Voluntary amalgamation of two firms on roughly equal terms into one new legal entity.

Mergers are effected by exchange of the pre-merger stock (shares) for the stock of the
new firm. Owners of each pre-merger firm continue as owners, and the resources of the
merging entities are pooled for the benefit of the new entity. If the merged entities
were competitors, the merger is called horizontal integration, if they
were supplier or customer of one another, it is called vertical integration.

DEFINITION OF 'MERGER'
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.
a statutory combination of two or more corporations by the transfer of the
properties to one surviving corporation.
2.
any combination of two or more business enterprises into a single enterprise.
3.
an act or instance of merging.

Types of Company Mergers

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There are five commonly-referred to types of business

combinations known as mergers: conglomerate merger, horizontal merger, market extension merger, vertical merger
and product extension merger. The term chosen to describe the merger depends on the economic function, purpose
of the business transaction and relationship between the merging companies.

Conglomerate
A merger between firms that are involved in totally unrelated business activities. There are two types of conglomerate
mergers: pure and mixed. Pure conglomerate mergers involve firms with nothing in common, while mixed
conglomerate mergers involve firms that are looking for product extensions or market extensions.
Example
A leading manufacturer of athletic shoes, merges with a soft drink firm. The resulting company is faced with the same
competition in each of its two markets after the merger as the individual firms were before the merger. One example
of a conglomerate merger was the merger between the Walt Disney Company and the American Broadcasting
Company.

Horizontal Merger
A merger occurring between companies in the same industry. Horizontal merger is a business consolidation that
occurs between firms who operate in the same space, often as competitors offering the same good or service.
Horizontal mergers are common in industries with fewer firms, as competition tends to be higher and the synergies
and potential gains in market share are much greater for merging firms in such an industry.
Example
A merger between Coca-Cola and the Pepsi beverage division, for example, would be horizontal in nature. The goal
of a horizontal merger is to create a new, larger organization with more market share. Because the merging
companies' business operations may be very similar, there may be opportunities to join certain operations, such as
manufacturing, and reduce costs.

Market Extension Mergers

A market extension merger takes place between two companies that deal in the same products but in separate
markets. The main purpose of the market extension merger is to make sure that the merging companies can get
access to a bigger market and that ensures a bigger client base.
Example
A very good example of market extension merger is the acquisition of Eagle Bancshares Inc by the RBC Centura.
Eagle Bancshares is headquartered at Atlanta, Georgia and has 283 workers. It has almost 90,000 accounts and
looks after assets worth US $1.1 billion.
Eagle Bancshares also holds the Tucker Federal Bank, which is one of the ten biggest banks in the metropolitan
Atlanta region as far as deposit market share is concerned. One of the major benefits of this acquisition is that this
acquisition enables the RBC to go ahead with its growth operations in the North American market.
With the help of this acquisition RBC has got a chance to deal in the financial market of Atlanta , which is among the
leading upcoming financial markets in the USA. This move would allow RBC to diversify its base of operations.

Product Extension Mergers

A product extension merger takes place between two business organizations that deal in products that are related to
each other and operate in the same market. The product extension merger allows the merging companies to group
together their products and get access to a bigger set of consumers. This ensures that they earn higher profits.
Example
The acquisition of Mobilink Telecom Inc. by Broadcom is a proper example of product extension merger. Broadcom
deals in the manufacturing Bluetooth personal area network hardware systems and chips for IEEE 802.11b wireless
LAN.
Mobilink Telecom Inc. deals in the manufacturing of product designs meant for handsets that are equipped with the
Global System for Mobile Communications technology. It is also in the process of being certified to produce wireless
networking chips that have high speed and General Packet Radio Service technology. It is expected that the products
of Mobilink Telecom Inc. would be complementing the wireless products of Broadcom.

Vertical Merger
A merger between two companies producing different goods or services for one specific finished product. A vertical
merger occurs when two or more firms, operating at different levels within an industry's supply chain, merge
operations. Most often the logic behind the merger is to increase synergies created by merging firms that would be
more efficient operating as one.
Example

A vertical merger joins two companies that may not compete with each other, but exist in the same supply chain. An
automobile company joining with a parts supplier would be an example of a vertical merger. Such a deal would allow
the automobile division to obtain better pricing on parts and have better control over the manufacturing process. The
parts division, in turn, would be guaranteed a steady stream of business.
Synergy, the idea that the value and performance of two companies combined will be greater than the sum of the
separate individual parts is one of the reasons companies merger.

