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Mergers, Acquisitions and CollaborationDr. SavithaI. BASIC DEFINITIONSA. Merger; combination of two firms into one.B. Acquisition; one business buys another.Cash.Securities.Combination of cash and securities.2Mergers: Basic ConceptsMerger - combination of two or more enterprises whereby the assets and liabilities of one are vested in the other, with the effect that the former enterprise loses its identity.
Amalgamation combination of two corporate entities where the assets and liabilities of both are vested in a third entity, with the effect that both former entities lose their identities to form a new entity. 3Acquisition: Traditionally, the term described a situation when a larger corporation purchases the assets or stock of a smaller corporation, while control remained exclusively with the larger corporation.Often a tender offer is made to the target firm (friendly) or directly to the shareholders (often a hostile takeover). Transactions that bypass the management are considered hostile, as the target firms managers are generally opposed to the deal.C. General Process; Acquisitions1. Initial contacts between management teams2. Tender offer by acquirer to target company stockholders3. Stockholders required to vote approval4. Acquirer purchases majority or complete interestD. General Process; Merger1. Initial contacts between management teams2. Negotiations as to new name, management team3. Stock exchange details negotiated4. Merger proposal goes to stockholders for vote5. If stockholders approve, deal consummated when stock changes hands
5Mergers and AcquisitionsTarget: the corporation being purchased, when there is a clear buyer and seller.Bidder: The corporation that makes the purchase, when there is a clear buyer and seller. Also known as the acquiring firm.Friendly: The transaction takes place with the approval of each firms managementHostile: The transaction is not approved by the management of the target firm.TERMINOLOGY OF M&AA. "BEAR HUG"Acquirer mails letter to directors of target firm announcing intentions and requiring a quick decision on bid. B. "SATURDAY NIGHT SPECIAL"Offer made to stockholders just before the markets close on Friday. Takes maximum advantage of stockholder greed7C. HOSTILE TAKEOVER1. When the target firm's management fights the tender offer. 2. Acquiring firm must carry offer to stockholders of target firm. 3. This strategy is generally nasty and expensive - an effort frequently carried out to a questionable conclusion.Good deal for stockholders of target firm.Bad deal for stockholders of acquiring firm.8D. WHITE NIGHTWhen target firm cannot defend itself against the hostile acquirer, it will seek another firm to acquire it (one more acceptable to management).Shark RepellantSlang term for any one of a number of measures taken by a company to fend off an unwanted or hostile takeover attemptExamples: poison pills, scorched earth policies9F. "PAC-MAN";1. A form of defense in which the target tenders for shares of acquirer: e.g., Martin-Marietta - Bendix. 2. The standoff is usually resolved when one of the parties finds a "white knight" to help. In the case of Martin-Marietta, it was Allied Corp10G. "POISON PILL";1. Another anti-takeover defense; a. target company threatens to load the balance sheet with debtb. the acquirer effectively gets more debt than the business can handle.2. Effectiveness is not always guaranteed.11 Motivation for MergersTo diversify the areas of activity and thereby to reduce business risksTo achieve optimum size so as to reap the benefits of economy of scale; reduction in WCTo reduce the duplicate expenses and thereby to improve the profitabilityTo serve the customer better; revenue enhancementTo have cohesiveness in control of the organisationTo grow without any gestation periodTechnology transferEnhances debt capacity
12 Adverse Effects of MergersMergers especially horizontal reduces the number of players and consequently the competition in the marketMergers amongst rivals is invariably unfriendly to consumersMergers often results in increased market share and thereby leads to dominance which makes the resultant enterprise complacent; brings inefficiency in the organizationMergers between healthy and unhealthy enterprises reduces the tax liability and thereby makes the States exchequer poorMergers often fail to create harmonization in human relation13Horizontal mergers A horizontal merger results in the consolidation of firms that are direct rivalsthat is, sell substitutable products within overlapping geographic markets.Examples: The formation of Brook Bond Lipton India Ltd. through the merger of Lipton India and Brook Bond The merger of Bank of Mathura with ICICI (Industrial Credit and Investment Corporation of India) Bank The merger of BSES (Bombay Suburban Electric Supply) Ltd. with Orissa Power Supply Company The merger of ACC (erstwhile Associated Cement Companies Ltd.) with Damodar Cement
The merger of firms that have actual or potential buyer-seller relationshipsExamples: Time Warner-TBS; Disney-ABC Capitol Cities; Brown Shoe-Kinney, Ford-Bendix.
