MOHIT PANCHALRIYA MAJOKA

ACQUISITION

WHAT IS ACQUISITION ? An acquisition is a corporate action in which a company buys most, if not all,

of another firm's ownership stakes to assume control of it. An acquisition occurs when a buying company obtains more than 50%

ownership in a target company.

As part of the exchange, the acquiring company often purchases the target company's stock and other assets, which allows the acquiring company to make decisions regarding the newly acquired assets without the approval of the target company’s shareholders.

Acquisitions can be paid for in cash, in the acquiring company's stock or a combination of both.

WHY MAKE AN ACQUISITION ? To achieve economies of scale, greater market share, increased synergy, cost reductions, or new

niche offerings.

To expand their operations to another country.

Acquisitions are often made as part of a company's growth strategy when it is more beneficial to take over an existing firm's operations than it is to expanding on its own.

To find higher growth and new profits, the large firm may look for promising young companies to acquire and incorporate into its revenue stream.

To reduce excess capacity, eliminate the competition, or focus on the most productive providers.

If a new technology emerges that could increase productivity, a company may decide that it is most cost-efficient to purchase a competitor that already has the technology. 

DIFFERENT TYPES OF ACQUISITION There are mainly two types of Acquisition:◦ Friendly ◦ Hostile

FRIENDLY ACQUISITION:

Friendly acquisitions occur when the target firm expresses its agreement to be acquired. 

Friendly acquisitions often work towards a mutual benefit for both the acquiring and the target companies.

The companies develop strategies to ensure that the acquiring company purchases the appropriate assets, including the review of financial statements and other valuations, and that the purchase accounts for any obligations that may come with the assets.

Once both parties agree to the terms and meet any legal stipulations, the purchase moves forward.

DIFFERENT TYPES OF ACQUISITION HOSTILE ACQUISITION:

Hostile acquisitions don't have the same agreement from the target firm, and the acquiring firm must actively purchase large stakes of the target company to gain a majority.

Hostile takeovers occur when the target company does not consent to the acquisition.

In this case, the acquiring company must attempt to gather a majority stake to force the acquisition to go forward.

To acquire the necessary stake, the acquiring company can produce a tender offer designed to encourage current shareholders to sell their holdings in exchange for an above-market value price.

To complete, a 30-day acquisition notice must be filed with the Securities and Exchange Commission (SEC) with a copy directed to the target company's board of directors.

WAYS OF FINANCING AN ACQUISITION Private equity financing : It takes the form of venture capital – a

professionally managed pool of funds that invest in high-growth opportunities – or private equity firms. 

Equity financing : It involves the buyer company selling securities in order to raise money, then using that money for both the acquisition transaction and to provide additional cash for the new company.

Bank financing : It takes a variety of forms. The most common is to receive a cash flow-based loan, in which case the bank scrutinizes the cash flow, debt load and profit margins of the target company.

Asset-based financing : It is another option. In an asset-based loan, the lender looks at the collateral (the inventory, receivables and fixed assets of the target firm) rather than the cash flow and debt loan.

ACQUISITION PROCESS  Preliminary Assessment or Business Valuation- In this process of

assessment not only the current financial performance of the company is examined but also the estimated future market value is considered.

Phase of Proposal- After complete analysis and review of the target firm's market performance, in the second step, the proposal for merger or acquisition is given.

Exit Plan- When a company decides to buy out the target firm and the target firm agrees, then the latter involves in Exit Planning.

Structured Marketing- After finalizing the Exit Plan, the target firm involves in the marketing process and tries to achieve highest selling price.

Stage of Integration- In this final stage, two firms are integrated through acquisition.

Preliminary Assessment or Business Valuation

Phase of Proposal

Exit PlanStructured Marketing

Stage of Integration

ACQUISITION PROCESS 

Impact of Acquisitions● Employees: Acquisitions impact the employees or the workers the

most. It is a well known fact that whenever there is a merger or an acquisition, there are bound to be lay offs.

● Impact on top level management: Impact of acquisitions on top level management may actually involve a "clash of the egos". There might be variations in the cultures of the two organizations.

● Shareholders of the acquired firm: The shareholders of the acquired company benefit the most. The reason being, it is seen in majority of the cases that the acquiring company usually pays a little excess than it what should. Unless a man lives in a house he has recently bought, he will not be able to know its drawbacks.

● Shareholders of the acquiring firm: They are most affected. If we measure the benefits enjoyed by the shareholders of the acquired company in degrees, the degree to which they were benefited, by the same degree, these shareholders are harmed

ADVANTAGES & DISADVANTAGES OF ACQUISITION

ADVANTAGES● Increased market share.● Increased speed to market● Lower risk comparing to develop new products.● Increased diversification● Avoid excessive competition

DISADVANTAGES

● Inadequate valuation of target.● Inability to achieve synergy.● Finance by taking huge debt.

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DIFFERENCE BETWEEN MERGER & ACQUISITION:

MERGERi. Merging of two organization

in to one.ii. It is the mutual decision.iii. Merger is expensive than

acquisition(higher legal cost).iv. Through merger shareholders

can increase their net worth.v. It is time consuming and the

company has to maintain so much legal issues.

vi. Dilution of ownership occurs in merger.

ACQUISITIONi. Buying one organization by

another.ii. It can be friendly takeover or

hostile takeover.iii. Acquisition is less expensive

than merger.iv. Buyers cannot raise their

enough capital.v. It is faster and easier

transaction.vi. The acquirer does not

experience the dilution of ownership.

EXAMPLES OF ACQUISITION Tata Group Acquired Corus, October 2006Deal size: $12.98 billion, Country: United Kingdom● Tata Steel is India’s second largest steel company with a

capacity of producing 3.8 million tonnes of crude steel. It has most of its plant in Jamshedpur, Jharkhand. It is considered as one of the best companies in producing steel. In October 2006, Tata Steels acquired Corus with an outstanding price of $12.98 billion.

● In February, 2010, Bharti Airtlel added 180 million new customers in its list by acquiring an African Mobile Network provider called Zain Africa. This acquisition took place against an amount of $10.7 billion.

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Bharti Airtel acquired Zain Africa, February 2010Deal size: $10.7 billion, Country: Kenya