PART-II

A. TURNAROUND MANAGEMENT AND ITS FACTORS The present business scenario is one wherein constant change is the name of the game. For any firm to survive in any industry, there has to be constant monitoring and improvement of its systems and operations. When a firm faces severe cash crisis or a consistent downtrend in its operating profits or net worth, it is on its way to becoming insolvent. The slide cannot be prevented unless appropriate actions, both internal and external, are initiated to change the future prospects. This process of bringing about a revival in the firms fortunes is what is termed as Turnaround Management. It deals with all aspects of business from personal protection to reviewing in detail the financial, market and sales plans of the business along with cash flow projections, pricing, staffing and product and services contributions. It discusses how to deal with and establish relationships with bankers, creditors and vendors as well as the steps to take in downsizing, including the best ways to let people go. It takes an in-depth look at the competition, customers, trends and the future of the business from a blank paper planning perspective. Kevin Muir emphasizes that in a turnaround situation, major changes need to be made and that planning and implementing the plans are essential.

To be concrete, Turnaround management is a process dedicated to corporate renewal. It uses analysis and planning to save troubled companies and returns them to solvency. Turnaround Management involves management review, activity based costing, root failure causes analysis, and SWOT analysis to determine why the company is failing. Once analysis is completed, a long term strategic plan and restructuring plan are created. These plans may or may not involve a bankruptcy filing. Once approved, turnaround professionals begin to implement the plan, continually reviewing its progress and make changes to the plan as needed to ensure the company returns to solvency. There are 3 phases in any Turnaround Management. 1 The diagnosis of the impending trouble or the danger signals 2. Choosing appropriate Turnaround Strategy 3. Implementation of the change process and its monitoring.

Phase I: Watching out for the danger signal Do companies turn sick overnight and qualify as potential candidates for turnaround, or do they become sick slowly, which can be stopped by timely corrective action? Obviously only the latter is possible. But in reality, most companies do not recognize this fact.. The following are some of the universally accepted danger signals, which a company should watch out for: Decreasing market share / Decreasing constant rupee sales Decreasing profitability Increased dependence on debt / Restricted dividend polices Failure to plough back the profits into business / Wrong diversification at the expense of the core business. Lack of planning Inflexible CEO / Management succession problems / Unquestioning Board of Directors A management team unwilling to learn from competitors. Phase II: Choosing appropriate Strategy Hoffer, an expert management guru, classifies Turnaround Management into two broad categories. They are 1. Strategic Turnaround As the name itself suggests, strategic turnaround choices may force the company to completely change its current way of operations. The choices under this method are A new way to compete in the existing business Entering into an altogether new business Under the first choice, the focus is either on increasing the market share in a given product market frame work or in repositioning the product market relationship. The increase in market share can be achieved by improving product quality perception through dealer push or by a consumer pull. Alternatively, entering a new business as a turnaround strategy can be approached through the process of product portfolio management. 2. Operating Turnarounds Basically they are of 4 types and the strategy adopted depends on the various situations in which the firm is. All these strategies focus on short-term effects only. 1 Asset reduction strategies 2 Revenue increasing strategies 3. Cost cutting strategies 4 Combination strategies

 If a firm is operating much below the Breakeven level, it must take steps to reduce its assets. This will reduce the level of fixed costs and help in reducing the total costs of the firm. If the firm is operating substantially but not extremely below its breakeven level, then the appropriate turnaround strategy is to generate extra revenues. Operating closer but below breakeven levels calls for application of combination strategies. Under this method all the three namely cost reducing, revenue generating and asset reduction actions are pursued simultaneously in an integrated and balanced manner. Combination strategies have a direct favourable impact on cash flows as well as on profits. If the firm is operating around or above the breakeven level, cost reduction strategies are preferable as they are easy to carry out and the firms profits rise once the unnecessary costs are cut down. Phase III: Implementation of the change process Implementation plays an important role in any turnaround management. Identification of an appropriate strategy by itself will not guarantee success. Similarly partial adoption of a strategy is also not useful. The selected strategy needs to be pursued relentlessly and with all out effort to make it work. The success or otherwise of a Turnaround strategy depends on the commitment shown by the top management as also the operating management. Success Stories The case of Hindustan Machine Tools HMT was formed to manufacture machine tools with a foreign collaborator. After nearly a decade of operation, it decided to diversify into Watch industry. The effect of this diversification was felt only after 57 years when the main business of HMT crashed and the company started incurring losses. The watch division came to the rescue and it generated cash profits to keep the company going. The case of Bharat Heavy Electricals Limited The company was started with the objective of producing power generating equipments and virtually enjoyed monopoly. But as the years went by, because of the inability of the State Electricity Boards and private sector to set up new power plants, its capacity utilisation fell down tremendously. To offset this depression, BHEL ventured into Telecommunications, Metropolitan Transportation and Defense production. Due to this timely diversification, BHEL is now one of the rare profit making PSUs Conclusion It can be thus seen that for Turnaround management to be implemented, it is imperative for the management to be aware of its position in the industry in which it is functioning as also its status in the overall scheme of things.

