s- mergers & acquisitions

8/7/2019 S- Mergers & Acquisitions

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Mergers & Acquisitions


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Concepts ofConcepts of Mergers and Acquisitions (M&A)M&A)

The terms corporate restructuring, mergers, acquisitions, take-

overs, business combinations, amalgamations, strategic

alliance, disinvestment, joint venture, etc. are sometimes used

interchangeably although they represent different concepts indifferent situations.

Mergers and Acquisitions (M&A) may be classified according

to:

Structure Economic relation

Approach


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StructureStructure--wise Classificationwise Classification

Corporate Restructuring: Any change in the capital structure,operations or ownership.

Merger: When a firm purchases or acquires another firm.

Acquiring firm continues to survive but the acquired (or target)

firm loses its identity.

Amalgamation or Consolidation: All the combining firms lose

their separate identity and a new firm comes into being.

Acquisition: When both acquiring and acquired firms retain their

identity, the former is generally known as the holding company

and the latter, subsidiary. Flexibility in re-conversion in that the

acquiring company can de-combine by selling its equity holding

in subsidiary. In merger and amalgamation, the reverse process is

difficult.


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Structure-wise Classification

Takeover: Acquisition leading to managementcontrol or consolidation of existing control. Bothbuyer and seller continue to exist.

Strategic alliance: Agreement to cooperate to

achieve some specific commercial objectives.

Disinvestment: Selling off shares to the public.

Joint venture: Firms joining together to perform a

specific job or product sharing profits and lossesas per agreement.


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Economic RelationEconomic Relation--wise Classificationwise Classification

Horizontal merger: When firms engaged insimilar lines of activity merger together, it is

called horizontal merger (e.g. Maruti-SuzukiLtd., Tata Steel-Corus, Exxon and Mobile,etc.).

The objective is to gain greater marketshare through economies of scale.


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Vertical merger: When firms involved in

different stages of production or service (value

chain) combine to gain competitive advantage. Vertical mergers take place along the value

chain to reduce the overall cost of the product

or service (e.g. a manufacturing company

merging with a raw materials supply company;

an oil exploration company combining with a

refinery).


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Conglomerate: When firms involved in unrelated

activities or different industries combine generally

to smooth out wide fluctuations in earnings to

achieve sustainable growth. For example, firms in

mature industries having poor prospects of

growth, diversify through M&A. Conglomerates may be of several types, viz.

product related, market related or pure.



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ApproachApproach--wise Classificationwise Classification

Friendly takeover: Everything (purchaseconsideration, mode of payment, etc.) resultsbased on negotiations between two or morecompanies in the process.

Hostile takeover or tender offers: Acquiringcompany making the offer/bid directly to theshareholders of the acquired company.

Leverage buyout (LBO): The buyer borrowing

funds to the extent of a major share of thepurchase price and pledges the bought assets ascollateral security for the loan.


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M&A in IndiaM&A in India

In India, as in China, M&A generally take place

through FDI inflows. During 19971999, about 40

per cent of FDI inflows in India accounted for M&A.

Industry wise, the largest number of mergers have

taken place in the banking and finance sector.

Other sectors which witnessed substantial number

of M&A are chemicals, textiles, electrical,

electronic, hotels, pharmaceuticals and

automobiles.


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M&A: SynergiesM&A: Synergies

M&A are justified by the synergies they create.

Synergies exist when assets are worth more when

used in conjunction with each other than separately.

There are five components of synergy. Economies of scale (mass production)

Economies of scope (diversified products)

Economies due to competitive positioning

Economies due to corporate positioning

Economies due to financial strategy


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Purchase Consideration

and its Payment

It may a lump sum amount or value of netassets.

How is the lumpsum amount determined?Determinants: Expected cash flows, marketshare, assets and liabilities to be taken over, andmany more financial and non-financial factors.

The consideration may be paid by (i) cash,(ii) partly in cash and partly in shares, and(iii) entirely by securities.


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Regulations of M&A in IndiaRegulations of M&A in India

Section Area covered

390

391

392

393394

394A

395

396

396A

Interpretation of sections 391 and 393.

Power to compromise or make arrangements with creditors and members.

Power of High Court to enforce compromises and arrangements.

Information as to compromises or arrangements with creditors and members.Provisions for facilitating reconstruction and amalgamation of companies.

Notice to be given to Central Government for applications under Sections 391

and 394.

Power and duty to acquire shares of shareholders dissenting from scheme or

contract approved by majority.

Power of Central Government to provide for amalgamation of companies in

national interest.

Preservation of books and papers of amalgamated company.

Source: Companies Act, 1956.


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Regulations of M&A in India

SEBIs regulations cover both friendly and hostiletakeovers (Clauses 40A and 40B of the Listing Agreement).

They are intended to make sure that, in a friendlytakeover, all shareholders, especially the minorityshareholders, get a fair treatment. Accordingly, a greatdeal of transparency is to be built into the Takeover Code.

In hostile takeover, regulations cover both negotiated andopen-market takeovers, competitive bids, revision of offer,

withdrawal of an offer under certain circumstances, andrestraining a second offer within six months.

Violation of regulations attract several penalties.


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Valuation Methods

Valuation of business is a critical issue that

forms part of M&A agreement.

Some of the important methods are:(i) Capitalization of net cash flows,

(ii) Capitalization of earnings, (iii) net assets

value, (iv) fair value, (v) market

capitalization, (vi) Net Present Value,

(vii) capital asset pricing model.


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Managing M&AManaging M&A Post-mergers failures are not rare phenomenon.

M&A are strategic corporate decisions. All aspects of the matter legal, economic,

organizational, cultural, social, etc. should be duly considered.

The process of M&A generally involves detailed analysis in respect of the following:

y Size, position and competence of the target company.

y Asset composition, solvency and profitability.

y Due diligence.

Companies generally form a team of experts drawing them from marketing,

engineering, HR, finance, accounting, legal and taxation departments. The team

evaluates the entire process before giving its considered opinion on the proposed

deal.

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