EXECUTIVE SUMMARY

Industrial maps across the world have been constantly redrawn over the years through
various forms of corporate restructuring. The most common method of such restructuring is
Mergers and Acquisitions (M&A). The term "mergers & acquisitions (M&As)" encompasses
a widening range of activities, including joint ventures, licensing and synergising of energies.
Industries facing excess capacity problems witness merger as means for consolidation.
Industries with growth opportunities also experience M&A deals as growth strategies. There
are stories of successes and failures in mergers and acquisitions. Such stories only confirm the
popularity of this vehicle.
Merger is a tool used by companies for the purpose of expanding their operations often
aiming at an increase of their long term profitability. There are 15 different types of actions
that a company can take when deciding to move forward using M&A. Usually mergers occur
in a consensual (occurring by mutual consent) setting where executives from the target
company help those from the purchaser in a due diligence process to ensure that the deal is
beneficial to both parties. Acquisitions can also happen through a hostile takeover by
purchasing the majority of outstanding shares of a company in the open market against the
wishes of the target's board. In the United States, business laws vary from state to state
whereby some companies have limited protection against hostile takeovers. One form of
protection against a hostile takeover is the shareholder rights plan, otherwise known as the
"poison pill".
Mergers and acquisitions (M&A) have emerged as an important tool for growth for Indian
corporates in the last five years, with companies looking at acquiring companies not only in
India but also abroad.

IN
TR
OD
UC
TI
ON

MERGER
Merger is defined as combination of two
or more companies into a single company
where one survives and the others lose
their corporate existence. The survivor
acquires all the assets as well as liabilities
of the merged company or companies.
Generally, the surviving company is the
buyer, which retains its identity, and the
extinguished company is the seller.
Merger is also defined as amalgamation.
Merger is the fusion of two or more
existing companies. All assets, liabilities
and the stock of one company stand
transferred to
Transferee Company in consideration of
payment in the form of:

Equity shares in the transferee

company,

Debentures
company,

Cash,
A mix of the above modes.

in

the

transferee

CLASSIFICATIONS OF MERGERS
Mergers are generally classified into 5
broad categories. The basis of this
classification is the business in which the
companies
are
usually
involved.
Different motives can also be attached to

these mergers. The categories are:

Horizontal Merger
It is a merger of two or more competing
companies, implying that they are firms
in the same business or industry, which
are at the same stage of industrial
process. This also includes some group
companies trying to restructure their
operations by acquiring some of the
activities of other group companies.
The main motives behind this are to
obtain economies of scale in production
by eliminating duplication of facilities
and
operations,
elimination
of
competition, increase in market segments
and exercise better control over the
market.
There is little evidence to dispute the
claim that properly executed horizontal
mergers lead to significant reduction in
costs. A horizontal merger brings about
all the benefits that accrue with an
increase in the scale of operations. Apart
from cost reduction it also helps firms in
industries like pharmaceuticals, cars, etc.
where huge amounts are spent on R & D
to achieve critical mass and reduce unit
development costs.

Vertical Mergers
It is a merger of one company with
another, which is involved, in a different
stage of production and/ or distribution
process
thus
enabling
backward
integration to assimilate the sources of
supply and / or forward integration
towards market outlets.

The main motives are to ensure ready

take off of the materials, gain control
over product specifications, increase
profitability by gaining the margins of the
previous supplier/ distributor, gain
control over scarce raw materials
supplies and in some case to avoid sales
tax.

Conglomerate Mergers
It is an amalgamation of 2 companies
engaged in the unrelated industries. The
motive is to ensure better utilization of
financial resources, enlarge debt capacity
and to reduce risk by diversification.
It has evinced particular interest among
researchers because of the general
curiosity about the nature of gains arising
out of them. Economic gain arising out of
a conglomerate is not clear.
Much of the traditional analysis relating
to economies of scale in production,
research, distribution and management is
not relevant for conglomerates. The
argument in its favour is that in spite of
the absence of economies of scale and
complimentaries, they may cause
stabilization in profit stream.
Even if one agrees that diversification
results in risk reduction, the question that
arises is at what level should the
diversification take place, i.e. in order to
reduce risk should the company
diversify or should the investor diversify
his
portfolio?
Some
feel
that
diversification by the investor is more
cost effective and will not hamper the
companys core competence.
Others argue that diversification by the
company is also essential owing to the

fact that the combination of the financial

resources of the two companies making
up the merger reduces the lenders risk
while combining each of the individual
shares of the two companies in the
investors portfolio does not. In spite of
the arguments and counter- arguments,
some amount of diversification is
required, especially in industries which
follow cyclical patterns, so as to bring
some stability to cash flows.

Concentric Mergers
This is a mild form of conglomeration. It is
the merger of one company with another
which is engaged in the production /
marketing of an allied product. Concentric
merger is also called product extension
merger. In such a merger, in addition to the
transfer of general management skills,
there is also transfer of specific
management skills, as in production,
research, marketing, etc, which have been
used in a different line of business. A
concentric merger brings all the advantages
of conglomeration without the side effects,
i.e., with a concentric merger it is possible
to reduce risk without venturing into areas
that the management is not competent in

Consolidation Mergers
It involves a merger of a subsidiary
company with its parent. Reasons behind
such a merger are to stabilize cash flows
and to make funds available for the
subsidiary.

Market-extension merger

Two companies that sell the same

products in different markets.

Product-extension merger
Two companies selling different but
related products in the same market

ACQUISITION
Acquisition in general sense is acquiring
the ownership in the property. In the
context of business combinations, an
acquisition is the purchase by one
company of a controlling interest in the
share capital of another existing
company.

