Module-2

Forms of corporate restructuring expan

sion, sell offs, corporate control, change
s in ownership structure. Types of
mergers – horizontal, vertical,
conglomerate, co generic.
 FORMS/STRATEGIES OF
CORPORATE RESTRUCTURING
Expansion Corporate Control
Mergers, Acquisitions & Anti take over defenses
Takeovers Share buyback/repurchases
Tender offers Debt equity Exchange offers
Asset acquisition Financial reorganisation (bankruptcy)
Alliances and Joint ventures Proxy contests

Contraction Changes in ownership structures

Divestitures Leveraged buyout
Spin -offs Junk bonds
Split - ups Going private
Equity carve – outs ESOPs
Assets sale
 Expansion
 Form of restructuring which results in an
increase in size of the firm.
 Merger, Acquisition & takeovers
 Tender offers
 Asset acquisition
 Alliances & Joint ventures
 Mergers, Acquisitions, and Takeovers
 Merger
 Two firms agree to integrate their operations on a
relatively co-equal basis
 Acquisition
 One firm buys a controlling, 100 percent interest in
another firm with the intent of making the acquired firm
a subsidiary business within its portfolio
 Takeover
 Special type of acquisition strategy wherein the target
firm did not solicit the acquiring firm's bid
 Unfriendly acquisition
4
 Restructuring – Expansion
Merger
o Two firms join and integrate operations as co-equals.

o Glaxo Smithkline (GSK) and Novartis (2014)

o E.g. Daimler-Benz (German)-Chrysler(US) (1998) –

Merger came to an end on 2007.

o RIL & RPL merger (2009);

o Centurion Bank & bank of Punjab – Centurion Bank

of Punjab (2005);
o Centurion Bank f Punjab merged with HDFC in 2008
o Kotak Mahindra and ING Vysya 2014 5
 Restructuring - Expansion
Acquisitions
o One firm buys a controlling interest in another firm with
the intent to make the other firm a division or subsidiary
of the acquiring firm.

o In general these agreements are friendly but do not result

in a co-equal relationship.
o Microsoft – LinkedIn (2016)
o Flipkart-Mynthra (2014)
o Facebook and WhatsApp (2014)
o Tata tea –Tetley(2000)
o HUL & Modern foods (PSU) (2000)
6
Restructuring - Expansion
o Takeovers:
o A corporate takeover refers to a transfer of
control from one investor group to another.
o Acquisition bid is unsolicited.
o Generally results in incumbent management
being removed.
o e.g. UB group – Shaw Wallace (Chhabria
group) (2005); Diageo tookover United
Spirits (2013)
o Hindujas – Ashok Leyland (1987);
o Reliance – IPCL (2002)
 Alternative Takeover1 Tactics

 Friendly deals (Target board

supports bid)
 Hostile deals (Target board
contests bid). Rare due to
 Target board flexibility in
setting up defenses
 Impact on bid premiums
 Impact on postclosing
integration
 The threat of hostile bids often
moves target boards toward
negotiated settlements.
1A corporate takeover refers to a transfer of control from one investor group to another.
Takeover might be :
Hostile Takeover
A takeover attempt that is strongly
resisted by the target firm
Friendly Takeover
Target company's
management and board of
directors agree to a merger or
acquisition by another
company.
 Restructuring – Expansion
Tender Offer or Acquisition of Stock
• A firm can acquire another firm by purchasing target firm’s voting
stock in exchange for cash, shares of stock, or other securities.
• A tender offer is a public offer to buy shares made by one firm directly
to the shareholders of another firm.
– If the shareholders choose to accept the offer, they tender their shares by
exchanging them for cash or securities.
– A tender offer is frequently contingent on the bidder’s obtaining some
percentage of the total voting shares.
– If not enough shares are tendered, then the offer might be withdrawn or
reformulated.
Mittal’s bid for Arcelor
Asset Acquisition
o Buying assets of another company- tangible assets and
intangible like brands
o Cement division acquisition of TISCO (Tata steel) by Laffarge
(France) (1998)
o Coca Cola – Parle (Thums Up; Gold Spot; Limca) (1993)
o HLL (now HUL)- Lakme (1996)

