Mergers Acquisitions and Corporate Restructuring-II

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<p>MERGERS MODULE 1## Mergers and Acquisition : Important terms. Merger: the share holders of two companies deciding to pool the resources of the companies under a common entity to do the business activity is called merger. Two companies agree to go forward as a single company rather than separately owned and operated. Both companies stocks are surrendered and new stock is issued in its place. TATA-CORUS-$13 Billion Daimler- Benz &amp; Chrysler -&gt; Daimler Chrysler. It is also called as Amalgamation. ##Mergers or amalgamation may take two forms Merger through absorption: absorption is a combination of 2 or more companies into an existing co. All cos except one lose their identity in a merger through absorption. Ex: Absorption of Tata Fertilizer Ltd (TFL) by Tata Chemicals LTd (TCL) TCL an acquiring co (buyer); survived after merger while TFL an acquired co ( a seller) ceased to exist. TFL transferred its assets, liabilities and shares to TCL under the scheme of merger. ##Mergers through consolidation Consolidation: two or more companies combine to form a new company. In this form of merger all companies are legally dissolved and a new entity is created. In a consolidation, the acquired company transfers its assets, liabilities and shares to the new company for cash or exchange of share. Ex : Merger or amalgamation of Hindustan Computers Ltd, Hindustan Instruments Ltd, Indian software co Ltd and Indian Reprographics ltd in 1986 to an entirely new co, called HCL ltd. ##Amalgamation: is used when two or more companies carries on similar business go into liquidation and a new company is formed to take over their business. Takeover: a takeover generally involves the acquisition of a certain stake in the equity capital of a company which enables the acquirer to exercise control over the affairs of the company. Ex: HINDALCO took over INDAL by acquiring a 54% stake in INDAL from its overseas parent, Alcan. However, INDAL was merged into HINDALCO. ##WHAT IS CORPORATE RESTRUCTURING Corporate restructuring refers to a broad array of activities that expand or contract a firms operations or substantially modify its financial structure or bring about a significant change in its organisational structure and internal functioning.</p> <p>Inter alia, it includes activities such as mergers, purchases of business units, takeovers, slump sales, demergers, leveraged buyouts, organizational restructuring, and performance improvement initiatives. We will refer to these activities collectively as mergers, acquisitions, and restructuring (a widely used, though not a very accurate, term) or just corporate restructuring. Sacrificing some rigour, these activities may be classified as shown next ##Top ten acquisition made by Indian companies.Acquirer Tata steel Hindal co Target co Corus group Novels Country targeted UK Canada Korea German Belgium Kenya Romania singapore france canada Deal value $ million 12000 5982 729 597 565 500 324 293 290 239 Industries steel steel steel pharmatical Energy Oil gas pharmatical steel electronics telecon</p> <p>Video con Daewoo elec co. Dr. reddys Beta pharmatical labs Suzlon energy HPCL Hansen group Kenya petroleum refinery Ltd</p> <p>Rambaxy Terapia S A labs Tata steel Nat steel</p> <p>Video con Thomson SA VSNL Teleg lobe</p> <p>Near $4500 million. More than double the amount involved in US companies acquisition of Indian companies.</p> <p>CORPOCategories of Mergers: 1. Horizontal . 3. Conglomerate. 2. Vertical. ##Horizontal merger This is a combination of two or more firms in similar type of production, distribution or area of business. Horizontal merger involves two firms operating and competing in the same kind of business activity. MOTIVES: 1. Elimination or reduction in competition 2. Putting an end to price cutting 3. Economies of scale in production 4. Research and development 5. Marketing and management. Ex: combining of book publishers or two mufg cos to gain dominant mkt share. (Mittals Strategy) The acquisition of American Motors by Chrysler in 1987 represents a horizontal combination or merger. Horizontal merger increase monopoly power of the combined firm. ##Vertical mergers</p> <p>Vertical merger occurs when a firm acquires firms Upstream from it or firms downstream from it. In case of an Upstream merger it extends to the firms supplying raw materials and to those firms that sell eventually to the consumer in the event of a down-stream merger. when co combines with the supplier of materials it is called backward merger and when it combines with the customer it is known forward merger. EX: Vertical Forward Integration Buying a customer Indian Rayons acquisition of Madura Garments along with brand rights