Mergers & AcquisitionsMergers & Acquisitions

Meaning of Mergers and Meaning of Mergers and AcquisitionsAcquisitions

MergersMergers refer to the fusion of one company into another refer to the fusion of one company into another (Absorption)(Absorption) or two companies coming together to form a new corporate entity or two companies coming together to form a new corporate entity (Consolidation).(Consolidation).

Tata Fertilizers Ltd (TFL:A) and Tata Chemicals Ltd (TCL:B) Tata Fertilizers Ltd (TFL:A) and Tata Chemicals Ltd (TCL:B) merged through merged through absorptionabsorption to form Tata Chemicals Ltd ; TFL+ TCL to form Tata Chemicals Ltd ; TFL+ TCL = TCL or, = TCL or, A +B = BA +B = B

Hindustan Computers Ltd (A), Hindustan Instruments Ltd (B), Indian Hindustan Computers Ltd (A), Hindustan Instruments Ltd (B), Indian Software Company Ltd ( C) and Indian Reprographics Ltd (D) Software Company Ltd ( C) and Indian Reprographics Ltd (D) merged into a new company (through merged into a new company (through ConsolidationConsolidation) called HCL Ltd ) called HCL Ltd (E) or, (E) or, A +B+C+D = EA +B+C+D = E

AcquisitionsAcquisitions on the other hand denotes a company acquiring on the other hand denotes a company acquiring controlling stake in another so that the acquirer can have management controlling stake in another so that the acquirer can have management control over the other firmcontrol over the other firm

Motives Behind M&A DealsMotives Behind M&A Deals

Motives Behind M&AMotives Behind M&A There can be a wide variety of motives behind Mergers & There can be a wide variety of motives behind Mergers &

Acquisitions. One of the most basic motives for M&A is Acquisitions. One of the most basic motives for M&A is growthgrowth. . Mergers and acquisitions provide a means whereby a company can Mergers and acquisitions provide a means whereby a company can grow quickly. Often the only alternative is to grow more slowly grow quickly. Often the only alternative is to grow more slowly through internal expansion. Competitive factors, however, may make through internal expansion. Competitive factors, however, may make such internal growth ineffective.such internal growth ineffective.

SynergySynergy is another factor which is often associated as a motive for is another factor which is often associated as a motive for M&A. It refers to the type of reactions that occur when two substances M&A. It refers to the type of reactions that occur when two substances or factors combine to produce a greater effect together than that or factors combine to produce a greater effect together than that which the sum of the two operating independently could account for. which the sum of the two operating independently could account for. {AB> (A+B}{AB> (A+B}

Diversification Diversification could be another motive. It means growing outside a could be another motive. It means growing outside a company’s current industry category. It could be a desire to enter company’s current industry category. It could be a desire to enter industries that are more profitable than the firm’s current industry.industries that are more profitable than the firm’s current industry.

Motives Behind M&AMotives Behind M&A Firms may acquire another firm with hope of experiencing Firms may acquire another firm with hope of experiencing economic economic

gainsgains. These economic gains may come as a result of . These economic gains may come as a result of economies of scale economies of scale or economies of scopeor economies of scope. Economies of scale are the reductions in per-. Economies of scale are the reductions in per-unit costs that come as a size of company’s operations, in terms of unit costs that come as a size of company’s operations, in terms of revenues or units of production, increases. Economies of scope occur revenues or units of production, increases. Economies of scope occur when a business can offer a broader range of services to its customer when a business can offer a broader range of services to its customer base base

Companies Companies gaingain also through also through horizontal and vertical mergers and horizontal and vertical mergers and acquisitionsacquisitions. Horizontal deals involve mergers between competitors, . Horizontal deals involve mergers between competitors, where as vertical transactions involve companies that have a buyer-where as vertical transactions involve companies that have a buyer-seller relationship (in the supply chain). Although the pursuit of seller relationship (in the supply chain). Although the pursuit of monopolistic power is sometimes believed to be a cause of horizontal monopolistic power is sometimes believed to be a cause of horizontal mergers, the research in this area often fails to show that the other mergers, the research in this area often fails to show that the other companies in the market perceive that a real increase in market power companies in the market perceive that a real increase in market power will be achieved in many cases. Vertical transactions may sometimes will be achieved in many cases. Vertical transactions may sometimes provide valuable benefits, but sometimes generate unforeseen adverse provide valuable benefits, but sometimes generate unforeseen adverse effectseffects..