Consultants play an invaluable part here since they help in identifying and vetting the strategy in the light of the prevailing situations, thus ensuring effective turnaround of the organisation. With the corporate sector positioned for a giant leap in India, it is time organisations took stock of their performances, so as to stay in the race. When a firm faces severe cash crisis or a consistent down trend in its operating profits / net worth, it is on itsway to becoming insolvent. The slide cannot be prevented unless appropriate actions, both internal and external, are initiated to change the future prospects. This process of bringing about a revival in the firms fortunes is what is termed as TURNAROUND MANAGEMENT. Turnaround Management involves the formulation and implementation of a strategic plan and a set of actions for corporate renewal and restructuring, typically during times of severe corporate financial distress. Often with the help of outside turnaround consultants or strategy consultants, a Root Cause Analysis is made and a turnaround plan is devised and executed, assuming that the firm still offers the potential to return to financial solvency, profitability and strategic viability. The root causes of strategic distress are: Poor Vision Poor Strategy Poor Execution Acts of God certain risks which cause irreparable damage MORE IMMEDIATE CAUSES INCLUDE WEAK MANAGEMENT, WEAK ECONOMY, BUSINESS ECONOMICAL REASONS, OVERINVESTMENT / UNDER-INVESTMENT ETC. STEPS IN TURNAROUND MANAGEMENT PROCESS Management Change: Consultants may be called in to manage the turnaround of the firm Situational Analysis: Assess the situation and future business viability Emergency Action Plan: Implement emergency steps. Develop strategic survivor plan Business restructuring: Implement the plan, restructuring the business. Survive the crisis Return to normalcy: Return to normal operations, profitability and growth

Stages of Organisational Turnaround Boyne This theoretical framework was suggested by Boyne (2006) as a generic model that had been distilled from various stage models of decline and recovery in private organisations. The author searched and identified studies that contained systematic empirical evidence about the effectiveness of TMS including comparison of successful and unsuccessful recovery attempts. This search was limited to a journal article as a rough quality control and search of keywords in which 21 comparative studies yield the suggested model. Additionally, five qualitative studies describing success stories of recovery processes derived from the public sector are analysed in order to evaluate whether the model can be applied to public organisations. The author concludes that the model of TMS is derived from the private sector literature but offer a useful platform for the public organisation context. While the previously presented model: Stages of Organisational Turnaround (McKiernan, 2003) emphasised the stages that a failing organisation goes through, Boynes model emphasises the crossroads in managerial strategies during a recovery process. Nonetheless, stages and aspects that were covered earlier will be briefly presented to avoid repetition. This model constitutes a managerial process that reflects and simplifies seven stages that may be complex, disordered, occur at the same time, compressed or extended. 1. The Onset of Decline- The first stage refers to the causes of the failure. 2. Corrective Action and Recovery to Avert a Turnaround Situation- A corrective is an action taken in quick response to decline. This action prevents a deep decline from developing and avoids the need to implement TMS. One of the problems in researching organisational failure is making the separation between a natural, temporary decline and a permanent one (Schendel, Patton, and Riggs, 1976). A corrective action distinguishes between the two. In other words, in cases where successful corrective actions were employed, performance returned to be normal, and TMS were not used. In such cases, the situations could be considered as temporary declines but not as turnaround situations. By contrast, cases in which unsuccessful or no corrective actions were employed, and performance continued to deteriorate, can be considered as permanent declines. Additionally, corrective action not only helps the organisation to escape from failure, it encourages organisational learning that may prevent future identical breakdowns since it trains the organisation to quickly spot a decline and appropriately react to it. Repeated cases of decline later on would find a management that has already dealt with such situations. In LAs for instance, the prompt establishment of a psychologist team for children in reaction to a terror attack could be considered as a corrective action.

A quick response to a crisis could support the education system in this case, and prevent further psychological and emotional damage and deterioration. In addition, drawing a lesson afterwards could be an organisational learning act that would help in similar future crises. 3. Turnaround Situation - This stage refers to the core organisational failure. 4. Search for New Strategies- At a later point in time, the leaders of a failing organisation might recognise that a new course of action is required. This recognition could trigger the search for new strategies to prevent terminal decline. The search for new strategies includes preliminary steps such as diagnosing the causes of failure and determining present organisational needs. However, in accordance to the democratic process, the selection of these strategies has to be approved by other bodies, such as the council. 5. a. Selection of New Strategies - The selection of new strategies is a formal managerial act that ends in agreed strategies as part of the recovery plan. In LAs, approval of a recovery plan may involve democratic procedures such as consultation with local volunteers, coalition deals, private-public participation and partnership, and official voting of council members. These procedures might delay the implementation of the recovery plan especially if it involves a retrenchment of services which might, in turn lead to stakeholder resistance. However, not every search for strategies ends up in selection of strategies, as described in stage 5.b. 5. b. No Escape Strategy Found- Selection of new strategy is not guaranteed. Political considerations like those mentioned above or lack of managerial skills may find the management with no clear and approved strategy. This problem is severe since it occurs after the failure has struck and although the management admitted its existence it failed to start a recovery process. When no recovery strategy was found and approved, perhaps because political or managerial skills were missing, the LA will fall into a combination of low performance and high persistence, which is permanent failure (Meyer and Zucker, 1989). 6. Implementation of New Strategies- This is the core managerial act during the recovery process. The management implements TMS: retrenchment, repositioning, and reorganisation. The implementation of TMS could lead to one of the three options presented in stage 7. 7. Turnaround- The ideal outcome of the implementation of TMS is turnaround in organisational performance.

However, there are no clear-cut timescales and criteria to define whether a process has been successful or not. Generally, the relevant benchmark is the return to the level of performance that was

CORPORATE TURN AROUND STRATEGY In many cases, the businesses that end up in receivership have not heeded early warning signs and sought the right assistance at the appropriate time. Turnaround experts do not just work with businesses in trouble. Many clients seek their advice for general profit improvement. Companies must be willing to admit they need help. The earlier we get engaged, the more options we have to restructure the business. The three key elements of any turnaround are: financial restructuring, operational restructuring and stakeholder management. A turnaround practitioner will use skills in insolvency/corporate finance/audit; management consulting/CFO; project management; negotiation & stakeholder management; HR skills; financial modelling; as well as lateral thinking ability and the ability to stay calm under pressure. The key is to critically assess the troubled entitys business plan and review profit and loss to determine the causes of underperformance such as rising production costs, loss of customers or increased competition. Timing is crucial when a company is underperforming. Turnaround specialists create and implement rolling 100 day work plans detailing the key initiatives being targeted to improve business performance and ensure that the initiatives are implemented in a timely, efficient manner. The work focuses around improving cash flow, stabilizing operations, communicating with key stakeholders to re-build their support, exploring all strategic options and developing a comprehensive turnaround strategy. The turnaround specialist will undertake strategic, financial and operational reviews to identify areas of underperformance and then work with management to implement strategies to improve the overall performance of the business.

