Mergers ‘n’ Acquisitions

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Learn what are mergers and acquisitions, their difference, company strategies and their line of action during the M&A process.

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Mergers ‘n’ Acquisitions

  1. 1. By ARJUN MATHUR
  2. 2. The Main IdeaOne plus one makes three: this equation is the special alchemy of a merger or anacquisition. The key principle behind buying a company is to create shareholder value overand above that of the sum of the two companies. Two companies together are morevaluable than two separate companies - at least, thats the reasoning behind M&A.merger happens when two firms, often of aboutthe same size, agree to go forward as asingle new company rather than remainseparately owned and operated. This kind ofaction is more precisely referred to as a "mergerof equals."e.g diamler-chrysler
  3. 3. ACQUISITION: When one company takes over anotherand clearly established itself as the new owner, thepurchase is called an acquisition. From a legal point ofview, the target company ceases to exist, the buyer"swallows" the business and the buyers stock continuesto be traded.
  4. 4. Horizontal merger- Two companies that are in direct competition andshare the same product lines and markets i.e. it results in the consolidationof firms that are direct rivals. E.g. Exxon and Mobil, Ford and Volvo,Volkswagen and Rolls Royce and LamborghiniVertical merger- A customer and company or a supplier and company i.e.merger of firms that have actual or potential buyer-seller relationship eg.Ford- Bendix, Time Warner-TBS.Conglomerate merger- generally a merger between companies which donot have any common business areas or no common relationship of anykind. Consolidated firm may sell related products or share marketing anddistribution channels or production processes.
  5. 5. THE FOLLOWING MOTIVES ARE CONSIDERED TO IMPROVE FINANCIALPERFORMANCE: Economy of scale Economy of scope Cross-selling Synergy Taxation Geographical or other diversification Resource transfer Vertical integration Absorption of Similar Businesses under Single Mangement
  6. 6. 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 proclaim that the action is a merger ofequals, even if its technically an acquisition. Being bought out oftencarries negative connotations, therefore, by describing the deal as amerger, deal makers and top managers try to make the takeover morepalatable.
  7. 7. Merger wavesThe economic history has been divided into Merger Waves based on themerger activities in the business world as: Period Name Facet 1889 - 1904 First Wave Horizontal mergers 1916 - 1929 Second Wave Vertical mergers Diversified 1965 - 1989 Third Wave conglomerate mergers Congeneric mergers; 1992 - 1998 Fourth Wave Hostile takeovers; Corporate Raiding 2000 - Fifth Wave Cross-border mergers
  8. 8. Mergers and Acquisitions in India: company acquired deal Hindalco Novelis $5,982 million Tata Steel Corus Group plc $12,000 million Dr. Reddys Labs Betapharm $597 million Ranbaxy Labs Terapia SA $324 million. Suzlon Energy Hansen Group $565 million Videocon Daewoo Electronics $729 million Corp. HPCL Kenya Petroleum $500 million Refinery Ltd.. VSNL Teleglobe $239 million.
  9. 9. When it comes to mergers andacquisitions deals in India , thetotal number was 287 from themonth of January to May in 2007.It has involved monetarytransaction of US $47.37 billion.Out of these 287 merger andacquisition deals, there have been102 cross country deals with atotal valuation of US $28.19 billion. The United Nations “WorldInvestment Report 2000”suggests that the recent increasein cross-border mergers andacquisitions is mainly due toincrease in the globalizationof markets
  10. 10. CASE STUDYJPMorgan Chase & Co.
  11. 11. JPMorgan Chase & Co. JPMorgan Chase Bank One (merged 2000) (acq. 2004) Chase J.P. Morgan & Co. (merged 2000) (formerly Morgan Banc One Corp. First Chicago NBDChase Manhattan Bank Guaranty Trust) (merged 1968) (merged 1995) (merged 1996) (merged 1959)
  12. 12. JPMorgan Chase & Co. has operations in 60 countries. It is a majorprovider of financial services with assets of $2 trillion, and the largestmarket capitalization and third largest deposit base U.S. bankinginstitution behind Wells Fargo and Bank of America. The hedge fund unitof JPMorgan Chase is the largest hedge fund in the United States with$53.5 billion in assets as of the end of 2009.JP Morgan Chase is one of the Big Four banks of the United States withBank of America, Citigroup and Wells FargoJPMorgan Chase‟s activities are organized, for managementreporting purposes, into six business segments :Investment BankRetail Financial ServicesCard ServicesCommercial BankingTreasury & Securities ServicesAsset Management
  13. 13. Bank One is the nations sixth-largest bank holdingcompany, with assets of $290 billion. It had morethan 51 million credit cards issued, and serves nearly7 million retail households and more than 20,000middle market customers. It also manages $175billion of clients investment assets.
  14. 14. STEPS… July 1stmarked the official “Day 1” for the competed mergerbetween JP Morgan Chase and Bank One. Prior to this day, at midnight, these two companies officiallymerged to form an integrated new financial giant. Every day, internal newsletters came out to all of the employees of JPMorgan Chase in order to inform everyone of the new steps being taken bysenior management towards the completion of the merger with Bank One Furthermore, a discussion board was created on JP Morgan Chase‟swebsite, in order for anyone internal to the firm to be able to ask questions,or to voice any concerns with regard to the merger. On April 22, 2004 the article heading “JP Morgan Chase reports 38%increase in earnings” made its way into the business section of the NewYork Times.