Economies of Scale (Concept)Economies of Scale (Concept) Economy of scale refers to the cost reduction in producing a product from Economy of scale refers to the cost reduction in producing a product from

increasing the scale of its production in a given period. Since production increasing the scale of its production in a given period. Since production costs may have a fixed component that is largely invariant to volume of costs may have a fixed component that is largely invariant to volume of production, e.g. ,rents, administrative costs, the per unit cost (fixed + production, e.g. ,rents, administrative costs, the per unit cost (fixed + variable) falls when these fixed costs of production are spread over a large variable) falls when these fixed costs of production are spread over a large volume. This results in scale economies. Similar scale economies may also volume. This results in scale economies. Similar scale economies may also exist in the case of non-production costs associated with marketing, selling, exist in the case of non-production costs associated with marketing, selling, distribution, storage, after sales service, etc., provided they have a fixed distribution, storage, after sales service, etc., provided they have a fixed cost component invariant to volume. Since in a merger, the merging firms cost component invariant to volume. Since in a merger, the merging firms jointly produce and sell a larger volume than each on its own, there is jointly produce and sell a larger volume than each on its own, there is opportunity for scale economies through mergers.opportunity for scale economies through mergers.

Economies of Scope (Concept)Economies of Scope (Concept) With multiple products, a firm can achieve scope economy. Scope With multiple products, a firm can achieve scope economy. Scope

economy exists when the total cost of producing and selling several economy exists when the total cost of producing and selling several products by the multi-product firm is less than the sum of the costs of products by the multi-product firm is less than the sum of the costs of producing and selling the same products by individual firms specializing producing and selling the same products by individual firms specializing in each of those products. Examples of economy of scope include costs of in each of those products. Examples of economy of scope include costs of R&D, use of single umbrella brand to sell several products, selling R&D, use of single umbrella brand to sell several products, selling products through a common distribution channel etc. Scope economy products through a common distribution channel etc. Scope economy depends on the existence of certain capabilities and resources that have a depends on the existence of certain capabilities and resources that have a common applicability across several products.common applicability across several products.

Scope economy may also be manifested in the form of increased sales Scope economy may also be manifested in the form of increased sales revenue and profits. It is nothing but effective use of existing common revenue and profits. It is nothing but effective use of existing common resources and capabilities that creates added value through increased resources and capabilities that creates added value through increased volume and sales revenue as well as their cost effective utilization.volume and sales revenue as well as their cost effective utilization.

Motives Behind M&AMotives Behind M&A Other gains may come in the from of financial benefits when a Other gains may come in the from of financial benefits when a larger larger

firmfirm that resulted from the combination of two or more smaller firms that resulted from the combination of two or more smaller firms has has better access to capital markets. better access to capital markets. This improved access could also This improved access could also come in the form of acome in the form of a lower cost of capital lower cost of capital

Another motivation for M&As may take the form of Another motivation for M&As may take the form of improved improved managementmanagement. . AA bidding firm may be able to pay a premium for a bidding firm may be able to pay a premium for a target because of anticipated gains it will experience when it applies its target because of anticipated gains it will experience when it applies its superior management skills to the target’s business.superior management skills to the target’s business.

One of the M&A motives could be One of the M&A motives could be acquiring new technology.acquiring new technology. Various other motives exist for M&As, including Various other motives exist for M&As, including accelerating the accelerating the

R&D processR&D process through acquiring companies that are strong in that through acquiring companies that are strong in that area. Other targets may have area. Other targets may have good distribution systemsgood distribution systems that make that make them attractive. The motives are many and can vary from deal to deal.them attractive. The motives are many and can vary from deal to deal.

