Issues of Merger and Acquisition with Special

Reference to International Practices

-Madhav Prasad Bhatta

• Mergers and Acquisitions (M&A) refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling and combining of different companies that can add finance or help a growing company in a given industry grow rapidly without having to create another business entity.

• A Merger or Acquisition (M or A) is a combination of two companies where one corporation is completely absorbed by another corporation.

• The less important company loses its identity and becomes part of the more important corporation, which retains its identity.

• A merger extinguishes the merged corporation, and the surviving corporation assumes all the rights, privileges and liabilities of the merged corporation.

• Consolidation is not a merger. Here two companies loose their separate identities and unite to form a completely new corporation.

• Becoming big is the underlying principle behind the M&A business strategy.

• Every business strives for survival in the growing era of core competence and globalization (survival of the fittest).

• M&A means the change for a business and the underlying principle is 2+2=5.

• The joining or merging of two companies create additional value which is called synergy value.

• An acquisition is the purchase of one company by another company. This can be public or private. Acquisition can be friendly or hostile.

• Acquisition usually requires to a purchase of a smaller firm by a larger one and the process of acquisition is also very complex with many dimensions influencing its outcome (tax and regulatory implications).

Distinction between M&A

• Although often used synonymously, the terms M &A mean slightly different things:• When one company takes over another and clearly

establishes itself as the new owner, the purchase is called an acquisition. From a legal point of view the target company ceases to exist, the buyer ‘swallows’ the business and the buyer’s stock continues to be traded.

• Merger happens when two firms agree to go forward as a single new company rather than remain separately owned and operated. This is ‘merger of equals”.

Motives behind M&A

• Becoming big would make you powerful (although small is beautiful).

• Survival of fittest.• Synergy value in terms of revenues, expenses,

cost of capital etc. cost can be reduced eliminating redundant services in HR, Accounting, IT etc.

• Strategic reasons such as positioning, gap filling, organizational competencies (through intellectual capital and innovative ideas).

• Broader market access and risk diversification.• Improve financial performance through

economy of scale and scope (expansion) as well as through tax benefits.

• Banks can become more stronger through increased earning capacity, better staff, strengthened capital base and wider branch network.

• Managerial motives include status, power, empire building, remuneration, hubris etc.

• Other third party motives are advisors, lawyers, accountants, regulators etc.

• Suppliers and customers also promote mergers for their benefits.

Types of Mergers

• Based on the competitive relationships several alternative forms of merger include horizontal merger, vertical merger and conglomerate merger.

• A merger between two or more firms operating same kind of business activity is horizontal merger. The amalgamation of Diamler-Benz and Chrysler is a noteworthy example of horizontal merger.

• Vertical merger : – a merger between firms that are involved in the

operations of different stages of production (like oil exploration and oil refinery company or a car manufacturer and a tire company) is the vertical merger.

– Vertical mergers take two basic forms: forward integration (firm buys a customer) and backward integration (acquires a supplier).

• Conglomerate mergers encompasses all other acquisitions. Two firms in completely different industries merge. For example a gas pipeline company merging with a high technology company or the merger between an automobile manufacturer and a real estate company.

Brand considerations

• M &A often create brand problems. The future success of a M or A depends on making wise brand choices.

• Four different approaches dealing with naming issues, each with specific pros and cons:– Keep one name and discontinue the other (eg. United

continued after the merger between it and continental.)

– Keep one and demote the other to a divisional brand or product brand.

– Keep both names and use them together as in the case of Price water house coopers or PwC.

– Discard both legacy names and adopt a totally new one. The classic example is the merger of Bell Atlantic with GTE which became Verizon communications.

• The factors influencing brand decisions in a M&A transaction can range from political to tactical. Ego can drive choice just as well as rational factors like brand value and costs involved.

