1. Briefly explain the theories if merger?

10Marks

Mergers and acquisitions are taking place with various objectives, various analysts have advocated different theories to explain the motives behind mergers and acquisitions. The following are some of the theories: 1. Differential efficiency theory: According to differential efficiency theory of mergers, if the management of firm A acquires firm B, the efficiency of firm B is brought up to the level of firm A, then this increase in efficiency is attributed to the merger. 2. Inefficient management theory According to inefficient management theory, some firms operate below their potential and consequently have low efficiency. Such firms are likely to be acquired by other more efficient firms in the same industry. They would also have the managerial ability to improve the latters performance. 3. Synergy The amount by which the value of the combined firm exceeds the sum value of the two independent firms is termed as synergy. Synergy is based on the notion that merger of two companies can create greater shareholder value than if they are operated separately. Or It is the ability of combination of two firms to be more profitable than the two firms operating independently 4. Diversification Diversification or acquiring different line of business is another motive for mergers. Such mergers reduce the instability of earnings. It is also taken up to diversify from companys core product lines or markets into those that have higher growth prospects. 5. Market share Mergers are undertaken to improve the ability and maintain prices above competitive level. Increase in the size of the firm is expected to result in market power. This decrease in number of firms will increase recognized interdependence. 6. Strategic realignment Mergers are used to adopt rapid changes in external environment mainly in terms of regulatory framework and technological innovation. 7. Hubris hypothesis {winners curse} Explains why mergers occur even if the current market value of the target firm reflects its true worth or value.

Instead of accepting the market valuations managers or bidders believe that their own valuation of the target company is superior and tend to overpay. 8. Agency problem Arises whenever two parties do not have exactly the same objective, the benefits to one of the parties can come at the expense of another party. Because of differences between the objectives of management and shareholders, agency problem can lead to ineffectiveness. 9. Information and signaling The announcement of merger negotiations convey information or signals to market participants the future cash flows are likely to increase. The bidders see a potential for increase in future values. 10. Tax considerations Net operating losses of the target company and the revaluation of assets influence Mergers & acquisition. Loss carried forward can be set off against the combined firms taxable income.

2. What do you understand by synergy?

3Marks

The amount by which the value of the combined firm exceeds the sum value of the two independent firms is termed as synergy. Synergy is based on the notion that merger of two companies can create greater shareholders value than if they operated separately. Or It is the ability of combination of two firms to be more profitable than the two firms operating independently 3. What is strategic alignment? Mergers are used to adopt rapid changes in external environment mainly in terms of regulatory framework and technological innovation 4. What is winners curse? Winners curse or hubris hypothesis explains why mergers occur even if the current market value of the target firm reflects its true worth or value. Instead of accepting the market valuations managers or bidders believe that their own valuation of the target company is superior and tend to overpay. 5. Name the type of mergers? Give an example for each. a. Horizontal merger i. Kingfisher & air deccan ii. Tata corus steel b. Vertical merger i. Dabur-fem products ii. Telecommunication wit mobile company/internet

c. Conglomerate merger d. Cross-border mergers i. Bharthi-AXA ii. ING-vysya iii. Arcelor-mittal 6. Distinguish between horizontal & vertical merger? Horizontal merger A merger in which two firms in the same industry combines after in an attempt to achieve economies of scale (market share, technology) Example: kingfisher and air deccan, Tata cores steel Vertical merger A merger in which one firm acquires a supplier or another firm that is closer to its existing customer often in an attempt to control supply & distribution channels Example: Dabur-fem products, telecommunication wit mobile company/internet. HORIZONTAL MERGER Horizontal merger is when two or more corporate firms dealing in similar lines of activity come together The purpose of horizontal merger is elimination or reduction of competition, economies of scale A horizontal merger is one that takes place between two companies which are essentially operating in the same market 7. What are the motives for merger? The primary motive of merger is to create synergy. The other motives are as follows: i. Gain market share ii. Economies of scale iii. Enter new market iv. Acquire technology v. Utilization of surplus, funds & managerial effectiveness vi. Strategic objectives. 8. What are the internal and external factors leading to mergers & acquisition? The internal factors which lead to mergers & acquisition are: 1. Funds/Capital One of the major factors for M &A is Funds. Funds are very much essential for any organization. However, funds also play a major role in taking business decisions related to M & A. Usually firms/ organizations merge VERTICAL MERGER Vertical merger is when a firm acquires either a upstream firm or downstream firm The purpose of vertical merger is covering buying cost, lower distribution cost. A vertical merger is one in which the company expands backwards & forward in the direction of ultimate consumer