Yet another motive of M&A could be Yet another motive of M&A could be reduction of taxesreduction of taxes through a through a reverse mergerreverse merger

Motives Behind M&AMotives Behind M&A HUL acquired Lakme to enter cosmetics market through an HUL acquired Lakme to enter cosmetics market through an

established brandestablished brand Glaxo and Smithkline Beecham merged to gain market share and Glaxo and Smithkline Beecham merged to gain market share and

eliminate competitioneliminate competition Tata Tea acquired Tetley to leverage Tetley’s international marketing Tata Tea acquired Tetley to leverage Tetley’s international marketing

strength.strength. Blackberry and Treo merged to introduce cell phone capability with e-Blackberry and Treo merged to introduce cell phone capability with e-

mail connectivitymail connectivity IBM acquired Daksh to acquire latter’s competency in BPO businessIBM acquired Daksh to acquire latter’s competency in BPO business Merger of Orange, Hutch and Vodafone helped in worldwide market Merger of Orange, Hutch and Vodafone helped in worldwide market

expansionexpansion TDPL merged with Sun Pharma to have access to latter’s funds TDPL merged with Sun Pharma to have access to latter’s funds

(liquidity)(liquidity) Ashok Leyland Information Technology (ALIT) was acquired by Ashok Leyland Information Technology (ALIT) was acquired by

Hinduja Finance, a group company, so that it could set off the Hinduja Finance, a group company, so that it could set off the accumulated losses in AILT’s books against its profits.accumulated losses in AILT’s books against its profits.

Synergy (Concept)Synergy (Concept) The anticipated existence of synergistic benefits allows firms to incur the The anticipated existence of synergistic benefits allows firms to incur the

expenses of acquisition process and still be able to afford to give target expenses of acquisition process and still be able to afford to give target shareholders a premium for their shares. Synergy may allow the combined shareholders a premium for their shares. Synergy may allow the combined firm to appear to have a positive firm to appear to have a positive “Net Acquisition Value (NAV)”“Net Acquisition Value (NAV)”

NAV = V(AB) – [V(A) +V(B)] - P-ENAV = V(AB) – [V(A) +V(B)] - P-E = [V(AB) – {(V(A) + V(B)}]- (P+E)= [V(AB) – {(V(A) + V(B)}]- (P+E) V(AB)V(AB) = Combined Value of the two firms, = Combined Value of the two firms, V(A)V(A) and and V(B)V(B) are value of are value of A A

and B;and B; PP= Premium paid for = Premium paid for BB; ; EE = Expenses of the acquisition process = Expenses of the acquisition process

The term in the square brackets is the synergistic effect. This effect must The term in the square brackets is the synergistic effect. This effect must be greater than the sum of P and E to justify going forward with the mergerbe greater than the sum of P and E to justify going forward with the merger

Merger SynergyMerger Synergy

Synergy

Operational Synergy Financial Synergy

Lowering of Cost of Capital Synergy

Revenue-EnhancingSynergy

Cost- ReducingSynergy

Cross MarketingEconomies of Scale & Scope

Bigger- less riskierRisk premium reduces

Mini Case StudiesMini Case Studies

GE- What to do when you can’t GE- What to do when you can’t achieve a leading position?achieve a leading position?

General Electric (GE) had a large number conglomerate mergers to occupy General Electric (GE) had a large number conglomerate mergers to occupy leading positions in many industries. However, in spite of its best efforts it leading positions in many industries. However, in spite of its best efforts it could not occupy a leading position in the insurance industry. In 2005, it could not occupy a leading position in the insurance industry. In 2005, it announced that it would sell its reinsurance business to Swiss Re for $8.5 announced that it would sell its reinsurance business to Swiss Re for $8.5 billion. GE’s CEO at that time, Jeffrey Immelt, successor to the well billion. GE’s CEO at that time, Jeffrey Immelt, successor to the well known Jack Welch, indicated that the insurance business was “a tough known Jack Welch, indicated that the insurance business was “a tough strategic Fit for GE”. It was an admission of failure by a very successful strategic Fit for GE”. It was an admission of failure by a very successful company. GE cut its losses and sold the reinsurance business to another company. GE cut its losses and sold the reinsurance business to another company that was better at it than they were.In many ways this is a sign of company that was better at it than they were.In many ways this is a sign of good management as managers need to know when to cut losses and focus good management as managers need to know when to cut losses and focus on areas in which they can achieve greater returns rather than continue on areas in which they can achieve greater returns rather than continue with a failing business just to avoid having to admit mistakes to the with a failing business just to avoid having to admit mistakes to the shareholders. Given the volume of business deals that GE does, all of them shareholders. Given the volume of business deals that GE does, all of them are not going to be a success. The key is to quickly recognize and admit are not going to be a success. The key is to quickly recognize and admit mistakes and refocus on the winners.mistakes and refocus on the winners.