Merger Waves (Movements)Period Name Facet

1889-1904 First wave Horizontal Mergers

1916-1929 Second Wave Vertical Mergers

1965-1989 Third Wave Diversified conglomerate mergers

1992-1998 Fourth Wave Congeneric mergers, hostile takeovers, corporate raiding

1998-2003 Fifth Wave Cross border mergers

2003-2008 Sixth wave Shareholder Activism, private equity

• The great merger movement was predominantly US business phenomenon that happened from 1895-1905. A great wave of merger swept through the manufacturing sector during this period. More than1800 of such firms were disappeared into consolidations.

• In 1900 the value of firms acquired in merger was 20 percent of GDP. In 1990 was 3 percent and by 2000, it was around10-11 percent of GDP.

• Dupont, US steel, and General electric were the prominent companies to merge during the Great Merger movement. Due to technological advances of their products, patents and brand recognition they are able to keep their dominance in their respective sector even today.

• During the third merger wave corporate marriage involved more diverse companies.

Some notable M&As

• In 1987, an Australian company named Stephen Jaques Stone James, which was a partnership company with partners, merged with the company named Mallesons. After the Merger the new joint company was known as Mallesons stephen Jaques. This merger contributed significantly to the telecommunication centre development in Australia.

• In USA most significant merger took place during 1990s. About 100000 firms were merged or taken over during that period. The high incidence of merger and acquisitions were due to strong stock market. The M&A of this period involved big brands and huge amount of dollars.

• In 1980 Regan Administration adjusted its policies to allow more horizontal mergers and acquisitions.

• Beginning mid-1980s to mid 1990, major Television networks ABC,CBS and NBC were purchased by another corporation.

• In 1989 Time inc. merged with Warner corporation to form the largest media conglomerate in the world.

• M&A have grown significantly in China in recent years. This is the outcome of economic reforms and accession to WTO. M&A, unheard in China before 1990s, played important role in foreign investment in recent years.

• Government agencies supervising M&A in China are the ministry of commerce, the state developmen and reform commission, assets supervision and administration commission, and the China securities regulatory commission.

• Other noteworthy M&As were: the British petroleum (BP) with Amoco (erstwhile standard oil of Indiana), the merger of Exxon with Mobil=ExxonMobil, The acquisition of Air Touch communications by vodafone group, Shell transport and Trading company by Royal Dutch Petroleum company Tata Steel acquired Corus group and Daewoo Electronics corp by Videocon.

• Reliance Industries in March 2009 approved a scheme of amalgamation of its subsidiary Reliance Petroleum with the parent company. The all-share merger deal between the two Mukesh Ambani group firms was valued at about Rs. 8,500 crore ($1.68 billion). This Acquisitions transaction till date.

• Cross border M&A rose significantly in East Asian Countries (Indonesia, Korea, Malaysia and Thailand) during the East Asian crisis period.

• Cross border merger can encourage longer-term reforms like operational restructuring and reallocation of assets in firms along with improving efficiency, competitiveness and corporate governance (UNCTAD)

• The need of M&A has significantly increased along with the rise of globalization.

Cross-Border Mergers and Acquisitions (Purchases), 1991–2009 (billion US$) Source UNCTAD 2010

1991–96

1997–99

2000–05

2006 2007 2008 2009

World 76.6 406.0 409.2 625.3

1022.7

706.5 249.7

Developed Economies

65.3 376.1 347.3 497.3

841.7 568.0 160.8

Developing Economies

7.8 12.6 37.7 114.9

144.8 105.8 74.0

Asia 4.7 9.3 27.6 70.8 94.5 94.4 67.3East Asia 2.4 7.1 12.9 21.2 0.7 39.9 35.9Southeast Asia

2.1 2.6 9.6 7.5 25.9 18.9 4.3

South Asia INDIA

0.1 0.0 1.1 6.7 29.1 13.5 0.3

Cross-Border Mergers and Acquisitions (Purchases), 1991–2009 (billion US$) Source UNCTAD 2010

