CERTIFICATE

This is to certify that

1. Janhvi Shah 809
2. Shruti Mehta 801
3. Misha Jain 795
4. Dharni Nakka 804
5. Saket Athalye 784
6. Amar Nandu 806
have completed a project on Merges & Acquisition as a part
of their Vocational (Office Management) curriculum of the
year 2017-18.

Mrs. Rose John Mrs. Lata Shetty

(Head of Department) (Vice Principal)
Index
1) Introduction
2) Merger: Types
3) Acquisition : Types
4) Causes of Mergers and Acquisitions

5) Strategies

6) Requirements

7) Legal procedures

8) Stages involved in any M&A

9) Who gets benefits

10) Valuation of Companies

11) Practical Examples

12) Facebook and WhatsApp case study

13) Causes Of Failure
14) Advantages and Disadvantages
15) Conclusion
16) Visit Report
17) Vote Of Thanks
INTRODUCTION
The concept of merger and acquisition in
India was not popular until the year 1988.
During that period a very small percentage
of businesses in the country used to come
together. The key factor contributing to
fewer companies involved in the merger is
the regulatory and prohibitory provision of
the MRTP Act 1969. According to this act
the company or the firm has to follow a
pressurized and burdensome procedure to
get approval for Mergers and Acquisitions.
 WHAT IS A MERGER?
Merger is the activity by which two
companies unite into one new company. It is
a strategy of combining different companies
into a single company in order to enhance
the financial and operational strengths of
both organizations.

TYPES OF MERGER:
We have 5 different types of mergers
namely:
 Horizontal merger
 Vertical merger
 Conglomerate merger
 Concentric merger/Product extension
merger
 Market extension merger.
 HORIZONTAL MERGERS:
When two firms working in the same
industry or producing similar kind of
products combine, it is known as a horizontal
merger .The main objectives of such
mergers is to gain benefits from the
economies of scale, to reduce competition,
achieve the monopoly status and control the
market. When two companies working in the
same field combine, they are in a better
position to achieve monopoly in the market
and thus increase the sale of their products.
Examples-
 Merger of bank of Mathura with ICICI
bank.
 Merger of Lipton India with Brooke bond
 Merger of Associated Cement Company
[ACC] with Damodar Cements.
VERTICAL MERGERS:
There are two ways in which a vertical
merger can take place.
One is when it merges with a company that
produces the raw materials used by it.
For e.g.: merger of a tire manufacturer with
a company that produces rubber.
Another form of a vertical merger is when a
company merges with another company
which would help it get closer to the
customers. For e.g.: A FMCG company
merging with an advertising company or with
a retailing outlet.

CONGLOMERATE MERGERS:
These types of mergers are complete
opposites of horizontal mergers.
When two companies operating in different
industries and producing products which are
in no way related to each other merge, the
merger is said to be a conglomerate merger.
The main aim of such mergers is to achieve
big size and spread them throughout the
market so that they can increase the sale of
their products.
Example: Merger of a watch manufacturer
with a cement company.

CONCENTRIC MERGERS/ PRODUCT

EXTENSION MERGERS:
Such mergers take place between two
companies who serve the same customers in
a particular industry but do not offer the
same products or services. Their products
might be complementary but they are not
the same.
These types of mergers take place in order
to facilitate the customers to buy the
products because it is easier to sell the
products jointly rather than selling them
individually.
For e.g.: merger of a DVD producer with a
DVD player producer.

MARKET EXTENSION MERGERS:

The merger of two companies producing and
selling the same products but in different
markets is called as a market extension
merger. Such mergers help the companies in
entering different markets and hence
increasing their profits.
ACQUISITION:
The word acquisition is derived from the
word acquire which means to obtain
something. Hence acquisition refers to the
process by which a company or a firm
acquires another company and establishes
itself as the new owner of the company.
An acquisition can also be called as a
takeover or a buyout. An acquisition takes
place when a company purchases the assets
of the company it is going to acquire in the
due course. The company to be acquired is
usually referred to as the target company.
TYPES OF ACQUISITIONS:
There are two types of acquisitions namely:
 Friendly acquisitions
 Hostile acquisitions