Achieving a Number- One or –Two Achieving a Number- One or –Two Ranking is not a panacea Ranking is not a panacea

Simply achieving a number-one or-two ranking in an industry is not Simply achieving a number-one or-two ranking in an industry is not sufficient to guarantee success. This was demonstrated in the farm sufficient to guarantee success. This was demonstrated in the farm equipment business. In 1994, Case Corp, found itself mired in a distant equipment business. In 1994, Case Corp, found itself mired in a distant third position in the firm equipment business with little hope of catching third position in the firm equipment business with little hope of catching the leader, John Deere Corp. The success that companies like GE had in the leader, John Deere Corp. The success that companies like GE had in using a dominant position in various markets to outplace smaller rivals using a dominant position in various markets to outplace smaller rivals surely was not lost on the management of Case Corp when it decided to surely was not lost on the management of Case Corp when it decided to merge with the number –two company in the business.. New Holland, the merge with the number –two company in the business.. New Holland, the 1999 $4.6 billion merger created CNH Global – a company with sales 1999 $4.6 billion merger created CNH Global – a company with sales almost $11 billion. However, merely being in the number two position did almost $11 billion. However, merely being in the number two position did not prevent the combined company from losing further ground to John not prevent the combined company from losing further ground to John Deere. Since the merger, CNH had trouble generating profits and Deere. Since the merger, CNH had trouble generating profits and continued to try to cut costs and integrate the two companies better to continued to try to cut costs and integrate the two companies better to realize economies that could yield greater profits.realize economies that could yield greater profits.

Mobil Merger with Exxon – Mobil Merger with Exxon – Horizontal MergerHorizontal Merger

In December 1998, Exxon announced that it was merging with the Mobil In December 1998, Exxon announced that it was merging with the Mobil Oil Company. The $82 billion merger created the world’s largest oil Oil Company. The $82 billion merger created the world’s largest oil company. Both companies were vertically integrated with substantial oil company. Both companies were vertically integrated with substantial oil reserves and a broad retail network. In spite of their substantial size, the reserves and a broad retail network. In spite of their substantial size, the companies were able to convince regulators that the new oil behemoth companies were able to convince regulators that the new oil behemoth would not stifle competition. The success of this was underscored when in would not stifle competition. The success of this was underscored when in 2006, Exxon-Mobil announced the highest annual profits of any corporate 2006, Exxon-Mobil announced the highest annual profits of any corporate history. The company’s 2005 annual profits were $36 billion on sales $371 history. The company’s 2005 annual profits were $36 billion on sales $371 billion and a market capitalization of $377 billion, making it the largest billion and a market capitalization of $377 billion, making it the largest company in the world.company in the world.

Scale Economy in a MergerScale Economy in a MergerDeutsche Bank & Dresdner BankDeutsche Bank & Dresdner Bank

In Germany, because of strong competition, retail banking was a low In Germany, because of strong competition, retail banking was a low return operation. In March 2000, Deutsche Bank, the largest commercial return operation. In March 2000, Deutsche Bank, the largest commercial bank in Germany and Dresdner Bank, one of its oldest rivals and the third bank in Germany and Dresdner Bank, one of its oldest rivals and the third largest German Bank proposed a merger to address the suboptimal size of largest German Bank proposed a merger to address the suboptimal size of each bank .Deutsche Bank judged that it needed ten to twelve million retail each bank .Deutsche Bank judged that it needed ten to twelve million retail customers to achieve the critical mass necessary to generate decent profits customers to achieve the critical mass necessary to generate decent profits in the retail business. The merger would have produced a retail business in the retail business. The merger would have produced a retail business exceeding the critical size and yielded scale economies. Although this logic exceeding the critical size and yielded scale economies. Although this logic was sound, the negotiation between the two banks failed for other reasons.was sound, the negotiation between the two banks failed for other reasons.