Warning signs to look for These include when management has been too focused on growing revenue without considering the impact on margins and profit; if businesses dont have the right systems and controls in place to manage their working capital; or if businesses dont have the right management team depth of skill and dont review financial and operational performance regularly. The key signs that should start senior managements alarm bells ringing are:

Actual/potential bank covenant breaches Working capital growth outstripping revenue growth Profit warnings/missing forecasts/declining margins General industry downturn or industry consolidation Loss of key management personnel or increase in staff turnover Difficulty in obtaining general finance Management buying sales at the expense of margin Creditor or debtor ageing issues Competitor risk ATO and Super arrears Loss of a major customer Post merger integration issues

Cash flow is the key Any improvement in working capital the amount of cash tied up in accounts receivable, inventory and accounts payable - is beneficial, especially in current deteriorated market conditions. Extra capital can be used to pay down debt, fund capital expenditure, satisfy seasonal cash requirements or further invest in growth initiatives such as research and development. For specialist performance improvement and turnaround management firms, the aim is to deliver strategies which rapidly improve profitability and cash flow. To do this, we need to know what drives their business, how to achieve above industry benchmarks and more importantly implement strategies that increase the financial performance and value of their business. The following is a summary of the 6 essential elements required (in our view) to achieve a successful turnaround.

1. Ability to prove business viability by demonstrating the various initiatives that will restore earnings and cash flow 2. Ability to manage all key stakeholders and keep them all moving in the right direction 3. Credible management which might mean making certain replacements to bolster the credibility of management 4. An ability to maintain or enhance the reputation of the business 5. An ability maintain supplier credit and terms 6. An ability to release internal working capital and secure external funding. Studying turnarounds and turnaround practices can help CEOs and business owners maintain and grow healthy and profitable businesses. Many of the techniques and practices used in turnarounds are good management fundamentals and differ only in emphasis and execution between turnarounds and stable companies. Some of the practices need to be used judiciously and some avoided when dealing with a stable company. Understanding and applying turnaround practices in non-crisis situations can, however, be the difference between long-term success or failure. Turnaround management is everyday business and its practices and principles should be part of every CEOs and business owners bag of tricks. BENEFITS A successful turnaround creates value for all stakeholders and retains employment for many employees and management. 1. Revenue enhancement as a turnaround strategy Revenue enhancement focusses on increasing sales through improvement of systems, processes and technology in the primary value chain activities: Customer management processes such as sales and marketing, and aftersales service to increase turnover through more effective sales force performance, new products, improved functionality and range of products, new markets, better promotion, etc. Operations management processes - inbound logistics, operations, outbound logistics - to increase performance on quality and lead time,

thereby raising customer satisfaction through increased service delivery capability. Innovation processes - Research and Development to increase the ability to offer the market new products. The lead time for revenue enhancement is normally longer than that of cost reduction. If the business is in a financial crisis and revenue enhancement cannot be funded, revenue enhancement often follows after cost reduction and/or asset reduction initiatives have generated cash. Increasing sales are required if the distressed company operate below breakeven. Revenue enhancement takes longer to have effect than cost reduction though. 2. Cost reduction as a turnaround strategy: Cost reduction is the turnaround strategy having the fastest impact on the bottom line. Overhead and direct costs in the primary value chain and support functions are normally reduced to a level that can be borne by the level of sales that will remain after cost cutting. Overhead cost reduction takes place in chunks. Removing more and more chunks eventually means that some business units or product lines cannot be supported anymore, and the sales associated with those fall away too. Cost reduction often involves retrenchment of employees, especially in turnaround situations where salaries and wages represent a large portion of the cost structure. We don't believe in cutting costs to the bone - thereby inhibiting the organisation's ability to create, fulfil and administer demand.

3. Asset reduction as a turnaround strategy Working capital reduction is common to any turnaround.

However, if the distressed company is too far below breakeven, working capital reduction, revenue enhancement and cost reduction strategies alone will not suffice. In this situation, the turnaround strategy is normally to shrink the business into profitability. In such cases, cutback action takes the form of shrinking into profitability by means of portfolio disinvestment. This involves closure or sale of business units, divisions, operations and assets, and outsourcing of value chain activities in order to focus on the remaining profitable or potentially profitable business units or sections of the value chain. Such down-scoping represents a kind of strategic repositioning by itself. As with cost reduction, closure and outsourcing of business units involves retrenchment of employees. Portfolio disinvestment through selling off assets is often used as mechanism to raise cash for the turnaround. TURNAROUND STRATEGIES 1. Reorganisation as a turnaround strategy: In our experience, reorganisation always forms part of turnaround management. Reorganisation deals with all the people issues in the business. It entails restructuring, restaffing, reskilling and turnaround leadership revitalisation to yield improved leadership, management, organisational structure, organisational alignment and culture. Reorganisation is invariably required to ensure success of the other turnaround strategies viz. strategic repositioning, revenue enhancement, cost reduction or asset reduction. Depending on the turnaround situation, reorganisation can be limited to leadership alignment, and better management systems for planning and control of the company. Often, however, the extent of reorganisation required goes as far as changes in top management and in the organisational structure.

