MERGERS AND ACQUISITIONS

Presented By :

Anuj Gupta 3
Jitesh Patil 13
Bhushan Patil 23
Hiral Shah 33
Neha Shenvi 43
Neelesh Patil 53
Sonal Kumar PG4
1. A merger is the complete absorption of one firm by another
and in this scenario we refer to an acquisition that takes place
in friendly terms.

2. The acquiring firm retains its identity and acquires all the
assets and liabilities of the acquired firm that ceases to exist
and, thus, such transactions are also called acquisitions (e.g.
the acquisition of McDonnell Douglas by Boeing)

3. In a consolidation, both firms come to an end to exist and a

new firm is created after the acquisition (e.g. Peco Energy
and Unicom merged to form the new utility firm Exelon)
4. In the typical merger, the stockholders of the ceased firm
receive either cash or shares in the surviving firm.

5. The acquiring firm makes an offer to the stockholders of the

acquired (or target) firm to purchase their shares through
cash, shares in the new firm or both.

6. Another form of an acquisition is for the acquiring firm to

purchase all the assets of the acquired firm, but this may be a
costly procedure.
 Acquisitions can be
 Horizontal: a firm acquires another firm in the same industry
(Daimler – Chrysler in 1998)
 Vertical: a firm acquires another firm in a different stage
(backward or forward) of the production process (GM - Fisher
Body)
 Conglomerate (merger): combination of two firms in unrelated
industries (Mobil Oil – Montgomery Ward in 1974)

 A takeover is the purchase of one firm by another firm

 If the takeover is friendly, then it is basically an acquisition, but if not,

then it is known as hostile takeover (IBM’s acquisition of Lotus in
1995; Oracle’s bid for PeopleSoft in 2003)
INCREASE IN M& A
700

600

500

400
N o. of Deals
300 Amount (USD million)
200

100

0
2006 2007
Mergers & Acquisitions Defined

Mergers Acquisitions

• two firms are combined on • one firm buys another

a relatively co-equal basis firm

• the words are often used interchangeably even

though they mean something very different

• merger sounds more amicable, less threatening

 Difference
Mergers
• parent stocks are usually
retired and new stock issued
• name may be one of the
parents’ or a combination
• one of the parents usually
emerges as the dominant
management
Acquisitions
• can be a controlling
share, a majority, or
all of the target firm’s
stock
• can be friendly or
hostile
• usually done through
a tender offer
 INDIA INC. GOES GLOBAL
 Tata Steel acquired UK based Corus
for $ 8 billion.
 Suzlon Energy Ltd acquired German
firm Repower Systems AG for $ 1.7
billion.
 United Spirits bought Scotch whisky
distiller Whyte & Mackay for US$
1.11 billion
 Hindalco acquired Novelis for
$ 6 billion
INDIA GOES GLOBAL

 TATA Chemical acquires US based Soda Ash Maker General

Industrial Products for $ 1 billion

 Indian shipping company Great Offshore acquires UK based

Sea Dragon for US$ 1.4 billion

 Essar Energy acquires 50% stake in Kenya Petroleum

refineries ltd.

 Banswara Syntex to acquire France firm Carreman Michel

Thierry for around US$ 125 million
GRAPHICAL REPRESENTATION OF INDIAN
OUTBOUND DEALS SINCE 2000.
REGULATORY FRAMEWORK

 Applicable Indian Laws

- Companies Act
- Competition Act
- Income Tax Act
- Indian Stamp Act
- SEBI Takeover Code
- FEMA
CLASSIFICATIONS MERGERS AND
ACQUISITIONS