  15. 15. The net income was reported to be “$1.9 billion, or 92 cents ashare, at this point, compared with $1.4 billion, or 69 cents a share,”a year earlier Revenue for the first quarter was reported at “$8.98 billion, whichwas up 7 percent from $8.41 billion” a year earlier. This positive change in earnings, as well as an increase in sharevalue, also shows the stockholders‟ and stakeholders‟ support of themerger On June 3, 2004, the article headline now read “JP Morgan vicepresident Donald Layton says he will retire.” After the merger, he would have overseen the finance, riskmanagement and technology divisions, and would have reported tothe chief operating officer, James L. Dimon, now Bank Ones chiefexecutive.
  16. 16. Last but not least, on September 1, 2004, The New York Timesarticle heading in the business sections read “JP Morgan andBank One to merge mutual fund units.” JP Morgan Funds and One Group Mutual Funds became fullyintegrated into a single fund in February 2005. It is necessary to note that the words “merger” and “acquisition”are often interchanged, and in some instances, the “merger”between Bank One and JP Morgan Chase is referred to as JPMorgan Chase buying Bank One. The $58 billion deal was officially closed and empowered inJuly. Before this event could take place, the balance sheets andthe financial statements of JP Morgan Chase and Bank Oneneeded to be integrated into single accounting statements
  17. 17. REASONS OF ACQUISITION:- A JP Morgan Chase press release dated January 14, 2004 announced that JP Morgan Chase and Bank One had agreed to merge in a “strategic business combination establishing the second largest banking franchise in the United States, based on core deposits.” With earnings contributions that are balanced out between retail and 31 wholesale banking, the combined company is expected to be “well- positioned to achieve strong and stable financial performance And increase shareholder value through its balanced business mix, greater scale, and enhanced efficiencies and competitiveness.”
  18. 18. OWNERSHIP The combined company will be headed by William B. Harrison, 60, as the chairman and chief executive officer And by James Dimon, 47, as the president and chief operating officer, with Dimon to succeed Harrison as CEO in 2006 and Harrison continuing to serve as the chairman.
  19. 19. POST-MERGER The merged company will be known as JP Morgan Chase & Co. It would continue to trade on the New York Stock Exchange, under the symbol JPM, and its corporate headquarters will still be located in New York. The JP Morgan brand will continue to be used for the wholesale business; and the combined company will continue to use both brands (JP Morgan Chase and Bank One) in their respective markets and products.
  20. 20. "[The merger] will create one of the worlds great financialservices companies” -Harrison "the merger of Bank One and JP Morgan Chase makes tremendous sense strategically, operationally and financially” -Dimon
  21. 21. BENEFITS :- Bank One opened up to JP Morgan Chase a retail banking market JP Morgan Chase gained over 2000 branches and client exposure in areas in which it had not been as well known before As known in the financial industry, Citigroup it the biggest competitor of JP Morgan Chase. After the merger, JP Morgan Chase with Bank One as its ally, has a much bigger chance at beating its competition. Cut out potential competitor in its area
  22. 22. TWO GREAT BANKING COMPANIESJP Morgan Chase (as of Bank One (as of 9/30/03)9/30/03 ) 92,900 employees  71,200 employees 3rd largest bank  6th largest bank holding company in holding company in U.S.  U.S. $793 billion assets  $290 billion assets Operations in virtually  1,800 branches in 14 every state and more states than 50 countries
  23. 23. JP Morgan Bank One combined ChaseLoans $236,201 $141,710 $ 377,911Assets 792,700 290,006 1,082,706Managed assets 827,015 326,769 1,153,784Deposits $313,626 $163,411 $ 477,037Total Liabilities 747,743 267,595 1,015,338Total Equity 44,957 22,411 67,368All data in million dollars
  24. 24. Financial data in $ millions Financial data in $ millions Year 2004 2005 2006 2007 2008 2009 Revenue 43,097 54,533 61,437 71,372 67,252 100,434 EBITDA 7,140 13,740 22,218 Net Income 4,466 8,483 14,444 15,365 5,605 11,728 Employees 160,968 168,847 174,360 180,667 224,961 222,316
  25. 25. risk of monopolies. Consumers then become exploited andresources become misallocated if these mergers create major entrybarriers restricting competition, which can potentially lead to marketfailure and a decline in economic welfare.companies make predictions for growth, increased efficiency, andgreater profits. However, more often then not, those predictions proveto be over inflated, and this also leads to disappointments on the sideof investors, shareholders and the management involved in themerger.There are certain imperfections in the capital markets whichcontribute to imperfect information and at times even merger failures.The reasons for market imperfections include the fact that oftencorporate control does not work optimally, and that unsuccessfulmanagement is in place for a long time.
  26. 26. Despite negative studies and resistance from the economists, M&A‟s continue to be an important tool behind growth of a company. Reason being, the expansion is not limited by internal resources, no drain on working capital - can use exchange of stocks, is attractive as tax benefit and above all can consolidate industry - increase firms market power.Two thirds of the respondents say that high acquisition activity positivelyimpacts a company‟s market perception.Just as counselors say that marriages based on the premise that „she canchange him‟ do not have a stellar record, mergers and acquisitions are notthat diferent.

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