Benefits of Mergers
A merger occurs when two firms join together to form one. The new firm will have an
increased market share, which reduces competition. This reduction in competition can be
damaging to the public interest, but help the firm gain more profits.
However, mergers can give benefits to the public.
1. Economies of scale. This occurs when a larger firm with increased output can reduce
average costs. Lower average costs enable lower prices for consumers.

Different economies of scale include:

Technical economies; if the firm has significant fixed costs then the new
larger firm would have lower average costs,
Bulk buying A bigger firm can get a discount for buying large quantities
of raw materials
Financial better rate of interest for large company
Organisational one head office rather than two is more efficient
Note a vertical merger would have less potential economies of scale than a horizontal
merger e.g. a vertical merger could not benefit form technical economies of scale. However
in a vertical merger there could still be financial and risk-bearing economies.
Some industries will have more economies of scale than others. For example, car
manufacture has high fixed costs and so gives more economies of scale than two clothing
retailers.
More on economies of scale
2. International Competition. Mergers can help firms deal with the threat of multinationals
and compete on an international scale.
3. Mergers may allow greater investment in R&D This is because the new firm will have
more profit which can be used to finance risky investment. This can lead to a better quality
of goods for consumers. This is important for industries such as pharmaceuticals which
require a lot of investment.
4. Greater Efficiency. Redundancies can be merited if they can be employed more
efficiently.
5. Protect an industry from closing. Mergers may be beneficial in a declining industry
where firms are struggling to stay afloat. For example, the UK government allowed a
merger between Lloyds TSB and HBOS when the banking industry was in crisis.
6. Diversification. In a conglomerate merger two firms in different industries merge. Here
the benefit could be sharing knowledge which might be applicable to the different industry.
For example, AOL and Time-Warner merger hoped to gain benefit from both new internet
industry and old media firm

8 Specific Motives for Mergers and Acquisitions

OCTOBER 27FIRMSCONSULTING

CORPORATE RESTRUCTURING, FINANCE, MBA 2 COMMENTS

Mergers are undertaken if it is believed two or more companies which are merging will be
greater together than sum of its parts. The math of a merger is 1+1=3 or 2+2=5.
Specific motives for mergers for strategic and financial reasons include the following:
Tax advantages Tax advantages in mergers will differ from one location to another. In US
it can be utilized if the acquiring firm or target company has a tax loss carry-forward. Tax
loss carry-forward refers to the ability to deduct past losses from the taxable income. This
advantage is available in mergers but not forholding companies. To decrease the
attractiveness of this motive, the US and many other countries limit the amount of tax loss
carry-forward that can be deducted annually from the taxable income of merged companies.
For example, assume the acquiring company is a profitable company and the target
company is a loss maker which incurred losses in the past two years. When the merger is
completed, the operating results of a merged company, which probably will have the identity
of the acquiring company, will be reported on a consolidated basis.
This means the acquiring company will be able to deduct past losses of the target company
from the consolidated taxable income, within limits. Merged firms will continue deducting
the tax loss carry-forward (within limits) until it is recovered completely over a duration of up
to 20 years.
Increases liquidity for owners If the acquiring firm is a large company and target
company is a small organization then the target companys shareholders may find it very
appealing that after merger their shares liquidity and marketability will likely be
considerably better.
Gaining access to funds The acquiring company may have high financial leverage (a lot
of debt) thereby making access to additional external debt financing very limited. Therefore,
one of the motives of the acquiring company to undertake the merger is to merge with a
company which has a healthy liquidity position with low or non-existent financial leverage
(very little or no debt).
Growth This is one of the most common motives for mergers. It may be cheaper and less
risky for the acquiring company to merge with another provider in a similar line of business
than to expand operations internally. It is also much faster to grow by acquisition.
Sometimes an organization may have a window of opportunity that will be closing fast and
the only way the organization can take advantage of this opportunity is by acquiring a
company with competencies and resources necessary to take advantage of the opportunity.
Additional benefits of growth motivated mergers are that a competitor or potential future
competitor is eliminated.

