PROCESS OF MERGER

Formulation Locate Investigate Negotiation Integration Motivate

FORMULATION
The top management should establish specific criteria based on the objectives that have determined and on a strategy of growth through acquisition. The organization should evaluate in advance what the ideal target company looks like in terms of various factors such as the following Type of cost structure of the target company Market channel of the target

FORMULATION
Strategic customer accounts and market segments accessed by the target. Capital structure Types of governance process to be followed.

LOCATE
After finding the eligible target companies, the initial financial and operational analysis should be done. This initial financial and operational analysis leads to the initial conversation between the executive staffs. With continuing interest from both parties, the acquiring company ultimately defines and submits the initial deal parameters, terms and conditions as part of the letter of intent and the secrecy agreement.

INVESTIGATE

Full integration Moderate integration Minimal integration

NEGOTIATION
Deal teams along with the senior executives: Formulate the final negotiation strategy for all terms and conditions of the deal. Consideration include price, performance, people, legal protection and governance.

INTEGRATION
In determining how to resolve the many issues that arise at this stage, the merging organizations must carefully consider such questions as how fast to integrate. How much trouble will be created. How trouble can be minimized. How people can be helped to continue focusing on customers, safety and day to day operations.

MOTIVATE
Once major integration activities are complete and most if not all the projected synergies have been achieved, management responsibility shifts to the demands of forcing the organization forward in order to achieve ongoing performance improvements.

DEAL STRUCTURING PROCESS

Deal structuring involves identifying The primary goals of the parties involved in the transaction; Alternatives to achieve these goals; and How to share risks. The appropriate deal structure is that which Satisfies as many of the primary objectives of the parties involved as necessary to reach agreement Subject to an acceptable level of risk

CLOSING THE DEAL

Target is evaluated by the acquirer Terms are agreed upon Ratified by the respective boards Approved by a majority (usually two-thirds) of shareholders from both firms Appropriate filing of paperwork Possible consideration by The Antitrust Division of the Department of Justice or the Federal Trade Commission

FIVE STAGE MODEL

FIVE STAGE MODEL

Stage I - Corporate Strategy Development Stage II - Organizing for Acquisition Stage III- Deal Structuring & Negotiation Stage IV - Post-Acquisition Integration Stage V - Post-Acquisition Audit & Organizational Learning

STAGEI: CORPORATE STRATEGY DEVELOPMENT M&A is a part of Corporate Strategy Enhancing competitive advantage Optimizing Current portfolio of business Gaining Economies of Scale Searching for Partners with Matching Resources Difficulty of Quantifying competitive advantage of M& A

STAGE II: ORGANIZING FOR ACQUISITION M&A may be a separate function or a part of the normal functions Acquirer must develop capability and core competence Arrange for obtaining additional resources Prepare a Road Map for Post Merger Scenario of each department and functions Standardize & internalize early warning signals

STAGE III: DEAL STRUCTURING & NEGOTIATION

Major Pitfalls in Deal Structuring & Negotiation - Overvaluation of target company - Conflict of Interest of Advisors such as Investment Bankers, lawyers, accountants and environmental consultants - Obtaining insufficient data - Defective due diligence - not determining the range of negotiation parameters -lack of clear negotiation regarding the positions of the senior managers of both the firms - not developing defense strategies regarding regulatory agencies

CONTD III DEAL STRUCTURING & NEGOTIATION For avoiding the pitfalls, the corporate should - do proper valuation of the target - conduct in advance a thorough investigation of conflict of interest of the advisors - conduct an elaborate due diligence even by more than one agency - negotiate clearly the absorption of the HR and their designations

STAGE IV: POST ACQUISITION INTEGRATION

Change Management Project management capabilities Communication Plans Deadlines for execution of plans Performance benchmarks Reward for achievements Merger of information systems - continued..

IV POST ACQUISITION INTEGRATION HR Problems - detailed meeting and discussion with HR - reduce anxiety - assuring retention - no cultural shock - no downgrading of designations - no superior-inferior treatment

POST-ACQUISITION AUDIT & ORGANIZATIONAL LEARNING

Contribute to codification of past acquisition related activities. Communicate both success and failures in acquisitions effectively so they become embedded in organizational procedures, systems, cultures and routines. Highlight the weeknesses in systmes and processes and help the business units and functions improve these systems and processes.

POST-ACQUISITION AUDIT & ORGANIZATIONAL LEARNING

Create a well calibrated feedback mechanism for organizational learning. Facilitate single loop learning, i.e. understand reasons for failure of expectations. Facilitate double loop learning, i.e. questions the assumptions underlying acquisition strategy and programme and its expectations.

