSOLIDATION
e.g: Birla Group of
companies:
Indian Rayon and Industries
Ltd and
Indo Gulf Industries Ltd
are consolidated to give birth
to a new company named
Aditya Birla Nuvo Ltd

ACQUISITION OR TAKE OVER

This refers to acquiring of a
controlling stake in the Ownership
of company by another entity.
Normally by way of buying the
share capital of one company by
another company
either in a hostile manner or with
the consent of existing owners.