Scope Economy in a MergerScope Economy in a MergerPearson Plc.Pearson Plc.

Pearson PLC, the UK firm that inter alia, publishes the Financial times, Pearson PLC, the UK firm that inter alia, publishes the Financial times, also produces several products for the education market, particularly the also produces several products for the education market, particularly the first growing e-education market .It made several acquisitions and entered first growing e-education market .It made several acquisitions and entered into alliances to expand its online product portfolio concerned with into alliances to expand its online product portfolio concerned with developing and distributing curriculum content. In august 2000, Pearson developing and distributing curriculum content. In august 2000, Pearson acquired the Minneapolis-based firm, National Computer Systems (NCS) acquired the Minneapolis-based firm, National Computer Systems (NCS) for $2.5 billion. NCS provided software and internet-based technologies for $2.5 billion. NCS provided software and internet-based technologies for collecting, managing and interpreting education data and was also for collecting, managing and interpreting education data and was also leader in testing and assessment technology that had access to 40% of US leader in testing and assessment technology that had access to 40% of US Schools. The acquisition extended Pearson’s product range and allowed Schools. The acquisition extended Pearson’s product range and allowed the merged companies to to tailor individual learning programs that the merged companies to to tailor individual learning programs that enabled students to learn from home with the participation of their parents, enabled students to learn from home with the participation of their parents, while cutting the cost of reaching a wider number of students. The annual while cutting the cost of reaching a wider number of students. The annual estimated cost savings was of the order of $50 million by 2002.estimated cost savings was of the order of $50 million by 2002.

Types of MergerTypes of Merger

Types of MergersTypes of Mergers 1.Horizontal Merger1.Horizontal Merger

2.Vertical Merger2.Vertical Merger

3.Concentric Merger3.Concentric Merger

4.Conglomerate Merger4.Conglomerate Merger

5.Accretive Merger5.Accretive Merger

6.Dilutive Merger6.Dilutive Merger

Horizontal MergerHorizontal Merger Under this strategy, two companies that are in direct Under this strategy, two companies that are in direct

competition and sharing the same product lines and competition and sharing the same product lines and market merge. The merger is based on the assumption that market merge. The merger is based on the assumption that it will provide synergy and allow enhanced cost efficiencies it will provide synergy and allow enhanced cost efficiencies to the new business.to the new business.

Noteworthy popular horizontal mergers includeNoteworthy popular horizontal mergers include : : Daimler-Daimler-Benz and Chrysler, Glaxo Wellcome Plc and Smith Kilne Benz and Chrysler, Glaxo Wellcome Plc and Smith Kilne Beecham Plc, Exxon and Mobil, Volkswagen and Rolls Beecham Plc, Exxon and Mobil, Volkswagen and Rolls Royce, Lipton India and Brooke Bond, Bank of Madura Royce, Lipton India and Brooke Bond, Bank of Madura with ICICI Bank etc. with ICICI Bank etc.

Large horizontal mergers are sometimes perceived as anti-Large horizontal mergers are sometimes perceived as anti-competitive, for they give new entity an unfair competitive competitive, for they give new entity an unfair competitive advantage over its competitors.advantage over its competitors.

Vertical MergerVertical Merger Vertical mergersVertical mergers are usually mergers of non-competing companies where are usually mergers of non-competing companies where

one’s product is a necessary component or complement of the other. These one’s product is a necessary component or complement of the other. These mergers enable a firm to deal with different aspects of business such as mergers enable a firm to deal with different aspects of business such as growing / procuring raw materials, manufacturing, packaging, transporting, growing / procuring raw materials, manufacturing, packaging, transporting, marketing and distributing (retailing).marketing and distributing (retailing).

Vertical integrationVertical integration can lower transaction costs, lead to synergic improvement can lower transaction costs, lead to synergic improvement in design, production and distribution of final output in a cost-effective in design, production and distribution of final output in a cost-effective efficient way. efficient way.