11
 How Companies Can Work
Together
 Joint venture: parties work together for lengthy or
indeterminate period of time
 Form new, third entity
 Divide ownership and control of new entity, determine who will
contribute what resources
 Advantage: two entities can remain focused on their core
businesses while letting joint venture pursue the new
opportunity
 Downside: governance issues and economic fairness issues
create friction and eventual disbandment
Restructuring - Expansion
o Joint ventures
o Two companies enter into an agreement to provide certain
resources for a specific business purpose and a limited duration.
o e.g. Hindustan Motors & Mitsubishi to produce Lancer & Pajero
o JV between Maruti Udyog and Suzuki of Japan – Now Maruti Suzuki
India Ltd
o Sony Corporation (Japan) And Erricsson (Sweden) (Split the JV
after 10 years Oct 2011)
How Companies Can Work Together
 Strategic alliance (or teaming agreement): parties
work together on a single project for a finite period
of time
 Do not exchange equity
 Do not create permanent entity to mark relationship
 Written memorandum of understanding (MOU):
memorializes strategic alliance and sets forth how
parties plan to work together
 E.g. M Pesa – ICICI bank and Vodafone India
 Uber and Paytm; Uber & Spotify;
Google and Luxottica
 Restructuring - Contraction
o Reduction in size of the firm
o Divestiture
o Selling assets, divisions, subsidiaries to another
corporation or combination of corporations or
individuals, generally resulting in an infusion of
cash.
o Types
o Spin - offs
o Split - ups
o Equity carve - outs
o Assets sale
 Restructuring – Contraction
Spin-offs
A new, independent company created by detaching
either a division of a parent company’s assets and
operations or a subsidiary.
Shares in the new company are distributed to the
parent company’s shareholders on a pro rata basis.
e.g. IT division of Wipro was spun off as Wipro
Infotech in 1980s;
Godrej’s Retail division ‘Nature’s basket’ (Feb, 2009)
Pantaloon Retail spin off Big Bazaar and Food
bazaar into a new entity Future value retail (March,
2009)
L&T spun off its cement business (2002)
 Restructuring - Contraction

o Split-ups
o The entire company is broken up into two or more
companies, parent company no longer exists
o With one or more spin-offs
o New class of stock for each company
o e.g. Cendant (US) – 4 cos real estate; travel; hospitality,
vehicle rental business in 2005 ;
o APSEB into APGENCO & APTRANSCO (1999)
 Restructuring - Contraction
o Equity carve-out
o Offering of full or partial interest in a subsidiary to the
investment public OR IPO of a corporate subsidiary OR to a
strategic partner
o e.g DuPont in 1998 subsidiary Conoco; Lucent (1996);
AT&T (1993)

o Asset sale
o Sale of tangible or intangible assets of a company to generate
cash
o Cash to shareholders and go out of existence/continue to do
business
o e.g. Asset sale of Dabhol Power company (2005) (now
called RGPPL - Ratnagiri Gas and Power Private Limited)
Corporate Control
 Anti take over defenses
 Share buyback/repurchases
 Debt equity Exchange offers
 Financial reorganisation (bankruptcy)
 Proxy contests

19
Restructuring – Corporate Control
o Obtaining control over the management of a firm;
o To influence in organisational strategies
o Share Buybacks/repurchases
o Company buying its own shares back from the existing
shareholders or from open market.
o Reduction in equity capital
o Strengthens promoter’s controlling position
o Takeover defense
o Treasury Stock
o e.g.DLF (2008); ipca (2008); Reliance infrastructure, Infosys,
TCS
o Takeover defenses
o To prevent a sudden, unexpected hostile takeover and
gaining control of the company
 Restructuring – Corporate Control
– Exchange offers
– On or more classes of securities the right or option to exchange a
part or all their holding for a different class of securities of the firm
– Exchanging debt for equity (increases leverage) or Equity for debt
(decreases leverage)
– Financial Reorganisation and bankruptcy
• Restructuring when firm experiences financial distress
– Out of court procedures
– Merger into another firm
– Formal legal proceedings – reorganisation OR liquidation
– Proxy contests
• Attempt by a single or a group of shareholders to
– Take control in a company; Expel the board or management
Source : ICFAI material, p.9. begi.
Weston, Mitchell & Muherin. (2006). Takeovers, restructuring, and corporate governance, 4th ed., New Delhi : Pearson Education,
pp.370-82.
Changes in ownership structures
• Leveraged buyout
• Junk bonds
• Going private
• ESOPs

