Merger & Aquisition.ppt


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Merger & Aquisition.ppt

  1. 1.  An acquisition, also known as a takeover or a buyout, is the buying of one company (the ‘target’) by another.  Acquisition usually refers to a purchase of a smaller firm by a larger one. Sometimes, however, a smaller firm will acquire management control of a larger or longer established company and keep its name for the combined entity. This is known as a reverse takeover
  2. 2.  An acquisition may be private or public, depending on whether the acquire or merging company is or isn't listed in public markets.  Another type of acquisition is reverse merger, a deal that enables a private company to get publicly listed in a short time period.
  3. 3.  An acquisition may be friendly or hostile. Whether a purchase is perceived as a friendly or hostile depends on how it is communicated to and received by the target company's board of directors, employees and shareholders. It is quite normal though for M&A deal communications to take place in a so called 'confidentiality bubble' whereby information flows are restricted due to confidentiality agreements (Harwood, 2005).
  4. 4.  Combining of two or more companies generally by offering the stock holders of one company securities in the acuiring company in exchange for the surrender of their stock.  Merger is basically when two companies become one .This decision is usually mutual between both firm.
  6. 6.  The merger between two companies that are in direct competition and share the same product lines and markets. OR  A merger occuring between companies producing similar goods or offering similar services.
  7. 7.  Vertical mergers refer to the combination of two entities at different stages of the industrial or production process. For example, the merger of a company engaged in the construction business with a company engaged in production of brick or steel would lead to vertical integration.
  8. 8.  Market extension merger: Merger between two companies that sale the same products in different markets.  Product extension merger: Merger between two companies selling different but related products in same market.
  9. 9.  A conglomerate merger is a merger between two entities in unrelated industries. The principal reason for a conglomerate merger is utilization of financial resources, enlargement of debt capacity,and increase in the value of outstanding shares by increased leverage and earnings per share, and by lowering the average cost of capital.
  10. 10.  These are mergers between entities engaged in the same general industry and somewhat interrelated, but having no common customer-supplier relationship.
  11. 11.  In a typical merger, the merged entity combines the assets of the two companies and grants the shareholders of each original company shares in the new company based on the relative valuations of the two original companies. However, in the case of a ‘cash merger’, also known as a ‘cash-out merger’, the shareholders of one entity receive cash in place of shares in the merged entity. This is a common practice in cases where the shareholders of one of the merging entities do not want to be a part of the merged entity.
  12. 12.  A triangular merger is often resorted to for regulatory and tax reasons. As the name suggests, it is a tripartite arrangement in which the target merges with a subsidiary of the acquirer.
  13. 13.  A merger happens when two firms 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". The firms are often of about the same size. Both companies' stocks are surrendered and new company stock is issued in its place.For example, in the 1999 merger of Glaxo Wellcome and SmithKline Beecham, both firms ceased to exist when they merged, and a new company, GlaxoSmithKline, was created. While An Acquisition is the purchase of one business or company by another company.
  14. 14. Various methods of financing an M&A deal exist- Cash : Payment by cash. Such transactions are usually termed acquisitions rather than mergers because the shareholders of the target company are removed from the picture and the target comes under the (indirect) control of the bidder's shareholders. Stock : Payment in the form of the acquiring company's stock, issued to the shareholders of the acquired company at a given ratio proportional to the valuation of the latter.
  15. 15.  Economy of scale: This refers to the fact that the combined company can often reduce its fixed costs by removing duplicate departments or operations, lowering the costs of the company relative to the same revenue stream, thus increasing profit margins.  Economy of scope: This refers to the efficiencies primarily associated with demand-side changes, such as increasing or decreasing the scope of marketing and distribution, of different types of products.  Increased revenue or market share: This assumes that the buyer will be absorbing a major competitor and thus increase its market power (by capturing increased market share) to set prices
  16. 16.  Cross-selling: For example, a bank buying a stock broker could then sell its banking products to the stock broker's customers, while the broker can sign up the bank's customers for brokerage accounts. Or, a manufacturer can acquire and sell complementary products.  Taxation: A profitable company can buy a loss maker to use the target's loss as their advantage by reducing their tax liability. In the United States and many other countries, rules are in place to limit the ability of profitable companies to "shop" for loss making companies, limiting the tax motive of an acquiring company.  Geographical or other diversification: This is designed to smooth the earnings results of a company, which over the long term smoothens the stock price of a company, giving conservative investors more confidence in investing in the company. However, this does not always deliver value to shareholders
  17. 17.  Resource transfer: resources are unevenly distributed across firms (Barney, 1991) and the interaction of target and acquiring firm resources can create value through either overcoming information asymmetry or by combining scarce resources.  Vertical integration: Vertical integration occurs when an upstream and downstream firm merge (or one acquires the other). There are several reasons for this to occur. One reason is to internalise an externality problem. A common example of such an externality is double marginalization. Double marginalization occurs when both the upstream and downstream firms have monopoly power and each firm reduces output from the competitive level to the monopoly level, creating two deadweight losses. Following a merger, the vertically integrated firm can collect one deadweight loss by setting the downstream firm's output to the competitive level. This increases profits and consumer surplus. A merger that creates a vertically integrated firm can be profitable.
