University of Management & Technology | School of Law & Policy

LL.M. in Commercial Law | Mergers & Acquisitions

Lecture Note 2 | Session 2

Mergers: Pros & Cons

• Wisdom

o M&A is a tactic to execute a strategy; it’s not the strategy

itself.
o Financial viability is as important as strategic objective.
o If 1 + 1 doesn’t at least equal to 3, then the M&A is of no use.

• Reasons for M&A

o Alternatives not viable

§ In-house production
§ License-production
§ Outsourcing
§ Enter into Joint Venture or Partnership
o Fill a strategic gap in the company’s product-range, resources
and/or capabilities
o Increase market sharee (preferably with an existing revenue
stream)
§ Expand into a new market where a similar company is
already operating rather than start from scratch
§ Gain a better distribution network
§ Gain a wider and broader network
§ This distribution or marketing network gives both
companies a wider customer base practically overnight
§ Example: Japan-based Takeda Pharmaceutical
Company’s purchase of Nycomed, a Switzerland-based
pharmaceutical company, in order to speed market
growth in Europe
o Removing or lessening competition
§ Example: Google’s purchases of search engines,
Outride (2001), Kaltix (2003), Akwan (2005), Orion
(2006), etc.
o Increasing capacity and capability
§ expanded research and development opportunities
§ more robust manufacturing operations
§ leveraging costly manufacturing operations (acquisition
of Volvo by Ford)
o Synergy
§ Better use of complementary resources
§ 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 (1+1 ≥ 3)
o Revenue enhancement and increased profitability.
§ Revenue/Net Income upside due to synergies after cost
of acquisition/integration
§ Financial leverage


University of Management & Technology | School of Law & Policy
LL.M. in Commercial Law | Mergers & Acquisitions
Lecture Note 2 | Session 2

o Acquisition of technology and know-how
§ acquiring a unique technology platform rather than trying
to build it
§ Industrial know-how and positioning, acquired research
and development know-how
o Acquisition of IP (trademarks, patents, designs, source codes)
o Economies of scale
§ An important financial reason often given for merger
is economies of scale. Economies of scale simply mean
that the cost of doing business, whether in
manufacturing or the aforementioned operating
economies, will be lower in the combined business firm.
The thinking, in one camp, is that if the cost of doing
business is lower, that cost will be passed on to the
consumer, resulting in a win-win situation. Not every
financier and economist believes this theory but many
do. Some believe that merger results in the
monopolization of an industry and that will cause the
exact opposite effect.
o Higher competitiveness
o Reduction of tax liability
§ Tax loss carry-forward. A carry-forward, or tax loss
carry-forward is a provision that allows an individual or a
business to use a net operating loss in one year to offset
a profit in one or more future years. This provision is also
called 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
o Diversification of products or services
§ 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.
§ Diversification is the reduction of risk through investment
decisions. If a large, conglomerate firm thinks that it has
too much exposure to risk because it has too much of its
business invested in one particular industry, it may buy a
business in another industry. That would provide a
measure of diversification for the acquiring firm. In other
words, the acquiring firm no longer has all its eggs in
one basket
o Business mix restructuring: the acquirer may divest non-core
businesses to focus on and strengthen its core businesses
o Cost savings
§ Lower cost of operation and/or production
§ When two companies have similar products or services,
combining can create a large opportunity to reduce


University of Management & Technology | School of Law & Policy
LL.M. in Commercial Law | Mergers & Acquisitions
Lecture Note 2 | Session 2

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
§ Operating economies may result due to the 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 particularly true if 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.
o Survival
§ 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.
§ Improved financing is another motive for merger. If a
company is in trouble financially, it may look for another
company to acquire it. The alternative may be to go out
of business or take bankruptcy
o Replacing leadership
§ 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
o Maximizing shareholder value

• Reasons against M&A

o 50% M&A fail

o 60-70% M&A fail to meet desired objectives – KPMG/Deloitte &
Touche
o Viable alternatives
o No strategic benefit (cost-benefit analysis)
o High or overestimated valuations
o High acquisition costs
o Lack of well understood value drivers
o Cultural misfit: Differences in business culture and ethos
§ Failure of DaimlerChrysler merger
o Unknowns: Lack of information for effective due diligence


University of Management & Technology | School of Law & Policy
LL.M. in Commercial Law | Mergers & Acquisitions
Lecture Note 2 | Session 2

o Board/management conflict of interest
o Short-term opportunity cost
§ Same investment could be placed elsewhere for a higher
financial return
§ Sometimes this does not deter M&A because projected
long-term financial benefits outweigh short term costs
o Legal expenses
o Creation of monopoly or oligopoly
o Illegality (competition/anti-trust)
o Against shareholder interests
§ Complacent management
§ Reduced competitiveness
§ Reduced share prices
o Against management interests
o Disadvantages to consumers
§ Higher prices
§ Lower quality of goods and services
§ Lower industry innovation
§ Suppression of competing businesses
o Intangible costs