Mergers and Acquisitions

Introduction
• A merger is a combination of two entities into one entity
• An acquisition occurs when one entity takes ownership of another entity's
stock, equity interests or assets.
• In a acquisition the acquiring company just needs to get a majority stake in
the company it is acquiring
• Mergers and Acquisitions allow businesses to change the nature of their
business or competitive positioning.
Objectives of M&A
• Economies of scale
• Elimination of competition
• Adaptation of modern technology
• Market share
• Patent rights
• Desire to enjoy monopoly
 Advantages Disadvantages
• To become bigger • Culture Clash
• Reach new markets • Financing
• Reduction of duplication
 Successes Failures
• Disney and Pixar: The combination of • Microsoft and aQuantive, A rare mistake
Disney’s marketing and brand name by Microsoft in Valuation. Believing
with Pixar’s innovation led to movies online advertising to be the future
like “WALL-E,” “Up,” and “Bolt.” A Microsoft purchased a digital marketing
combination of creativity and energy company named aQuantive for $6.3
billion overpaying by 85% and the
company's online advertising efforts
• Former Competitors Exxon and Mobil continue to cost it $2 billion annually.
in 1999 signed an $81 billion
agreement to merge and create
ExxonMobil. ExxonMobil remains the • DaimlerChrysler In 1998 German
strongest leader in the oil market. carmaker Daimler, maker of Mercedes-
Benz, merged with Chrysler via a $39
billion stock swap. Later, disgruntled
Chrysler shareholders filed a class-action
suit.
Top M&A deals of India
• Vodafone-Idea merger | Deal size: USD 23 billion
• Vodafone-Hutchison Essar | Deal size: USD 10.9 billion
• Ranbaxy-Daiichi Sankyo | Deal size: USD 4.6 billion
• Snapdeal - Freecharge | Deal size: USD 400 million
• Flipkart - Myntra | Deal size: USD 300 million
• Ola - TaxiForSure | Deal size: USD 200 million
• UltraTech Cement-Jaypee Group | Deal size: Rs 16,189 crore
Acquisition Premiums
• Price paid in excess to the pre-acquisition market value.
• General trend of average premium paid over past 20 year: 40% - 50%.

Boiling question
Why such staggeringly overvalued acquisitions are made?
Prime factors for Acquisition Premiums
• Agency problem
• Hubris
• Friendly Relations
• Winner’s Curse
Other Reasons
Healthy
relationship Relationships
between
individuals
in the two
firms Acquisition
Premiums
Winner’s
Curse: Multiple
winning bid Bidders

overestimat
es the value
Fate of Overpriced Acquisition
• According to a research, 70% of acquiring firms fail to recoup the premium
payment.
• Selling relatively redundant assets and consolidation of the rest of the assets.
• Large-scale workforce reductions. ( ebay-pay pal)

These actions lead to harming the long-term value of acquired firm’s

assets
Divestiture of acquired businesses
• According to a study, 44% of the acquisitions are eventually divested.
• Divested due to:
1. Poor performance
2. Low organizational inertia to maintain the acquisition.
3. Acquired firm is young and small.
4. If the parent firm has prior divesture experience.
• Example: Daimler-Chrysler- Daimler sold Chrysler for a loss ($28.6bn)
Acquisition Capability Development
• Major learnings:
• Select better future targets
• Improve their integration processes for future acquisition
• Complementary capabilities leads to valuable capabilities
• Mechanism for learning
• Opportunity to transfer experience into situation where it does not apply
• Active performance feedback
Contd.
• Observing and learning from others – Vicarious learning
• More exploratory search.
• Less exploitation of current knowledge stocks
Cross Border M&A
• Why is it needed?
• Means of entering foreign markets
• Enrich their competitive positions within international market(eg. Walmart
and Flipkart, Idea and Vodafone)
• Reduce transaction costs involved
• Challenges:
• Liability of foreignness in host country(culture, area regulations, business
norms
Performance outcomes analysis:
• Acquiring firm create more value when firm acquired are based in countries
with lower risks
• Acquiring firms benefit when the newly acquired firms can effectively
integrate into the acquiring firms
Conclusion
• M&As’ are popular strategies common across various industry
• While once it was only used by US and western European countries, but
now it is been widely used across the world
• It is still highly complex and has high risk
• Issues:
• Whether complementary capability exists?
• If paid too high premium
• In sum, M&As’ can sometimes be highly effective and successful strategy,
but should be carefully designed and implemented.