Types of acquisitions:
i. Friendly takeover: Before a bidder
makes an offer for another company, it
usually first informs the company's board
of directors. If the board feels that
accepting the offer serves shareholders
better than rejecting it, it recommends the
offer be accepted by the shareholders.
ii. Hostile takeover: A hostile takeover
allows a suitor to take over a target
company's management unwilling to
agree to a merger or takeover. A takeover
is considered "hostile" if the target
company's board rejects the offer, but the
bidder continues to pursue it, or the
bidder makes the offer without informing
the target company's board beforehand.

iii. Back flip takeover: A back flip takeover

is any sort of takeover in which the

acquiring company turns itself into a

subsidiary of the purchased company.
This type of a takeover rarely occurs.
iv. Reverse takeover: A reverse takeover is
a type of takeover where a private
company acquires a public company.
This is usually done at the instigation of
the larger, private company, the purpose
being for the private company to
effectively float itself while avoiding
some of the expense and time involved in
a conventional IPO

Methods of Acquisition:
An acquisition may be affected by: Agreement with the persons
holding majority interest in the
company
management
like
members of the board or major
shareholders
commanding
majority of voting power;

Purchase
market;

of

shares

in

open

To make takeover offer to the

general body of shareholders;

Purchase of new shares by private

treaty;

Acquisition of share capital

through the following forms of
considerations viz. Means of cash,
issuance of loan capital, or
insurance of share capital.

DISTINCTION BETWEEN
MERGERS AND
ACQUISITIONS
Although they are often uttered in the
same breath and used as though they were
synonymous, the terms merger and
acquisition mean slightly different things.
When one company takes over another and
clearly established itself as the new owner,
the purchase is called an acquisition. From
a legal point of view, the target company
ceases to exist, the buyer "swallows" the
business and the buyer's stock continues to
be traded.
In the pure sense of the term, a merger
happens when two firms, often of about the
same size, agree to go forward as a single
new company rather than remain
separately owned and operated. This kind
of action is more precisely referred to as a
"merger of equals." Both companies'
stocks are surrendered and new company
stock is issued in its place. For example,
both Daimler-Benz and Chrysler ceased to
exist when the two firms merged, and a
new company, DaimlerChrysler, was
created.

In practice, however, actual mergers of

equals don't happen very often. Usually,
one company will buy another and, as part
of the deal's terms, simply allow the
acquired firm to proclaim that the action is
a merger of equals, even if it's technically
an acquisition. Being bought out often
carries negative connotations, therefore, by
describing the deal as a merger, deal
makers and top managers try to make the
takeover more palatable.
A purchase deal will also be called a
merger when both CEOs agree that joining
together is in the best interest of both of
their companies. But when the deal is
unfriendly - that is, when the target
company does not want to be purchased it is always regarded as an acquisition.
Whether a purchase is considered a merger
or an acquisition really depends on whether
the purchase is friendly or hostile and how
it is announced. In other words, the real
difference lies in how the purchase is
communicated to and received by the target
company's board of directors, employees
and shareholders.

Motives behind M&A

The following motives are considered to

improve financial performance:
1

) Synergies: the combined

company can often reduce its
fixed costs by removing duplicate
departments
or
operations,
lowering the costs of the
company relative to the same
revenue stream, thus increasing
profit margins.

2 ) Increased revenue/Increased
Market Share: This assumes that
the buyer will be absorbing a
major competitor and thus
increase its market power (by
capturing increased market share)
to set prices.
3 ) 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. Economies of Scale:
For
example,
managerial
economies such as the increased
opportunity
of
managerial
specialization. Another example is
purchasing economies due to
increased
order
size
and
associated bulk-buying discounts.
4 ) Taxes: A profitable company can
buy a loss maker to use the
target's loss as their advantage by
reducing their tax liability.
5 ) Resource transfer: resources are
unevenly distributed across firms
and the interaction of target and
acquiring firm resources can

create value through either

overcoming
information
asymmetry or by combining
scarce resources.
6 ) Vertical integration: Vertical
Integration occurs when an
upstream and downstream firm
merges (or one acquires the
other). By merging the vertically
integrated firm can collect one
deadweight loss by setting the
upstream firm's output to the
competitive level. This increases
profits and consumer surplus. A
merger that creates a vertically
integrated firm can be profitable.

Therefore, additional motives for merger

and acquisition that may not add
shareholder value include:
1 ) Diversification: While this may
hedge a company against a
downturn in an individual
industry it fails to deliver value,
since it is possible for individual
shareholders to achieve the same
hedge by diversifying their
portfolios at a much lower cost
than those associated with a
merger.
2 ) Manager's hubris: manager's

overconfidence about expected

synergies from M&A which
results in overpayment for the
target company.
3 ) Empire building: Managers have
larger companies to manage and
hence more power.

4 ) Manager's compensation: In the

past,
certain
executive
management teams had their
payout based on the total amount
of profit of the company, instead
of the profit per share, which
would give the team a perverse
incentive to buy companies to
increase the total profit while
decreasing the profit per share
(which hurts the owners of the
company, the shareholders);
although some empirical studies
show that compensation is linked
to profitability rather than mere
profits of the company.

STAGES OF A MERGER
Pre-mergers are characteristics by
the :1. COURTSHIP: The respective management teams
discuss the possibility of a merger and
develop a shared vision and set of
objectives. This can be achieved
through a rapid series of meetings
over a few weeks, or through several
months of talks and informal
meetings

2. EVALUATION AND
NEGOTIATION: Once some form of understanding has
been reached the purchasing company
conducts due diligence a detailed
analysis of the target compan y assets,
liabilities and operations. This leads
to a formal announcement of the
merger and an intense round of
negotiations, often involving financial
intermediaries. Permission is also
sought from trade regulators. The new
management team is agreed at this
point, as well as the board structure of
the new business.
This phase typically lasts three or four
months, but it can take as long as a
year if regulators decide to launch an
investigation into the deal. C losure
is a commonly referred term to
describe the point at which the legal
transfer of ownership is completed.

3. PLANNING: More and more companies use this

time before completing a merger to
assemble a senior team to oversee the
merger integration and to begin
planning the new management and
operational structure.

Post Merger is characterized by

the

1) THE IMMEDIATE
TRANSITION: This typically lasts three to six months
and often involves intense activity.
Employees receive information about
whether and how the merger will
affect their employment terms and
conditions. Restructuring begins and
may include site closures, redundancy
announcements,
divestment
of
subsidiaries (sometimes required by
trade regulators), new appointments
and job transfers. Communications
and human resources strategies are
implemented. Various teams work on

detailed plans for integration.