2. Strategic repositioning as a turnaround strategy: Strategic repositioning holds the most potential but is the most neglected turnaround strategy according to academic research. When properly employed, strategic repositioning yields the most spectacular and sustainable turnaround results. Strategic repositioning changes the mission and customer value proposition of the distressed company by changing what products are offered to what markets and in which fashion. In doing so it changes the revenue - cost - asset structure of the business, yielding improved profitability and return on capital employed. It may do so by either growing, shrinking or refocusing the business. For the single business unit business, strategic repositioning entails a compete rethink of why it is in business and how it is to achieve a sustainable competitive advantage. For the multi-business unit or multi-product line situation, strategic repositioning may additionally entail portfolio disinvestment, as in asset reduction, to focus on the core business. Conversely, it may entail growing the portfolio to enhance sales and profitability. Growth, however, normally requires investment inter alia in new technology and people, and switching costs exist. If the business is in severe distress, lack of turnaround funding often prohibits this line of action. Strategic repositioning is therefore in practice more often employed after cost reduction has been successful, if at all. 3. Investment Basis A. Innovation in Products B. Debt Re-Structuring C. Valuation

4. The impact of stakeholder support on turnaround strategy Stakeholders are seldom interested in a turnaround plan that may look good on paper, but which won't show results in the foreseeable future. Stakeholders often require short-term results first before finally approving a longer-term plan.

In turnaround management it is therefore imperative to resolve the financial crisis, and rapidly show an impact on cash flow and the bottom line to prove survivability. Selection of turnaround strategies therefore has to heed turnaround phasing requirements, typically: Stabilise the business, and execute first-stage restructuring such as reorganisation, cost reduction and working capital reduction using shortterm or internally generated finance. Having gained the support and confidence of stakeholders, embark on the major restructuring programme involving revenue enhancement and strategic repositioning using finance of a longer-term nature.

5. Retrenchment The Retrenchment strategy of the turnaround management describes wideranging short-term actions, to reduce financial losses, to stabilize the company and to work against the problems, that caused the poor performance. The essential content of the Retrenchment strategy is therefore to reduce scope and the size of a business. This can be done by selling assets, abandoning difficult markets, stopping unprofitable production lines, downsizing and outsourcing. These procedures are used to generate resources, with the intention to utilize those for more productive activities, and prevent financial losses. Retrenchment is therefore all about an efficient orientation and a refocus on the core business. Despite that many companies are inhibited to perform cutbacks, some of them manage to overcome the resistance. As a result they are able get a better market position in spite of the reductions they made and increase productivity and efficiency. Most practitioners even mention, that a successful turnaround without a planned retrenchment is rarely feasible. 6.Repositioning The Repositioning strategy, also known as entrepreneurial strategy, its main focus is to generate revenue with new innovations and change in product portfolio and market position. This includes the development of new products, entering new markets, extrapolating alternative sources of revenue and modifying the image or the mission of a company.

7.Replacement Replacement is a strategy, where top managers or the Chief Executive Officer (CEO) are replaced by new ones. This turnaround strategy is used, because it is theorized that new managers bring recovery and a strategic change, as a result of their different experience and backgrounds from their previous work. It is also indispensable to be aware, that new CEOs can cause problems, which are obstructive to achieve a turnaround. For an example, if they change effective organized routines or introduce new administrative overheads and guidelines. Replacement is especially qualified for situations with opinionated CEOs, which are not able to think impartial about certain problems. Instead they rely on their past experience for running the business or belittle the situation as short-termed. The established leaders fail therefore to recognize that a change in the business strategy is necessary to keep the company viable. There are also situations, where CEOs do notice that a current strategy isnt successful as it should be. But this hasnt to imply, that they are capable or even qualified enough to accomplish a turnaround. Is a company against a Replacement of a leader, could this end in a situation, where the declining process will be continued. As result qualified employees resign, the organisation discredits and the resources left will run out as time goes by. 8. Renewal With a Renewal a company pursues long-term actions, which are supposed to end in a successful managerial performance. The first step here is to analyse the existing structures within the organisation. This examination may end with a closure of some divisions, a development of new markets/ projects or an expansion in other business areas. A Renewal may also lead to consequences within a company, like the removal of efficient routines or resources. On the other hand are innovative core competencies implemented, which conclude in an increase of knowledge and a stabilization of the company value.

Hurdles or Challenges Three critical hurdles or challenges that management faces in any repositioning program 1. Design: What type of restructuring is appropriate for dealing with the specific challenge, problem, or opportunity that the company faces? 2. Execution: How should the restructuring process be managed and the many barriers to restructuring overcome so that as much value is created as possible? 3. Marketing: How should the restructuring be explained and portrayed to investors so that value created inside the company is fully credited to its stock price? B. MERGER AND ACUISITION- LIVE EXAMPLE Defining M&A The Main Idea One plus one makes three: this equation is the special alchemy of a merger or an acquisition. The key principle behind buying a company is to create shareholder value over and above that of the sum of the two companies. Two companies together are more valuable than two separate companies - at least, that's the reasoning behind M&A. This rationale is particularly alluring to companies when times are tough. Strong companies will act to buy other companies to create a more competitive, cost-efficient company. The companies will come together hoping to gain a greater market share or to achieve greater efficiency. Because of these potential benefits, target companies will often agree to be purchased when they know they cannot survive alone. Distinction between Mergers and Acquisitions Although they are often uttered in the same breath and used as though they were synonymous, the terms merger and acquisition mean slightly different things. When one company takes over another and clearly established 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 "swallows" the business and the buyer's stock continues to be traded. In the pure sense of the term, a merger happens when two firms, often of about the same size, agree to go forward as a single new company rather than remain separately owned and operated. This kind of action is more precisely referred to as a "merger of equals." Both companies' stocks are surrendered and new company stock is issued in its place.