Diversification Diversification is an external growth strategy and sometimes serves as a

motive for a merger. For example, if an organization operates in a volatile industry, it may
decide to undertake a merger to hedge itself against fluctuations in its own market. Another
example can be when an acquiring company pursues a target company which is located in
different state or country. This is called a geographical diversification.
Related diversification seems to have a better track record. It refers to expanding in the
current market or entering new markets and adding related new products and services to
the product or service line of the acquiring company.
Diversification usually does not deliver value to the shareholders because they can diversify
their portfolio on their own at much lower cost. Therefore, diversification on its own is
unlikely to be sufficient motive for a merger.
Synergistic benefits Synergy occurs when the whole is greater than sum of its parts. For
example, in terms of math it could be represented as 1+1=3 or as 2+2=5. Within the
context of mergers, synergy means the performance of firms after a merger (in certain areas
and overall) will be better than the sum of their performances before the merger. For
example, a larger merged company may be able to order larger quantities from suppliers
and obtain greater discounts due to the size of the order.
In the context of mergers, there can be two types of synergy. The first type of synergy
results in economies of scale, which refers to decreased costs. Another type of
synergyresults in increased revenues such as cross-selling.
As per the above, economies of scale are derived from synergy. For example, merging
businesses in the same business line will allow elimination of some of the duplicated
overhead costs. A new business will not need two human resources and public relations
departments. Instead, the best employees will be kept and the rest of personnel and unused
office space will be reallocated or no longer used.
Cross-selling is another benefit derived from synergy. If some of the products and services of
merged companies differ then cross-selling those products and services to the other firms
customer base can be a cost effective way to increase sales. Being able to effectively meet
more of the customers needs may also increase customer loyalty due to higher customer
satisfaction which can occur by effectively providing customers with a broader spectrum of
products and services which meet customers needs.
Synergy benefits with regard to an increase in revenue are usually more difficult to achieve
than synergy benefits with regard to decreasing costs. Management also needs to be careful
to ensure that potential synergy benefits are not overestimated as this may result in
overpayment for the target company.
Protection against a hostile takeover Defensive acquisition is one of thehostile
takeover defense strategies that may be undertaken by target of the hostile takeover to
make itself less attractive to the acquiring company. In such a situation, the target company
will acquire another company as a defensive acquisition and finance such an acquisition
through adding substantial debt. Due to the increased debt of the target company, the

acquiring company, which planned the hostile takeover, will likely lose interest in acquiring
the now highly leveraged target company. Before a defensive acquisition is undertaken, it is
important to make sure that such action is better for shareholders wealth than a merger
with the acquiring company which started off the whole process by proposing a hostile
takeover.
Acquisition of required managerial skills, assets or technology The target company
may have managerial skills, assets and/or technology that the acquiring company needs to
improve its performance, profits, revenue, cut costs, reduce productivity etc. This can
become a motive for merger.

The Reasons for Mergers and Acquisitions

By Christina Tangora Schlachter and Terry H. Hildebrandt, MA, MA, PCCfrom Leading
Business Change For Dummies

Mergers and acquisitions take place for many strategic business reasons, but the most
common reasons for any business combination are economic at their core. Following
are some of the various economic reasons:

Increasing capabilities: Increased capabilities may come from expanded

research and development opportunities or more robust manufacturing operations
(or any range of core competencies a company wants to increase). Similarly,
companies may want to combine to leverage costly manufacturing operations (as
was the hoped for case in the acquisition of Volvo by Ford).
Capability may not just be a particular department; the capability may come from
acquiring a unique technology platform rather than trying to build it.
Biopharmaceutical companies are a hotbed for M&A activities due to the extreme
investment necessary for successful R&D in the market. In 2011 alone, the four
biggest mergers or acquisitions in the biopharmaceutical industry were valued at
over US$75 billion.

Gaining a competitive advantage or larger market share: Companies may

decide to merge into order to gain a better distribution or marketing network. A
company may want to expand into different markets where a similar company is
already operating rather than start from ground zero, and so the company may just
merge with the other company.
This distribution or marketing network gives both companies a wider customer base
practically overnight.

One such acquisition was Japan-based Takeda Pharmaceutical Companys

purchase of Nycomed, a Switzerland-based pharmaceutical company, in order to
speed market growth in Europe. (That deal was valued at about US$13.6 billion, if
youre counting.)