2) THE TRANSITION PERIOD :

This lasts anywhere between six
months to two years. The new
organizational structure is in place
and the emphasis is now on fine
tuning the business and ensuring that
the envisaged benefits of the mergers
are realized. Companies often
consider cultural integration at this
point and may embark on a series of
workshops exploring the values,
philosophy and work styles of the
merged business.

PHASES OF MERGERS &

ACQUISITIONS

PHASE I: STRATEGIC
PLANNING
Stage 1: Develop or Update Corporate
Strategy
To identify the Companys strengths,
weaknesses and needs
1) Company Description
2) Management & Organization
Structure
3) Market & Competitors
4) Products & Services
5) Marketing & Sales Plan
6) Financial Information
7) Joint Ventures
8) Strategic Alliances
Stage 2: Preliminary Due Diligence
1)
2)
3)
4)

Financial
Risk Profile
Intangible Assets
Significant Issues

Stage 3: Preparation of Confidential

Information memorandum
1) Value Drivers
2) Project Synergies

PHASE II: TARGET/BUYER

IDENTIFICATION &
SCREENING
Stage 4: Buyer Rationale
1) Identify Candidates
2) Initial Screening

Stage 5: Evaluation of Candidates

1) Management and Organization
Information
2) Financial
Information
(Capabilities)
3) Purpose of Merger or Acquisition

PHASE III: TRANSACTION

STRUCTURING
Stage 6: Letter of Intent

Stage 7: Evaluation of Deal Points

1) Continuity of Management
2) Real Estate Issues
3) Non-Business Related Assets
4) Consideration Method
5) Cash Compensation
6) Stock Consideration
7) Tax Issues
8) Contingent Payments
9) Legal Structure
10) Financing the Transaction
Stage 8: Due Diligence
1)
2)
3)
4)

Legal Due Diligence

Seller Due Diligence
Financial Analysis
Projecting Results of the Structure

Stage 9: Definitive Purchase

Agreement
1) Representations and Warranties
2) Indemnification Provisions

Stage 10: Closing the Deal

PHASE IV: SUCCESSFUL

INTEGRATION

1)
2)
3)
4)
5)

Human Resources
Tangible Resources
Intangible Assets
Business Processes
Post Closing Audit

Mergers and
Acquisitions:
Valuation
Investors in a company that is aiming to
take over another one must determine
whether the purchase will be beneficial to
them. In order to do so, they must ask
themselves how much the company being
acquired is really worth.
Naturally, both sides of an M&A deal
will have different ideas about the worth
of a target company: its seller will tend to
value the company at as high of a price as
possible, while the buyer will try to get
the lowest price that he can. There are,
however, many legitimate ways to value
companies. The most common method is
to look at comparable companies in an
industry, but deal makers employ a
variety of other methods and tools when
assessing a target company. Here are just
a few of them:
Comparative Ratios - The following are
two examples of the many comparative
metrics on which acquiring companies

may base their offers:

Price-Earnings Ratio (P/E Ratio) - With
the use of this ratio, an acquiring
company makes an offer that is a
multiple of the earnings of the target
company. Looking at the P/E for all the
stocks within the same industry group
will give the acquiring company good
guidance for what the target's P/E
multiple should be.
Enterprise-Value-to-Sales
Ratio
(EV/Sales) - With this ratio, the acquiring
company makes an offer as a multiple of
the revenues, again, while being aware of
the price-to-sales ratio of other
companies in the industry.
Replacement Cost - In a few cases,
acquisitions are based on the cost of
replacing the target company. For
simplicity's sake, suppose the value of a
company is simply the sum of all its
equipment and staffing costs. The
acquiring company can literally order the
target to sell at that price, or it will create
a competitor for the same cost. Naturally,
it takes a long time to assemble good
management, acquire property and get
the right equipment. This method of
establishing a price certainly wouldn't
make much sense in a service industry
where the key assets - people and ideas are hard to value and develop.

Discounted Cash Flow (DCF) - A key

valuation tool in M&A, discounted cash
flow analysis determines a company's
current value according to its estimated
future cash flows. Forecasted free cash
flows (operating profit + depreciation +
amortization of goodwill capital
expenditures

 cash taxes - change in working capital)

are disco unted to a present value using
the company's weighted average costs of
capital (WACC). Admittedly, DCF is
tricky to get right, but few tools can rival
this valuation method.

MAGIC CIRCLE FOR A

SUCCESSFUL MERGER

A companys integration process can

ensure the formation of such a circle. It

acts rather like the Gulf Stream, where
the flow of hot and cold water ensures a
continuous cyclical movement. A well
designed integration process ensures that
the new entitys designed strategy
reaches deep into the organisation,
ensuring a unity of purpose. Basically
everyone understands the purpose and
logic of the deal. The integration process
can ensure that the ideas and the
creativity can are not dissipated but are
fed into the emergent strategy of the
organisation this is achieved through the
day to day job of the encouraging and
motivating people and also creating
forums where people can think the
impossible.
The
chart
below
demonstrates the relationship between
designed and emergent strategy and
merger integration. It suggests how
merging organizations can become
learning
organisation;
strategy
formulation and implementation merges
into collective learning.

Some merger failures can be explained

by this model. For example, serious
problems arise when a company relies
too heavily on designed strategy. If the
management team is not getting high
quality feedback and information from
the rest of the organisation, it runs the
risk of becoming cut off. Employees may
perceive their leaders as being out of
touch with reality of the merger, leading
to a gradual loss of confidence in senior
managements ability to chart the future
of the new entity. Similarly, the
leadership team may not receive timely
information about external threats,
brought about perhaps by the predatory
actions of competitors or dissatisfies

customers
with the
result that
performance suffers and the new
management is criticized for failing to get
grips with the complexities of the
changeover.
However, too much reliance on emergent
strategy can lead to the sense of a
leadership vacuum within the combining
organizations. The management team
may seem to lack direction or to be
moving too slow. This often leads
political infighting and territory building
and the departure of many talented
people.