a. To increase the funds in the organizations: the amount of funds will be huge when the assets of different organization are pooled in as one. This policy is pooled when well established businesses try to diversify or expand their business. b. Shortage of funds- when 2 or more organizations are facing a shortage, they undertake mergers to fulfill the needs and demands. 2. Working capital working capital refers to the capital/amount needed to carry out the day today activities of the organization. Hence working capital requirement determines the need for M&A. When an organization is in need for working capital but does not have enough resources to carry out the day to-day activities then mergers is one of the best alternatives for any organization. Acquisition assists in the survival of businesses which are suffering losses. Big companies take over small businesses just to pool in more resources, thereby assisting the small companies to survive, i.e., not lose its existence. 3. Time management / Resource management- Time management is also an important aspect for M&A. When 2 or more businesses are merged then the amount/number of resources available will increase. This directly reduces the time which is required for carrying out its activities. Example:, when the number of laborers increase, the time taken to produce a product is minimized. Resource management refers to efficient utilization of resources in the organization. The number of opportunities to utilize the resources of the organization will be more when organizations join hands. 4. Managerial efficiency Mergers and acquisitions help in increasing the firms efficiency. The goodwill on one company, its brand name and all the other factors responsible for the growth of the company will be pooled into one organization. Usually small companies let themselves to be taken over by the big and well established companies in order to acquire the brand name.

5. Large scale M&A helps in increasing the resources of the organization. It results in the increase of funds, labor resources and also the other essential resources in an organization. This directly results in the expansion of the businesses. Hence for the firms or businesses who intend to expand their business on a large scale opt for mergers or acquisitions.

6. Increase of turnover and revenue- M&A results in increased production and better utilization of the resources. It automatically increases the turnover and thereby increasing the revenue of the business. So some business opts for M&A to increase their income earning capacity.

7. Tax benefits- the merging companies can show losses to get reduction in taxes and benefit out of it.

External factors 1. Competition In order to reduce the competition in the market M&A is adopted. Competition determines the existence of an organization in the market. Companies can either merge to face the tough competition posed by major players in the market or the companies i.e. rival companies can merge together to eliminate the competition amongst themselves.

2. Monopolistic market M&A assists the companies in gaining a major share in the market. Major players may merge together or takeover small business in order to eliminate the competition and to rule the market. Monopoly helps the major players to determine prices for commodities by themselves i.e. deregulation of prices.

3. To reach global markets having large scale business- usually businesses undertake M&A in order to expand their business globally. The business may seek to market its products in the international market by joining with a foreign company. The reasons for global mergers may be Expansion or diversification of business Too seek demand for domestic markets To fulfill the needs of the international markets 4. Technology factor- Technology is a major factor in taking decisions regarding mergers and acquisitions. When companies are not able to access to better technology then the companies join with companies who have the required resources. Technology advancement helps in time and resources management.

5. Marketing strategy for advertisements and promotions- Merging with companies with better advertising and promotion strategies will increase in the development of smaller businesses. Hence marketing strategies is also a factor influencing M&A.

6. Synergy- Synergy refers to the additional gain that is a direct outcome of the merger or acquisition.

Example: company As share value is 200 lakhs and company Bs share value is 100 Lakhs. When company A & Company B merged, the share value of the newly formed company AB is 305 lakhs. The increase of 5 lakhs in the total share value is Synergy.