For example, both Daimler-Benz and Chrysler ceased to exist when the two firms merged, and a new company, DaimlerChrysler, was created. In practice, however, actual mergers of equals don't happen very often. Usually, one company will buy another and, as part of the deal's terms, simply allow the acquired firm to proclaim that the action is a merger of equals, even if it's technically an acquisition. Being bought out often carries negative connotations, therefore, by describing the deal as a merger, deal makers and top managers try to make the takeover more palatable. 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. But when the deal is unfriendly - that is, when the target company does not want to be purchased - it is always regarded as an acquisition. Whether a purchase is considered a merger or an acquisition really depends on whether the purchase is friendly or hostile and how it is announced. In other words, the real difference lies in how the purchase is communicated to and received by the target company's board of directors, employees and shareholders. Merger and acquisition has become the most prominent process in the corporate world. The key factor contributing to the explosion of this innovative form of restructuring is the massive number of advantages it offers to the business world. Following are some of the known advantages of merger and acquisition:

The very first advantage of M&A is synergy that offers a surplus power that enables enhanced performance and cost efficiency. When two or more companies get together and are supported by each other, the resulting business is sure to gain tremendous profit in terms of financial gains and work performance. Cost efficiency is another beneficial aspect of merger and acquisition. This is because any kind of merger actually improves the purchasing power as there is more negotiation with bulk orders. Apart from that staff reduction also helps a great deal in cutting cost and increasing profit margins of the company. Apart from this increase in volume of

production results in reduced cost of production per unit that eventually leads to raised economies of scale.

With a merger it is easy to maintain the competitive edge because there are many issues and strategies that can e well understood and acquired by combining the resources and talents of two or more companies. A combination of two companies or two businesses certainly enhances and strengthens the business network by improving market reach. This offers new sales opportunities and new areas to explore the possibility of their business. With all these benefits, a merger and acquisition deal increases the market power of the company which in turn limits the severity of the tough market competition. This enables the merged firm to take advantage of hi-tech technological advancement against obsolescence and price wars.

Types of Mergers and Acquisitions

There are many types of mergers and acquisitions that redefine the business world with new strategic alliances and improved corporate philosophies. From the business structure perspective, some of the most common and significant types of mergers and acquisitions are listed below: 1. Horizontal Merger This kind of merger exists between two companies who compete in the same industry segment. The two companies combine their operations and gains strength in terms of improved performance, increased capital, and enhanced profits. This kind substantially reduces the number of competitors in the segment and gives a higher edge over competition. 2. Vertical Merger Vertical merger is a kind in which two or more companies in the same industry but in different fields combine together in business. In this form, the companies in merger decide to combine all the operations and productions under one shelter. It is like encompassing all the requirements and products of a single industry segment.

3. Co-Generic Merger Co-generic merger is a kind in which two or more companies in association are some way or the other related to the production processes, business markets, or basic required technologies. It includes the extension of the product line or acquiring components that are all the way required in the daily operations. This kind offers great opportunities to businesses as it opens a hue gateway to diversify around a common set of resources and strategic requirements. 4. Conglomerate Merger Conglomerate merger is a kind of venture in which two or more companies belonging to different industrial sectors combine their operations. All the merged companies are no way related to their kind of business and product line rather their operations overlap that of each other. This is just a unification of businesses from different verticals under one flagship enterprise or firm. There are two types of mergers that are distinguished by how the merger is financed. Each has certain implications for the companies involved and for investors: o Purchase Mergers - As the name suggests, this kind of merger occurs when one company purchases another. The purchase is made with cash or through the issue of some kind of debt instrument; the sale is taxable. Acquiring companies often prefer this type of merger because it can provide them with a tax benefit. Acquired assets can be written-up to the actual purchase price, and the difference between the book value and the purchase price of the assets can depreciate annually, reducing taxes payable by the acquiring company. We will discuss this further in part four of this tutorial. o Consolidation Mergers - With this merger, a brand new company is formed and both companies are bought and combined under the new entity. The tax terms are the same as those of a purchase merger. 5. Market-extension merger Two companies that sell the same products in different markets. 6. Product-extension merger Two companies selling different but related products in the same market. Acquisitions As you can see, an acquisition may be only slightly different from a merger. In fact, it may be different in name only. Like mergers, acquisitions

are actions through which companies seek economies of scale, efficiencies and enhanced market visibility. Unlike all mergers, all acquisitions involve one firm purchasing another - there is no exchange of stock or consolidation as a new company. Acquisitions are often congenial, and all parties feel satisfied with the deal. Other times, acquisitions are more hostile. In an acquisition, as in some of the merger deals we discuss above, a company can buy another company with cash, stock or a combination of the two. Another possibility, which is common in smaller deals, is for one company to acquire all the assets of another company. Company X buys all of Company Y's assets for cash, which means that Company Y will have only cash (and debt, if they had debt before). Of course, Company Y becomes merely a shell and will eventually liquidate or enter another area of business. Another type of acquisition is a reverse merger, a deal that enables a private company to get publicly-listed in a relatively short time period. A reverse merger occurs when a private company that has strong prospects and is eager to raise financing buys a publicly-listed shell company, usually one with no business and limited assets. The private company reverse merges into the public company, and together they become an entirely new public corporation with tradable shares. Regardless of their category or structure, all mergers and acquisitions have one common goal: they are all meant to create synergy that makes the value of the combined companies greater than the sum of the two parts. The success of a merger or acquisition depends on whether this synergy is achieved. Valuation The number as well as the average size of merger and acquisition deals is increasing in India. During post liberalization, increase in domestic competition and competition against cheaper imports have made organizations merge themselves to reap the benefits of a large-sized company. The merger and acquisition valuation is the building block of a proposed deal. It is a technical concept that needs to be estimated carefully. The use of different valuation techniques and principles has made valuation a subjective process. A conflict in the choice of technique is the main reason for the failure of many mergers. For instance, the asset value can be determined both at the market price and the cost price. Therefore, it is important that the merging parties should first discuss and agree upon the methods of valuation.

