1. Financial Management
Topic Merger and Types of Merger
Submitted To
Roll No Name
04 Nirav Bhadra
14 Govind Dhuri
24 Kathireasan
34 Anita Pansare
44 Sachin Sangare
54 Khushal Thakkar
Appendix
Sr. No Topic Page No
1 What is Merger 3
2 Advantages of Merger 5
1
2. 3 Disadvantages of Merger 6
4 Procedure for Merger 6
5 Reasons of Merger 9
6 Types of Merger 11
7 Case Study 15
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3. What is a Merger?
A merger occurs when two companies combine to form a single
company. It is very similar to an acquisition or takeover, except
that the existing stockholders of both companies involved retain a
shared interest in the new corporation. By contrast, in an
acquisition one company purchases a bulk of a second
company's stock, creating an uneven balance of ownership in the
new combined company.
The entire merger process is usually kept secret from the general
public, and often from the majority of the employees at the
involved companies. Since the majority of attempts do not
succeed, and most are kept secret, it is difficult to estimate how
many potential mergers occur in a given year. It is likely that the
number is very high, however, given the amount of successful ones
and their desirability for many companies.
There are a number of reasons by two companies may want to
merge, some of which are beneficial to the shareholders and some
of which are not. One reason, for example, is to combine a very
profitable company with a losing company in order to use the
losses as a tax write-off to offset the profits, while expanding the
corporation as a whole.
Increasing a company's market share is another major use of the
merger, particularly among large corporations. By joining with
major competitors, a company can come to dominate the market
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4. it competes in, giving it a freer hand with regard to pricing and
buyer incentives. This form may cause problems when two
dominating companies merge, as it may trigger litigation regarding
monopoly laws.
Another type of popular merger brings together two companies
that make different, but complementary, products. This may also
involve purchasing a company that controls an asset that the
other company uses somewhere in its supply chain. Major
manufacturers buying out a warehousing chain in order to save on
warehousing costs, as well as making a profit directly from the
purchased business, is a good example of this. PayPal's merger
with eBay is another good example, as it allowed eBay to avoid
fees they had been paying, while tying two complementary
products together.
A merger is usually handled by an investment banker, who aids
in transferring ownership of the company through the strategic
issuance and sale of stock. Some have alleged that this
relationship causes some problems, as it provides an incentive for
investment banks to push existing clients towards merging, even in
cases where it may not be beneficial for the stockholders.
The process will no doubt change in the future, as dynamic
technologies allow for the development of a more streamlined
marketplace that manages to protect the privacy of interested
companies while linking up companies that could benefit from
combining.
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5. Advantages of Merger
A merger does not require cash.
A merger may be accomplished tax-free for both parties.
A merger lets the target (in effect, the seller) realize the
appreciation potential of the merged entity, instead of being
limited to sales proceeds.
A merger allows the shareholders of smaller entities to own a
smaller piece of a larger pie, increasing their overall net
worth.
A merger of a privately held company into a publicly held
company allows the target company shareholders to receive
a public company's stock, despite the liquidity restrictions of
SEC Rule 144a.
A merger allows the acquirer to avoid many of the costly and
time-consuming aspects of asset purchases, such as the
assignment of leases and bulk-sales notifications.
Of considerable importance when there are minority
stockholders is the fact that upon obtaining the required
number of votes in support of the merger, the transaction
becomes effective and dissenting shareholders are obliged
to go along.
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6. Disadvantages of Merger
Diseconomies of scale if business become too large, which
leads to higher unit costs.
Clashes of culture between different types of businesses can
occur, reducing the effectiveness of the integration.
May need to make some workers redundant, especially at
management levels - this may have an effect on motivation.
May be a conflict of objectives between different businesses,
meaning decisions are more difficult to make and causing
disruption in the running of the business.
Procedure of Merger
Stage I – Application to the court
Parties are for compromise and arrangement
A Company and its creditors
A Company and its members
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7. Application to the court can be made by the
Company/Liquidator/creditor/member
The Application must be accompanied by a scheme of
compromise/arrangement.
Stage II - Direction by the court
The court shall give direction for holding the meeting only if it
is satisfied that the scheme of arrangement is workable and
reasonable. Meeting shall be conducted in manner as
directed by court.
The court has no power to dispense with the holding of
meeting even though the shareholders might have
unanimously approved the scheme.
Stage III – Notice of compromise and arrangement
The notice shall be given by the court to CG. CG has right to
make a representation (i.e. objections, comments and
suggestions) in respect of compromise and arrangement.
Representation must be considered by the court but it is not
bound by representation.
Notice calling the meeting shall be sent to the members or
creditors
The Notice shall contain Terms and Effect of compromise or
arrangement, material interest of directors or manager and
interest of debenture trustees.