Vertical Backward Integration Buying a supplier IBMs acquisition of Daksh Merits: 1. Low buying cost of materials 2. Lower distribution costs 3. Assured supplies and market 4. Increasing or creating barriers to entry for potential competitors 5. Placing them at a cost disadvantage. ##Carnegie Steel One of the earliest, largest and most famous examples of vertical integration was the Carnegie Steel company. The company controlled not only the mills where the steel was manufactured but also the mines where the iron ore was extracted, the coal mines that supplied the coal, the ships that transported the iron ore and the railroads that transported the coal to the factory, the coke ovens where the coal was coked, etc. The company also focused heavily on developing talent internally from the bottom up, rather than importing it from other companies. American Apparel American Apparel is a fashion retailer and manufacturer that actually advertises itself as vertically integrated industrial company. The brand is based in downtown Los Angeles, where from a single building they control the dyeing, finishing, designing, sewing, cutting, marketing and distribution of the company's product. The company shoots and distributes its own advertisements, often using its own employees as subjects. It also owns and operates each of its retail locations as opposed to franchising. According to the management, the vertically integrated model allows the company to design, cut, distribute and sell an item globally in the span of a week. [9] Since the company controls both the production and distribution of its product, it is an example of a balanced vertically integrated corporation. Oil industry Oil companies, both multinational (such as ExxonMobil, Royal Dutch Shell, or BP) and national (e.g. Petronas) often adopt a vertically integrated structure. This means that they are active all the way along the supply chain from </p> <p>locating crude oil deposits, drilling and extracting crude, transporting it around the world, refining it into petroleum products such as petrol/gasoline, to distributing the fuel to company-owned retail stations, where it is sold to consumers. ##Conglomerate merger Conglomerate merger represents a merger of firms engaged in unrelated lines of business. Rationale for such merger: Diversification of risk 3 types of Conglomerate merger a) Product-extension mergers broaden the product lines of firms. These are mergers between firms in related business activities and may also be called concentric mergers. Product Extension: New product in Present territory P&amp;G acquires Gillette to expand its product offering in the household sector and smooth out fluctuations in earning. b) A geographic market-extension merger involves two firms whose operations have been conducted in non overlapping geographic areas. Ex: Pizza Hut a fast food chain restaurant centered in USA, sought to wow Indian customers by opening their restaurant in all most all major urban centers of India. c) Pure conglomerate mergers involves unrelated business activities. These would not qualify as either product-extension or market extension. New product &amp; New territories Indian Rayons acquisition of PSI Data Systems. ##GENERAL ELECTRICALS . GE's divisions include GE Capital includes: GE Commercial Finance and GE Money and GE Consumer Finance, 2. GE Technology Infrastructure includes: GE Aviation, the former Smiths Aerospace and GE Healthcare and NBC Universal, an entertainment company. Through these businesses, GE participates in a wide variety of markets including the generation, transmission and distribution of electricity (eg. Nuclear, gas and solar), lighting, industrial automation, medical imaging equipment, motors, railway locomotives, aircraft jet engines, and aviation services. It was co-founder and is 80% owner (with Vivendi) of NBC Universal, the National Broadcasting Company. Through GE Commercial Finance, GE Consumer Finance, GE Equipment Services, and GE Insurance it offers a range of financial services as well. It has a presence in over 100 countries. Since over half of GE's revenue is derived from financial services, it is arguably a financial company with a manufacturing arm. It is also one of the largest lenders in countries other than the United States, such as Japan.