Investors in a company that is aiming to take over another one must determine whether the purchase will be beneficial to them. In order to do so, they must ask themselves how much the company being acquired is really worth. Naturally, both sides of 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. Comparative Ratios - The following are two examples of the many comparative metrics on which acquiring companies may base their offers: A. 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. B. 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. 2. 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. 3. 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 (operating profit + depreciation + amortization of goodwill capital expenditures cash taxes 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.

Break Ups As mergers capture the imagination of many investors and companies, the idea of getting smaller might seem counterintuitive. But corporate break-ups, or demergers, can be very attractive options for companies and their shareholders. Advantages The rationale behind a spinoff, tracking stock or carve-out is that "the parts are greater than the whole." These corporate restructuring techniques, which involve the separation of a business unit or subsidiary from the parent, can help a company raise additional equity funds. A break-up can also boost a company's valuation by providing powerful incentives to the people who work in the separating unit, and help the parent's management to focus on core operations. Most importantly, shareholders get better information about the business unit because it issues separate financial statements. This is particularly useful when a company's traditional line of business differs from the separated business unit. With separate financial disclosure, investors are better equipped to gauge the value of the parent corporation. The parent company might attract more investors and, ultimately, more capital. Also, separating a subsidiary from its parent can reduce internal competition for corporate funds. For investors, that's great news: it curbs the kind of negative internal wrangling that can compromise the unity and productivity of a company. For employees of the new separate entity, there is a publicly traded stock to motivate and reward them. Stock options in the parent often provide little incentive to subsidiary managers, especially because their efforts are buried in the firm's overall performance. Disadvantages That said, de-merged firms are likely to be substantially smaller than their parents, possibly making it harder to tap credit markets and costlier finance that may be affordable only for larger companies. And the smaller size of the firm may mean it has less representation on major indexes, making it more difficult to attract interest from institutional investors. Meanwhile, there are the extra costs that the parts of the business face if separated. When a firm divides itself into smaller units, it may be losing the synergy that it had as a larger entity. For instance, the division of expenses such as marketing, administration and research and development (R&D) into different business units may cause redundant costs without increasing overall revenues.

Restructuring Methods There are several restructuring methods: doing an outright sell-off, doing an equity carve-out, spinning off a unit to existing shareholders or issuing tracking stock. Each has advantages and disadvantages for companies and investors. All of these deals are quite complex. Sell-Offs A sell-off, also known as a divestiture, is the outright sale of a company subsidiary. Normally, sell-offs are done because the subsidiary doesn't fit into the parent company's core strategy. The market may be undervaluing the combined businesses due to a lack of synergy between the parent and subsidiary. As a result, management and the board decide that the subsidiary is better off under different ownership.

MERGERS AND ACQUISITION STRATEGIES 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. Every company has different cultures and follows different strategies to define their merger. Some take experience from the past associations, some take lessons from the associations of their known businesses, and some hear their own voice and move ahead without wise evaluation and examination. Following are some of the most essential strategies of merger and acquisition that can work wonders in the process:

The first and foremost thing is to determine business plan drivers. It is very important to convert business strategies to set of drivers or a source of motivation to help the merger succeed in all possible ways. There should be a strong understanding of the intended business market, market share, and the technological requirements and geographic location of the business. The company should also understand and evaluate all the risks involved and the relative impact on the business.

Then there is an important need to assess the market by deciding the growth factors through future market opportunities, recent trends, and customer's feedback. The integration process should be taken in line with consent of the management from both the companies venturing into the merger. Restructuring plans and future parameters should be decided with exchange of information and knowledge from both ends. This involves considering the work culture, employee selection, and the working environment as well. 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, the merger can be taken forward to finalizing a deal.

MERGERS AND ACQUISITIONS IN INDIA Global M&A is one of the most happening and fundamental element of corporate strategy in today's world. Many companies around the world have merged with each other with a motive to expand their businesses and enhance revenue. In the span of few years there are many companies coming together for betterment across the globe. Recent mergers and acquisitions 2011 are Lipton Rosen & Katz in New York, Sullivan & Cromwell LLP in New York, Slaughter & May in London, Mallesons Stephen Jaques in Sydney, and Osler Hoskin & Harcourt LLP in Toronto. Even in India merger and acquisition has become a fashion today with a cut throat competition in the international market. There are domestic deals like Penta homes acquiring Agro Dutch Industries, ACC taking over Encore Cement and Addictive, Dalmia Cement acquiring Orissa Cement, Edelweiss Capital acquiring Anagram Capital. All these are recent merger and acquisition 2010 valued at about USD 2.16 billion. Apart from these there are other successful mergers in India as follows:

Tata Chemicals took over British salt based in UK with a deal of US $ 13 billion. This is one of the most successful recent mergers and acquisitions 2010 that made Tata even more powerful with a strong access to British Salt's facilities that are known to produce about 800,000 tons of pure white salt annually. Merger of Reliance Power and Reliance Natural Resources with a deal of US $11 billion is another biggest deal in the Indian industry. This merger between the two made it convenient and easy for the Reliance power to handle all its power projects as it now enjoys easy availability of natural gas. Airtel acquired Zain in Africa with an amount of US $ 10.7 billion to set new benchmarks in the telecom industry. Zain is known to be the third largest player in Africa and being acquired by Airtel it is deliberately increasing its base in the international market. ICICI Bank's acquisition of Bank of Rajasthan at aout Rs 3000 Crore is a greta move by ICICI to enhance its market share across the Indian boundaries especially in northern and western regions. Fortis Healthcare acquired Hong Kong's Quality Healthcare Asia Ltd for around Rs 882 Crore and is now on move to acquire the largest dental service provider in Australia, the Dental Corp at about Rs 450 Crore.