Therefore it is very important that a

careful balance is struck between
designed and emergent strategy for
integration after the merger between two
companies is done.

S
Y
N
E
R
G

Y
When most people talk about mergers
and acquisitions they talk about synergy.
But what is synergy?
Synergy is derived from a Greek word
synergos, wh ich means working
together, synergy refers to the ability of
two or more units or comp anies to
generate greater value working together
than they could working apart. The
abilit y to make 2 + 2 = 5 instead of 4.
Typically synergy is thought to yield
gains to the acquiring firm through two
sources
1) Improved operating efficiency
based on economies of scale or
scope
2) Sharing of one or more skills.
For managers synergy is when the
combined firm creates more value than
the independent entity. But for
shareholders synergy is when they
acquire gains that they could not obtain
through
their
own
portfolio
diversification decisions. However this is
difficult to achieve since shareholders
can diversify their ownership positions
more cheaply.
For both the companies and individual
shareholders the value of synergy must
be examined in relation to value that
could be created through other strategic
options like alliances etc.
Synergy is difficult to achieve, even in
the relatively unusual instance that the
company does not pay a premium.
However, when a premium is paid the
challenge is more significant. The reason
for this is that the payment of premium
requires the creation of greater synergy to
generate economic value.

The actual creation of synergy is an

outcome that is expected from the
managers work. Achieving this outcome
demands effective integration of
combined units assets, operations and
personnel. History shows that at the very
least, creating synergy requires a great
deal of work on the part of the managers
at the corporate and business levels. The
activities that create synergy include
1) Combining similar processes
2) Co-ordinating business units that
share common resources
3) Centralizing support activities that
apply to multiple units
4) Resolving
conflict
among
business units

The Types of Synergy

1) Operations Synergy
This is obtained through integrating
functional activities. It can be created
through economies of scale / or
scope.

2)Technology Synergy
To create synergies through this,
firms seek to link activities associated
with research and development
processes. The sharing of R&D
programs, the transfer of technologies

across units, products and programs,

and the development of new core
business through access to private
innovative capabilities are examples
of activities of firms trying to create
synergies

3) Marketing Based Synergy

Synergy is created when the firm
successfully links various marketingrelated activities including those
related to sharing of brand names as
well as distribution channels and
advertising
and
promotion
campaigns.

4) Management Synergy
These synergies are typically gained
when competitively relevant skills
that were possessed by managers in
the formerly independent companies
or business units can be transferred
successfully between units within the
newly formed firm.

5) Private Synergy
This can be created when the
acquiring firm has knowledge about
the complementary nature of its
resources with those of the target firm
that is not known to others.

REVENUES
Revenue deserves more attention in
mergers; indeed, a failure to focus on this
important factor may explain why so
many mergers dont pay off. Too many
companies lose their revenue momentum
as they concentrate on cost synergies or
fail to focus on post merger growth in a
systematic manner. Yet in the end, halted
growth hurts the market performance of a
company far more than does a failure to
nail costs.

The belief that mergers drive revenue

growth could be a myth. A study of 160
companies shows that measured against
industry peers, only 36 percent of the
targets maintained their revenue growth
in the first quarter after the merger
announcement. By the third quarter, only
11 percent had avoided a slowdown. It
turned out that the targets continuing
underperformance explained only half of
the slowdown; unsettled customers and
distracted staff explained the rest.

Only 12 percent of these companies

managed to accelerate their growth
significantly over the next three years. In
fact, most sloths remained sloths, while
most solid performers slowed down.
Overall, the acquirers managed organic
growth rates that were four percentage
points lower than those of their industry
peers; 42 percent of the acquirers lost
ground.

Why should one worry so much about

revenue growth in mergers? Because,
ultimately, it is revenue that determines
the outcome of a merger, not costs;
whatever the mergers objectives,
revenue actually hits the bottom line
harder

Fluctuations in revenue can quickly

outweigh fluctuations in planned cost
savings. Given a 1 percent shortfall in
revenue growth, a merger can stay on
track to create value only if a company
achieves cost savings that are 25 percent
higher than those it had anticipated.
Beating target revenue-growth rates by 2
to 3 percent can offset a 50 percent
failure on costs.

Furthermore, cost savings are hardly as

sure as they appear: up to 40 percent of
mergers fail to capture the identified cost
synergies. The market penalizes this
slippage hard: failing to meet an earnings
target by only 5 percent can result in a 15
percent decline in share prices. The
temptation is then to make excessively
deep cuts or cuts in inappropriate places,
thus depressing future earnings by taking
out muscle, not just fat.

Finally, companies that actively pursue

growth in their mergers generate a
positive dynamic that makes merger
objectives, including cost cutting, easier
to achieve.

Out of the 160 companies studied only 12

percent achieved organic growth rates
(from 1992 to 1999) that were

significantly ahead of the organic growth

rates of their peers, and only seven of
those companies had total returns to
shareholders that were better than the
industry average. Before capturing the
benefits of integration, such merger
masters look after their existing
customers and revenue. They also target
and retain their revenue-generating talent
especially the people who handle
relations with customers.

Thus it can be noted that if revenue is not

monitored properly and if one does not
make an effort to maintain revenue it can
result in significant losses to the
company.

DISADVANTAGES
OF MERGERS
AND
ACQUISITIONS

1 ) All liabilities assumed (including

potential litigation)
2 ) Two thirds
of shareholders
(most states) of
both firms must
approve 3 )
Dissenting
shareholders can
sue to receive
their f air
value
4 ) Management cooperation needed
5)
Ind
ivid
ual
tran
sfer
of
ass
ets
ma
y
be
cos
tly
in
leg
al
fee

s
6)
Inte
grat
ion
diff
icul
t
wit
hou
t
100
%
of
sha
res
7 ) Resistance can raise price
8 ) Minority holdouts
9 ) Technology costs - costs of
modifying individual organizations
systems etc.
STAProcess and organisational
change issues every organisation
has its own culture and business
processes
10
)
Hu
ma
n
Iss
ues

Sta
ff
fee
lin
g
ins
ecu
re

an
d
un
cer
tai
n.
1
1)
A
ver
y
hig
h
fail
ure
rat
e
(cl
ose
to
50
%).