FRIENDLY ACQUISITIONS: When the

target company agrees to be acquires and is
ready to sell all its assets and shares, the
acquisition is called a friendly acquisition.
HOSTILE ACQUISITIONS: When the
board of directors or the key employees of
the company disagree or oppose the
acquisition, it is said to be a hostile
acquisition.
It can take place through two ways:
 By purchasing the stock and assets of
the company at a price which is above the
market price.
 By initiating a proxy fight.
CAUSES OF MERGERS AND
ACQUISITIONS
1. Growth:-
Mergers can give the acquiring company an
opportunity to grow market share without
having to really earn it by doing the work
themselves - instead, they buy a
competitor's business for a price. Usually,
these are called horizontal mergers. For
example, a beer company may choose to
buy out a smaller competing brewery,
enabling the smaller company to make more
beer and sell more to its brand-loyal
customers. By buying out one of its
suppliers or one of the distributors, a
business can eliminate a level of costs. If a
company buys out one of its suppliers, it is
able to save on the margins that the
supplier was previously adding to its costs;
 this is known as a vertical merger. If a
company buys out a distributor, it may be
able to ship its products at a lower cost.
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:
2. 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. The most used word in
M&A is synergy, which is the idea that by
combining business activities, performance
will increase and costs will decrease.
Essentially, a business will attempt to merge
with another business that has
complementary strengths and weaknesses.
3. 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 Company’s 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 you’re
counting.) Many M&A deals allow
the acquirer to eliminate future competition
and gain a larger market share in its
product's market. The downside of this is
that a large premium is usually required to
convince the target
company's shareholders to accept the offer.
It is not uncommon for the acquiring
company's shareholders to sell their shares
and push the price lower in response to the
company paying too much for the target
company.
 4. 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 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. These two conflicting goals have
been used to describe thousands of M&A
transactions. A company that merges
to diversify may acquire another company in
a seemingly unrelated industry in order to
reduce the impact of a particular industry's
performance on its profitability. Companies
seeking to sharpen focus often merge with
companies that have deeper market
penetration in a key area of operations.
5. Replacing leadership:-

Ineffective
leaders

Mismanagement

Policies are not

efficient enough
In a private company, the company may need
to merge or be acquired if the current
owners can’t 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.
6. 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.
 7. Surviving:-
It’s 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.
8. Tax and operational efficiency
advantages.
There is several possible tax advantages
associated with mergers and acquisitions,
such as a tax loss carry forward. If one of
the firms involved in the merger has
previously sustained net losses, those losses
can be offset against the profits of the
firm that it has merged with, a significant
benefit to the newly merged entity. This is
only valuable if the financial forecasting for
the acquiring firm indicates that there will
be operating gains in the future that will
make this tax shield worthwhile.

Another, often-criticized corporate

merger/acquisition scheme involves a
company in a high corporate tax country
merging with another corporation in a low
corporate tax rate country. Sometimes the
corporation in the low-tax environment is
much smaller and would normally not be a
candidate for a major corporate merger.
With the merger, however, the new company
is legally located in the low-tax country and
subsequently avoids millions and sometimes
billions in corporate taxes. If two companies
merge that are in the same general line of
business and industry, then operating
economies may result from a merger.
Duplication of functions within each firm
may be eliminated to the benefit of the
combined firm. Functions such as accounting,
purchasing, and marketing efforts
immediately come to mind. This is sometimes
particularly beneficial when two relatively
small firms merge. Business functions are
expensive for small business firms. The
combined firm will be better able to afford
the necessary activities of a going concern.
But operating economies can be achieved by
larger mergers and acquisitions as well.
9. Foreign Exchange and Foreign Market
advantages:-
Another kind of diversification attempts to
reduce risk by merging with firms in other
countries. This reduces foreign exchange
risk and the dangers posed by localized
recessions. Fiat, the Italian multinational,
merged with Chrysler Corporation, which
made them more competitive in American
markets while also reducing foreign
exchange risk.
STRATEGIES OF MERGERS AND
ACQUISITION
Strategies play an integral role when it
comes to merger and acquisition. A sound
strategic decision and procedure is very
important to ensure success and fulfilling of
expected desires. M&A strategies are
extremely important in order to derive
maximum benefit out of a merger and
acquisition deal. It is quite difficult to
decide on the strategies of merger and
acquisition especially for those companies
who are going to make a merger and
acquisition deal for the first time. In this
case they take lessons from the past
mergers and acquisition that took place in
the market between other companies and
proved to be successful. Every company has
different cultures and follows different
strategies to define their merger. Through
market survey and market analysis of
different mergers and acquisitions, it has
been found out that there are some golden
rules which can be treated as the strategies
for successful merger and acquisition deal.
1. PLAN DRIVERS:
Before entering in the any merger or
acquisition deal, the target company’s
market performance and market positions is
to be examined thoroughly so that the
optimal target company can be chosen and
the deal can be finalized at a right price.
The first and the foremost thing are to
determine business plan drivers. It is very
important to convert business strategy to
set of drivers or a source of motivation to
help the merger succeed in all possible ways.
2. UNDERSTANDING THE MARKET:
There should be a strong understanding of
the intended business market, market share,
and the technological requirements and the
geographic location of the business. The
company should also understand and evaluate
All the risks involved and the relative
impact on the business.
3. ACCESSING THE MARKET:
Then there is an important need for
identification of future market
opportunities, recent market trends, and
the customer’s reactions to the company’s
product in order to assess the growth
potential of the company.
4. INTEGRATION PROCESS:
After finalizing the merger and acquisition
deal, the integration process of the
companies should be started in time. The
integration process should be taken in line
with the consent of the management from
both the
companies
venturing into
the merger.
Before the
closing of the
deal, when the negotiation process is on,
from that time, the management of both
the companies requires to work on a proper
integration strategy. This is to ensure that
no potential problem come up after the
closing of the deal.
5. RESTRUCTURING PLANS:
If the company which intends to acquire the
target firm plans should be declared and
implemented within the period of acquisition
to avoid uncertainties. It is also very
important to
consider the
working to consider
the working
environment and
culture of the
workforce of the
target company, at the time of drawing op
merger and acquisition strategies, so that
the laborers of the target company do not
feel left out and become demoralized.
Restricting plans and future parameters
should be decided with the exchange of
information and knowledge from both ends.
6. TAKE STEPS:
At the end, ensure that all those involved in
the merger including management of the
merger companies, stakeholders, board
members, and investors agree on the
defined strategies. Once approved by the
shareholders, merger can be taken forward
for finalizing the deal.
REQUIREMENTS OF MERGERS AND
ACQUISITIONS