Vertical mergers can be classified as: (a) Vertical mergers can be classified as: (a) Market Extension MergerMarket Extension Merger (enabling (enabling sale of the same product in different markets) (b) sale of the same product in different markets) (b) Product Extension MergerProduct Extension Merger

( increasing the range of products a company sells in a particular market) (c ) ( increasing the range of products a company sells in a particular market) (c ) Forward IntegrationForward Integration (a supplier of raw material merging with the procurer of (a supplier of raw material merging with the procurer of raw materials) (d) raw materials) (d) Backward integrationBackward integration (a manufacturer of a product merges (a manufacturer of a product merges with the provider of raw materials) (e) with the provider of raw materials) (e) Balanced integrationBalanced integration ( a company sets ( a company sets up a subsidiary which supplies it with inputs and distributes the outputs.)up a subsidiary which supplies it with inputs and distributes the outputs.)

Vertical MergerVertical Merger The basic objective of a vertical merger is to eliminate costs of The basic objective of a vertical merger is to eliminate costs of

searching for vendors & procuring raw materials, contracting prices, searching for vendors & procuring raw materials, contracting prices, payment collection and coordinating productionpayment collection and coordinating production . . Such a merger Such a merger usually has a positive impact on company’s profitability.usually has a positive impact on company’s profitability.

Some examples of vertical mergers are: Some examples of vertical mergers are: Tata Industrial Finance and Tata Industrial Finance and Tata finance, HUL and TOMCO, Apple and Intel, Reliance Industries Tata finance, HUL and TOMCO, Apple and Intel, Reliance Industries Ltd and Reliance petrochemicals Ltd.Ltd and Reliance petrochemicals Ltd. Usha Martin and Usha Beltron, Usha Martin and Usha Beltron, Time Warner Inc (cable operation) and Turner Corporation Time Warner Inc (cable operation) and Turner Corporation (Producer of CNN) .(Producer of CNN) .

Vertical mergers are also viewed as anti-competitive as they can rob Vertical mergers are also viewed as anti-competitive as they can rob the supply business of its competition.the supply business of its competition.

Concentric MergerConcentric Merger

A type of merger where two companies are in the same or related A type of merger where two companies are in the same or related industries but do not offer the same products. In a concentric merger, industries but do not offer the same products. In a concentric merger, the companies may share similar distribution channels, providing the companies may share similar distribution channels, providing

synergies for the mergersynergies for the merger. .  An example of a concentric merger is An example of a concentric merger is Citigroup's acquisition of Citigroup's acquisition of

Travelers InsuranceTravelers Insurance. While both were in the financial services . While both were in the financial services industry, they had different product linesindustry, they had different product lines. .

Conglomerate MergerConglomerate Merger Conglomerate mergers involve firms engaged in unrelated types of Conglomerate mergers involve firms engaged in unrelated types of

business activities.business activities. Time Warner and Walt Disney, A leading manufacturer of athletic Time Warner and Walt Disney, A leading manufacturer of athletic

shoes, merges with a soft drink firm.shoes, merges with a soft drink firm.   ITC Limited is a classic case of conglomerate diversification. ITC is ITC Limited is a classic case of conglomerate diversification. ITC is

into many unrelated businesses, from cigarettes to hotels and paper into many unrelated businesses, from cigarettes to hotels and paper

and biscuits and “Atta” (flour)and biscuits and “Atta” (flour)  

Accretive mergerAccretive merger Accretion is natural growth in size or extent by gradual external Accretion is natural growth in size or extent by gradual external

addition. Accretion implies value creation. Accretive merger occurs addition. Accretion implies value creation. Accretive merger occurs when a company with high P/E ratio merges with a company with when a company with high P/E ratio merges with a company with low P/E ratio, which leads to increase in EPS of the acquiring low P/E ratio, which leads to increase in EPS of the acquiring companycompany..

