MERGERS AND ACQUISITIONS

What is Mergers & Acquisitions?

Mergers and Acquisitions are defined as consolidation of companies. Differentiating the two terms,
Mergers is the combination of two companies to form one, while Acquisitions is one company taken
over by the other. Merger and Acquisition is one of the major aspects of corporate finance world.
The reasoning behind Merger and Acquisition generally given is that two separate companies
together create more value compared to being on an individual stand. With the objective of wealth
maximization, companies keep evaluating different opportunities through the route of merger or
acquisition.

The Structure of Mergers

Mergers may be structured in multiple different ways, based on the relationship between the two
companies involved in the deal.
 Horizontal merger: Two companies that are in direct competition and share the same
product lines and markets.
 Vertical merger: A customer and company or a supplier and company. Think of a cone
supplier merging with an ice cream maker.
 Congeneric mergers: Two businesses that serve the same consumer base in different ways,
such as a TV manufacturer and a cable company.
 Market-extension merger: Two companies that sell the same products in different
markets.
 Product-extension merger: Two companies selling different but related products in the
same market.
 Conglomeration: Two companies that have no common business areas.
Advantages and Disadvantages of MERGERS

Advantages:

 Market Share: Let’s say 2 companies are in a similar market and are in competition. Instead of
having lost out to a third company they can decide to merge the 2 companies and gain larger
market share.
 Reduced Cost of Operations: Another advantage of a merger, the size of a merged company
gets bigger compared to individual companies. So, because of the economy of scale, the total
cost of operation can be reduced.
 Revenue and Profit Growth: The companies may want to achieve the objective of revenue
and subsequently profit growth.
 Expanding Operating to New Geographies: It’s hard for a company to directly go and get
established in the new market or geographies. That’s why it can target to merge similar
company in that area and get the business started.

Disadvantages

 Creation of monopoly: A bigger company can become a monopoly in the market and then it
can increase the prices of is goods/ supplier which is not good for the consumer.
 Difficulty in communication & coordination: Another disadvantage of a merger could be
tough to communicate and coordinate between the employees of different cultures.
 Costly Affair: Since shareholders of merged companies want a premium on their shares for a
merger to go through, hence it could be a very costly affair.

Advantages and Disadvantages of ACQUISITIONS:

Advantages:
 Speed: It provide ability to speedily acquire resources and competencies not held in house. It
allows entry into new products and new markets. Risks and costs of new product development
decrease.
 Market power: It builds market presence. Market share increases. Competition decrease.
Excessive competition can be avoided by shut down of capacity. Diversification is aggrieved.
Synergistic benefits are gained.
 Overcome entry barrier: It overcomes market entry barrier by acquiring an existing
organization. The risk of competitive reaction decrease.
 Financial gain: Organization with low share value or low price earnings ratio can be acquired
to take short term gains through assets stripping.
 Resources and competencies: Acquisition of resources and competencies not available in
house can be a motive for merger and acquisition.
 Stakeholder expectations: Stakeholder may expect growth through acquisitions.

Disadvantage of acquisition are:

 Integration problems: The activities of new and old organizations may be difficult to
integrate. Cultural fit can be problematic. Employees may resist it.
 High cost: The acquirer may pay high cost, especially in cases of hostile takeover bids. Value
may not be added for the acquirer.
 Financial consequences: The returns from acquisitions may not be attractive. Executed cost
saving may not materialize.
 Unrelated diversification: This may create problem of managing resources and competencies.
 Too much focus: Too much managerial focus on acquisitions can be detrimental to internal
development.

Difference between the MERGERS AND ACQUISITIONS

MERGERS ACQUISITIONS

Merging of two organisations into one Buying one organisation by another

It is the mutual decision It can be friendly takeover or hostile

takeover

Merger is more expensive than Acquisition Acquisition is less expensive than Merger

Through Mergers shareholders can increase Buyers cannot raise their enough capital
their net worth

It is time consuming and the company has to It is faster and easiest transactions
maintain somuch legal issues

Dilution of ownership occurs in Mergers The acquirer does not experience the dilution
of ownership
Principle behind any Merger and Acquisition is 2+2=5

There is always synergy value created by the joining or merger of two companies. The synergy
value can be seen either through the Revenues (higher revenues), Expenses (lowering of expenses)
or the cost of capital (lowering of overall cost of capital).

Three important considerations should be taken into account

 The company must be willing to take the risk and vigilantly make investments to benefit
fully from the merger as the competitors and the industry take heed quickly.

 To reduce and diversify risk, multiple bets must be made, in order to narrow down to the one
that will prove fruitful.

 The management of the acquiring firm must learn to be resilient, patient and be able to adopt
to the change owing to ever-changing business dynamics in the industry.

Reasons for Mergers and Acquisitions

 Financial synergy for lower cost of capital

 Improving company’s performance and accelerate growth

 Economies of scale

 Diversification for higher growth products or markets

 To increase market share and positioning giving broader market access Strategic realignment
and technological change

 Tax considerations

 Under valued target

  Diversification of risk

Reasons for the failure of Merger and Acquisition

 Poor strategic fit: Wide difference in objectives and strategies of the company

 Poorly managed Integration: Integration is often poorly managed without planning and
design. This leads to failure of implementation

 Incomplete due diligence: Inadequate due diligence can lead to failure of Mergers and
Acquisitions it is the crux of the entire strategy

 Overly optimistic: Too optimistic projections about the target company leads to bad
decisions and failure of the Mergers and Acquisitions
 Shri Vishnu Engineering College For Women
(Autonomous)
Approved by AICET & Permanently Affiliated to JNTUK, Kakinada
Vishnupur, Bhimavaram

Department of Management Studies

Subject Name:
Business Policy & Strategic Management
Topic Name:
Mergers and Acquisitions

Submitted by: Submitted to:

P. Santhi Priyanka Mrs. J. Swarna Jyothi
Regd No: Faculty Designation:
18B01E0041 Assistant Professor