Mergers and Acquisition activity is now at

its highest. It is of course a compelling way
of boosting corporate earnings. Mergers and
Acquisitions can also be hard to get right
with many deals failing to meet
expectations. If buying or merging the right
business isn’t hard enough, integrating the
business and realizing deal value is harder
still. And of course there are always chances
of failure. With so much at stake when
integrating a business, it is worth looking at
what preparations we need to do before
merging.
The requirements of Mergers and
Acquisitions are:-
1. Coordinate and compromise:-
Whether the merger takes place anywhere,
in companies, firms or business
organizations, the managers must be
coordinating each other’s activities. They
need to decide the new agreement, rules and
policies with mutual understanding without
conflicts. The need is to keep a check on
difference of opinions. If they aren’t able to
decide among themselves, a third party or
executor must be appointed who can advise
them on decision making matter. They may
be willing to compromise at few things for
better future of their joint company.
2. Excellent organizational skills:-
Sometimes there is no clear team in the new
organization. Until the organizational
structure of the new organization is
clarified, the team members may not be
aware who they may be reporting to. The
manager needs to motivate people around
him and involve them in existing and
imperfect channels of authority which will
be made perfect shortly.
3. Manager must be comfortable with
ambiguity:-
The disconnecting and reconnecting of
organizations can create times when people
don’t know what they should be doing and
what process to follow. He should be able to
facilitate groups, mobilize people and frame
quick strategies that provide direction. He
must have excellent communication skills.
His task is to create order out of chaos.
4. He needs to think like an entrepreneur:-
He must have an analytical mind and think
big. He must have zeal and persistence to
achieve something. Innovative mind is
required to make sure that new resources
are well designed and used in optimum place.
The opportunity to innovate comes at point
of great change. He needs to grab and seize
opportunities for deep and enduring value.