Holcim's Acquisitions in 2005

Abstract: The case explains the two acquisitions made by Holcim, the Switzerland-based cement company, in 2005. These two acquisitions were the India-based Associate Cement Companies (ACC) and the UK-based Aggregate Industries (AI). While the deal with AI increased shareholder value and involved two parties, the deal with ACC was relatively more complex. Holcim entered into an alliance with Gujarat Ambuja Cement

Limited (GACL) to acquire ACC. The case explains how the deal was structured and how it gave the companies involved certain operational advantages. The case also covers the criticisms that were raised against the deal. Details pertaining to other acquisitions carried out by Holcim in the late 1990s and the early 2000s are also mentioned in the case. Issues: Why companies go in for acquisitions alliances. How strategies alliances/acquisitions create value. How market maturity of a company affects its acquisition decisions.

Introduction In 2005, the Glaris, Switzerland-based Holcim Group (Holcim), was one of the world's leading suppliers of cement, aggregates and ready-mix concrete. It held majority and minority stakes in a number of companies in more than 70 countries. Holcim was also involved in consulting and trading services related to engineering. In 2004, the company had sales of CHF 13,215 million and a net income of CHF 914 million. Holcim adopted the inorganic growth strategy and was on an acquisition spree in the 1990s and 2000s. In 2005, Holcim acquired Aggregate Industries (AI) based in Leicestershire, UK and Associated Cement Companies Ltd (ACC) in India. Holcim's acquisition strategy was based on the level of maturity of the market where the acquired companies were located . AI, which was a supplier of aggregates, asphalt and ready-mix concrete, added value to Holcim's operations through integration in mature markets like the US

and UK, while ACC was meant to bring in sustained revenues to Holcim due to the potential of the cement industry in an emerging economy like India, where demand for cement was increasing at a higher pace than in Europe and the United States BACKGROUND Holcim was founded in 1912 in the village of Holderbank7 in Switzerland, and in a decade it expanded to other European markets by investing in a number of cement companies. It invested in African countries like South Africa, and Egypt in the 1930s. In the 1950s and 1960s, Holcim invested in the North American markets. The following decades saw the company entering the Asia Pacific region. Over the years Holcim has increased its stake in a number of companies through which it has been operating in a number of markets. In 2001, it increased its stake in PT Semen Cibinong Tbk8 from 12.5% to 75%. In the same year, Holcim acquired 70% of Novi Popovac Cement Factory's share capital in Serbia. In 2003, the company took over Cementos de Hispania SA of Spain. In the same year the company also acquired a Cyprus-based cement company, Bogaz Madencilik. In Bulgaria, Holcim went ahead with the acquisition of Plevenski Cement AD from the Greece-based Titan Cement Company SA in December 2003. In January 2004, Holcim announced that it has increased its stake in the Moscow-based Alpha Cement JSC to 68.8%. In 2004, the company also acquired Rohrbach Zement & Co. KG at Baden-Wurttemberg, Germany. In 2005, Holcim acquired AI and ACC. The company's operating segments included cement/clinker, aggregates/concrete and other products/services. Holcim implemented a longterm growth strategy. It strengthened its position as an integrated supplier of building materials by expanding its market presence through strategic acquisitions... Acquiring AI

About AI In 2003, AI produced 66.4 million tonnes of aggregates, 11.8 million tonnes of asphalt, 7.0 million cubic metres of ready-mix concrete and 3.7 million tonnes of pre-cast concrete products. With operations in UK, US, Norway and Channel Islands, the company employed over 8,600 people working in more than 650 locations by the end of 2003. Half of the company's revenues came from the US. In 2003, AI's revenues increased to 1,459 million from 1,378.2 million in 2002. The company reported a seventh successive year of profit with profit before tax increasing to 140.1 million in 2003 from 134.5 million in 2002. Acquiring ACC Background of the Deal The cement industry in India was so highly fragmented that even in 2004, the 146.38 MT of installed capacity under large plants category was controlled by as many as 55 companies. With an installed capacity of approximately 150 MT in 2005, the Indian cement industry in 2004-05 was the second largest cement producer in the world accounting for approximately 6% of the global production. Outlook Not only did the deals with AI and ACC result in Holcim's entry into the two attractive markets of UK and India, but it also brought in immediate revenues to Holcim. The two acquisitions helped Holcim to achieve increased capacity and sales in all the product and geographic segments.

"Animation has always been the heart and soul of the Walt Disney Company and it is wonderful to Bob Iger and the company embrace that heritage by bringing the outstanding animation talent of the Pixar team back into the fold." 3 - Roy Disney Jr. in 2006. Introduction

On January 24, 2006, the US based media and entertainment company - Walt Disney Company (Disney) announced that it would acquire its animation partner, Pixar for US$ 7.4 billion in stock. Disney had been in partnership for producing and distributing animation films with Pixar since 1991. In January 2004, owing to differences with Disney's then CEO Michael Eisner (Eisner), Pixar had announced that it would partner with another distribution company in 2006. But Robert Iger (Iger), who took over from Eisner on September 30, 2005, revived talks with Pixar and finally succeeded in acquiring it. The deal expected to be finalized by May 2006 would make Steve Jobs (Jobs), CEO of Apple Computer Inc. (Apple), the major shareholder in Disney with an equity stake of approximately 7%. This was because Jobs had a 50.6% equity stake in Pixar. He would also become a member of Disney's Board of Directors. Even after the merger, Disney and Pixar were to work from their separate headquarters at Burbank, and Emeryville (both in California), respectively. Disney's press release said, "This acquisition combines Pixar's preeminent creative and technological resources with Disney's unparalleled portfolio of world-class family entertainment, characters, theme parks and other franchises, resulting in vast potential for new landmark creative output and technological innovation that can fuel future growth across Disney's businesses."Analysts said that the deal was more important to Disney than to Pixar. While all of Pixar's films like Toy Story, The Incredibles and Finding Nemo were successful, Disney's animation films like Treasure Planet, Home on the Range and Brother Bear had performed below expectations. Some analysts felt that the deal was priced a bit higher than expected. In the US$ 7.4 billion deal, Disney got a library of six Pixar films. This seemed expensive for Disney, especially when compared to Viacom's acquisition of DreamWorks SKG in December 2005, which had 59 films, for US$ 1.6 billion. However, according to Nelson Gayton, Professor at Wharton, "Any premium that Disney might have paid for the Pixar acquisition must also be evaluated in light of the nature of the animation content that Pixar produces and the distribution possibilities it offers via new technologies." Industry analysts were of the view that, apart from gaining access to Pixar's technology, it was important that Disney got a person of the caliber of Jobs on its board. Asserting this, Tim Bajarin, President, Creative Strategies said, "His biggest impact will be to