THE ACQUISITION PROCESS

Business plan structure

Financing Management team

Due Due diligence diligence Negotiations

Post-acquisition actions

Search

Target Target

Completion

Integration

Desk top Approach

Value Risk

Warranties Audit Indemnities Settlement Disclosure Sale & purchase agreement Post acquisition review

Target selection

Heads of agreement Indicative bid?

DUE DILIGENCE

DUE DILIGENCE
Analysis and appraisal of an entity in preparation for establishing a relationship with that entity which involves business risk.
In all, it tries to ensure that What You See is What You Get

DUE DILIGENCE
A thorough investigation about the target company and its operations is called due diligence Due Diligence is the process of evaluating a prospective business decision by getting information about the financial, legal, and other material (important) state of the other party.

WHY AND WHEN DO YOU CONDUCT A DUE DILIGENCE?

WHY? Transactions involve substantial financial obligations A characteristic of our business environment is to always present the best picture Essential to determine the undisclosed risks which are attached to the transaction as this may result in the transaction being aborted or affect the purchase price or terms of the agreement

WHAT IS THE DUE DILIGENCE PROCESS?

Appointment of the team Skills/expertise Clear and definite mandate Costs Confidentiality agreements Due Diligence Questionnaire and Checklist One on one interviews with management from the target company Investigative mode of enquiry which will include searches of public registers

MAKING DUE DILIGENCE EFFECTIVE

Strategy Target identification and evaluation

Financial assessment Tax review direct/ indirect Commercial assessment of markets, management, operations, IT, potential synergies, pensions etc

Integrated financial and commercial due diligence

Management Merchant bankers Lawyers and other advisers

Due diligence deliverables

Pricing issues

Strategic fit

Improvement Key postopportunities acquisition actions

Capex needs

Funding issues

Warranty and contract issues

Deal negotiation and completion

Post-acquisition plans

TYPES OF DUE DILIGENCE

Financial The business + historic/ prospective financials. Tax Tax aspects, liabilities etc. Legal Litigation, key contracts, regulatory aspects, title to property, direct and indirect taxes. Specialist Commercial/ Operational/ Environmental/ HR/ Technological Product analysis, competitor analysis, barriers to entry, facilities, supply chain, capex needs Plant efficiency Contracts, pensions, mobility of labour

THE DUE DILIGENCE REPORT

This report should contain: An outline of the scope of the review An analysis of the documentation and information revealed A list of all the information disclosed by investigations (public record searches) Limitations and disclaimers of liability An executive summary which outlines the legal issues identified and advises on the legal implications of proceeding with the transaction (Risks and Liabilities)

AREAS COVERED BY DUE DILIGENCE

[a] Commercial Aspects [b] Operational Aspects [c] Financial Aspects [d] Legal Aspects [e] HR Aspects [f] Organisational Aspects [g] Aspects of Information Systems

[A] COMMERCIAL ASPECTS

Competitive Position Customer Relation Market Share Brand Portfolio atents/Copyrights

[B] OPERATIONAL ASPECTS

Production Processes Technology used Production Systems Channels of Distribution Outsourced Operations Sub-contracting

[C] FINANCIAL ASPECTS

Capital Structure Accounting Systems Audit Systems Tax Liability Lending Agencies

[D] LEGAL ASPECTS

Contractual Obligations Cases Pending with Regulatory Agencies like RBI, SEBI, and other Government Departments Product Liability Class Action Suits Environmental Liability

[E] HR ASPECTS

Competence Compensation Training Employee Relations Disputes Outstanding Contracts

[F] ORGANISATIONAL ASPECTS

Structure Delegation of Authority Leadership Bureaucracy

[G] INFORMATION SYSTEMS

Performance Cost Complexity Compatibility

WORKFLOW

Due Diligence Checklist

I. Financial information A. Annual and quarterly financial information for the past three years: Income statements, balance sheets, and cash flows, including footnotes; Planned versus actual results; Management financial report; Breakdown of sales and gross profit by: - Product type - Distribution channel - Geography; Current backlog by customers; Accounts receivable aging schedule.

 B. Financial projections: Quarterly financial projections for the last two fiscal years and the latest quarter; revenue by product type, customers and channel (full income statements, balance sheets, cash flow statements); Major growth drivers and prospects; Predictability of business; Risks attendant to foreign operations (e.g. exchange rate fluctuation, government instability); Industry and company pricing policies; Economic assumptions underlying projections (different scenarios based on price and market fluctuations); Explanation of projected capital expenditures, depreciation, and working capital requirements; External financing arrangement assumptions.

