i

A STUDY ON MERGERS AND ACQUISITIONS TO ACHIEVE A

GOAL OF WEALTH MAXIMIZATION
(A project report)

Submitted to:

Dr. Y. Papa Rao

Faculty, Corporate Finance

Submitted by:

Archit Srivastav

Sem VII, Sec:A, Roll no: 30

B.A. LLB (HONS.)

Date of Submission: 23/10/2019

Hidayatullah National Law University,

Naya Raipur, Chhattisgarh
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DECLARATION

I, Archit Srivastav, hereby declare that, the project work entitled, ‘A study on mergers and
acquisitions to achieve a goal of wealth maximization’ submitted to H.N.L.U. Naya Raipur, is
record of an original work done by me under the guidance of, Dr. Y. Papa Rao, H.N.L.U.,
Naya Raipur.

Name: Archit Srivastav

B.A. LLB (Hons.)

Semester: VII

Section: A

Roll No: 30

Date: 23/10/2019
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CERTIFICATE

This is to certify that the content of this project entitled, “A study on mergers and acquisitions
to achieve a goal of wealth maximization” is the bona fide work of him submitted to
Hidayatullah National Law University, Raipur.

The original research work was carried out by him under my supervision in the academic
year 2019-20. On the basis of declaration made by him, I recommend this research project for
evaluation.

Certified by-

Dr. Y. Papa Rao,

Faculty of Corporate Finance

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ACKNOWLEDGEMENTS

I, Archit Srivastav, would like to humbly present this project to Dr. Y. Papa Rao. I would first
of all like to express my most sincere gratitude to Dr. Y. Papa Rao for her encouragement and
guidance regarding several aspects of this project. I am thankful for being given the
opportunity of doing a project on ‘A study on mergers and acquisitions to achieve a goal of
wealth maximization’. I am thankful to the library staff as well as the IT lab staff for all the
convenience they have provided me with, which have played a major role in the completion
of this paper.

I would like to thank God for keeping me in the good health and senses to complete this
project.

Last but definitely not the least, I am thankful to my seniors for all their support, tips and
valuable advice whenever needed. I present this project with a humble heart.
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CONTENTS

DECLARATION .................................................................................................. ii

CERTIFICATE ..................................................................................................... iii

ACKNOWLEDGEMENTS .................................................................................. iv

INTRODUCTION……………………………………………………….............. 1

MERGERS AND ACQUISITIONS………………………………………………...3

WEALTH MAXIMIZATION………………………………………………….…...4

WEALTH MAXIMIZATION BY MERGERS AND ACQUISITIONS…………....5

ADVANTAGES AND DISADVANTAGES OF MERGERS AND ACQUISITION

(M&A)……………………………………………………………………………….8

MERGERS AND ACQUISITIONS CASE STUDY………………………………..10

CONCLUSION................................................................................................... ……13

REFERENCES ...............................................................................................14
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INTRODUCTION

Mergers and acquisitions (M&A) is a general term used to describe the consolidation of
companies or assets through various types of financial transactions, including mergers,
acquisitions, consolidations, tender offers, purchase of assets and management acquisitions.

The terms "mergers" and "acquisitions" are often used interchangeably, although in actuality,
they hold slightly different meanings. When one company takes over another entity, and
establishes itself as the new owner, the purchase is called an acquisition. From a legal point
of view, the target company ceases to exist, the buyer absorbs the business, and the buyer's
stock continues to be traded, while the target company’s stock ceases to trade.

On the other hand, a merger describes two firms of approximately the same size, who join
forces to move forward as a single new entity, rather than remain separately owned and
operated. This action is known as a "merger of equals." Both companies' stocks are
surrendered and new company stock is issued in its place. Case in point: both Daimler-Benz
and Chrysler ceased to exist when the two firms merged, and a new company, Daimler
Chrysler, was created. A purchase deal will also be called a merger when both CEOs agree
that joining together is in the best interest of both of their companies.