Analytical

Zeal and persistence

Innovation
LEGAL PROCEDURES

The Act lays down the legal procedures for

mergers or acquisitions:-
• Permission for merger:-
Two or more companies can amalgamate only
when the amalgamation is permitted under
their memorandum of association. Also, the
acquiring company should have the
permission in its object clause to carry on
the business of the acquired company. In
the absence of these provisions in the
memorandum of association, it is necessary
to seek the permission of the shareholders,
board of directors and the Company Law
Board before affecting the merger.
• Information to the stock exchange:-
The acquiring and the acquired companies
should inform the stock exchanges (where
they are listed) about the merger.
• Approval of board of directors:-
The board of directors of the individual
companies should approve the draft proposal
for amalgamation and authorize the
managements of the companies to further
pursue the proposal.
• Application in the High Court: - An
application for approving the draft
amalgamation proposal duly approved by the
board of directors of the individual
companies should be made to the High Court.
• Shareholders' and creators' meetings: -
The individual companies should hold
separate meetings of their shareholders and
creditors for approving the amalgamation
scheme. At least, 75 percent of
shareholders and creditors in separate
meeting, voting in person or by proxy, must
accord their approval to the scheme.
• Sanction by the High Court: - After the
approval of the shareholders and creditors,
on the petitions of the companies, the High
Court will pass an order, sanctioning the
amalgamation scheme after it is satisfied
that the scheme is fair and reasonable. The
date of the court's hearing will be published
in two newspapers, and also, the regional
director of the Company Law Board will be
intimated.
• Filing of the Court order: - After the
Court order, its certified true copies will be
filed with the Registrar of Companies.
• Transfer of assets and liabilities: - The
assets and liabilities of the acquired
company will be transferred to the acquiring
company in accordance with the approved
scheme, with effect from the specified
date.
• Payment by cash or securities: - As per the
proposal, the acquiring company will
exchange shares and debentures and/or
cash for the shares and debentures of the
acquired company. These securities will be
listed on the stock exchange.
STAGES INVOLVED IN ANY M&A:
Phase 1: Pre-acquisition review: this would
include self assessment of the acquiring
company with regards to the need for M&A,
ascertain the valuation (undervalued is the
key) and chalk out the growth plan through
the target.
Phase 2: Search and screen targets: This
would include searching for the possible apt
takeover candidates. This process is mainly
to scan for a good strategic fit for the
acquiring company.
Phase 3: Investigate and valuation of the
target: Once the appropriate company is
shortlisted through primary screening,
detailed analysis of the target company has
to be done. This is also referred to as due
diligence.
Phase 4: Acquire the target through
negotiations: Once the target company is
selected, the next step is to start
negotiations to come to consensus for a
negotiated merger or a bear hug. This brings
both the companies to agree mutually to the
deal for the long term working of the M&A.
Phase 5: Post merger integration: If all the
above steps fall in place, there is a formal
announcement of the agreement of merger
by both the participating companies.
WHO GETS BENEFIT FROM MERGERS
AND ACQUISITIONS
Basically the merger is, two or more
companies coming together and making a new
company. The reasons are to expand, to
capture the market, for cost cutting etc...
Ultimately to make more profit. But here
the question is,'how this profit is
distributed?'
The merger is an advanced version
of partnership; rather it's an extension of
partnership. As in partnership two or more
sole proprietor come together to form a new
partnership firm and in merger two or more
running companies integrate to form a new
merged company. Thus in merger also,
companies decide profit sharing ratio. The
base of this decision is their contribution
for the new merged company. All company
will give the old company's assets employee’s
capital etc. in new company. Thus we can
conclude that all company will contribute the
value of the initial company in the new
merged company and determination of profit
sharing ratio can be done through comparing
values of all companies.
For example, RK Limited is bringing capital
of 2 crores and building of 4 crores. And KK
Limited is bringing 2 crores as capital and 1
crores of furniture. So the total
contribution of RK Limited is 6 crores and
KK Limited is 3 crores the new merged
Company RKK Limited hence the profit
sharing ratio between them is 2: 1. So in this
case if the annual profit will be 6 crores
then the first party will get 4 crores and
the second party will get 2 crores.
Here the case may happen like one company
gets more stake than it’s worth and gets
benefit because other was strongly in
insisting for merger and it loses there. Or
one company has more skilled and
coordinated workforce while another
company's work force is unskilled, so here in
integrated output the first company loses
and other benefits.
Acquisition:
In acquisition there are two parties one is
acquiring company and second is the target
company. Acquiring company acquires the
target company therefore it is called as
acquisition. When the acquisition happens it
can happen in following two forms or in the
combination of both.
1. Acquiring company’s owners give Target
Company the cash and target companies
owners don't exist anymore.
2. The second possible route is where
acquiring company gives target company
shares of acquiring company; this is where
target companies owners get shares in
acquiring company by giving their own shares
in the target company.
In acquisition acquiring company should know
the value of the target company. So it can
compare the initial value of the target with
the amount paid to it in the acquisition. By
this the acquiring company can know what is
the additional value that is paid to the
target company.
Let's take a cash based acquisition example
as it is easy to understand. The target was
initially valued at 100 crores but in the
acquisition it is being paid 125 crores so we
can understand that 25 crores is the
additional cost that the acquiring company is
paid to the target so here target benefits
and acquiring company loses. The reason
behind paid extra can be targets potential
to grow more or consistent progress from
several years.
There is also another possibility that target
is initially valued at 100 crores but in
acquisition it got only 80 crores so here
target loses and acquiring company benefits.
This can happen due to collapsing stage
target or lesser demand in the market.
After knowing this much one very natural
doubt arises in the mind that, 'merger and
acquisition activity is generally practiced to
gain advantage but if one company is may
going to lose some interest then why it
participates in the merger and acquisition?'
The answer to this is very simple- These
losses faced by any company are very
negligible against the benefit which it will
get in the future. Today though it has to pay
some extra but the upcoming profit and the
control over the market would definitely
compensate it. The M&A activity is
definitely beneficial but there is a condition
that the new alliance and the bond between
the two companies should go long in their
way; if any kind of breakup or disruption will
take place in between the company which
had incurred the losses previously would
have to suffer.
We have discussed the cash based
acquisition but how the acquisition of shares
based take place? Here the companies
should know what is the exchange ratio. The
exchange ratio is the ratio at which
acquiring company gives shares to the target
company it is not randomly decided but this
decided by measuring the value of both the
companies' individually.
So in merger and acquisition of cash based
or share based in all these cases we came to
the point where one should determine the
value of the company. Therefore to move on
further with M&A we should learn the
concept of Valuation of Companies.
VALUATION
In a merger or acquisition transaction,
valuation is essentially the price that one
party will pay for the other, or the value
that one side will give up to make the
transaction work. Valuations can be made via
appraisals or the price of the firm’s stock if
it is a public company, but at the end of the
day valuation is often a negotiated number.
Valuation is often a combination of cash flow
and the time value of money. A business’s
worth is in part a function of the profits and
cash flow it can generate. As with many
financial transactions, the time value of
money is also a factor. How much is the
buyer willing to pay and at what rate of
interest should they discount the other
firm’s future cash flows?
Both sides in an M&A deal will have
different ideas about the worth of a target
company: its seller will tend to value the
company at as high of a price as possible,
while the buyer will try to get the lowest
price that he can.
There are, however, many legitimate ways to
value companies. The most common method
is to look at comparable companies in an
industry, but deal makers employ a variety
of other methods and tools when assessing a
target company. Here are just a few of
them:
1. Discounted Cash Flow (DCF) - A key
valuation tool in M&A, discounted cash flow
analysis determines a company's current
value according to its estimated future cash
flows. Forecasted free cash flows (net
income + depreciation/amortization - capital
expenditures - change in working capital) are
discounted to a present value using the
company's weighted average costs of capital
(WACC). Admittedly, DCF is tricky to get
right, but few tools can rival this valuation
method.
2. Comparative Ratios - The following are
two examples of the many comparative
metrics on which acquiring companies may
base their offers:
Price-Earnings Ratio (P/E Ratio) - With the
use of this ratio, an acquiring company
makes an offer that is a multiple of the
earnings of the target company. Looking at
the P/E for all the stocks within the same
industry group will give the acquiring
company good guidance for what the
target's P/E multiple should be Enterprise-
Value-to-Sales Ratio (EV/Sales) - With this
ratio, the acquiring company makes an offer
as a multiple of the revenues, again, while
being aware of the price-to-sales ratio of
other companies in the industry.
3. Replacement Cost - In a few cases,
acquisitions are based on the cost of
replacing the target company. For
simplicity's sake, suppose the value of a
company is simply the sum of all its
equipment and staffing costs. The acquiring
company can literally order the target to
sell at that price, or it will create a
competitor for the same cost. Naturally, it
takes a long time to assemble good
management, acquire property and get the
right equipment. This method of establishing
a price certainly wouldn't make much sense
in a service industry where the key assets -
people and ideas - are hard to value and
develop.
Here we should be clear about one thing
that the valuation is not the exact or
precise because it is very obvious that every
company will tend to measure its value
higher. And also one important reason is
that it is lot of based on future forecasted
benefits, where we can't exactly predict
that the market forces of demand and
supply will remain conducive to the company
in the future or may any drastic change
would take place in the economy. It's right
that valuation is rough estimation, though it
is vital because it gives a measure which we
can take as a base to make further strategic
decisions regarding M&A.
As mentioned earlier after valuation aspect
completes, companies compare their values
on themselves and according to the
proportion of their value they decide profit
sharing ratio. But it is lot of based on
negotiations and management's mutual
understandings, as merger is by willingness.
Therefore the consent of all parties plays a
dominant role.
Acquisition after valuation aspect completes
the management has to come at a conclusion
that how much shares are to be given to
target company. In case of cash it is very
straight forward but we can see that
nowadays lot of acquisitions and share based
not cash based.
E.g. Facebook had acquired Whatsapp but it
didn't pay the entire 19 billion USD in cash