22
 Restructuring – Changes in ownership structure
– Leveraged Buyout (LBO)
• A leveraged buyout (LBO) is the acquisition of a company or division of
a company (“target”) financed with a substantial portion of borrowed
funds. Debt : 80 to 90% (assets as collaterals)
» Debt is used for acquiring a company
» Often applied to firm borrowing fund to buy back its own stock
MBOs; EBO – Tata Tea (Kannan Devan ) 2005

e.g. Berkshire Hathaway for Shaw Industries Inc;

Tata’s acquisition of 25 per cent govt holding in VSNL(2002).
Tata Tea – Tetley
Tata Steel - Corus
Restructuring – Changes in ownership structure

o Going Private
o Transformation of a public limited company into a
privately held firm
o Delisting
o companies’ desire to avoid scrutiny of
shareholders, regulators and potential investors,
and also avoid payment of exorbitant compliance
costs associated therewith.
o e.g. Essar steel; Carrier Aircon India Ltd, Otis
Elevator Company India Ltd
Restructuring – Changes in ownership structure
ESOP
o An ESOP is a kind of employee benefit plan. In an ESOP, a
company sets up a trust fund, into which it contributes new
shares of its own stock or cash to buy existing shares
o Mechanism whereby a company can make tax deductible
contributions of cash or stock into a trust.
o An ESOP is nothing but an option to buy the company's share
at a certain price. This could either be at the market price
(price of the share currently listed on the stock exchange), or at
a preferential price (price lower than the current market price).
o If the firm has not yet gone public (shares are not listed on any
stock exchange), it could be at whatever price the
management fixes it at.
o Not taxed until withdrawn; Anti take over defence
Types of mergers
 Horizontal
 Vertical
 Conglomerate

26
 MERGERS AND ACQUISITIONS DEFINITIONS
Classified by the relatedness of business activities of the parties to the combination:

Type Characteristic Example

Horizontal Companies are in the Walt Disney Company
merger same line of business, buys Lucasfilm (October
often competitors. 2012).
Vertical merger Companies are in the Google acquired Motorola
same line of production Mobility Holdings (June
(e.g., supplier–customer). 2012).
Conglomerate Companies are in Berkshire Hathaway
merger unrelated lines of acquires Lubrizol (2011).
business.

27
 Types of Mergers/Strategies
oHorizontal mergers
oMerger between two firms competing in
the same industry
oIncreases firm’s market power.
oe.g. SBI and State Bank of Indore (2010);
Nedungadi Bank and Punjab national Bank
(2003)
Facebook and WhatsApp

Board of Editors. (2003). Mergers and acquisitions. Vol 1, New Delhi : ICFAI University Press, pp.91-95
Ross, Westerfield & Jordan (2006). Fundamentals of Corporate Finance, 7th ed. New York:McGraw -Hill Irwin,
28
p.798.
 Horizontal merger
• Cement industry – Birla with L&T
• Liquor industry United Breweries with Shaw Wallace
• Diageo with United Spirits
• Aviation industry – Jet Airlines with Air Sahara.
• Vodafone acquisition on HEL, telecommunication industry
(2007)
• Vodafone and Idea
 Examples of Horizontal Merger
• Lipton India and Brooke Bond.

• Bank of Madura with ICICI Bank.

• BSES Ltd with Orissa Power Supply Company.