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8. Every director, manager and debenture trustee shall their
interest in the scheme and how their interest will be effected
by scheme.
Stage IV – Approval of the scheme by creditors/members-
conditions
The scheme must be approved by a majority in number of
creditors or members (any class of them) who are present
and voting.
The creditors or members (or any class of them) approving
the scheme must represent ¾ in value of creditors/members
who are present and voting.
The Scheme must be approved by equity shareholder as well
as preference shareholders. Such approval may be received
in a meeting of Equity and preference shareholders or in a
separate meeting as per order of the court.
Stage V – Court to be satisfied that scheme is bonafide
Compliance of direction of the court in holding the meeting,
provision of the companies act. Arrangement is a real and
was accepted by a competent authority.
Disclosure of material facts including latest financial position,
auditors report and other information.
Members or creditors or any class of them are fairly
represented by those who attended the meeting.
The majority is not coercing minority
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9. There is no oblique motive of the scheme.
Scheme is based on commercial consideration, workable,
feasible, financially viable and in public interest
Scheme is in interest of company, members or creditors.
Majority is acting reasonably, prudently and bonafide.
Stage VI – Sanction of the Scheme
It is discretion of the court to sanction or reject the scheme.
Stage VII – Filing of the order of the court with the Registrar
The Scheme becomes binding only on the filing of the court’s
order with the Registrar.
Reason for Mergers
There are generally two types of mergers: (a) horizontal - between
competing firms in the same sector and in the same part of the
value chain; and (b) vertical - between firms in the same sector
but in different parts of the value chain.
Mergers are often described as a marriage since it normally
involves two partners more or less equal in strength which have
decided to combine their managerial and operational functions to
form a new company with shared resources and corporate
objectives.
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10. There are a number of reasons that companies pursue mergers:
Industry Consolidation
Most industries are fragmented and consist of many competitors. A
merger is a tactical move that enables a company to reposition
itself (with a merger partner) into a stronger
operational and competitive industry
position.
Improve Competitive Position
One important reason that companies
combine is to improve their competitive
market position. Merging with a competitor
is an excellent way to improve a
company's position in the marketplace. It
reduces competition, and allows the
combined firm to use its resources more
effectively.
Defensive Move
A merger is an attractive tactical
move in any economic environment
- particularly in a cyclical down-turn
where a merger can be a strong
defensive move.
Synergies
Reduce costs and improve earnings.
One of the most common reasons for a merger are synergies -
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11. allowing two companies to work more
efficiently together than either would
separately. Such synergies may result from
the ability to exploit economies of scale,
eliminate duplicated functions, share
managerial expertise and raise capital. Generally, the assumption
is that larger firms are more cost-effective than are smaller
companies (i.e. exhibit "economies of scale").
Market / Business / Product Line Issues
Often mergers occur simply because one firm is in a market that
another wants to enter or in order to gain a critical size that can
justify the expense of geographic expansion. All of the target firm's
experience and resources (the employees' expertise, business
relationships, etc.) are available by merging with the other party.
Whether the market is a new product, a business line, or a
geographical region, market entry or expansion is a powerful
reason for a merger.
Closely related to these issues are product line issues. A firm may
wish to expand, balance, fill out or diversify its product lines.
Acquire Resources and Skills
One firm may simply wish to obtain access to the resources of
another company or to combine the resources of the two
companies. These resources may be tangible resources such a
plant and equipment, or they may be intangible resources such as
trade secrets, patents, copyrights, leases, etc., or they may be
talents of the target company's employees.
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12. Types of Mergers
Horizontal Mergers
• Horizontal mergers occur when two companies sell similar
products to the same markets. A merger between Coca-
Cola and the Pepsi beverage division, for example, would be
horizontal in nature. The goal of a horizontal merger is to
create a new, larger organization with more market share.
Because the merging companies' business operations may
be very similar, there may be opportunities to join certain
operations, such as manufacturing, and reduce costs.
Example
• A merger between Coca-Cola and the Pepsi beverage
division, for example, would be horizontal in nature. The goal
of a horizontal merger is to create a new, larger organization
with more market share. Because the merging companies'
business operations may be very similar, there may be
opportunities to join certain operations, such as
manufacturing, and reduce costs.
Vertical Mergers
• A vertical merger joins two companies that may not compete
with each other, but exist in the same supply chain. An
automobile company joining with a parts supplier would be
an example of a vertical merger. Such a deal would allow
the automobile division to obtain better pricing on parts and
have better control over the manufacturing process. The
parts division, in turn, would be guaranteed a steady stream
of business.