in fact it paid a major part of 16 billion USD

almost in share.
Now after valuation how shares get
exchange? The main four criteria’s for
exchanging of shares are as follows:
1. Intrinsic value per share or book value per
share
The exchange ratio is calculated as the
intrinsic value per share of Target Company
upon the intrinsic value per share of
acquiring company.
Let's take an example that target
WhatsApp has book value of $100 where as
the acquiring company Facebook has a book
value of $1,000.
So the exchange ratio = 1/10 = 1: 10.
WhatsApp will get one share of Facebook
for every 10 shares that it has. Why?
Because the Facebook is valued 10 times
higher than WhatsApp. It's an apple to
Apple comparison.
2. Earnings per Share (EPS)
This is based upon the profit accumulated
by a share in specific period.
E.g. WhatsApp has EPS of $50 and
Facebook has EPS of $200
So the exchange ratio
= 50/200 = 1/4 = 1: 4.
One share of Facebook for every 4 shares
of WhatsApp.
3. Market Price per Share
Market value of a share as per current SEBI
index is considered. E.g. MP of Whatsapp is
150 and MP of Facebook is 1500.
So the exchange ratio = 150/1500 = 1/10 = 1:
10.
Again WhatsApp 10 Shades are equal to one
share of Facebook.
4. Combination
Combination of any of the above criteria is
taken as per both parties' management's
negotiations.
E.g. intrinsic value of target and Market
Price of acquiring is considered.
So the exchange ratio = 100/1500 = 1/15 = 1:
15.
Here Facebook will receive 15 shares of
WhatsApp for each of its share.
Besides a combination of all criteria’s is also
possible by giving a weighted average of
25% to each of these parameters.
Management has to consider following
crucial factors while dealing with M&A:
Future prospects of the business. Does the
target company have solid growth prospects
or at least generate solid profits and cash
flow? The risk of the other company? Are
they in an industry that will add too much
risk to the combined entity? Operationally is
the business well-run, is there a solid
employee base? The cost of capital in terms
of this transaction providing the best return
on the acquiring party’s capital.
Hence, management has too much
responsibility in course of merger and
acquisition. As they have to value the
company, calculate exchange ratio etc. So
many efforts have to be put in and also
analysis of all data and considering all
factors related to it becomes essential as
M&A happens in millions and billions; so any
inaccurate step can result a great loss.
Because decisions are to be taken
premerger and acquisition and the results of
them will only reflect in post M&A stage.
All these procedures related to valuation
are very complicated and many legal
interventions take place in between these.
Therefore to cope up with all such
complexities a third party is generally
approached, this is a group of professionals
who helps to carry out such procedures,
increases understandings between parties
and guide them in the course of merger and
acquisition.
PRACTICAL EXAMPLES OF MERGERS AND
ACQUISITION
The IT sector is one of the leading potential
telecom markets in the global context. It
has witnessed a drastic revolution in the
past 15 years. Initially the sector was under
the control of the government- BSNL,
MTNL and VSNL were the only three
telephone networks in India. But after the
economic reform of 1991, the sector was
privatized under the regulation of TRAI. So
many Indians as well as the MNCs started
promoting the sector, however there has
been a robust growth in the recent years
with faster and faster speed of Internet- 3
G and 4G being made available to people.
But in the late 2016 a massive cutthroat
disruption was caused in the sector by the
latest entrant in the industry the publicly
proclaimed telecom, Reliance Jio. The three
major network providers in India before Jio
were Airtel, Vodafone and Idea.
Airtel was the most successful Telco in
India since the past 15 years. It had a
profit percentage of approximately 31.7% of
the total market share.