• Associated Cement Companies Ltd Damodar Cement.

o Vertical mergers
o Merger between firms that are in different stages of
production or value chain.
o Combination of companies that usually have a buyer –
seller relationship – backward /forward integration
o Acquiring a supplier (backward integration)
o Buying a distributor (Forward integration)
o e.g. PepsiCo acquired (merger agreement) two largest
bottlers (PBG & PAS) in 2009
o Boise Cascade (paper manufacturer, US, renamed as Boise
Paper) acquired office Max (an office pdt distributor) in
2003
o Tata Motors acquires Italian design house Trilix (2010)
 Example of Vertical Merger
• Time Warner Incorporated, a major cable operation, and the Turner Corporation, which produces CNN, TBS, and
other programming.

• Pixar-Disney Merger
oConglomerate mergers
oMerger between firms that are not related
to each other or unrelated business
activity.

oProduct extension
ogeographic market extension
opure conglomerate mergers
• # Product-extension merger –
– Conglomerate mergers which involves companies selling
different but related products in the same market or sell non-
competing products and use same marketing channels of
production process.
– E.g. Phillip Morris-Kraft (1988), Pepsico- Pizza Hut, Proctor and
Gamble and Clorox
• # Market-extension merger –
– Conglomerate mergers wherein companies that sell the same
products in different markets/ geographic markets.
– E.g. Morrison supermarkets and Safeway, (supermarkets)
– Time Warner (telecommunications)-TCI (Cable Television
provider)
• # Pure Conglomerate merger-
– two companies which merge have no obvious relationship of
any kind. E.g. BankCorp of America- Hughes Electronics
 Example of Conglomerate Merger
• merger between the Walt Disney Company and the American
Broadcasting Company.
• Tata- Sky
• L&T and Voltas
Congeneric merger
 A congeneric merger involves firms that are interrelated, but
not identical, lines of business.
 A congeneric merger is a merger in which one firm acquires
another firm that is in the same general industry but neither in
the same line of business nor a supplier or a customer.
 Congeneric merger
 bank and a leasing company.
 Citigroup's acquisition of Travelers
Insurance
 While both were in the financial services industry,
they had different product lines.
 Prudential Financial and stock brokerage
company Bache & Co (1981)
 Although both companies were involved in the
financial services sector, prior to the deal, Prudential
was focused primarily on insurance while Bache dealt
with the stock market.
Motives or Reasons for
M&As
38
Motivations for M&A OR Why M&As happen
• Synergy
– Operating Synergy
– Financial Synergy

• Diversification (Related/Unrelated)

• Strategic realignment
– Technological change
– Deregulation

• Financial considerations
– Acquirer believes target is undervalued
– Booming stock market
– Falling interest rates
• Market power
• Ego/Hubris
• Tax considerations
 Synergy
• Value realised from the incremental cash flows
generated by combining two businesses
– E.g. if market value of two firms is $100m and $75m
respectively and their combined value is $200m,
then value of synergy is $25m

• Two types
– Operating Synergy
• Improve operating efficiency
– Financial Synergy
• Reduction in acquirer’s cost of capital due to M&A
 Operating synergy

• Gains in efficiency from

–Economies of Scale
–Economies of Scope
–Complementary technical assets and Skills

• Gains from improved managerial operating practices

• Results in shareholder wealth creation

 Operating synergy –
Economies of Scale
– Reduction in average total cost of a firm producing a
single product for a given scale of plant due to decline
in average fixed costs as production volume increases

– Fixed cost – depreciation, amortization, interest

payments, lease payments, customer/vendor contracts
– Sharing of central facilities – top mgmt, headquarters;
computer services.