1. Horizontal
• A merger in which two firms in the same industry combine.
• Often in an attempt to achieve economies of scale and/or scope.
2. Vertical
• A merger in which one firm acquires a supplier or another firm that is
closer to its existing customers.
• Often in an attempt to control supply or distribution channels.
3. Conglomerate
• A merger in which two firms in unrelated businesses combine.
• Purpose is often to ‘diversify’ the company by combining
uncorrelated assets and income streams
4. Cross-border (International) M&As
• A merger or acquisition involving a Canadian and a foreign firm a
either the acquiring or target company.
 TYPES OF TAKEOVERS
Takeover
– The transfer of control from one ownership group to another.
Acquisition
– The purchase of one firm by another
Merger
– The combination of two firms into a new legal entity
– A new company is created
– Both sets of shareholders have to approve the transaction.
Amalgamation
– A genuine merger in which both sets of shareholders must approve the
transaction
– Requires a fairness opinion by an independent expert on the true value
of the firm’s shares when a public minority exists
 CAPITAL STRUCTURE CHANGES

 Recapitalize
 Share buyback or paying super dividend
 Greater voting rights to the management

 Huge increase in debt on the balance sheet

 Share price increases

 Assume more debt

 Adding debt without recapitalizing
 Prevents LBO

 Issue more share

 Buy shares
 Divert shares away from hostile bidders and arbitragers
 Prevent LBO ( reduce borrowing capacity and cash flow)
CASE 1: COSTS OF A CASH
ACQUISITION
 Suppose we have the following information about firms 1 and 2 and
that firm 1 is considering acquiring firm 2

Firm 1 Firm 2

Price per share $20 $10

# of shares 25 10

Market value $500 $100

EXAMPLE Case 1

 Assume that
 Both firms are 100% equity owned
 The incremental net gain to firm 1 from acquiring firm 2 is $100
 Firm 2 has decided not to sell for less than $150 ($100 firm value + $50 acquisition
premium)
 The value of firm 2 to firm 1 is
V2* = V2 + V = $100 + $100 = $200
 The NPV of the cash acquisition is $200 - $150 = $50
 After the acquisition, firm 1’s value increases by $50 to $550 ($500 was initial
value) and firm 2’s stockholders have captured $50 out of the $100 merger gains
 Firm 1 continues to have 25 share and each share will be worth $550/25 = $22,
meaning a gain of $2 per share
CASE 2: COSTS OF A STOCK
ACQUISITION
 In a stock acquisition, the stockholders of firm 2 exchange their
shares for shares in the new firm

 The merged firm will be worth

V12 = V1 + V2 + V = $500 + $100 + $100 = $700

 Since firm 2’s stockholders want to sell the firm for $150 they will
receive $150 worth of shares from firm 1 or $150/$20 = 7.5 shares
given the price of firm 1’s shares
 The new firm has 25 + 7.5 = 32.5 shares worth $700 meaning a value per share of
$700/32.5 = $21.54, which is lower because firm 2’s stockholders also own part of
the new firm

 What was the cost of acquiring form 2 to firm 1? Was it only $150?

 The 7.5 shares of the merged firm owned by firm 2’s stockholders are worth 7.5 
$21.54 = $161.55

 The NPV of the stock acquisition is

NPV = V2* - C = $200 - $161.55 = $38.45

which is lower than the NPV of the cash acquisition because firm 2’s stockholders
share some of the gains (but also the losses)
Implementation Issues
Structure, Control, and Compensation
M&A activity requires responses to these issues:

 m-form structure is typically used

 management controls & compensation policies

are similar to those used in diversification strategies

Managers must decide on the level of integration:

 target firm may remain somewhat autonomous

 target firm may be completely integrated
Implementation Issues
Cultural Differences

• high levels of integration require greater cultural

blending

• cultural blending may be a matter of:

combining elements of both cultures
essentially replacing one culture with the other
• integration may be very costly, often unanticipated

• the ability to integrate efficiently may be a source

of competitive advantage
International Issues

Government Policy

• Governments may constrain ownership by

foreign firms

Governments may restrict repatriation of profits

Government labor policy may limit a firm’s ability to

apply management practices to target firm
Summary

•M&A activity is a mode of entry for vertical integration and

diversification strategies.

•A firm’s M&A strategy should satisfy the logic of corporate

level strategy.

•M&A activity can create economic value at announcement, but

target firms usually capture that value.

•M&A activity can create value over the long term

•for the acquiring firm
Thank you