Consolidated firms may sell related products, share marketing and distribution channels and perhaps production processes; or they may be wholly unrelated.
Product extension conglomerate mergers involve firms that sell non-competing products, use related marketing channels or production processes.Examples: Cardinal Healthcare-Allegiance; AOL-Time Warner; Phillip Morris-Kraft; Citicorp-Travelers Insurance; Procter & Gamble-Clorox.
Market extension conglomerate mergers join together firms that sell competing products in separate geographic markets.
Examples: Time Warner-TCI; Morrison Supermarkets-SafewayA pure conglomerate merger unites firms that have no obvious relationship of any kind.Examples: AT&T-Hartford Insurance
Mergers & Acquisitions DefinedTypes of M&A ActivityVerticalHorizontalProduct ExtensionMarket ExtensionConglomerate suppliers or customers competitors complementary products complementary markets everything elseRelatedUnrelated18
20Reasons for Acquisitions Increased market power- Exists when a firm is able to sell its goods or services above competitive levels or when the costs of its primary or support activities are lower than those of its competitors; Entails buying a competitor, a supplier, a distributor, or a business in a highly related industryLower risk compared to developing new productsIncreased diversificationLearning and developing new capabilities
Research suggests20% of all mergers and acquisitions are successful60% produce disappointing results20% are clear failures
20Do Mergers and Acquisitions Create Value?The Empirical EvidenceAcquiringFirmsTargetFirmsM&A Activity creates value, on average, as follows:no value createdvalue increases byabout 25%related M&A activity creates more value thanunrelated M&A activityM&A activity creates value, but target firms capture it21Facts & Figures on Mergers - IndiaLate 1980s 35 mergers1997 552 mergers2002 - $ 6.5 billion2003 - $ 3.7 billion (Business & Economy Magazine)The value of mergers in India more than doubled to $9.32 billion in 2004, from $4.4 billion in 2003. (Bloomberg Feb 2005)
The first quarter of 2005 itself has seen M&As to the tune of over $3 billion. (Thomson Financial)
22Cross Border Mergers in IndiaThe motivating factors for cross border M&As are:Quickest way to growAcquire tangible and intangible assetsRestructure existing operationsExploit synergiesObtain strategic advantages
However, the overwhelming majority of the cross border M&As involve foreign firms acquiring Indian companies. In cases where such acquisitions involve no increase in economic efficiencies or production capacities, it raises the concern that such M&As simply shift ownership from domestic to foreign hands.
23Mergers in IndiaFrom 1991 to date, mergers are not regulated from a competition perspective. The Asian Development Outlook 2005 mentions the impact of M&As in India; Coca Cola re-entered the Indian market in 1993 by acquiring Parle. Today it has 50% market share of the soda industry. Pepsi gained a major market presence by acquiring Duke in 1988, and now has 48% market share of the soda industry.24Mergers in IndiaHLL has succeed in enhancing its market share through a process of Mergers /AcquisitionsProduct 1992-93 1997-98Ice Cream 0.00 74.06Sauces,ketchups,jams 0.00 63.54Dental hygiene products 11.20 41.56Soaps 19.66 26.01Synthetic detergents 33.12 46.72 25India goes global TATA Chemical acquires US based Soda Ash Maker General Industrial Products for $ 1 billionIndian shipping company Great Offshore acquires UK based Sea Dragon for US$ 1.4 billion Essar Energy acquires 50% stake in Kenya Petroleum refineries ltd. 26Inbound Transactions
Sistema, Russian Joint Stock Companys acquisition of 74% stake in Shyam Telelink Telecommunications French banking major BNP Paribass acquisition of 45% stake in financial services firm Sundaram Home Finance for $45.81 million Standard Chartered Bank bought 49% stake for $34.19 million in UTI Securities and Interpublic Group hiked its stake in Lintas India to 100% for $100 million UBS Global Managements Acquisition of Standard Chartered Asset Management Company for $ 117.78 MillionEMC Corporations Acquisition of Valyd Software Pvt. Ltd.Orklas Acquisition of MTR foods for $ 100 Million
27Mergers and AcquisitionsIn efficient markets, the stock market reaction on the day of the merger announcement represents the NPV of the transaction.Generally, bidder stock prices remain unchanged or even drop when an acquisition is announced. Histo