– Flipkart-myntra – cost of customer acquisition

 Illustrating Economies of Scale
Period 1: Firm A (Pre-merger) Period 2: Firm A (Post-merger)
Assumptions:
Assumptions: • Firm A acquires Firm B which is producing
500,000 units of the same product per year
• Price = $4 per unit of output sold
• Firm A closes Firm B’s plant and transfers
• Variable costs = $2.75 per unit of output production to Firm A’s plant
• Fixed costs = $1,000,000 • Price = $4 per unit of output sold
• Firm A is producing 1,000,000 units of • Variable costs = $2.75 per unit of output
output per year
• Fixed costs = $1,000,000
• Firm A is producing at 50% of plant capacity
Profit = price x quantity – variable costs
– fixed costs
Profit = price x quantity – variable costs
= $4 x 1,500,000 - $2.75 x 1,500,000
– fixed costs
- $1,000,000
= $4 x 1,000,000 - $2.75 x 1,000,000
= $6,000,000 - $4,125,000 - $1,000,000
- $1,000,000
= $875,000
= $250,000
Profit margin (%)2 = $875,000 / $6,000,000 =
Profit margin (%)1
= $250,000 / $4,000,000 = 14.58%
6.25%
Fixed costs per unit = $1,000,000/1.500,000 =
Fixed costs per unit = $1,000,000/1,000,000 $.67
= $1
Key Point: Profit margin improvement is due to spreading fixed costs over more units of output.
1Margin per unit sold = $4.00 - $2.75 - $1.00 = $ 0.25; 2Margin per units sold = $4.00 - $2.75 - $.67 = $0.58
 Economies of scope
• Reduction in average total costs for a firm
producing two or more products, because it is
cheaper to produce these products in a single firm
that in separate firms

• Declining average fixed and variable costs

• Also cost savings realised by using a specific set

of skills or an asset currently employing in
producing a single product to produce multiple
products
 Economies of scope

• Examples of OH and sales related economies of scope

– Having a single dept (e.g. a/cing/HR) support multiple product lines
– A sales force selling multiple related products rather than a single
product
– Savings in distribution costs by transporting a number of products to
single location

• Examples
– P&G uses its consumer marketing skills to sell full range of personal
care as well as healthcare products (Acquired old spice (1990),
Gillette (2005),…….)
– Honda employs proprietary know-how (an intangible asset) to
enhance internal combustion engines to manufacture, in addition to
cars and motorcycles
 Illustrating Economies of Scope
Pre-Merger:
• Firm A’s data processing
center supports 5
manufacturing facilities
• Firm B’s data processing
center supports 3
manufacturing facilities
Post-Merger:
• Firm A’s and Firm B’s data processing
centers are combined into a single
operation to support all 8 manufacturing
facilities
• By combining the centers, Firm A is able
to achieve the following annual pre-tax
savings:
– Direct labor costs = $840,000.
– Telecommunication expenses =
$275,000
– Leased space expenses = $675,000
– General & administrative expenses =
$230,000

Key Point: Cost savings due to expanding the scope of a single center to
support all 8 manufacturing facilities of the combined firms.
 Complementary technical assets and skills
o Possessed by one firm that could be used by another
to fill the gap in its technical capabilities

o Related R&D, related Technologies

o Pharmacia and Upjohn merged with Monsanto to form
Pharmacia
oThis merger gave Pharmacia and Upjohn access to Monsanto’s
Cox-2 inhibitors and Monsanto access to the other’s expertise in
Genomics
o a firm that is very good at distribution and marketing
merging with a very efficient service provider/producer
o HLL and TOMCO 1994
o Merger bw HDFC and Times Bank in 1999 - HDFC branches in metro
and Times in non-metro urban
o ICICI bank and Bank of Madurai (South Indian Market)2000
 Financial Synergy

o Reduction in acquirer’s cost of capital due to M&A

oIf merged firms have cash flows that are relatively
uncorrelated
oRealise cost savings from lower security issuance and
transaction costs
oBetter matching of investment opportunities with
internally generates funds
oResources can be transferred from cash-rich units to cash-
poor units
 Diversification
o Buying firms beyond a company’s current lines of
business
o Allows a firm to shift its core product lines or target
markets into ones that have higher growth prospects
o Examples
o E.g. Microsoft and Nokia;
o Johnson & Johnson’s acquisition of Pfizer’s consumer
healthcare products line
o Retailer J.C Penny’s acquisition of Eckerd Drugstore chain
(drug retailer)
o E.g. : Lenova acquiring IBM Low end servers and Motorolla
Mobility;
o 2012- IBM acquiring web based HR software maker Kenexa to
move its existing software business into fast-growing business
App via the web
 Strategic realignment