In RIL merger with IPCL, the swap ratio was one share of RIL for In RIL merger with IPCL, the swap ratio was one share of RIL for every 5 shares of IPCL. This was believed to be EPS accretive for the every 5 shares of IPCL. This was believed to be EPS accretive for the shareholders of RILshareholders of RIL

Dilutive MergerDilutive Merger In a Dilutive merger the EPS of the acquiring company falls after In a Dilutive merger the EPS of the acquiring company falls after

merger. Since the EPS declines, the acquiring company’s share price merger. Since the EPS declines, the acquiring company’s share price also falls, as the market expects a decrease in company’s future also falls, as the market expects a decrease in company’s future earnings. This type of merger takes place when the P/E ratio of the earnings. This type of merger takes place when the P/E ratio of the acquiring firm is lower than the P/E ratio of the target firm.acquiring firm is lower than the P/E ratio of the target firm.

Limits of Value Creation in M&ALimits of Value Creation in M&A An important consideration in mergers driven by scale economies is the An important consideration in mergers driven by scale economies is the

limit to such economies in the form of limit to such economies in the form of Minimum Efficient Scale (MES)Minimum Efficient Scale (MES). . As the scale of production increases, the cost of production falls initially As the scale of production increases, the cost of production falls initially rapidly and then slowly before turning flat. Beyond the MES, further scale rapidly and then slowly before turning flat. Beyond the MES, further scale economies are unlikely. If the merging firm’s plants are already operating economies are unlikely. If the merging firm’s plants are already operating at or beyond the MES, any production based scale economy is difficult to at or beyond the MES, any production based scale economy is difficult to achieve. achieve.

While focusing on While focusing on scale economiesscale economies, firms should also be aware of , firms should also be aware of diseconomies of scale, which arise from diffusion of control, complexities diseconomies of scale, which arise from diffusion of control, complexities of monitoring, ineffectiveness of communication and multiple layers of of monitoring, ineffectiveness of communication and multiple layers of management. These diseconomies may be compounded by the process of management. These diseconomies may be compounded by the process of scaling up through a merger.scaling up through a merger.

Limits of Value Creation in M&ALimits of Value Creation in M&A The extent for scope economy may often be very elusive. To get the same The extent for scope economy may often be very elusive. To get the same

medical sales people to sell drugs aimed at treating different ailments may medical sales people to sell drugs aimed at treating different ailments may often be a prescription for greater ailment. This may be the case if the often be a prescription for greater ailment. This may be the case if the drugs are highly specialized and require a considerable amount of expert drugs are highly specialized and require a considerable amount of expert knowledge of them on the part of the sales force. This could lead to knowledge of them on the part of the sales force. This could lead to diseconomies of scope.diseconomies of scope.

In case of vertical integration the following could pose challenges- (a) In case of vertical integration the following could pose challenges- (a) Absence of market discipline can make internal production inefficient and Absence of market discipline can make internal production inefficient and costly. (b) Small production volume reduces opportunity for scale and costly. (b) Small production volume reduces opportunity for scale and learning economics © Incentives to keep up with new technology gets learning economics © Incentives to keep up with new technology gets diminisheddiminished

Types of AcquisitionsTypes of Acquisitions Asset PurchaseAsset Purchase

Under this method, the acquiring firm purchases specific identifiable Under this method, the acquiring firm purchases specific identifiable assets. In some cases, it may also assume specific liabilities. The target assets. In some cases, it may also assume specific liabilities. The target company, however, may not like this as it has to pay capital gain tax on the company, however, may not like this as it has to pay capital gain tax on the difference between the assets sold and the purchase price allocated to such difference between the assets sold and the purchase price allocated to such assets (less depreciation). The target company instead would prefer to sell assets (less depreciation). The target company instead would prefer to sell the entire business, with employees in place and without the need to wind the entire business, with employees in place and without the need to wind up the company.up the company.

Stock PurchaseStock Purchase

Under this method, theUnder this method, the acquirer purchases the entire outstanding equity acquirer purchases the entire outstanding equity of the target company. It is a method whereby the acquirer purchases of the target company. It is a method whereby the acquirer purchases the entire company and all assets and liabilities of the business that the entire company and all assets and liabilities of the business that come with it. Stock purchases does not cause any disruption of the come with it. Stock purchases does not cause any disruption of the operations, which can continue as usual.operations, which can continue as usual.

Five Stages in M&AFive Stages in M&A

Five Stages in M&A

1CorporateStrategy

2Organizing for M&A

3Deal

Structuring

4Post M&AIntegration

5Post M&A

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