DEFENCE STRATEGIES
AGAINST MERGERS AND

ACUISITIONS
Companies can also adopt strategies and
take precautionary actions to avoid
hostile takeover. This is very necessary in
present day industrial rivalry where a
small lack in precaution can result in
huge loss to the stakeholders of the firm.
Some of the defence strategies against
takeover are:

Poison Pills
To avoid hostile takeovers, lawyers
created this contractual mechanics that
strengthen Target Company. One usual
poison pill inside a Corporation
Statement is the clause which triggers
shareholders rights to buy more company
stocks in case of attack. Such action can
make severe differences for the raider. If
shareholders do really buy more stocks of
company with advantaged price, it will
be harder to acquire the company control
for sure.
It is associated with high cost
It may keep the good investors away

Stock option workout

Poison Pill may have the same structure
of stock options used for payouts. Under
these agreements, once the triggering fact
happens, investor have the right to
turnkey some right. In poison pill event,
most common is an option to buy more
shares, with some advantages. Priced
with better conditions, lower than what
bidders does for the corporation it serves
for the specific purpose of protecting the
corporation current shareholders.
The usual stock option is made to
situations of high priced stocks. That

usually
happens
under
takeover
operations. A takeover hard to be
defended usually will have a bid offer
with a compatible price, at that moment
which is higher than usual for
shareholders, with conditions to be
accepted by stockholders.
Shark Repellent
Among shark repellent instruments there
are: golden parachute, poison pills,
greenmail, white knight, etc.
White Knight
Another fortune way to handle a hostile
takeover is through White Knight
bidders. Usually players of some specific
market know each ones history, strategy,
strength, advantages, clients, bankers and
legal supporters. Meaning beyond
similarities or not, there're communities
around these companies. In this a
strategic partner merges with the target
company to add value and increase
market capitalization. Such a merger can
not only deter the raider, but can also
benefit shareholders in the short term, if
the terms are favorable, as well as in the
long term if the merger is a good strategic
fit.
White Squire
To avoid takeovers bids, some
shareholder may detain a large stake of
one company shares. A white squire is
similar to a white knight, except that it
only exercises a significant minority
stake, as opposed to a majority stake. A
white squire doesn't have the intention,
but rather serves as a figurehead in
defense of a hostile takeover. The white
squire may often also get special voting

rights for their equity stake. With friendly

players holding relevant positions of
shares, the protected company may feel
more comfortable to face an unsolicited
offer. A White Squire is a shareholder
than itself can make a tender offer.
Otherwise it has so much relevance over
the company stock composition, that can
make raiders takeover more difficult or
somewhat expensive. Real White Squire
does not take over the target company,
and only plays as a defense strategy.

In order to defend these companies, some

bankers organize funds for that specific
purpose. A White Squire fund is designed
to increase share participation in
companies under stress.

Golden Parachutes
A golden parachute is an agreement between a company and an employee (usually upper
executive) specifying that the employee will receive certain significant benefits if employment
is terminated. . Without it, officers have no stability, and it may represent inaccurate defense
strategy in case of bidders pressure. It can further accelerate drastic and unnecessary measures.
From an overall analysis, cost of golden parachutes is relatively low, compared with
disadvantages of its absence. Officers can have minimum guarantees after takeover is
accomplished. Otherwise inappropriate attitudes can be taken just to keep officers standings in
the market an inside the corporation. Golden parachutes try to make these challenges for the
corporation and over officers, as natural as possible. Studies show that these benefits can keep
chiefs working without excess pressure and drama, defending the corporation against all, till
the end, but with responsibility.

Poison put
In stocks trading, the rights assigned to common stock holders that sharply escalates the price
of their stockholding, or allows them to purchase the company's shares at a very attractive
fixed price, in case of a hostile takeover attempt.

Super majority amendment

Super-majority amendment is a defensive tactic requiring that a substantial majority, usually
67% and sometimes as much as 90%, of the voting interest of outstanding capital stock to
approve a merger. This amendment makes a hostile takeover much more difficult to perform.
In most existing cases, however, the supermajority provisions have a board-out clause that
provides the board with the power to determine when and if the supermajority provisions will
be in effect. Pure supermajority provisions would seriously limit management's flexibility in
takeover negotiations.

Fair price amendment

A provision in the bylaws of some publicly-traded companies stating that a company seeking
to acquire it must pay a fair price to targeted shareholders. Additionally, the fair price
provision mandates that the acquiring company must pay all shareholders the same amount per
share in multi-tiered shares. The fair price provision exists both to protect shareholders and to
discourage hostile acquisitions by making them more expensive.

Classified board

A staggered board of directors or classified board is a practice governing the board of directors
of a company, corporation, or other organization in which only a fraction (often one third) of
the members of the board of directors is elected each time instead of en masse. In this a
structure for a board of directors in which a portion of the directors serve for different term
lengths, depending on their particular classification. Under a classified system, directors serve
terms usually lasting between one and eight years; longer terms are often awarded to more
senior board positions. In publicly held companies, staggered boards have the effect of making
hostile takeover attempts more difficult. When a board is staggered, hostile bidders must win
more than one proxy fight at successive shareholder meetings in order to exercise control of
the target firm.

Authorization of preferred stock

The board of directors is authorized to create a new class of securities with special voting
rights. This security, typically preferred stock, may be issued to friendly voting rights. The
security preferred stock, may be issued to friendly in a control contest. Thus, this device is a
defense takeover bid, although historically it was used to provide the board of directors with
flexibility in financing under changing economic conditions. Creation of a poison pill security
could be included in his category but generally it's excluded from and treated as a different
defensive device.