o Use M&As to make rapid adjustments to changes in their external

environment
o Regulatory changes/technological innovation
o Regulatory changes
o Financial services, healthcare, media, telecom
o Technological advances
o Smartphones – threat to camera, wrist watches, alarm clocks, MP3 players
o Tablets – threat to desktop and lap tops
o E readers for hardback books
o WhatsApp and Skype : mobile phone companies
 Reasons for Acquisitions
Increased market power
 Entails buying a competitor, a supplier, a
distributor, or a business in a highly related
industry
 Exists when a firm is able to sell its goods or services
above competitive levels or when the costs of its
primary or support activities are lower than those of
its competitors

 Sources of market power include

 Size of the firm
 Resources and capabilities to compete in the market
 Share of the market
51

 E.g. Glaxo (UK) & Smithkline (UK) (in 2000)

 Market power
• With the addition to market share, a company can afford
to control the price in a better manner with a consequent
increase in profitability. The bargaining power of the firm
vis-a-vis labour, suppliers and buyers is also enhanced.

• In the case of the amalgamation of Reliance Petroleum

Limited with Reliance Industries Limited, the main
consideration had been that the amalgamation will
contribute towards strengthening Reliance’s existing
market leadership in all its major products. It was
foreseen that the amalgamated entity will be a major
player in the energy and petrochemical sector, bringing
together Reliance’s leading positions in different product
categories.
 Tax considerations
• Tax advantages –
–Carry forward and set off of losses of a loss-making
amalgamating company against profits of a profit-making
amalgamated company, e.g. Section 72A of the Income-Tax Act,
1961.
 Other motives for M&As
• Hubris (managerial pride)
– Acquirers believe that their valuation of the target is more
accurate than the market’s, causing them to overpay by
overestimating synergy
• Buying undervalued Assets (Q-Ratio)
– Acquire assets more cheaply when the equity of the existing
companies is less than the cost of buying or building the assets
• Managerialism (Agency Problems)
– Increase the size of the company to increase the power and
pay of managers
• Misvaluation
– Investor overvaluation of acquirer’s stock encourages M&As
using acquirer stock
 M&A by HLL (HUL)
1956: Hindustan Lever Ltd is formed following the merger of
Hindustan Vanaspati Manufacturing Company, Lever Brothers
Ltd and United Traders Incorporated
Food and Beverages
• Mar 1993 Acquisition of Kothari General Foods (by Brooke Bond India, BBIL)
• Jun 1993 Merger of Doom Dooma India (Tea Plantations) (BBIL)
• Jun 1993 Merger of Tea Estates India (Tea Plantations) (BBIL)
• Jun 1993 Merger of Brooke Bond India and Lipton India to form Brooke Bond
Lipton India (BBLIL)
• Jun 1993 Acquisition of Kissan Products (BBLIL)
• Jul 1993 Acquisition of Cadbury’s Dollops (Ice creams) (BBLIL)
• Mar 1994 Acquisition of Tata Oil Mills Company (TOMCO) (HLL)
• May 1994 Acquisition of Merryweather Food Products (BBLIL)
• Dec 1994 Acquisition of Kwality Ice Creams (BBLIL)
• Apr 1995 Acquisition of Milkfood Ice Creams (BBLIL)
• Jan 1996 Merger of BBLIL into HLL
• Jan 1998 Acquisition of Kwality Frozen Foods
• 1998 : Pond's India Limited merges with HLL
• Dec 1999 Acquisition of Rossell Industries Ltd. (Tea
plantations) (Unilever)
• Jan 2000 Acquisition of Modern Foods Industries
(74% in 2000; 100% - 2002)
• 2007 : Name formally changed to Hindustan Unilever
Limited
 M&A by HLL (HUL)
Detergents
 Mar 1995 Restructuring detergents and chemicals business with
subsidiary Stepan Chemicals and Hind Lever Chemicals
 Feb 1996 Acquisition of Vashisti Detergents
Personal Care Products
 Oct 1995 Acquisition of Lakme Lever Ltd.
 Sep 1996 Acquisition of Lakme’s manfacturing facilities
 Jan 1998 Merger of Pond’s India Ltd. with HLL
Impact of M&A
Segment Market Market share
share 1997-98
1992-93
Souces, ketch ups, Nil 63.54
jams
Ice creams Nil 74.06
Tea Nil 22.52
Coffee Nil 5.90
Soaps 19.66 26.01
Detergents 33.12 46.72
Cosmetics Nil 56.49
Animal feeds Nil 12.71
“Once you buy a company, you are married. You are
married to that company. It’s a lot harder to sell a
company than it is to buy a company. People always
call and congratulate us when we buy a company. I
say, “Look don’t congratulate us when we buy a
company, congratulate us when we sell it. Because a
fool can overpay and buy a company, as long money
will last to buy it.”

