Used as though they were synonymous, the terms ‘MERGER’ AND ‘ACQUISITION’mean slightly different things.
MERGER :Happens when two firms, often of about the same size, agree to goforward as a single new company rather than remain separately owned and operated. (Daimler-Benz and Chrysler ). CONCEPT = MERGER OF EQUALS
ACQUISITION : When ‘A’ takes over ‘B’ and clearly establishes itself as the new owner, the purchase is called an acquisition.From a legal point of view, the ‘B’ ceases to exist, ‘A’"swallows" ‘B’ and stock of ‘A’ continues to be traded. CONCEPT = BIGGER FISH FRIES THE - WILLING SMALLER
Mergers and acquisitions are a foreign direct investment entry mode, Multinationals usethese methods for entering into new markets.
The key principle behind buying a company is to create shareholder value over and above that of the sum of the two companies. Rationale is particularly alluring when times are tough.Strong companies will act to buy other companies to create a more competitive, cost-efficient company .
• In practice, however, actual mergers of equals dont happen very often. • Usually, one company will buy another and, as part of the deals terms, simply allow the acquired firm to claim - it a merger of equals, even if its technically an acquisition. • Being bought out often carries negative connotations.
Respective profiles PRE-aquisition TATA CORUS (Now renamed as - TATA steel ) 102 years in steel bazaar. 2nd in Europe , 1st in UK. World’s 56th largest . World’s 6th largest.Production Capacity of 30 Million. 371st rank in fortune list. Founder : J.N. Tata 40,000 people worldwide. Presence in 26 nations. Presence in 50 nations.
The Deal• Tata acquired Corus, which was four times larger than its size and the largest steel producer in U.K. .• Was officially announced on April 2nd, 2007 at a price of 608 pence (approx. 486 Rs.) per ordinary share in cash.• The deal was a 100% acquisition and the new entity is run by one of Tata’s steel subsidiaries. • Deal type – acquisition • Approximate value – $ 12 billion (US) .
TATA-CORUS specificOpportunities 1. Catapults Tata Steel into the league of top 10 global steelmakers considering that Corus is at least three times larger than Tata Steel (in terms of revenues and production capacities). 2. Augmented its crude steel capacity to 27 mtpa . 3. Besides, the deal between a large player with a significant presence and a strong distribution network (Corus) and an outfit that is the lowest-cost producer of steel (Tata Steel) suggests synergies.
Issues and challenges 1.Valuation and fundingIncreasing financial risk, as Tata Steel went on a debt- raising spree to finance a major part of the cost of acquisition. Out of the $12 billion it financed 4 through equity . 2. Manage the cultural and organizational differences
PRE-Merger Profiles DAIMLER - BENZ CHRYSLEREurope’s Largest Industrial Company US Based CompanyOperations in Operations in1.Passenger Cars 1.Cars2.Commercial Vehicles 2.Minivans3.Aerospace 3.Sport-utility vehicles4.Services 4.Trucks5.Directly Managed Businesses (Rail,6.Automotive Electronics and DieselEngines)Employs 3,00,000 people Motto - “We produce cars and trucks that people will want to buy, will enjoy driving and will want to buy again”
Why the merger ?FOR DAIMLER FOR CHRYSLERThe perfect storm . Merger or perish .For it was not able to reaprewards fully of the booming USeconomy.High costs for Daimler .Create a much larger globalenterprise to compete in majorworld markets .
Synergies• World Leader in Transportation .• Revenue Enhancement .• Minimum overlap in Markets and Customers .• Complete Spectrum of Products .• Lower Costs and Higher Productivity .• Cheaper Labor .• Exchange of Technology .• Higher Bargaining Power .
• Opposite management thinking .• Authoritative Germans vs. Creative Americans .• German replaces an American as Chrysler’s president .• Lack of governance .• Low level contact between the two top level management• guys .• The American dynamism faded under subtle German pressure.• It bled cash for almost an year, owing to mismanagement.• Cultural Differences.• Employee bias was rampant in the merged organization.
Issues• Daimler (Germans) relied heavily on quality and Chrysler (Americans) inclined towards being cost-effective .• Allegations of “fraud and deceit” on former Daimler executives .• Falling share price.• Falling sales and huge losses owing to volatile US auto industry .• Synergies not working out to be as expected .• Chrysler hell bent on producing “big” cars .• Daimler Chrysler’s market cap in the recent years was almost equal to what Daimler’s was before the merger !
ConclusionsWe are in a position to draw the following conclusions about M&A (collectively)conveniently .Opportunities :1. Synergies - Synergy is ability of merged company to generate higher shareholderswealth than the standalone entities .2. Benefits of better management – Since now the management is spearheaded by ateam combined with 2 different management practices , it gives the newly formedteam great opportunity to exploit resources , labor in hand .3.Influx of capital – ‘X’ capital of one and ‘Y’ capital of another CO. combine to form‘X+Y’ capital and undertake similar operations there by reducing the costs ofproduction remarkably.
Contd..4. New technology – greater capital inflow gives the newly formed company to acquire latest and advanced technology to undertake operations.5. To get access to greater amounts of raw material , labor at cheaper costs .6. Access to patents and trade marks.7. Total built up capacity increases relatively .8. Easier entry into new markets9. Channels of distribution increase.
Issues and challenges :1. Overpriced purchase – it may so happen in order to definitely takeover a company ends up paying more than the assessment.2. Miscalculation regarding the purchase consideration.3. Labor unrest – labor may be at unrest with the management , if the management is biased or even if labor is unhappy with the new combined policies/new management’s policies because change is always unwelcome .
Contd…4. Conflict of interest in the two managements –In case of a merger , even an acquisition where the purchaser is accommodating the management of the seller , there may be conflict of interest as the two managements may have been driven by different driving forces.5. Affects liquidity of the purchaser –It may happen that the purchaser decides to opt out of debt financing to lower the financial risk ,instead pays part in cash and rest through equity-swap thereby affecting its liquidity in a different manner.6. Legal hurdles –Companies opting for a merger or an acquisition may be at two different geographical locations , having different legal frameworks.Means that the companies will have to cross many legal hurdles to make sure that the compliance to law holds good .
But on what do the issues , opportunities and challenges from a M&A actually depend ?
It depends on the SWOT analysis ofthe company ,which consequently wouldconceive the basis of - strengths ,weaknesses , opportunities , threatsthat the company/companiesaccrues/accrue from a MERGER or anACQUISITION .
AcknowledgementsGoogle.comWikipedia.comSlideshare.comInvestopedia.comSpecial thank you to teachers andmates for constant and materialfeedback.
THANK YOU ! Created and presented by : Raaghav Bhatia , Shaheed Bhagat Singh college .