Coceptual Framework Of Mergers & Acquisitions-B.V.Raghunandan


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An introductory profile of mergers and acquisitions

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Coceptual Framework Of Mergers & Acquisitions-B.V.Raghunandan

  1. 1. Conceptual Framework
  2. 2. Mergers, Acquisitions & Corporate Restructuring “Any significant and permanent change in the capital structure of an organisation, long term assets, manufacturing operations, organisation or marketing”
  3. 3. Types of MA & CR <ul><li>Mergers/Amalgamation </li></ul><ul><li>Acquisitions/Take -Over </li></ul><ul><li>Spin-off </li></ul><ul><li>LBO </li></ul><ul><li>Divestiture </li></ul><ul><li>ESOP </li></ul><ul><li>Joint Venture </li></ul><ul><li>Holding Company </li></ul><ul><li>Split Up </li></ul><ul><li>Strategic Alliance </li></ul><ul><li>Sell–off </li></ul><ul><li>MBO </li></ul><ul><li>MBI </li></ul><ul><li>MLP </li></ul><ul><li>Reverse Merger </li></ul><ul><li>Equity Carve-out </li></ul>
  4. 4. Motives for M & A <ul><li>I Strategic Motive </li></ul><ul><li>II Financial Motive </li></ul><ul><li>III Organisational Motive </li></ul>
  5. 5. I Strategic Motive <ul><li>Growth </li></ul><ul><li>Scale of Operations </li></ul><ul><li>Competition </li></ul><ul><li>Market Share </li></ul><ul><li>Acquiring Size </li></ul><ul><li>Backward Integration </li></ul><ul><li>Forward Integration </li></ul><ul><li>Synergy </li></ul><ul><li>Core Competence </li></ul><ul><li>Diversification </li></ul><ul><li>Reduction of Risk </li></ul><ul><li>Balancing Product Cycle </li></ul><ul><li>Mgt of Recession </li></ul><ul><li>Entry into New Markets/New Segment </li></ul>
  6. 6. II Financial Motive <ul><li>Investment of Surplus Funds </li></ul><ul><li>Higher Market Capitalisation </li></ul><ul><li>Reducing Costs </li></ul><ul><li>Tax Planning/Tax Benefits </li></ul><ul><li>Revival of Sick Units </li></ul><ul><li>Increasing EPS </li></ul><ul><li>Creation of Shareholder Value </li></ul>
  7. 7. III Organisational Motive <ul><li>Entrepreneur’s Personal Compulsions </li></ul><ul><li>Retention of Management Talents </li></ul><ul><li>Removal of Inefficient Management </li></ul><ul><li>Quality of Management </li></ul><ul><li>Lobby Power </li></ul><ul><li>Emergence as an MNC </li></ul><ul><li>Emergence as a Conglomerate </li></ul>
  8. 8. Theories of Merger <ul><li>Efficiency Theory </li></ul><ul><li>Information & Signalling </li></ul><ul><li>Market Power </li></ul><ul><li>Tax Considerations </li></ul><ul><li>Agency Problems & Managerialism </li></ul><ul><li>Hubris Hypothesis </li></ul>
  9. 9. I Efficiency Theories <ul><li>Differential Efficiency Theory </li></ul><ul><li>Inefficient Management Theory </li></ul><ul><li>Synergy </li></ul><ul><li>Pure Diversification </li></ul><ul><li>Strategic Realignment </li></ul><ul><li>Undervaluation </li></ul>
  10. 10. A. Differential Efficiency Theory <ul><li>Differences in Efficiency </li></ul><ul><li>Predator Attitude </li></ul><ul><li>Easeness of Take-over </li></ul><ul><li>Distress Sale </li></ul><ul><li>Usage of Surplus Managerial Personnel </li></ul>
  11. 11. B. Inefficient Management Theory <ul><li>Poor Valuation </li></ul><ul><li>Shareholders Support </li></ul><ul><li>Market & Funding Agencies Support </li></ul><ul><li>Better Image for Both </li></ul>
  12. 12. C. Synergy <ul><li>Value, Premium Paid & Expenses of Merger </li></ul><ul><li>Financial Synergy </li></ul><ul><li>-Different Cash flows </li></ul><ul><li>-Different investment Opportunities </li></ul><ul><li>-Better Funding Externally </li></ul><ul><li>Specialised Funding Agencies provide funds </li></ul><ul><li>Operating Synergy </li></ul><ul><li>-Scale, Scope, indivisible Equipment, Production, R&D and marketing </li></ul><ul><li>Managerial Synergy </li></ul><ul><li>-Restructuring, Better Allotment of Authority, and Usage of Surplus Managerial Personnel </li></ul>
  13. 13. D. Pure Diversification <ul><li>Risk Management </li></ul><ul><li>Better Usage of Managerial Personnel </li></ul><ul><li>Better Exposure to Managerial Personnel </li></ul><ul><li>Better Visibility of the Company </li></ul><ul><li>Distributors Support </li></ul>
  14. 14. E.Strategic Realignment <ul><li>Changing Market </li></ul><ul><li>Changing Economic Environment </li></ul>
  15. 15. F. Undervaluation <ul><li>Perception of the Market </li></ul><ul><li>Underperformance </li></ul><ul><li>Target Company’s market Image </li></ul>
  16. 16. II Information & Signalling <ul><li>Coming into the news </li></ul><ul><li>Media Exposure </li></ul><ul><li>Higher Visibility </li></ul><ul><li>Market taking note </li></ul><ul><li>Hidden Valuation for the Target Company </li></ul><ul><li>Strength of the Acquiring Company </li></ul>
  17. 17. III Market Power <ul><li>Increasing Market share </li></ul><ul><li>Becoming a Trendsetter </li></ul><ul><li>Avoidance of Price War </li></ul><ul><li>Reduced Marketing Expenses </li></ul><ul><li>Avoidance of Duplicating Efforts </li></ul><ul><li>Rationalisation </li></ul>
  18. 18. IV Tax Considerations <ul><li>Assuming Losses of the Target Firm </li></ul><ul><li>Carry Over of Tax Credits </li></ul><ul><li>Avoidance of Dividend thus reducing Tax Liability </li></ul><ul><li>Saving Sales Tax in case of Vertical Integration </li></ul>
  19. 19. V.Agency Problem & Managerialism <ul><li>Shareholders are the Principal and the Managers are the Agents </li></ul><ul><li>When Managers act in their own interest, they benefit at the cost of Shareholders </li></ul><ul><li>By Takeover, such Managers are removed </li></ul><ul><li>Lesser Image in the Stock Market </li></ul><ul><li>Target for the Acquirer </li></ul><ul><li>Managerialism believes Takeover is the result of Agency Problem </li></ul>
  20. 20. VI Hubris Hypothesis <ul><li>Winners Curse make the Acquirer to be overconfident of his estimates </li></ul><ul><li>Heavy Premium is explained </li></ul><ul><li>Acquirer believes that he is a better judge than others </li></ul><ul><li>In a competitive tender offer, the urge to win comprises the Hubris </li></ul><ul><li>Happens due to the urge to avoid loss of face, getting publicity in the media, inexperience, overestimation of synergy, over enthusiasm of Investment Bankers etc. </li></ul>
  21. 21. THANK YOU