 C. Capital Structure: Current shares outstanding; Schedule of all options, warrants, rights, and any other potentially dilutive securities with exercise prices and vesting provisions; Summary of all debt instruments/bank lines with key terms and conditions; Off balance sheet liabilities; Capital losses. D. Other financial information; Summary of current federal, state, and foreign tax positions, including net operating loss carry forwards; General accounting policies (revenue recognition, etc.); Schedule of financing history for equity, warrants, and debt (dates, investors, dollars investment, percentage ownership, implied valuation, and current basis for each).

 II. Products A. Description of each product within each market segment (including product literature). B. Major customers and applications. C. Historical and projected growth rates. D. Market share. E. Speed and nature of technological change. F. Timing of new products and product enhancements. G. Cost structure and profitability. III. Customer information A. Representative list of 20 customers names, addresses, phone numbers, products owned, and timing of purchasers. B. List of strategic relationships (contact names, phone numbers, revenue contributions, marketing agreements). C. Revenue by customer (names, contact, and phone numbers of any customers accounting for 5% or more of revenue). D. Brief description of any significant relationship severed within the last two years.

IV. Competition Description of the competitive landscape within each market segment including the following: A. Market position and related strengths and weaknesses as perceived in the marketplace. B. Basis of competition (e.g. price, service, technology, distribution). V. Marketing, sales, and distribution A. Strategy and implementation: Discussion of domestic and international distribution channels; Positioning of the company and its products; Marketing opportunities/marketing risk; Description of marketing programs and examples of recent marketing/product/public relations/media information on the company. B. Major customers: Status and trends of relationships; Prospects for future growth and development. C. Principal Avenue for generating new business. D. Sales force productivity model: Compensation Average sales quota Sales cycle Plan for new hires. E. Ability to implement marketing plan within current and projected budget.

VI. Research and development A. Description of R&D organization: Strategy Key personnel Major activities. B. New product pipeline: Status and timing Cost of development Critical technology necessary for implementation Risks. C. Patents: Dependence on outside licensing and patents; Patents currently held by the company. D. Relationships with third parties: joint R&D efforts participation in industry associations. E. Ability to implement marketing plan within current and projected budgets.

 VII. Management and personnel A. Organization chart. B. Historical and projected headcount by function and location. C. Summary biographies of senior management, including employment history, age, service with the company, years in current position. D. Compensation arrangements: copies (or summaries) of key employment agreements; benefit plans. E. Discussion of incentive stock plans. F. Significant employee relations problems, past or present. G. Personnel turnover: data for last two years; key unfilled vacancies.

VIII. Legal and other matters A. Pending lawsuits against the company details concerning claimant, claimed damages, brief history, status, anticipated outcome, and name of the company's counsel. B. Pending lawsuits initiated by the company details concerning defendant, claimed damage, brief history, status, anticipated outcome, and name of the company's counsel. C. Description of environmental and employee safety issues and liabilities: Safety precautions New regulations and their consequences. D. List of material patents, copyrights, licenses and trademarks issued and pending. E. Summary of insurance coverage/any material exposures. F. Summary of material contracts. G. History of regulatory agency problems, if any. IX. Other company information A. Business plan, if available. B. List of board members. C. List of all stockholders with shareholding, options, warrants, or notes.

GOLDEN PARACHUTE
A golden parachute has been defined as an agreement between a company and an employee (usually upper executive) specifying that the employee will receive certain significant benefits if employment is terminated. Most definitions specify the employment termination is as a result of a merger or takeover also known as "Change-incontrol benefits".

GOLDEN PARACHUTE
Top executives in the event that a company is taken over by another firm, resulting in the loss of their job. Benefits include items such as stock options, bonuses, severance pay, etc.

INITIAL PUBLIC OFFERING (IPO)

An initial public offering (IPO) is the process through which a privately held company issues shares of stock to the public for the first time. IPO is a legal process, in which a company registers its securities (share equity) with the Stock Exchange for sale to the general investing public.

CULTURE SHOCK Culture shock is the personal disorientation a person may feel when experiencing an unfamiliar way of life due to immigration or a visit to a new country, or to a move between social environments.

CULTURE SHOCK
The difficulty have adjusting to new culture people had different markedly from their own. Emotional and physical discomfort that person feels while moving to new environment.

REVERSE CULTURAL SHOCK Also called as Re-entry shock. Return to home culture accustomed to new one.

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MANAGERIAL PERSPECTIVE ON MERGER

Under this perspective, managerial motives for mergers are considered as crucial determinants of the incidence, rationale, type, deal structure and outcome of mergers. One of the important considerations for managers during mergers is the extent of their control loss. In the context of takeovers, managers may act to maximize their own interests rather than those of the shareholders. Shareholders need to diverse appropriate incentive contracts to align managerial and their own interests. Contracts such as golden parachutes that allow compensation for managers in the event of losing their jobs are designed to minimize conflicts of interest.