Unfriendly deals, where target companies do not wish to be purchased, are always regarded
as acquisitions. Therefore, a purchasing deal is classified as a merger or an acquisition, based
on whether the purchase is friendly or hostile and how it is announced. In other words, the
difference lies in how the deal is communicated to the target company's board of directors,
employees and shareholders.1

1
https://www.investopedia.com/terms/m/mergersandacquisitions.asp
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Objectives of the study

There are two primary objectives of study.

1. To study about the concept of Mergers and Acquisitions.

2. To study about how it will help in wealth maximization.

Scope of Study

The scope of study includes the purview within which the project work lies. This topic has

been clearly enunciated with the help of articles from magazines, newspapers and other such

e-article databases that have been explored.

Methodology of Study

This project work is descriptive & analytical in approach. It is largely based on secondary &
electronic sources of data. Internet & other references as guided by faculty of Corporate
Finance are primarily helpful for the completion of this project.

Organisation of Study

The study/report has been organised into six sections. The first section deals with the
introduction of the study is discussed to know what the project is dealing with. The second
section deals with concept of Mergers And Acquisitions. The third section deals with the
Wealth Maximization. The fourth section deals with the Wealth Maximization By Mergers
And Acquisitions. The fifth section deals with the Advantages And Disadvantages Of
Mergers And Acquisition . The sixth section deals with the Mergers And Acquisitions Case
Study. The final section deals with the concluding observations.
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MERGERS AND ACQUISITIONS

Mergers is the combination of two companies to form one, while Acquisitions is one
company taken over by the other.

Mergers & Acquisitions can take place:

• by purchasing assets

• by purchasing common shares

• by exchange of shares for assets

• by exchanging shares for shares

Types of Mergers and Acquisitions:

Merger or amalgamation may take two forms: merger through absorption or merger through
consolidation. Mergers can also be classified into three types from an economic perspective
depending on the business combinations, whether in the same industry or not, into horizontal
( two firms are in the same industry), vertical (at different production stages or value chain)
and conglomerate (unrelated industries). From a legal perspective, there are different types of
mergers like short form merger, statutory merger, subsidiary merger and merger of equals.

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

• Diversification of risk2

2
https://www.edupristine.com/blog/mergers-acquisitions
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WEALTH MAXIMIZATION

It simply means maximization of shareholder’s wealth. It is a combination of two words viz.

wealth and maximization. A wealth of a shareholder maximizes when the net worth of a
company maximizes. To be even more meticulous, a shareholder holds share in the
company/business and his wealth will improve if the share price in the market increases
which in turn is a function of net worth. This is because wealth maximization is also known
as net worth maximization.

Finance managers are the agents of shareholders and their job is to look after the interest of
the shareholders. The objective of any shareholder or investor would be a good return on their
capital and safety of their capital. Both these objectives are well served by wealth
maximization as a decision criterion for business.

Capital investment decisions of a firm have a direct relation with wealth maximization. All
capital investment projects with an internal rate of return (IRR) greater than cost of capital or
having positive NPV or creates value for the firm. These projects earn more than the
‘required rate of return’ of the firm. In other words, these projects maximize the wealth of the
shareholders because they are earning more than what they can earn by investing themselves.
By analyzing the projects with the methods of capital budgeting, we come to know whether
wealth will or won’t be created in a particular project. But, what is the real source of wealth
creation? What is that characteristic of the project which becomes the root cause of value
creation?3

3
https://efinancemanagement.com/financial-management/wealth-maximization
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WEALTH MAXIMIZATION BY MERGERS AND

ACQUISITIONS

M&A is one of the major aspects of corporate finance world. The reasoning behind M&A
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.

A merger is an agreement to unite two existing companies into one new company. Mergers
and acquisitions are commonly done to expand a company’s reach, expand into new
segments, or gain market share in an effort to create shareholder value.