</p> <p>Tata Group: Tata Chemicals Tata Consultancy Services Tata Elxsi Tata Interactive Systems Tata Motors Tata Steel Tata Power Tata Tea Tata Communications Tata Technologies Limited Tata Teleservices Titan Industries The Indian Hotels Company Trent (Westside) Voltas Notable non-Indian Companies Corus Group Tetley Tata Daewoo Commercial Vehicle VSNL International Canada Jaguar Cars Land Rover Brunner Mond BrandsGood Earth Teas Tanishq Taj Hotels Tata Sky Tata Indicom Titan Westside Voltas The Kirloskar Group consisting of: Kirloskar Brothers Limited, Kirloskar Oil Engines, Kirloskar Ferrous Industries, Kirloskar Pneumatic Company, Kirloskar Ebara Pumps Ltd., Kirloskar Construction And Engineering Ltd., SPP Pumps (UK), Gondwana Engineers Ltd, and The Kolhapur Steels Ltd) is India's largest Engineering and Construction Conglomerate with sales exceeding $2 Billion. ##characteristics A conglomerate firm controls range of activates in various industries that require different skills in the specific managerial functions of research, applied engineering, prdtn, mktg and so on. Diversification is achieved mainly by external acquisitions and mergers, not by internal development. FINANCIAL CONGLOMERATES Conglomerate firms in which corporate mgt provides a flow of funds to operating segments, exercises control over strategic planning functions, and is the ultimate financial risk taker, but does not participate in operating decisions. Distinct economic functions are: 1. It improves risk/return ratios through diversification. 2. It avoids gamblers ruin (an adverse run of losses which might cause bankruptcy) 3. Establishing programs of financial planning control. These systems improves the quality of general &amp; functional managerial performance, there by resulting in more efficient operations &amp; better resource allocation for the economy. ##Managerial conglomerates Conglomerate firms which provide managerial expertise, counsel &amp; interaction on decisions to operating units. Mgt conglomerate not only assume financial responsibility &amp; control, but also play a role in operating decisions &amp; provide staff expertise &amp; staff services to the operating entities. Generic mgt functions are: 1. Planning, organizing, directing &amp; controlling are readily transferable to all types of business firms. </p> <p>This theory argues for mgt transferability across a wide variety of industries &amp; types of orgns including govt, nonprofit institutions and military and religious orgns. ##CONCENTRIC COMPANIES A merger in which there is carry over in specific mgt functions (ex: mktg) or complementarily in relative strengths among specific mgt functions rather than carry-over/complementarities in only generic mgt functions (eg: planning). Therefore, if the activities of the segments brought together are so related that there is carry over of specific mgt functions (mufg, finance, mktg, personnel, &amp; so on) or complementarily in relative strengths among these specific mgt functions, the merger should be termed concentric rather than conglomerate. Ex: if one co., has competence in research, mufg., or mktg that can be applied to the pdt problems of another co., that lacks that particular competence, a merger will provide the opportunity to lower cost function. Firms seeking to diversify from advanced technology industries my be strong on research but weaker on pdtn., and mktg., capabilities firms in industries with less advanced technology. ##Motives being merger (Reasons, logic, Benefits, Causes) 1. Limit competition 2. Utilize under-utilized market power 3. Achieve diversification 4. Overcome the problem of slow growth &amp; profitability of ones own industry 5. Utilize under utilized resources like, human, physical &amp; managerial skills 6. Reap speculative gains attendant upon new security issue/change in P/E ratio. 7. Achieve growth potentiality 8. Achieve profitability 9. Maximize the shareholders wealth 10.Diversifying the risk of the company 11.Gain economies of scale &amp; increase income with proportionately less investment 12.Displace existing management. 13.Circumvent government regulations. 14.Establish a transnational bridgehead without excessive start-up costs to gain access to a foreign market. ##Motives behind M&amp;A The dominant rationale used to explain M&amp;A activity is that acquiring firms seek improved financial performance. The following motives are considered to add shareholder value: Synergy: This refers to the fact that the combined company can often reduce duplicate departments or operations, lowering the costs of the company relative to the same revenue stream, thus increasing profit.</p> <p>Increased revenue/Increased Market Share: This motive assumes that the company will be absorbing a major competitor and thus increase its power (by capturing increased market share) to set prices. 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. Economies of Scale: For example, managerial economies such as the increased opportunity of managerial specialization. Another example are purchasing economies due to increased order size and associated bulkbuying discounts. Taxes: 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 shareh...</p>


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