  18. 18. Reasons why mergers fail….. >> Culture shock: Can you imagine IBM buying Google? The 'suit' culture of IBM will not at all jell with the casual approach that Google has, and a merger of this sort would fail miserably. >> 2+2>4 attitude: This is a merger between #2 and #3 trying to take over #1 by merging. Typically, the customers of both #2 and #3 get confused and move to #1, leaving the merged entity in the lurch. >> No plan: Two companies try to sometimes merge and see if they can work out something in the long run. But if both of them didn't have a plan to begin with, then they may end up not having a plan even when they join. >> Poor integration: In IT, integration between products matters a lot, and a company that tries to grow by acquiring many companies tends to fail simply because it looks like a jigsaw puzzle that has not been put together properly.
  19. 19.  >> People trouble: Many companies tend to tell employees about mergers way too late in the day, and so confused people tend to leave and the ones who leave first are the smartest ones. >> Lack of enthusiasm: Usually you hear of a brilliant start-up that was acquired by a respected brand and one year later, the founder of the start-up decides to 'pursue other interests' and from then on, the project runs out of steam. This is partially related to culture shock listed above, but there is one difference the failure here happens more due to lack of enthusiasm because the bright idea has become staid as time passes. >> Who needs you? Sometimes, two companies decide to merge a little too late, when both their technologies have been outdated and surpassed by a superior force. A merger at such a time is not bound to produce the best of results. In fact, the top gun company may actually benefit while the two merged companies struggle to find their collective feet. >> Poor decisions: Who will do what at the top management level once the merger happens? Will the CFO of the bigger entity become the CFO of the combined entity even if the CFO of the smaller company is more capable? Put the wrong CFO on top and he will botch up, while the better CFO resigns in disgust and moves on to a competitor. >> Ego clashes: This is ultimately one of the reasons why a merger fails. People who have been given short shrift, or who perceive it as such (let's face it, most of us are legends in our own minds) are bound to try to cause friction, leading to a failed me
  20. 20.  Top M&A deals worldwide by value (in mil. USD) from 2000 to 2010 Rank Year Purchaser Purchased Transaction value (in mil. USD) 1 2000 America Online Inc. Time Warner 164,747 2 2000 Glaxo Wellcome Plc. SmithKline Beecham Plc. 75,961 3 2004 Royal Dutch Petroleum Co. Shell Transport & Trading Co 74,559 4 2006 AT&T Inc BellSouth Corporation 72,671 5 2001 Comcast Corporation AT&T Broadband & Internet Svcs 72,041 6 2009 Pfizer Inc. Wyeth 68,000 7 2002 Pfizer Inc. Pharmacia Corporation 59,515
  21. 21. Mergers and acquisition deals, particularly the horizontal M&As, may affect the competitive situations in the industry.Since M&As have the potential to cut down the competition significantly,they are on the active scanner of Competition Commission on India (CCI). Mergers and acquisitions also affect the shareholders of the combining firms. This brings the M&As under the SEBI’s purview. Due to the restructuring of the firms and its tax impact, the Companies Act and the Income Tax Act regulations also come into the picture in an M&As deal.
  22. 22. Due to this multi-pronged impact of M&A deals , a comprehensive legal framework has evolved in India to regulate such deals.This regulation is mainly from the viewpoints of the impact of the deal on the-competitive position in the industry,shareholder,tax aspects,etc.The M&A activities in the Indian market are regulated by the provisions contained in the following: 1. Indian Companies Act,1956 2. Competition Act , 2002 3. Income Tax Act,1961 4. The Securities Exchange Board of India Regulations, 1997 5. Listing agreement of stock exchanges 6. Takeover code of SEBI
  23. 23. S.No. Acquirer Target Company(Company) Indutry Deal ($ million) 1 Tata steel Corus Group plc (UK) Steel 12,000 2 Hindalco Novelis (Canada) Steel 6,000 3 Videocon Daewoo Electronics Corp. (Korea) Electronics 730 4 Dr.Reddy’s Labs Betapharm (Germany) Pharmaceutical 597 5 Suzlon Energy Hansen Group (Belgium) Energy 565
  24. 24. 6 HPCL Kenya Petroleum Refinery Ltd (Kenya) Oil and Gas 500 7 Ranbaxy Labs Terapia SA (Romania) Pharmaceutical 324 8 Tata Steel Natsteel (Singapore) Steel 293 9 Videocon Thomson SA (France) Electronics 290 10 VSNL Teleglobe (Canada) Telecom 293