For example, back in August 2017, DowDuPont (DWDP) was formed after the merger
of Dow Chemical and DuPont created the world's largest chemical company in terms of sales.

Mergers affect the shareholders of both companies in different ways and is influenced by
several factors, including the prevailing economic environment, size of the companies and
management of the merger process. However, the conditions of the merger may have
different effects on the stock prices of each participant in the merger.

How Stock Price Is Affected

The merger of two companies causes significant volatility in the stock price of the acquiring
firm and that of the target firm. Shareholders of the acquiring firm usually experience a
temporary drop in share value in the days preceding the merger, while shareholders of the
target firm see a rise in share value during the period.

The stock price of the newly merged company is expected to be higher than that of both the
acquiring and target firms, and it is usually profitable for the target firm's shareholders, who
benefit from the resulting stock price arbitrage. In the absence of unfavorable economic
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conditions, shareholders of the merged company usually experience greatly improved long-
term performance and dividends.4

Motives behind M and A

These motives are considered to add shareholder value:
Economies of Scale: This generally refers to a method in which the average cost per unit is
decreased through increased production, since fixed costs are shared over an increased
number of goods. In a layman's language, more the products, more is the bargaining power.
This is possible only when the companies merge/ combine/ acquired, as the same can often
obliterate duplicate departments or operation, thereby lowering the cost of the company
relative to theoretically the same revenue stream, thus increasing profit. It also provides
varied pool of resources of both the combining companies along with a larger share in the
market, wherein the resources can be exercised.
Increased revenue /Increased Market Share: This motive assumes that the company will be
absorbing the major competitor and thus increase its power (by capturing increased market
share) to set prices.
Cross selling: For example, a bank buying a stock broker could then sell its banking products
to the stock brokers customers, while the broker can sign up the bank' customers for
brokerage account. Or, a manufacturer can acquire and sell complimentary products.
Corporate Synergy: Better use of complimentary resources. It may take the form of revenue
enhancement (to generate more revenue than its two predecessor standalone companies
would be able to generate) and cost savings (to reduce or eliminate expenses associated with
running a business).
Taxes : A profitable can buy a loss maker to use the target's tax right off i.e. wherein a sick
company is bought by giants.
Geographical or other diversification: this is designed to smooth the earning results of a
company, which over the long term smoothens the stock price of the company giving
conservative investors more confidence in investing in the company. However, this does not
always deliver value to shareholders.
Resource transfer: Resources are unevenly distributed across firms and interaction of target
and acquiring firm resources can create value through either overcoming information
asymmetry or by combining scarce resources. Eg: Laying of employees, reducing taxes etc.

4
https://www.investopedia.com/ask/answers/040815/how-does-merger-affect-shareholders.asp
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Improved market reach and industry visibility - Companies buy companies to reach new
markets and grow revenues and earnings. A merge may expand two companies' marketing
and distribution, giving them new sales opportunities. A merger can also improve a
company's standing in the investment community: bigger firms often have an easier time
raising capital than smaller ones.5

5
http://www.legalserviceindia.com/articles/amer.htm
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ADVANTAGES AND DISADVANTAGES OF MERGERS AND

ACQUISITION (M&A)

The advantage and disadvantages of merger and acquisition are depending of the new
companies short term and long term strategies and efforts. That is because of the factors
likes’ market environment, Variations in business culture, acquirement costs and changes to
financial power surrounding the business captured. So following are the some advantages and
disadvantages of merger and acquisition (M&A) are:

Advantages: Following are the some advantages

 The most common reason for firms to enter into merger and acquisition is to merge
their power and control over the markets.
 Another advantage is Synergy that is the magic power that allow for increased value
efficiencies of the new entity and it takes the shape of returns enrichment and cost
savings.
 Economies of scale is formed by sharing the resources and services (Richard et al,
2007). Union of 2 firm’s leads in overall cost reduction giving a competitive
advantage, that is feasible as a result of raised buying power and longer production
runs.
 Decrease of risk using innovative techniques of managing financial risk.
 To become competitive, firms have to be compelled to be peak of technological
developments and their dealing applications. By M&A of a small business with
unique technologies, a large company will retain or grow a competitive edge.
 The biggest advantage is tax benefits. Financial advantages might instigate mergers
and corporations will fully build use of tax- shields, increase monetary leverage and
utilize alternative tax benefits (Hayn, 1989).