Diversifying products or services: Another reason for merging companies is to

complement a current product or service. Two firms may be able to combine their
products or services to gain a competitive edge over others in the marketplace. For
example, in 2008, HP bought EDS to strengthen the services side of their
technology offerings (this deal was valued at about US$13.9 billion).
Although combining products and services or distribution networks is a great way to
strategically increase revenue, this type of merger or acquisition is highly scrutinized
by federal regulatory agencies such as the Federal Trade Commission to make sure
a monopoly is not created. A monopoly is when a company controls an
overwhelming share of the supply of a service or product in any one industry.

Replacing leadership: In a private company, the company may need to merge

or be acquired if the current owners cant identify someone within the company to
succeed them. The owners may also wish to cash out to invest their money in
something else, such as retirement!

Cutting costs: When two companies have similar products or services,

combining can create a large opportunity to reduce costs. When companies merge,
frequently they have an opportunity to combine locations or reduce operating costs
by integrating and streamlining support functions.
This economic strategy has to do with economies of scale: When the total cost of
production of services or products is lowered as the volume increases, the company
therefore maximizes total profits.

Surviving: Its never easy for a company to willingly give up its identity to
another company, but sometimes it is the only option in order for the company to
survive. A number of companies used mergers and acquisitions to grow and survive
during the global financial crisis from 2008 to 2012.
During the financial crisis, many banks merged in order to deleverage failing
balance sheets that otherwise may have put them out of business.

Mergers and acquisitions occur for other reasons, too, but these are some of the most
common. Frequently, companies have multiple reasons for combining.

Even though management and financial stakeholders view mergers and acquisitions as
a primarily financial endeavor, employees may see things a little differently (theyre
thinking WIIFM, or whats in it for me?).
Combining companies has some potential downsides for employees, who have to deal
with immediate fears about employment or business lines, but more positive sides of
merging may include more opportunities for advancement, or having access to more
resources to do ones job.
Steps to Make Mergers and Acquisitions More Successful:1.

Improving negotiation and price by knowing the company's exact market position

2.

Providing credibility and insurance to investors and bankers

3.

Selecting the optimal acquisition candidate for your company.

4.

Identifying market opportunities that an acquisition strategy can exploit

5.

Measuring customer attitudes on company's products to indicate their image in market

6.

Providing customer demographic data that gives insight into future market potential and

growth for targeted company

7.

Identifying opportunities for growth in market segmentation analysis

8.

Providing competitive benchmarking measurements to identify areas for fast

improvement in company
9.

Measuring market and technical trends to forecast future growth potential of company's

technology
10.

Identifying key trends in the market, the company's customers and relative position with

competitors to pinpoint future problems and opportunities.

Motives behind M&A

Motives behind M&A:These motives are considered to add shareholder value:

Economies of scale: This refers to the fact that the combined company can often
reduce duplicate departments or operations, lowering the costs of the company relative to the
same revenue stream, thus increasing profit.

Increased revenue/ Market Share: This motive assumes that the company will be
absorbing a major competitor and thus increase its power to set prices.

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.

Synergy: Better use of complementary resources.

Taxes: A profitable company can buy a loss maker to use the target's loss as their
advantage by reducing their tax liability.

Geographical or other diversification: This is designed to smooth the earnings results

of a company, which over the long term smoothen the stock price of a company, giving
conservative investors more confidence in investing in the company.

Vertical integration: Companies acquire part of a supply chain and benefit from the
resources.
These motives are considered to not add shareholder value:

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.

Managers hubris (pride): manager's overconfidence about expected synergies from

M&A which results in overpayment for the target company.

Empire building: Managers have larger companies to manage and hence more power.

Advantages:.1) Revenue enhancement

2) Cost reductions
3) Lower taxes
4) Changing capital requirements
5) A lower cost of capital

Dis-advantages:1) Excessive premium

In a competitive bidding situation, a company may tend to pay more. Often highest
bidder is one who overestimates value out of ignorance. Though he emerges as the
winner, he happens to be in a way the unfortunate winner. This is called winners
curse hypothesis.
2) Lack of research
Acquisition requires gathering a lot of data and information and analyzing it. It
requires extensive research. A carelessly carried out research about the acquisition
causes the destruction of acquirer's wealth.
3) Size Issues
A mismatch in the size between acquirer and target has been found to lead to poor acquisition
performance. Many acquisitions fail either because of 'acquisition indigestion' through buying
too big targets or failed to give the smaller acquisitions the time and attention it required
4) Diversification
Very few firms have the ability to successfully manage the diversified businesses. Unrelated
diversification has been associated with lower financial performance, lower capital productivity
and a higher degree of variance in performance.