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Mergers & Acquisitions (M&A)

Between today’s survival and tomorrow’s growth there is a thin line of opportunity, M&A strategies
help you to seize that opportunity."

A number of Indian Corporates have undertaken M&A in the recent past. In fact M &
As has become the buzz words in Indian corporate scenario. The recent merger of
the investment bank Enam and commercial bank Axis Bank is another prime
example of M & A. The present article seeks to simplify this growth strategy and
explain it in a logical manner.

Q1) What are the various ways a Corporate can achieve growth?

Ans. There are essentially two ways a Corporate can achieve growth. They are:

 Organic Route: In such a strategy, the Corporate undertakes projects and


builds capacities by itself. Such a strategy is time consuming as the projects
will have high gestation periods.

 Inorganic Route: M & A fall under this strategy. In such a case the
Corporate takes over another existing firm.

The key benefit in this case is the reduction in gestation period. In these cases if the
Corporates would have gone by the organic route, it would have been a couple of
months, even years to add capacity. The same objective can be achieved in a
significantly shorter time by a properly executed inorganic route. There are other
significant benefits also.

Q2) What are the other significant benefits of M&A?

Ans. The other significant benefits of M & A are:

A. Economics Of Scale And Economics Of Scope: - Reducing Fixed


Cost/Unit.

Economies of scale:-
In this case, the company increases its production capacity to such an extent that
the fixed cost/unit decreases.

Example:
Fixed Costs = 10 Lacs 10 Lacs
No. of units Produced = 10 Lacs 20 Lacs
Fixed cost/unit = Re. 1/- Re.
0.50/-

In such a case, by reducing the fixed cost/unit, the co. will be able to price its
products better. This is the advantage of global capacities.
Note: China has been using this technique and practicing dumping.
Economics of scope:
Is aiming to reduce marketing expenses. In such a case, we find that the co. is
looking at reducing its marketing expenses.
For e.g.: if a pharma co. XYZ has 100 salesman and other ABC has 50, then by
taking over ABC and removing the 50 salesmen, the two units after merging can
bring down its overall marketing costs.

Both Economies of Scope and Economies of Scale will result in synergy


(Synchronised energy). This essentially indicates that the whole unit formed after M
&A is greater than sum of the merging units. In short 2 plus 2 equals 5.

b. Acquisition of Intangibles:
Often M & As are for acquisition of Intangibles like brands, patents, goodwill etc. In
such cases the intangible assets are acquired at a hefty premium.

c. Diversification.
In this case the firms involved can offer better variety of products. Often firms
resort to M & A as they can get access to new markets a prime example is that of
Tata Steel with Corus.

d. Technology / Skilled man power.


Often Corporates go in for M & A to get access to new technology. All the M & As
happening in the technology space are prime examples of the same. Also they may
go in for M & A to get access to skilled management and manpower as seen in
financial services investment banking firms.

These are all examples of value creation. Apart from that, there could be the added
advantage of value capture.

Q 3) What is value capture?

Ans. Value capture essentially refers to the tax benefits that a Corporate will get
when they go for M&A.

Often loss making firms are acquired by Corporates for getting tax benefits. In such
a case, the taxable profit of the firm comes down. For e.g. Co.XYZ with 100 cr profit
and with a taxation rate of 20% will have to pay taxes of 20 crores.

However, if it acquires a company ABC with losses of 30crores, its taxable profit will
come down to 100- 30 =70 crores. The taxes in this case would be 14 crores. Thus,
the co. is saving 20 – 14 = 6 crores.

This is known as Value Capture. In this case the value is captured from the Govt
as less tax is paid. The Govt is in favor of the same as M & A in case of sick
Corporates generate employment. In fact the Govt allows carry forward of losses in
case the losses are so huge that they cannot be absorbed by the healthy units
current year’s profits.
Q4) What are the various ways in which M & A can be classified?

Ans. M & A can be further classified as:

Inbound Deals: Foreign companies acquiring Indian corporates are examples of


the same for e.g. Daichi of Japan taking over Ranbaxy.

Outbound Deals: Indian Corporates acquiring foreign Corporates or brands are


examples of the same. Hindalco of the Aditya Birla Group acquiring Novellis is an
example of the same.

Domestic Deals: These refer to the deals between Indian Companies. For e.g. the
merger of Global Trust Bank with Oriental Bank of Commerce.

It is significant to note that the outbound deals are increasing significantly showing
increasing risk appetite of Indian Corporates.

Also though used interchangeably, there are significant differences between the
terms Mergers and Acquisitions.

Q 5) What are the significant differences between Mergers and


Acquisitions?

Ans. In Acquisitions, all the Corporates involved retain their original identity and
survive.
In case of Mergers however at least one entity loses its existence. There are various
types of mergers.

Q6) What are the various types of mergers?

Ans. Merger is defined as a financial restructuring strategy wherein two or more


firms combine and at least one unit loses its legal entity.

In case of a straight merger, the bigger entity survives.

X + Y = X Straight Merger

X Y
XY
In case of reverse merger, the smaller entity survives.

+ = Reverse Merger

ICICI ICICI Bank

X ICICI Bank
Reverse Merger happens rarely as the smaller entity survives. In India, the classic
example of reverse merger is that of ICICI Bank (the smaller entity) with ICICI (the
bigger entity). In this case ICICI Bank survived as the management was of the view
that the future belonged to universal banking. (“UNIVERSAL BANKING”:- Refers to
offering all financial products under one banking roof)

=
Another example would be that of congloromate.

X + Y

X Z
In this an all together new entity Z is formed and both the firms X & Y lose their
Corporate identities.