Vodafone is a British MNC which was

launched in India in September 2007 it has
been doing well ever since it accounted for
profit of 22% in the Indian market share.
Idea is established by Birla Group. It was
the third largest mobile operator in India.
20.2% of the aggregate market share was
held by Idea Cellular Limited.
Adding up the total profit ratio these
companies accounted for an approximate
74% of the share in the Indian market and
26% was by other relatively small companies
like Aircel, Telenor, MTNL, and BSNL.
Reliance Jio was launched in 2016 by Mukesh
Ambani’s Reliance Industries caused a
drastic transition in the sector. Adopting
the disrupting market strategy, it provided
IT services for free of cost for 6 months on
promotional bases with a view to eliminate
its competitors for emerging the only
victorious Telco in
the country. Its
introduction
remarkably affected
the Indian market.
This is a pie chart illustrating the market
share of profit before jio as it can be seen
here Airtel has 24% Vodafone has 19% and
idea is 17% that really hold more than half
of the profit share and this is another pie
chart showing profit after jio.
We can clearly see sure that there is a
significant drop in the prophets of the 3
biggest Telco’s taking a major League Jio
has left Behind Airtel Vodafone and Idea
way behind.
This has made smaller Telco’s like Aircel,
Docomo and Telenor to grow even bigger. As
a result there has been a series of mergers
and acquisitions in the sector, biggest of
them all being Voda Idea merger. Further
more Reliance communication by Anil Ambani
is set to acquire its Rival Aircel. Also Bharti
Airtel announced the acquisition of Telenor
Indian Unit.
Voda Idea Merger
Just like the other two acquisitions the
cause of this merger is the same, to survive
in the market and to get an edge over its
competitors. currently Jio is the leading
Telco followed by Airtel, Vodafone and Idea
respectively. but with this merger under
way, it will make them the biggest telecom
operator in India accounting for nearly 40%
of the total revenue share, leaving jio and
Airtel behind. the resultant company will
thus have a total consumer base of nearly
400 million. the merger is already afoot.
Vodafone will sell 9.5% of its take so that
both the partners will have equal share of
35.5% in the company, while the rest will be
held by the general public, this merger is
likely to be completed by 2018 but this has
not actually taking place all of this was just
a theoretical reference.
FACEBOOK WHATSAPP CASE STUDY
In 2014, Facebook CEO Mark Zuckerberg
managed to agree on the deal with
WhatsApp founders Jan Koum and Brian
Acton for astonishing $19 billion.
This acquisition was the sixth biggest in
technologies and biggest ever in history of
acquisitions of software companies.
Facebook is a for-profit American
cooperation based in Menlo Park, California.
It was founded by Mark Zuckerberg and his
college roommates earlier limited the
college’s website to Harvard students only,
and then expanded to Stanford, Ivy League
and Boston area, eventually expanded to all.
WhatsApp was founded by ex college
dropout Jan Koum and ex yahoo engineer
Brian Acton.
Reasons for the acquisition:

1. Users: WhatsApp had more than 450

millions of active users out of which 70%
remain active daily.
2. Labor: Only 32 people were working in
the company in February and later in March
when the acquisition was realized there
were 56 employees. These employees
serving 450 million people, hence one
WhatsApp developer was serving 14 million
users but still it was 99.9% reliable. Also it
had incurred zero advertisement
expenditure.