CROSS BORDER MERGERS AND ACQUISITIONS

The rise of globalization has exponentially increased the market for cross border M&A. In
1996 alone there were over 2000 cross border transactions worth a total of approximately $256
billion. This rapid increase has taken many M&A firms by surprise because the majority of
them never had to consider acquiring the capabilities or skills required to effectively handle
this kind of transaction. In the past, the market's lack of significance and a more strictly
national mindset prevented the vast majority of small and mid-sized companies from
considering cross border intermediation as an option which left M&A firms inexperienced in
this field. This same reason also prevented the development of any extensive academic works
on the subject.
Due to the complicated nature of cross border M&A, the vast majority of cross border actions
have unsuccessful results. Cross border intermediation has many more levels of complexity to
it than regular intermediation seeing as corporate governance, the power of the average
employee,
company regulations, political factors customer expectations, and countries' culture are all
crucial factors that could spoil the transaction.

CASE STUDTCASE STUDY ON THE MERGER OF ICICI BANK AND BANK OF

RAJASTHAN

ICICI BANK is Indias second largest bank with total assets of Rs.3,634.00 billion (US$81
billion) at March 31,2010 and profit after tax Rs. 40.25 billion (US$ 896 million) for the year
ended March 31,2010.
The Banks has a network of 2035 branches and about 5,518 ATMs in India and presence in 18
countries. ICICI Bank offers a wide range of banking products and financial services to
corporate and retail customers through a variety of delivery channels and through its
specialized subsidiaries in the areas of investment banking, life and non-life insurances,
venture capital and asset management.

BANK OF RAJASTHAN, with its stronghold in the state of Rajasthan, has a nationwide
presence, serving its customers with a mission of together we prosper engaging actively in
Commercial Banking, Merchant Banking, Consumer Banking, Deposit and Money Placement
services, Trust and Custodial services, International Banking, Priority Sector Banking.
At March 31, 2009, Bank of Rajasthan had 463 Branches and 111 ATMs, total assets of Rs.
172.24 billion, deposits of Rs.151.87 billion and advances of Rs. 77.81 billion. It made a net
profit of Rs. 1.18 billion in the year ended March 31, 2009 and a net loss rs.0.10 billion in the
nine months ended December 31,2009.

WHY BANK OF RAJASTHAN

ICICI Bank Ltd, Indis largest Private sector bank, said it agreed to acquire smaller rival Bank
of Rajasthan Ltd to strengthen its presence in northern and western India.
Deal would substantially enhance its branch network and it would combine Bank of Rajasthan
branch franchise with its strong capital base.
The deal, which will give ICICI a sizeable presence in the northwestern desert of Rajasthan,
values the small bank at 2.9 times its book value, compared with an Indian Banking sector
average of 1.84.
ICICI Bank may be killing two birds with one stone through its proposed merger of the Bank
of Rajasthan. Besides getting 468 branches, Indias largest private sector bank will also get
control of 58 branches of a regional rural bank sponsored by BoR

NEGATIVES
The negatives for ICICI Bank are the potential risks arising from BoRs non-performing loans
and that BoR is trading at expensive valuations
As on FY-10 the net worth of BoR was approximately Rs.760 crore and that of ICICI Bank Rs.
5,17,000 crore. For December 2009 quarter, BoR reported loss of Rs. 44 crore on an income of
Rs. 373 crore.
ICICI Bank offered to pay 188.42 rupees per share, in an all-share deal, for Bank of
Rajasthan, a premium of 89 percent to the small lender, valuing the business at $668
million. The Bank of Rajasthan approved the deal, which was subject to regulatory
agreement.
INFORMATION
The boards of both banks, granted in-principle approval for acquisition in May 2010.
The productivity of ICICI Bank was high compared to Bank of Rajasthan. ICICI recorded a
business per branch of 3 billion rupees compared with 47 million rupees of BoR for fiscal
2009. But the non-performing assets(NPAs) record for BoR was better than ICICI Bank. For
the Quarter ended Dec 09, BoR recorded 1.05 percent of advances as NPAs which was far
better than 2.1 percent recorded by ICICI Bank.

TYPE OF ACQUISITION
This is a horizontal Acquisition in related functional area in same industry (banking) in order
to acquire assets of a non-performing company and turn it around by better management;
achieving inorganic growth for self by access to 3 million customers of BoR and 463 branches.

PROCESS OF ACQUISITION
Haribhakti & Co. was appointed jointly by both the banks to assess the valuation.
Swap ratio of 25:118(25 shares of ICICI for 118 for Bank of Rajasthan) i.e. one ICICI Bank
share for 4.72 BoR shares.
Post Acquisition, ICICI Bank s Branch network would go up to 2,463 from 2000
The NPAs record for Bank of Rajasthan is better than ICICI Bank. For the quarter ended Dec
09, Bank of Rajasthan recorded 1.05 % of advances as NPAs which is far better than 2.1%
recorded by ICICI Bank.
The deal, entered into after the due diligence by Deloitte, was found satisfactory in
maintenance of accounts and no carry of bad loans.

FAILURE OF MERGERS AND ACQUISITION

Historical trend shows that roughly two third of mergers and acquisitions will disappoint on
their own terms. This means they lose value on their stock market. In many cases mergers fail
because companies try to follow their own method of doing work. By analyzing the reason for
failure in mergers and eliminating the common mistakes, rate of performance in mergers can
be improved. Discussions on the increase in the volume and value of Mergers and Acquisitions
during the last decade have become commonplace in the economic and business press.
Merger-and-acquisition turned faster in 2010 than at any other time during the last five years.
Merger and acquisition deals worth a total value of US$ 2.04 billion were announced
worldwide in the first nine months of 2010. This is 43% more than during the same period in
2006. It seems that more and more companies are merging and thus growing progressively
larger.
80% of merger and acquisitions failed because they do not focus on other fields, common
mistakes should be avoided. M&As are not regarded as a strategy in themselves, but as an
instrument with which to realize management goals and objectives. A variety of motives have
been proposed for M&A activity, including: increasing shareholder wealth, creating more
opportunities for managers, fostering organizational legitimacy, and responding to pressure
from the acquisitions service industry. The overall objective of strategic management is to
understand the conditions under which a firm could obtain superior economic performance
consequently analyzed efficiency-oriented motives for M&As. Accordingly, the dominant
rationale used to explain acquisition activity is that acquiring firms seek higher overall
performance.
Failure an occur at any stage of process

Research has conclusively shown that most of the mergers fail to achieve their stated goals.