help guide Disney into the digital age and be the mediator of this major media company's content to the world of next-generation digital content delivery." Background Note Disney In 1923, Walt Elias Disney (Walt) arrived in California from Kansas City, bringing with him an animation film, Alice's Wonderland. On October 16, 1923, M.J Winkler (Winkler), a distributor, agreed to distribute the Alice Comedies and bought each character for US$ 1,500. This marked the beginning of Disney Brothers Cartoon Studio, with Walt's brother Roy Disney (Roy) sharing an equal partnership in the venture. Later, the name was changed to Walt Disney Studio. In 1927, after making Alice Comedies for four years, Walt created a new character called Oswald the Lucky Rabbit to start a new animation series. By this time, Winkler had handed over the business to her husband Charles Mintz (Mintz). After a year, as Oswald gained popularity, Walt tried to re-negotiate his contract for higher money. However, by that time, Mintz had poached Walt's employees to create an Oswald's series in his own studio. Walt also learned that he did not legally own the rights for Oswald. When Mintz demanded that Walt should work exclusively for him, Walt refused and parted ways. After his break-up with Mintz, Walt wanted to create a character stronger than Oswald. He visualized a new character in the form of a mouse and planned to name it 'Mortimer,' but on his wife's suggestion changed it to 'Mickey.' This marked the birth of the world famous 'Mickey Mouse' (Mickey). Initially, it was not easy for Walt to sell the new Mickey to the distributors as it had to compete with the popular Felix the Cat and Oswald. Walt's first animation film featuring Mickey, Plane Crazy (released in May 1928), failed to impress the audience who felt that Mickey resembled Oswald closely. Walt created the second Mickey feature film titled The llopin' Gaucho, but couldn't find distributors.

The Disney-Pixar Partnership In May 1991, Disney entered into an agreement with Pixar for developing and producing three computer animated feature films. According to the agreement, Disney agreed to produce movies to be developed and directed by Pixar's John Lasseter. Disney agreed to market and distribute these movies.

Pixar was to receive compensation based on the revenue obtained from distributing these films and related products. Including distribution fees, Disney was to get 87% of the distribution proceeds. Analyst felt that the agreement gave Pixar an expert partner in the film business with great marketing capabilities The first film under the agreement was Toy Story which was released in November 1995. It was the first computer animated feature film that was of one hour and twenty one minutes duration. The film was a huge success and generated over US$ 360 million in worldwide revenues. After the release of Toy Story, Disney extended its partnership with Pixar to a co-production agreement in 1997, under which Pixar agreed to produce five original computer-animated feature films, in a span of ten years... The Acquisition In March 2005, the Disney Board elected Iger as the company's CEO to succeed Eisner on September 30, 2005. Iger got a call from Jobs who hinted at a possible discusion on working together again. Analysts felt that Iger would find it difficult to strike a new deal as proposed by Jobs as it was heavily loaded in favor of Pixar. However, Iger adapted the proposal his own way. He asked for Disney's content to be distributed over the Internet through Apple's online store - iTunes. In October 2005, Iger and Jobs signed a deal to sell the past and current episodes of television shows of its ABC and Disney channels through iTunes. It started with five shows which included the popular shows Desperate Housewives and Lost. Jobs was pleased with the Iger's suggestion of linking up to offer videos through iTunes. Iger said that the deal with Apple was finalized in just three days. Meanwhile, Jobs also started re-negotiating on the Disney-Pixar agreement. With this rapprochement, there was speculation that Disney might acquire Pixar.

The Rationale Analysts said this deal was more important to Disney than to Pixar. For Disney, the acquisition gave it ownership of the world's most famous computer animation studio and its talent, with whom it had teamed up to create block busters since the 1990s. The timing was also perfect as its own animation films had failed one after another. Its first full computer animation film Chicken Little (released in November 2005) fared only marginally well. The deal would bring the technology company Apple (through Steve Jobs) closer to Disney, and Iger could further increase the digital content that was being offered through Apple. Analysts said that having Jobs on the Disney board would certainly give the company the necessary technology edge and direction. Further, with Lasseter, the creative genius behind Pixar's block busters, in charge of the new division, Disney would get the necessary push in creativity which it seemed to lack in recent times. The Road Ahead On the several benefits Disney would derive, Nelson Gayton, Professor at Wharton School of Business said, "I believe that the acquisition of Pixar was of utmost strategic importance to Disney, not only because of where Disney's previous distribution relationship with Pixar seemed headed, but also because of Pixar's potential value to Disney's 'family entertainment' brand and assets, like theme parks and television, that feed off this brand." While there were several possible synergies that could arise from the acquisition, there were also some potential trouble spots for Disney. The rise of Jobs to the Disney board as the single largest shareholder could become a major worry for Iger as Jobs was slightly unpredictable. The merger, in place of the partnership with Pixar, might make Iger second to the powerful and experienced Jobs. An industry analyst termed the move bold but predicted that Iger might leave Disney in a year, saying, "Iger just put a gun to his head." Analysts felt Iger had to be careful as he was still trying to create his own identity after being under the shadow of Eisner, who had been at the helm for more than twenty years...