3. Services cost was $1 per year hence

annual revenue was 20 million dollars but it
already had 450 million users which were
increasing daily, hence FB was purchasing
this potential too. To compare with Twitter
which had only 241 million users even after
operating 3 years longer than WhatsApp
had more than 600,000 users at the end of
that year.
4. Engagement: It became popular among
the teens. It was looking for new ways for
communication like voice calls, video calls
other than SMS. The engagement rate was
unseen before. It was due to its reliability,
availability and by most its simplicity.
5. Volumes: Plenty of users mean large
volumes of data provided. It was
comparable with SMS telecommunication
volumes leaving behind other social
networking sites; it had 19 million of sent
messages and 34 million of received
messages per day. 600 million photos
uploaded, 200 million voice messages sent,
100 million video messages daily. All these
numbers were doubling over the years
hence it caused global communication
change making people to switch from SMS
to free WhatsApp. Imagine the losses
suffered by the other companies erasing
33 billion in SMS revenues.
6. Security: Unlike other sites like Skype
it did not have security vulnerabilities.

7. Presence: Now with Facebook

purchasing WhatsApp it earned income
from the entire world. Facebook earlier
has majority of its income based in US and
Canada but after acquiring WhatsApp, it
gave it a good complimentary geographic
presence.

8. Rivals: Now Facebook can keep

WhatsApp out of hand of other rivals like
Google and Microsoft.
9. Deal value angle: Seeing the deal
revenue angle presently it incurs only
marginal expenses in terms of marketing
costs infrastructure cost and employee
cost. In terms of revenue it already earns
more than 20 million dollars for your hands
very good profits are resumed in future
because of its low cost model.

Hence WhatsApp was acquired for 19

billion dollars which includes 4 billion in
Cash, 12 billion worth of Facebook shares,
3 billions of restricted stock units. Jan
Koum, in addition joined the board of
directors of Facebook with salary equal to
that of Mark Zuckerberg.
Causes for the failure of mergers and
acquisition
Despite the highest degree of planning
strategy and investment some of the
mergers and acquisitions fail miserably.
There may be many reasons for these
failures. Many companies look at mergers
and acquisitions as solution to the temporary
problems. Before going for it, the need to
introspect their capabilities. Both the
parties the buyer and the seller need to do
proper research and analysis before going in
for the merger and acquisition. Following
could be the reasons for failure:
1. Failure due to finance: This may be
due to over paying then valuation and
negotiation errors. Misunderstandings may
prove very dangerous in the process of
meetings.

For example Google first bid $10 billion to

acquire WhatsApp but it failed because it
did not come with a seat as popularly said
and due to negotiation errors.
2. Cultural differences:
Out of the major reasons for the failure,
cultural differences between the
organizations are one of the major one. It
is difficult to integrate two different
cultures and their practices. This
mismatch may lead to deterring work
environment which in turn in shows the
Downtown of the organization.
It is important to understand other
companies’ culture. They must enter the
new company’s office carrying them with
four H’s: honesty, humanity, humility and
Honor.
The Hewlett Packard and Compaq merger
failure was due to cultural clash.
3. Failure due to region: A merger failure
may take place because two companies are
situated very far from one another, this
may lead to geographical constraints and
language barrier.

4. Deviation of concentration: Due to

mergers, managers need more time to
concentrate and invest into the deal. As a
result, they may be diverted from their
routine work and start neglecting their
core business activities. The employees
may get emotionally confused in the new
environment after the merger takes place.
Hence work gets hampered.
5. Communication gap: Communication
while the negotiations and the pre merger
meetings or post merger meetings should
be done clearly, honestly and with
consistency. It should be done to entire
team and not just to the top executives.
During mergers and acquisitions stress
levels are high; there are chances of
misinterpretation and rumors being spread.
6. Other reasons: Other reasons may be
overly optimistic goals, lack of experience
on the part of top managers and poor
strategic fit. The differences between the
objectives and strategies of the company
may prove the integration to be very
poorly planned and designed this leads to
failure of implementation. Due diligence
and innovative mind are required which is
the crux for the entire strategy.
Advantages of Mergers and Acquisitions
1. Higher profits: The first and
foremost advantage of mergers and
acquisitions is that companies which have
excess cash and not enough profitable
opportunities in their business can invest
that cash by merging or acquiring another
company which in turn will result in higher
sales for combined company and also higher
profits. In short cash which was lying idle
with the company can be used productively
by the company in mergers and acquisitions.
 2. Diversification is another major
benefit because if the company has merged
or acquired another company which belongs
to other industry then chances of a slump
in sales reduce because the loss in sales in
one company is compensated by another
company sales figure as chances of a slump
in both the companies operating in
different industries are very rare.
 3. Competition: Another advantage of
mergers and acquisitions is that if company
is buying company in the same industry then
it is effectively reducing the competition
and if competition is reduced then company
in turn will be incurring less expenditure on
advertisement and publicity and more on
research and development of products
leading to production of better product at
reasonable price leading to more sales and
profits for the company.
DISADVANTAGES OF MERGERS AND
ACQUISITIONS
1. Substantial Increase in Prices A
merger reduces competition and thus can
give the acquiring company the monopoly
power in the market. With less competition
and greater market share, the new firm
can increase prices of the products for
consumers. For example let’s consider a
hypothetical situation, where some major
automobile companies merge with each
other, the probable outcome is that they
will substantially increase the prices of
their product, because of the fact that
the consumers will not do not have many
options to choose from thus leaving them
with no other option but to purchase those
products at the increased prices. Thus,
this is one of the biggest drawbacks of the
M&As, wherein the market is highly
disrupted, and the consumers are the
ultimate sufferers.
2. Job Losses:
A merger can lead to a situation wherein
the employees have to lose their jobs.
Usually, while a merger or acquisition takes
place, the companies tend to reduce and
remove those assets which will not be
resulting in their profiting rearing process.
This is a particular reason for concern if it
is an aggressive takeover by an ‘asset
stripping’ company. An asset stripping
company is a company, which seeks to
 merge and get rid of under-performing
sectors of the target company.
3. Diseconomies of Scale