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13. Example
A vertical merger joins two companies that may not
compete with each other, but exist in the same supply
chain. An automobile company joining with a parts
supplier would be an example of a vertical merger. Such a
deal would allow the automobile division to obtain better
pricing on parts and have better control over the
manufacturing process. The parts division, in turn, would be
guaranteed a steady stream of business.
Synergy, the idea that the value and performance of two
companies combined will be greater than the sum of the
separate individual parts is one of the reasons companies
merger.
Market Extension Mergers
The main benefit of a market extension merger is to help
two organizations that may provide similar products and
services grow into markets where they are currently weak.
Rather than try to establish a retail presence in Europe,
Wal-Mart could merge with a European retailer that is
already successful and has good brand recognition. Even
though the two organizations are both big-box retailers
selling similar products, they have found success in
different parts of the world. As a single organization, they
have a diverse, global presence.
Example
A very good example of market extension merger is the
acquisition of Eagle Bancshares Inc by the RBC Centura.
Eagle Bancshares is headquartered at Atlanta, Georgia and
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14. has 283 workers. It has almost 90,000 accounts and looks after
assets worth US $1.1 billion.
Eagle Bancshares also holds the Tucker Federal Bank, which is
one of the ten biggest banks in the metropolitan Atlanta
region as far as deposit market share is concerned. One of
the major benefits of this acquisition is that this acquisition
enables the RBC to go ahead with its growth operations in
the North American market.
With the help of this acquisition RBC has got a chance to deal
in the financial market of Atlanta , which is among the
leading upcoming financial markets in the USA. This move
would allow RBC to diversify its base of operations.
Product Extension Mergers
Two companies may merge when they sell products into
different niches of the same markets. A manufacturer of high-
end stoves may merge with a company that makes budget-
conscious models. The combined organization now has a
complete product line that spans various price points.
Example
The acquisition of Mobilink Telecom Inc. by Broadcom is a
proper example of product extension merger. Broadcom
deals in the manufacturing Bluetooth personal area network
hardware systems and chips for IEEE 802.11b wireless LAN.
Mobilink Telecom Inc. deals in the manufacturing of product
designs meant for handsets that are equipped with the
Global System for Mobile Communications technology. It is
also in the process of being certified to produce wireless
networking chips that have high speed and General Packet
Radio Service technology. It is expected that the products of
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15. Mobilink Telecom Inc. would be complementing the wireless
products of Broadcom.
Conglomerate Mergers
• Conglomerate mergers occur when two organizations sell
products in completely different markets. There may be little
or no synergy between their product lines or areas of business.
The benefit of a conglomerate merger is that the new, parent
organization gains diversity in its business portfolio. A shoe
company may join with a water filter manufacturer in
accordance with a theory that business would rarely be
down in both markets at the same time. Many holding
companies are built upon this theory.
Example
A leading manufacturer of athletic shoes, merges with a
soft drink firm. The resulting company is faced with the
same competition in each of its two markets after the
merger as the individual firms were before the merger. One
example of a conglomerate merger was the merger
between the Walt Disney Company and the American
Broadcasting Company
Case Study of HDFC Bank and Centurion Bank of Punjab
The largest merger and perhaps the beginning of the
consolidation wave in the BFSI sector.
Bank’s main task was to harmonize the accounting policies
and, as a result, HDFC Bank took a hit of Rs. 70 Crs to
streamline the policies of erstwhile CBoP itself.
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16. Of this 70% went toward the harmonization of accounting
policies relating to loan- loss provisioning and depreciation of
assets,
And the balance 30% reserves write-offs were toward the
merger- related restructuring costs like stamp duty, HR and IT
integration expenses.
The cost/income ratio of the merged entity has increased to
around 56% from 50% levels for standalone HDFC Bank
HDFC Bank has retained almost all the employees of CBoP
and expects to achieve full synergies and efficiencies, in
terms of the restructured HR and IT processes, in the next 2-3
quarters
This merger with CBoP would result in the combined entity
having 1148 branches at present, which is the largest
branch distribution network for a private bank in India This
apart, HDFC Bank would gain dominance in states like
Punjab, Haryana, Delhi, Maharashtra and Kerala.
The merger will add close to 394 branches to HDFC Bank’s
network of 750 branches, almost 50% increase in the existing
network, while adding close to 19% to its asset base
On the product portfolio side, both the banks have a strong
foothold in vehicle financing, which is a natural synergy
CBoP has a strong and experienced management team. The
management has demonstrated its capability to integrate
diverse organizations by successfully reaping synergies of the
merger with Bank of Punjab. CBoP team has strengthen HDFC
Bank’s management bandwidth and consequently the latter
added international banking to its services kitty.
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