Mergers ,

Acquisitions &
Corporate
Restructuring
 What Does Merger Mean?

• Merger means the combination of two or

more companies in creation of a new
entity.
 Benefits of merger
• Diversification of product and service offerings

• Increase in plant capacity

• Larger market share

• Utilization of operational expertise and research and

development (R&D)

• Reduction of financial risk

Merger
oA transaction where two firms agree to integrate their
operations on a relatively co-equal basis because they
have resources and capabilities that together may
create a stronger competitive advantage.
o The combining of two or more companies, generally
by offering the stockholders of one company
securities in the acquiring company in exchange for
the surrender of their stock
o Example: Company A+ Company B= Company C.
 ACQUISITION

A transaction where one firms buys another firm with

the intent of more effectively using a core competence
by making the acquired firm a subsidiary within its
portfolio of business
 It also known as a takeover or a buyout
 It is the buying of one company by another.
 Inacquisition two companies are combine together to
form a new company altogether.
 Example: Company A+ Company B= Company A.
DIFFERENCE BETWEEN MERGER AND
ACQUISITION:

MERGER ACQUISITION
i. Merging of two organization in to i. Buying one organization by
one. another.
ii. It is the mutual decision. ii. It can be friendly takeover or
iii. Merger is expensive than hostile takeover.
acquisition(higher legal cost). iii. Acquisition is less expensive than
iv. Through merger shareholders can merger.
increase their net worth. iv. Buyers cannot raise their enough
v. It is time consuming and the capital.
company has to maintain so much v. It is faster and easier transaction.
legal issues. vi. The acquirer does not experience
vi. Dilution of ownership occurs in the dilution of ownership.
merger.
Tech Mahindra and Satyam
merged to form Mahindra
Satyam.
 Why do mergers fail ?

• Lack of human integration

• Mismanagement of cultural issues
• Lack of communication
Failed Merger of Daimler
Chrysler
 Types of Merger

1. Horizontal Merger
2. Vertical Merger
3. Conglomerate Merger
4. Concentric Merger
 Horizontal Merger

• Horizontal mergers are those mergers

where the companies manufacturing
similar kinds of commodities or running
similar type of businesses merge with
each other.
 Examples of Horizontal Merger
• Lipton India and Brooke Bond.

• Bank of Madura with ICICI Bank.

• BSES Ltd with Orissa Power Supply Company.

• Associated Cement Companies Ltd with Damodar

Cement.
 Vertical Merger

• A merger between two companies

producing different goods or services.
 Example of Vertical Merger
• Time Warner Incorporated, a major cable operation,
and the Turner Corporation, which produces CNN,
TBS, and other programming.

• Pixar-Disney Merger
 Conglomerate Merger
A merger between firms that are involved in totally
unrelated business activities.

Two types of conglomerate mergers:

1. Pure conglomerate mergers

2. Mixed conglomerate mergers involve firms that are

looking for product extensions or market extensions.
Conglomerate mergers

•Product extension conglomerate mergers involve

firms that sell non-competing products use related
marketing channels of production processes.
Examples: Cardinal Healthcare-Allegiance; AOL-Time
Warner; Phillip Morris-Kraft; Citicorp-Travelers
Insurance; Pepsico-Pizza Hut; Proctor & Gamble-
Clorox.
•Market extension conglomerate mergers join together
firms that sell competing products in separate
geographic markets.

Examples: Scripps Howard Publishing—Knoxville News

Sentinel; Time Warner-TCI; Morrison Supermarkets-
Safeway;SBC Communications-Pacific Telesis
•A pure conglomerate merger unites firms that have no
obvious relationship of any kind.
Examples:BankCorp of America-Hughes Electronics
;R.J. Reynolds-Burmah Oil & Gas; AT&T-Hartford
Insurance
 Example of Conglomerate
Merger
• Walt Disney Company and the American
Broadcasting Company.
 Concentric Merger

• A merger of firms which are into similar

type of business.
 Example of Concentric Merger
• Nextlink is a competitive local exchange carrier
offering services in 57 cities and building a
nationwide IP network.
• Concentric, a national ISP, offers dedicated and
dial-up Internet access, high-speed DSL and
VPN services across the U.S. and overseas.
 Value creation of Horizontal
merger
 Revenue Enhancement
 Basic objective is increased Market power & Revenue
growth
 Revenue growth achieved through lowering prices for
product & through network externality(enhacing customer
base)
 Leveraging marketing resources & capabilities
 Cost Savings
 The combination of activities of functional areas leads to
economies of sales & economies of scope
 New growth opportunities
 Value creation of Vertical
merger
 Creates value by intergration of a supply chain
 Reduce uncertainties which result in lower transaction
cost, inventory cost & information cost
 Improves efficiency by cutting out intermediatiers &
reducing overhead expenses & redundant assets
 Increase the ability to provide a package of products &
services
 Value creation of Conglomerate
 Better management throgh knowledge transfer
 Risk reduction which inturn lower cost of capital
 Co insurance effect
 Overhead cost can be reduced (in R&D, sales
etc)
 Improves bargaining power
 lSources of Synergy

Synergy is created when two firms are combined and can be

either financial or operating

Operating Synergy accrues to the combined firm as Financial Synergy

Added Debt
Strategic Advantages Economies of Scale Tax Benefits Capacity Diversification?

r returns on More new More sustainable Cost Savings in Lower taxes on Higher debt May reduce
vestments Investments excess returns current operations earnings due to raito and lower cost of equity
- higher cost of capital for private or
depreciaiton closely held
- operating loss firm
er ROC Higher Reinvestment carryforwards
Longer Growth Higher Margin
Period
 SYNERGIES RELATED TO
ACQUISITION.
• Economies of scale

• Staff reductions

• Acquiring new technology

• Improved market reach and industry visibility

• Taxation
Ways of merger – A merger can take place in
following ways:

By purchasing of assets

 By purchase of common shares

 By exchanging of shares for assets

 By exchanging of shares for shares

 Takeovers

A corporate action where an acquiring company

makes a bid for an acquiree. If the target
company is publicly traded, the acquiring
company will make an offer for the outstanding
shares.
 Takeover might be :
Hostile Takeover Friendly Takeover
A takeover attempt that is Target company's
strongly resisted by the management and board
target firm of directors agree to a
merger or acquisition by
another company.
 WHY SHOULD FIRMS TAKEOVER?

• To gain opportunities of market growth more quickly than

through internal means
• To seek to gain benefits from economies of scale
• To seek to gain a more dominant position in a national or
global market
• To acquire the skills or strengths of another firm to
complement the existing business
• To acquire a speedy access to revenue streams that it
would be difficult to build through normal internal growth
• To diversify its product or service range to protect itself
against downturns in its core markets