Disadvantages: Following are the some difficulties encountered with a merger-

 Loss of experienced workers aside from workers in leadership positions. This kind of
loss inevitably involves loss of business understand and on the other hand that will be
worrying to exchange or will exclusively get replaced at nice value.
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 As a result of M&A, employees of the small merging firm may require exhaustive re-
skilling.
 Company will face major difficulties thanks to frictions and internal competition that
may occur among the staff of the united companies. There is conjointly risk of getting
surplus employees in some departments.
 Merging two firms that are doing similar activities may mean duplication and over
capability within the company that may need retrenchments.
 Increase in costs might result if the right management of modification and also the
implementation of the merger and acquisition dealing are delayed.
 The uncertainty with respect to the approval of the merger by proper assurances.
 In many events, the return of the share of the company that caused buyouts of other
company was less than the return of the sector as a whole.

The merger and acquisition (M&A) reduces flexibility. If a rival makes revolution and may
currently market vital resources those are of superior quality, shift is tough. The change
expense is the major distinction between the particular merger worth and also the
merchandising value of the firm that can be of larger distinction.6

6
https://www.ukessays.com/essays/economics/advantages-and-disadvantages-of-mergers-and-acquisition-
economics-essay.php
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MERGERS AND ACQUISITIONS CASE STUDY

1: SUN PHARMACEUTICALS - RANBAXY

This is a classic example of a share swap deal. As per the deal, Ranbaxy shareholders will get
four shares of Sun Pharma for every five shares held by them, leading to 16.4% dilution in
the equity capital of Sun Pharma (total equity value is USD3.2bn and the deal size is USD4bn
(valuing Ranbaxy at 2.2 times last 12 months sales).

Reason for the acquisition: This is a good acquisition for Sun Pharma as it will help the
company to fill in its therapeutic gaps in the US, get better access to emerging markets and
also strengthen its presence in the domestic market. Sun Pharma will also become the number
one generic company in the dermatology space. (currently in the third position in US)
through this merger.

Objectives of the M&A:

• Sun Pharma enters into newer markets by filling in the gaps in the offerings of the
company, through the acquired company

• Boosting of products offering of Sun Pharma creating more visibility and market share in
the industry

• Turnaround of a distressed business from the perspective of Ranbaxy

This acquisition although will take time to consolidate, it should in due course start showing
results through overall growth depicted in Sun Pharma’s top-line and bottom-line reporting.

2: CMC - TCS

This is an example where there is a merger in the same industry (horizontal). It was done to
consolidate the IT businesses. The objective of this merger, as indicated by the management
of CMC, was that the amalgamation will enable TCS to consolidate CMC’s operations into a
single company with rationalised structure, enhanced reach, greater financial strength and
flexibility. Further it also indicated that, it will aid in achieving economies of scale, more
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focused operational efforts, standardisation and simplification of business processes and

productivity improvements.7

3. TATA STEEL-CORUS

Tata Steel is one of the biggest ever Indian’s steel company and the Corus is Europe’s second

largest steel company. In 2007, Tata Steel’s takeover European steel major Corus for the

price of $12.02 billion, making the Indian company, the world’s fifth-largest steel producer.

Tata Sponge iron, which was a low-cost steel producer in the fast developing region of the

world and Corus, which was a high-value product manufacturer in the region of the world

demanding value products. The acquisition was intended to give Tata steel access to the

European markets and to achieve potential synergies in the areas of manufacturing,

procurement, R&D, logistics, and back office operations.