Our job really begins the day we buy the company,

and we start working with the management, we start
working with where the company is headed.

Henry R. Kravis, Financier and Investor

 M&A Process/Organisation
1. Develop a strategic plan (Business plan)
2. Develop a merger plan(M/A plan)
3. Search candidates for merger (Search)
4. Screening process (Screen)
5. Initiate contact with the target (First contact)
6. Refine valn, structure the deal, due diligence
(Negotiation)
7. Integration plan
8. Closing
9. Post closing integration
10. Post closing evaluation

Board of Editors. (2003). Mergers and acquisitions. Vol 1, New Delhi : ICFAI University Press, pp.95-125
Merger/acquisition Process
1. Developing the strategic plan for the business
 Where to compete, how to compete, self assessment,
defining mission statement, setting objectives,
selecting strategy
 Mission and vision of the firm
2. Merger Plan
 Key management objectives – financial & non
financial; tactical plan
 Resource assessment
 Schedule for completion
3. The Search Process
 Establish a primary screening – industry, size,..
 Develop the search strategy
Merger/acquisition Process
4. The Screening Process
 Starts with Initial list of potential list of potential
candidates
 Criteria – Specific market or product segment,
profitability, degree of leverage and market share
5. First Contact
 Alternate approach strategies
 Discussing value
 Income (DCF); Market (Comparables Company); Asset
and other approaches
 Preliminary legal documents
 Confidentiality agreement, letter of intent
Merger/acquisition Process
6. Negotiation
• Defining purchase prices
• Refining valuation
• Structuring the Deal
• Legal, tax and accounting structures
• How assets are transferred, ownership
• Conditions on which either of the parties
would withdraw
• Due diligence
– Buyer’s and seller’s due diligence
• Developing a financing plan
Due diligence
 To prevent “unpleasant surprises”
 Assessing costs and benefits
 Past, present and predictable future
 Sources of value and liability
 Any litigation, contingent liability, all contratcs
 Team of
 Executives of the target/bidding firm
 Investment bankers
 Lawyers
 Chartered accountants
 Merger/acquisition Process
7. Developing the Integration Plan
 Benefit packages, contracts for employees
8. Closing – company changes hands
 Closing document consists of
– Purpose of acquisition
– Price
» Allocation of price; Payment mechanism
» Assumption of liabilities
– Covenants – obligations of both parties
– Conditions for closing
– Indemnification
– Other documents Articles of incorporation; litigations;
contracts; loan agreements; stock option schemes;
insurance policies
Merger/acquisition Process

9. Post closing integration

 Combining resources, processes, and
responsibilities of the merged companies
10. Post closing Evaluation
 Evaluate success of merger
 Actual performance and expected performance
 Corrective actions , if any
Participants in merger Activity
 Investment banks
 Identification of areas for restructuring
 Buyer/seller identification
 Structuring and valuation
 Negotiation
 Legal compliance
 Lawyers
 Accountants
 Valuation Experts
 Institutional
investorshttps://en.wikipedia.org/wiki/List_of_i
nvestment_banks
Board of Editors. (2003). Mergers and acquisitions. Vol 1, New Delhi : ICFAI University Press, pp.113-116