Some of the reasons identified are:

Corporate Culture Clash

Lack of Communication
Loss of Key people and talent
HR issues
Lack of proper training
Clashes between management
Loss of customers due to apprehensions
Failure to adhere to plans
Inadequate evaluation of target

Why the Merger Failed

Culture Clash:
To the principles involved in the deal, there was no clash of cultures. There was a remarkable
meeting of the minds at the senior management level. They look like us, they talk like us,
focused on the same things, and their command of English is impeccable. There was definitely
no culture clash there.. Although DaimlerChrysler's Post-Merger Integration Team spent
several million dollars on cultural sensitivity workshops for its employees on topics such as
"Sexual Harassment in the American Workplace" and "German Dining Etiquette," the larger
rifts in business practice and management sentiment remain unchanged. James Holden,
Chrysler president from September 1999 through November 2000, described what he saw as
the "marrying up, marrying down" phenomenon. "Mercedes was universally perceived as the
fancy, special brand, while Chrysler,
Dodge, Plymouth and Jeep [were] the poorer, blue collar relations"16. This fueled an
undercurrent of tension, which was amplified by the fact that American workers earned
appreciably more than their German counterparts, sometimes four times as much. The dislike
and distrust ran deep, with some Daimler-Benz executives publicly declaring that they "would
never drive a Chrysler". "My mother drove a Plymouth, and it barely lasted two-and-ahalf
years," commented Mercedes-Benz division chief Jrg en Hubbert to the then Chrysler vicechairman, pointed out to the Detroit Free Press that "The Jeep Grand Cherokee earned much
higher consumer satisfaction ratings than the Mercedes M-Class". With such words flying
across public news channels, it seemed quite apparent that culture clash has been eroding the
anticipated synergy savings. Much of this clash was intrinsic to a union between two
companies which had such different wage structures, corporate hierarchies and values. At a
deeper level, the problem was specific to this union: Chrysler and Daimler- Benz's brand
images were founded upon diametrically opposite premises. Chrysler's image was one of
American excess, and its brand value lay in its assertiveness and risk-taking cowboy aura, all
produced within a costcontrolled atmosphere. Mercedes-Benz, in contrast, exuded disciplined
German engineering coupled with uncompromising quality. These two sets of brands, were
they ever to share platforms or features, would have lost their intrinsic value. Thus the culture
clash seemed to exist
as much between products as it did among employees. Distribution and retail sales systems
had largely remained separate as well, owing generally to brand bias. Mercedes-Benz dealers,
in particular, had proven averse to including Chrysler vehicles in their retail product offerings.
The logic had been to protect the sanctity of the Mercedes brand as a hallmark of
uncompromising quality. This had certainly hindered the Chrysler Group's market penetration
in Europe, where market share remained stagnant at 2%19. Potentially profitable vehicles such

as the Dodge Neon and the Jeep Grand Cherokee had been sidelined in favor of the less-costeffective and troubled Mercedes A-Class compact and M-Class SUV, respectively. The AClass, a 95 hp, 12 foot long compact with an MSRP of approximately $20,000, competed in
Europe against similar vehicles sold by Opel, Volkswagen, Renault and Fiat for approximately
$9,000-$16,000. Consumers who ordinarily would have paid a premium for Mercedes'
engineering and safety record had been disappointed by the A-Class which failed an emerg
ency maneuver test conducted by a Swedish television station in 199920. The A-Class
appeared both overpriced and underengineered for the highly competitive European compact
market. The Dodge

Neon, in contrast, could have competed more effectively in this segment with an approximate
price of $13,000, similar mechanical specifications, and a record of reliability. Brand bias,
however, had prevented this scenario from becoming reality. Differing product development
philosophies continued to hamper joint

purchasing and manufacturing efforts as well. Daimler-Benz remained committed to its

founding credo of "quality at any cost", while Chrysler aimed to produce price-targeted
vehicles. This resulted in a fundamental disconnect in supply-procurement tactics and factory
staffing requirements. Upon visiting the Jeep factory in Graz, Austria, Hubbert proclaimed: "If
we are to produce the M-Class here as well, we will need to create a separate quality control
section and double the number of line workers. It simply can't be built to the same
specifications as a Jeep21". The M-Class was eventually built in Graz, but not without an
expensive round of retooling and hiring to meet Hubbert's manufacturing standards.

Sony acquisition of Columbia pictures

Sony: The Early Years and the Betamax

Masura Ibuka and Akio Morita founded Tokyo Tsushin Kogyo (Tokyo Telecommunications
Engineering Company) in 1946, with a mission to be a clever company that would make new
high technology products in ingenious ways."2 With the development of the transistor, the
cassette tape, and the pocket-sized radio by 1957, the company renamed itself Sony, from the
Latin word sonus meaning "sound." In 1967, Sony formed a joint venture with CBS Records to
manufacture and sell records in Japan. Norio Ohga, an opera singer by training, was selected to
head the CBS/Sony Group, quickly growing the joint venture into the largest record company
in Japan.
When Sony was preparing to launch the Betamax home videocassette recorder in 1974, it
invited representatives from rival consumer electronics companies to preview the new
technology but did not accept any advice or offers for joint development. Two years later, Sony
was surprised to learn that Matsushita subsidiary JVC was preparing to introduce its own
Video Home System (VHS) to compete with Betamax. While JVC licensed VHS to other
electronics firms, Sony chose to keep its Betamax format to itself and it s prices even higher
insisting that Betamax was superior in quality. When the less expensive VHS started to take
hold, motion picture studios began to release a larger number of their library titles on the
format. The more expensive Betamax failed despite its technological to release a larger number
of their library titles on the format.
Reason for failure:

Vastly different corporate culture.