The new company may experience

diseconomies of scale from the increased
size. After a merger, since the size of the
company is increased, it may lack the same
degree of control and thus may struggle to
motivate workers. If workers feel they are
just part of a big multinational, they may be
less motivated to try hard.

4. Loss in productivity
In cases where the small companies are
being merged or acquired by big companies,
the employees of the small companies may
require exhaustive re-skilling. Thus, the
time during which is required for such re-
skilling, the company will have to suffer
the non-productivity of those employees,
which indirectly would cast a burden on the
capital of the company.

5. Valuation: The biggest disadvantage of

mergers and acquisitions is the price at
which these deals happen because there is
no standardized or uniform way in which
one can find out the right price as each
company is unique and different from
others which make calculation of right
price a tricky one and chances of company
overpricing the merger and acquisition deal
are always there and since these decisions
are irreversible in nature it can lead to
problems for the company in future.

6. Integration process: Another

disadvantage of mergers and acquisitions is
the successful integration of employees of
merged firms because just in the case of
marriage the bride finds it difficult to
adjust with bridegroom relatives and
bridegroom relatives too find it difficult
to adjust with new member in the family, in
the same way the newly merged company
employees find it very difficult to cope
with new culture, employees, management
and so on. The two culprits due to which
many mergers fail and companies suffer
huge losses are the absence of integration
and price of the merger deal.
7. Shareholders: If the company is listed
then shareholders may not like the idea
because if the company takes too much
debt for the acquisition then it is risky as
failure of merger may lead to company
going into bankruptcy and shareholders will
never want such situation to happen and
also employees will feel unsecure as due to
merger there will be duplication of
positions and company will resort to lay off
of employees.
As one can see from the above that
merger and acquisition has many
advantages as well as disadvantages and it
is very difficult to pinpoint whether a
merger is beneficial or detrimental for a
company because every merger has
different objective and reason behind it
and hence company should take all factors
into account before going for this very
important strategic decision of merger and
acquisition.
Visit Report
To know a subject in a better manner it's
important to understand it beyond the limits
of the books. Keeping this in mind, to learn
the practical aspects of Merger &
Acquisition we had visited a merged CA firm
in Thane - KPB & Associates.
There we interacted with CA Priti Savla.
That session of approx an hour provided us a
great in depth knowledge regarding Merger
& Acquisition and its importance in today's
corporate world. Some glimpse of that
quality discussion...
Question: Which two firms where there
before the merger?
Priti Savla: Earlier, there were three
partners in the name of Parashaulau
Associates which was formed in 2002; one
of them joined one of the firms from the
big four. In 2008, this partnership firm
merged with another firm and now it is
called as K.P.B Associates. Now there are 6
partners in the firm. One of them existed
since 1995.
Question: What are the different types of
services provided by you?
Priti Savla: We provide various services
related to
i) Corporate laws
ii) Mergers and Acquisitions advisory
iii) Permission for setting up companies
iv) Helping the companies to wind up
v) Direct taxes starting from filing of
returns to litigation, i.e., appeals, CIT
appeals, tax planning, advisory
vi) Indirect taxes, service tax, excise, GST.
Question: What changes took place in the
administration after the merger?
Priti Savla: As the companies have merged,
there are more number of employees which
leads to expansion of different services like
verticals and number of clients.
Vote of thanks

We would like to thank our honorable

teachers, Mrs. Rose John and Jasmine
ma’am for helping us and guiding us through
the entire project. It is because of their
support that we got the opportunity to go
deep into the subject and gain extra
knowledge regarding complex business
strategy like Mergers & Acquisitions. Also
they took major efforts to inculcate the
attributes like team spirit and group
discussion in us which will help us in future.
This subject enabled us to get a glimpse of
how business deals are done and topics are
explained in actual corporate world. Thus,
giving us a sense of confidence for
performing such endeavors later.