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Introduction-International Merger and

Acquisition
What is Merger & Acquisition ?
• Mergers and acquisitions (M&A) is the area of corporate finances,
management and strategy dealing with purchasing and/or joining
with other companies. In a merger, two organizations join forces to
become a new business, usually with a new name. Because the
companies involved are typically of similar size and stature, the term
"merger of equals" is sometimes used.
• In an acquisition, on the other hand, one business buys a second
and generally smaller company which may be absorbed into the
parent organization or run as a subsidiary.

Over many decades, M & A has been a major contributor to world


economic growth.

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Introduction-International Merger and
Acquisition
• Why Companies Merge and Acquire: The underlying
motivation to merger and acquisition is enhancement of shareholder
value.
In financial terms, enhancement of shareholder value requires that
the net present value of the combined business (its post-acquisition
cash flows, discounted by the post acquisition cost of capital) must
be greater than the sum of the pre-acquisition value of the acquirer
and the acquisition cost.

Synergies: Synergies are benefits that can only be achieved by


putting two businesses together. They can be classified as follows:

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Introduction-International Merger and
Acquisition
1. Commercial Synergies: those benefits that come from
improvements in the underlying business of the companies. For
example, increased sales volume; ability to charge higher prices;
reduced costs. They usually result in higher profit margins.
2. Financial Synergies: those benefits that come from better use of
capital. For example, lower weighted average cost of capital;
making use of surplus cash etc.
3. Asset Synergies: those benefits that come from better use of
acquirer’s or target’s assets. For example, using excess
manufacturing capacity to maximize production volume; to combine
distribution network.

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Introduction-International Merger and
Acquisition
Merger & Acquisition Strategies:
Scale Acquisitions: The acquisition which is aimed at increasing the
scale of operations is called Scale Acquisitions. For example- Buying a
competing company from the same market.

Scope Acquisitions:
Horizontal Acquisition: Buying a company that sells same products,
but in different geographical markets.

Vertical Acquisitions: When a company expands into its different


stages of supply chain, it is called vertical acquisitions.

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Introduction-International Merger and
Acquisition
• A Brief History of Mergers and Acquisitions :
• Merger Waves:
 The railroad wave (approximately 1895–1905).
 The automobile wave (approximately 1918–1930).
 The conglomerate wave (approximately 1955–1970).
 The mega-merger wave (approximately 1980–1990).
 The globalisation wave (approximately 1994 to the present).

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Will the Next Wave of Merger &
Acquisition Create More Value?
• After 2000s, the market is experiencing a new surge of mergers and
acquisitions. It is largely known that in the past, two-thirds of M & A
transactions have destroyed value, often resulting in abject failure.
• Lessons from the Past: Four lessons can be derived from the
previous M & A analysis:
i. There is no statistical correlation between the value
creation and the size of the transaction. However, large
scale transactions (more than $ 1b) tend to destroy value
whereas small scale transactions tend to create value.
ii. An acquirers’ previous M & A experience has an influence
on value creation. Research shows that frequent buyers are
more likely to create value. On the other hand, a company
which carried out less than one M & A transaction over the
last 10 years will risk destroying value.

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Will the Next Wave of Merger &
Acquisition Create More Value?
• A merger and acquisition can act as a catalyst in
uncovering significant savings which were previously
concealed.
• Finally, value creation depends on how the merger
preparation and post merger integration process is managed.
In fact, although the market is positive about value creation
after 5 days in 54 percent of the deals, the average rate value
creation decreases to reach only 40 % one year after the
announcement.

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Will the Next Wave of Merger &
Acquisition Create More Value?
Best Practices and Advanced Approaches:
The key to efficient management of the M & As is the optimum use of
‘traditional’ best practices: evaluation of the target’s strategic interest and of
potential synergies, retention of key people, preparation of an integration
plan, massive use of internal and external communication, and obviously ,
speed of integration.

While some teams are working on the establishment of the new group,
other teams must remain focused on sales and customers.: this requires
transitory management systems.

Some companies may go beyond these and adopt advanced practices.

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Will the Next Wave of Merger &
Acquisition Create More Value?
Advanced Practices:
i. Better evaluation of the management and the human capital
during the due diligence process.
ii. Realistic evaluation of the synergies and their efficient
implementation by dedicated line people.
iii. Efficient management of the anti-trust negotiation process.
iv. Preserving the value of human capital.
v. Adoption of standardized acquisition and integration process.

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International M & A Takes Centre Stage
• M & A activity is now playing out on a larger scale ,
creating new opportunities for international investors and
growth oriented companies in emerging market countries
looking to enter into western markets.
Driving Forces for International M & A:
A. The Buyers: Buyers and sellers are still
demonstrating appetite for deals. Foreign buyers
with financial strength are eying on US market for
fertile investment.
B. Currency valuation: It is another driving factor.
For the last several years, foreign currencies
have been stronger against the US dollar.

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International M & A Takes Centre Stage

C. Maturation of Foreign Companies:

D. The Sellers: From a sellers’ perspective, international deals


have emerged as an important option for US companies
navigating a challenging economic environment.

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Emerging Markets and M & A Activity

• Investors from emerging markets are increasingly interested in


developed economies. National investment strategies are growing.
New, hot sectors are emerging, particularly financial services and
infrastructure. Valuations are arising as a result of emerging market
investment.

Key Trends:
I. International investment flows are changing. In the past, it
was invariably from developed country to developing country,
now a reverse trend is observed.
II. Notable among the new investors from the developing
markets are sovereign wealth funds, which are likely to have
considerable effect in future.

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Emerging Markets and M & A Activity
III. While investors from emerging markets are creating
competition in developed market, western private equity funds
are creating competition in developing markets.
IV. National investment strategies are also likely to shape future
merger and acquisition trends. Initially, the Chinese govt. was
interested in investment to ensure its supply chain, now they
are planning to invest in knowledge intensive industry.

There is however, one inhibitor, that could potentially affect the emerging M
& A market. The increased valuation attached to companies and assets in
those markets.

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Emerging Markets and M & A Activity

Key Challenges:
i. Emerging markets are inherently fast moving and this
can be true of their fiscal regimes.
ii. Different approaches to valuation methodologies can
also arise.
iii. Variations in accounting policies can lead to
misinterpretation of reported figures.
iv. Failure to assess political risk.
v. High turnover rates among senior corporate
executives may lead to corporate memory loss.

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Developments in Merger control
worldwide
Recently , two industrial super powers, India and China, have passed
new merger legislation, bringing their regimes further into harmony
with more mature systems such as those of the European union and
the United States.

 China: China adopted its first competition law in 2007. Pre-


merger notification is required under this law. Particular concern is
that acquisition of Chinese companies by foreign companies go
through national security checks.
 India: India’s new regime introduces mandatory merger
notification where specified assets or turnover thresholds are met.
However, the law incorporates a ‘domestic nexus’ element where
both companies have operation in India.

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