Poor understanding of movie business
Legal issues
Japanese recession

RECOMMENDATIONS
After analyzing the advantages and disadvantages of mergers and acquisitions along with
consideration of the rate of failure of the same, the companies should prioritize their goal and
focus on creating long-term benefits for organizations rather than short term achievements .
Defining firm goals, aligning with business strategy, conducting the right type of due diligence,
and gaining stakeholder value are also top concerns.
Monitor the Pace: It is clear that the pace of M&A in 2012 will return to pre-recession
volumes. Activity will be strong for both financial and strategic acquisitions. Take
extreme care during these high volume times to not allow the ego to get in front of the
brain on acquisition valuations. Overpaying for an acquisition can doom it to failure
from the onset.
Define Firm Goals: What outcome do you desire from a merger or acquisition?
Determine if the company can be integrated into current operations or left as a
standalone unit, realizing that strategies to channel existing customers into the new
company can increase revenues. Potential goals for the supply chain operations include
evaluation for consolidation, expansion and streamlined distribution processes, as well
as using forecasting tools to model combined revenues.

Align with Growth Strategies: Just because an acquisition seems like a good deal , it
should still be determined if it fits with your overall growth strategy. Due diligence that
incorporates a careful analysis and weighting of all risk factors must be conducted
before execution. This will help answer such key questions as, Does the risk of
acquiring a company for new products or new markets outweigh the perceived benefit of
the acquisition cost versus a Greenfield approach?

Identify the Right Targets: Start by making a target shortlist. Typically, a company will
gather as much relevant information on markets, companies, products and services as
needed to augment its portfolio. Second, develop a profile of the type of company ideal
for acquisition; for instance, your profile may include target revenues of $20 million,
North America focused, with an EBIDTA of $4 million.
The due diligence process will be specific to the
Do Specific Commercial Due Diligence:
areas covered include financial, legal,
type of company and market. Typical labor,

intellectual property, IT, environment and market/commercial areas. Also, an

operational/supply chain review is needed to identify the potential of additional value for
the target company by improving its operations; this review can also uncover any
serious operational risks. The outcome will provide full visibility and allow you, as the
potential buyer to consider aborting the deal or renegotiating the price.

Identify Any Weaknesses Through Due Diligence: Private equity firms will be
looking more for the untapped values, or disguised weaknesses, in the operations of
acquisition targets. Understanding a companys operational effectiveness from sour
cing to customer delivery will help price discovery and expose potentially costly
problems. This year, it is not solely about financial engineering; it is also about
uncovering the operational values early in the process and realizing what these are fairly
quickly.

Accelerate Integration to Boost Stake Holder Confidence: If the acquisition is

complete, it is now time to get results based upon the due diligence process. Stake
holders are expecting results by the first 100 days, and acquisition partners are looking
to boost their confidence. The first step is to organize and supplement your resources to
ensure a quick and efficient performance towards achieving theses goals. And within the
first 100 days, it is imperative that companies avoid supply chain disruptions, begin the
integration and set a pace for achieving results.

Develop Sound Operations Strategies: Even though business strategies can be

identified and understood, supply chain managers often launch too quickly into
initiatives that appear to integrate the supply chains. But in, they initiate actions that
automatically focus on operational cost savings synergies without first considering what
the operations strategies should be and how these should align with business strategies.
So, prior to considering the integration of supply chains, establish operations strategies
for geographies, customers, product categories, etc.

Set Integration of Processes and Technologies: It is important to dig into the

integration of supply chain processes and technologies to really grasp how the
integration will work. Address the Mega supply chain processes of Plan-But-MakeMove-Store-Sell Return to understand the synergies of supply chain cost reduction,
optimization of inventories, synergy of the business combination, facilities
rationalization, coordination of supply chain innovation, and the selection of
technologies to help transform the processes to the desired vision.

Validate Market Perception: The perception of the marketplace regarding a new

merger or acquisition can be validated by customers and channel partners
beforehand. Important issues include customer loyalty and customer service
levels, and how the market will perceive this will be affected by the acquisition.
M&A is no longer just about buying or combining companies; it is about integrating
supply chains to create greater business value and spur growth. Following these
priorities will allow company leaders to prepare for the business, operations and
cultural challenges involved in purchasing or acquiring other entities.

CONCLUSION
One size doesn't fit all. Many companies find that the best way to get ahead is to expand
ownership boundaries through mergers and acquisitions. For others, separating the public
ownership of a subsidiary or business segment offers more advantages. At least in theory,
mergers create synergies and economies of scale, expanding operations and cutting costs.
Investors can take comfort in the idea that a merger will deliver enhanced market power.
By contrast, de-merged companies often enjoy improved operating performance thanks to
redesigned management incentives. Additional capital can fund growth organically or through
acquisition. Meanwhile, investors benefit from the improved information flow from de-merged
companies.
M&A comes in all shapes and sizes, and investors need to consider the complex issues
involved in M&A. The most beneficial form of equity structure involves a complete analysis of
the costs and benefits associated with the deals.
Let's recap what we learned in this tutorial:

A merger can happen when two companies decide to combine into one entity or when
one company buys another. An acquisition always involves the purchase of one
company by another.

The functions of synergy allow for the enhanced cost efficiency of a new entity made
from two smaller ones - synergy is the logic behind mergers and acquisitions.

Acquiring companies use various methods to value their targets. Some of these methods
are based on comparative ratios - such as the P/E and P/S ratios - replacement cost or
discounted cash flow analysis.

An M&A deal can be executed by means of a cash transaction, stock-for-stock

transaction or a combination of both. A transaction struck with stock is not taxable.

Break up or de-merger strategies can provide companies with opportunities to raise

additional equity funds, unlock hidden shareholder value and sharpen management
focus. De-mergers can occur by means of divestitures, carve-outs spinoffs or tracking
stocks.

Mergers can fail for many reasons including a lack of management foresight, the
inability to overcome practical challenges and loss of revenue momentum from a
neglect of day-to-day operations.

BIBLIOGRAPHY

Book reference
Michael vag, Strategic management

Independent Project on Mergers and Acquisitions in India A Case Study -Kaushik Roy
Choudry
-K. Vinay Kuma
Cases in corporate Acquisitions, Mergers and Takeovers -Edited by Kelly Hill

Websites

www.business.gov.in
www.investopedia.com
www.economictimes.com