mergers

1. Presented by:
Roja M.V
Nanaiah T.G
Nandish H.M
Madhu S.A

2.  Efficiency theories
1. Differential managerial efficiency
2. Inefficient management
3. Synergy
4. Pure diversification
5. stratergic Realignment to changing environment
6. Hubris (winner curse)
7. Q-ratio

3. Cont.…
8. Information and signaling
9. Agency problem
10. Market share/power
11. Managerialism
12. Tax consideration

4.  DIFFERENTIAL EFFICIENCY
It is also called managerial synergy or managerial efficiency .
According to this theory
• if the management of firm A is more efficient than the
management of firm B and after firm A acquires firm B the
efficiency of firm B is brought upto the level of efficiency of firm
A .Efficiency is increased by merger.
• Basis for horizontal merger
• It may be social gain as well as private gain. Lastly level of
efficiency in the economy will be increased

5.  INEFFICIENT MANAGEMENT THEORY
• This is similar to the concept of managerial efficiency but it
is different in that inefficient management .
• Basis for mergers between firms when unrelated business i.e.,
conglomerate merger.
• The management in control is not able to manage asset
efficiently ,mergers with another firm can provide the necessary
supply of managerial capabilities .
• In this replacement of incompetent managers were the sole
motive for mergers and also manager of the target company
will be replaced

6.  SYNERGY
Synergy refers to the type of reactions that occur when two substances or factors
combine to produce a greater effect together than that which the sum of the two
operating independently could account for.
The ability of a combination of two firms to be more profitable than the two firms
individually.
In this companies can create great shareholders value than if they are operated
separately.
There are two types of synergy:
• Operating synergy
• Financial synergy

7.  Operating synergy
Operating synergy is improved by Economies of scale and Economies of
scope .
Economies of scale :
 it means reduction of average cost with increase In volume or
production. Because of fixed overhead expenses such as steel
,pharmaceutical, chemical and aircraft manufacturing .
 In that merging of company in same line of business such as horizontal
Merger it eliminates duplication and concentrate a great volume of activity
in a available facility .
 In vertical mergers com expands forward towards the customer or
backward towards the source of raw material (suppliers). By acquiring
com control over the distribution and purchasing bring in economies of
scale .

8. Cont.…..
Economies of scope:
Using a specific set of skill or an asset currently employed in producing a specific
product or service .
Operating synergy arise from improving operating efficiency through E/C’s of
scale and scope by acquiring a customers ,suppliers ,and compititors.

9.  Financial synergy
 Impact of merger on cost of capital of acquiring firms or the newly formed firm .
Cost of capital can be reduced with financial synergy.
 Financial synergy occurs as a result of the lower costs of internal financing
versus external financing. A combination of firms with different cash flow
positions and investment opportunities may produce a financial synergy effect
and achieve lower cost of capital.
 Tax saving is another considerations. When the two firms merge, their
combined debt capacity may be greater than the sum of their individual
capacities before the merger.
 The financial synergy theory also states that when the cash flow rate of the
acquirer is greater than that of the acquired firm, capital is relocated to the
acquired firm and its investment opportunities improve.

10.  PURE DIVERSIFICATION
 Diversification through mergers is commonly preferred to diversification
through internal growth, given that the firm may lack internal resources
or capabilities requires.
 It may be done including demand for diversification by managers and
other employees ,preservation of organizational and reputational capital,
financial and tax advantage.
 It is undertaken to shift from the acquiring com core product line or
market into those that have higher growth prospect .
Research reveals that investors do not benefited from diversification .
Investors perceive com diversified in unrelated areas as riskier because they
are difficult for mgt to understand.

11.  STRATEGIC REALIGNMENT To CHANGING
ENVIRONMENT.
• It suggests that the firms use the strategy of M&As as ways to rapidly
adjust to changes in their external environments in regulatory framework
and technological innovation . When a company has an opportunity of
growth available only for a limited period of time slow internal growth may
not be sufficient.
• Technical changes contributes to new products ,industries , market .
• The use of IT technology is likely to encourage mergers which are less
expensive and faster way to acquire new technology and owner knows
that how to fill a gap in current offering or to entering new business .

12.  HUBRIS HYPOTHESIS
Hubris hypothesis implies that managers look for acquisition
of firms for their own potential motives and that the
economic gains are not the only motivation for the
acquisitions. This theory is particularly evident in case
of competitive tender offer to acquire a target. The urge to win
the game often results in the winners curse refers to the ironic
hypothesis that states that the firm which over estimates the
value of the target mostly wins the contest.

13.  Q-ratio
 The ratio relates the market value of shares to replacement
value of asset.
 Inflation and high interest rate can depress share prices will
below the book value of the firm , high inflation may also
raise replacement cost above the book value of asset .
 Mergers are undertaken when market value of com is less
than replacement cost of its asset

14. Information and signaling
The announcement of mergers negotiation or a
tender offer may convey information or signals
to market participants that future cash flows are
likely to increase and that future will increase in
future values

15.  Agency problem
 Takeover and mergers would be a threat because of inefficiency or agency
problem .
 When it takes place where there is a divergence between the goals of
management and owners


16.  Market power /share
Mainly mergers are undertaken to improve ability to
set and maintain prices above competitive level .
Increase in the size of the firm is expected to result in
market share . The decrease in the number of firm
will increase recognized interdependence

17.  Managerialism
Managers may increase the size of the firm
through mergers in the beliefs that their
compensation is determined by size but in
practice management compensation is
determined by profitability

18.  Tax consideration
 Unused net operating loss of the target com and the
revaluation or writing up of acquired asset and the tax free
status of the deal influence M&A .
 Loss carryforward can be setoff against the combined firm
taxable income.