4. VODAFONE-HUTCHISON ESSAR

Vodafone India Ltd. is the second largest mobile network operator in India by subscriber

base, after Airtel. Hutchison Essar Ltd (HEL) was one of the leading mobile operators in

India. In the year 2007, the world’s largest telecom company in terms of revenue, Vodafone

made a major foray into the Indian telecom market by acquiring a 52 percent stake in

Hutchison Essat Ltd, a deal with the Hong Kong based Hutchison Telecommunication

International Ltd. Vodafone main motive in going in for the deal was its strategy of

expanding into emerging and high growth markets like India. Vodafone’s purchase of 52%

stake in Hutch Essar for about $10 billion. Essar group still holds 32% in the Joint venture.

7
https://www.edupristine.com/blog/mergers-acquisitions
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5. HINDALCO-NOVELIS

The Hindalco Novelis merger marks one of the biggest mergers in the aluminum industry.

Hindalco industries Ltd. is an aluminum manufacturing company and is a subsidiary of the

Aditya Birla Group and Novelis is the world leader in aluminum rolling, producing an

estimated 19percent of the world’s flat-rolled aluminum products. The Hindalco Company

entered into an agreement to acquire the Canadian company Novelis for $6 billion, making

the combined entity the world’s largest rolled-aluminum Novelis operates as a subsidiary of

Hindalco.

6. TATA MOTORS-JAGUAR LAND ROVER

Tata Motors Limited (TELCO), is an Indian multinational automotive manufacturing

company headquartered in Mumbai, India and a subsidiary of the Tata Group and the Jaguar

Land Rover Automotive PLC is a British multinational automotive company headquarters in

Whitley, Coventry, United Kingdom, and now a subsidiary of Indian automaker Tata

Motors. Tata Motors acquisition of luxury car maker Jaguar Land Rover was for the price

of $2.3 billion. This could probably the most ambitious deal after the Ranbaxy won. It

certainly landed Tata Motors in a lot of troubles.8

8
https://blog.ipleaders.in/10-biggest-ever-merger-acquisition-deals-in-india/
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CONCLUSION

M&A’s are considered as important change agents and are a critical component of any
business strategy. The known fact is that with businesses evolving, only the most innovative
and nimble can survive. In real terms, the rationale behind mergers and acquisitions is that
the two companies are more valuable, profitable than individual companies and that the
shareholder value is also over and above that of the sum of the two companies. Despite
negative studies and resistance from the economists, M and A's continue to be an important
tool behind growth of a company. Reason being, the expansion is not limited by internal
resources, no drain on working capital - can use exchange of stocks, is attractive as tax
benefit and above all can consolidate industry - increase firm's market power. The basic
reason behind mergers and acquisitions is that organizations merge and form a single entity to
achieve economies of scale, widen their reach, acquire strategic skills, and gain competitive
advantage. In simple terminology, mergers are considered as an important tool by companies
for purpose of expanding their operation and increasing their profits, which in façade depends
on the kind of companies being merged. Indian markets have witnessed burgeoning trend in
mergers which may be due to business consolidation by large industrial houses, consolidation
of business by multinationals operating in India, increasing competition against imports and
acquisition activities. Therefore, it is ripe time for business houses and corporate to watch the
Indian market, and grab the opportunity.
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REFERENCES

1. https://blog.ipleaders.in/10-biggest-ever-merger-acquisition-deals-in-india/
2. https://www.edupristine.com/blog/mergers-acquisitions
3. https://www.ukessays.com/essays/economics/advantages-and-disadvantages-of-
mergers-and-acquisition-economics-essay.php
4. http://www.legalserviceindia.com/articles/amer.htm
5. https://www.investopedia.com/ask/answers/040815/how-does-merger-affect-
shareholders.asp
6. https://efinancemanagement.com/financial-management/wealth-maximization