1991–96

1997–99

2000–05

2006 2007 2008 2009

World 76.6 406.0 409.2 625.3 1022.7

706.5 249.7

Developed Economies

65.3 376.1 347.3 497.3 841.7 568.0 160.8

Developing Economies

7.8 12.6 37.7 114.9 144.8 105.8 74.0

Asia 4.7 9.3 27.6 70.8 94.5 94.4 67.3East Asia 2.4 7.1 12.9 21.2 0.7 39.9 35.9Southeast Asia

2.1 2.6 9.6 7.5 25.9 18.9 4.3

South Asia INDIA

0.1 0.0 1.1 6.7 29.1 13.5 0.3

Merger Process or Terraces of Merger: ( from initial strategic formulations to

final complete integrations): Preparation (generation of ideas on

Mergers)merger objective and planning, development of

target criteria to suit the objective, identification of potential target for merger, appraisal to evaluate short listed target candidate for merger and making plan of actions on post merger integrations.

Negotiation and Transaction (Merger Agreement and MOU):Comprehensive financial and project analysis and appraisal

of alternative selected target.Making negotiations with logical strategy and tactical

solution. Integrations (comprehensive correlations and synergy):

evaluating distinct similarities and differences under merger.Planning ultimately post merger integrations and ensuring

implementation capabilities speedily.

The Future of Mergers and Acquisition

• Although a number of factors influence M&A, the market is the primary force that drives them.

• The late 1990s saw an unprecedented influx in mergers. In 1999, companies filed about three times the number received in 1995 and the total dollar value $11 trillion of mergers was ten times the amount since 1992.

• Mergers rise during a booming economy and decrease as the companies forced to downsize during recession.

M&A in Banking Sector

• A large number of international and domestic banks all over the world are engaged in M&A activities.

• One of the principal objectives is to reap the benefits of economies of scale.

• Other objectives are minimize expenses, reduce competition, ensure efficiency, profitability, synergy, grow shareholders value, remain dominant position in the market and strengthen bank structure through bank consolidation.

• Deregulations, financial liberalization, economic reforms and a number of other factors have played have played an important role behind the growth of M&A in a number of countries.

• Some of the major mergers in the Banking sector are Chase Manhattan Corporation with J P Morgan and Company, Sun Trust with National Commerce Financial etc.

• Since 1991 the Bank of America, the largest banking company in the country today, materialized out of 18 large mergers, the modern Wells Fargo was forged in 12, J P Morgan Chase in 7 and Citigroup in three including the massive combination of Citicorp and Travelers.

Merger In India

Why M&A can Fail ?

• In theory synergy i.e.2+2=5 sounds good, but in practice things can go awry.

• Combining systems and merging departments may work, but revenue and synergy may not be as expected.

• Historical trends show that roughly two thirds of big mergers will disappoint on their own terms.

• Some of the reasons behind failed mergers are:- Poor strategic fit, cultural and social differences

(out of people problem), inadequate and incomplete due diligence (which is the watch dog for M&A process), poorly managed integration (which requires high level quality management for planning and design).

– Costly: mainly when synergies are not realized, premium paid may not recouped.

– Over optimistic approach can be disappointing.– Imitation- somebody else has done approach may

not work.– A merger may often have more to do with glory

seeking than business strategy. It can be the executives ego to be the biggest and best and get a big bonus through the deals, no matter what happens to the share price later.

• Not all Mergers fail. Size and global reach can be advantageous. Strong managers can often squeeze greater efficiency out of badly run rivals.

• The success of mergers depends on how realistic the deal makers are and how well they can integrate two companies while maintaining day to day operations.

• For the success of mergers, the following things need to keep in mind:– strategic fit: something unique, marketing fit:

product and service complement one another, promotion programs, brand names, distributional channels, customer mix etc.

– Operating fit: labor, technology, production capacities.

– Management fit: expertise and talents-what the companies bring together and own well these elements fit together.

• Financial fit: sales, profitability, return on capital, cash flow etc.

• Due Diligence (DD) is also very broad and deep, extending well beyond the functional areas (finance, production, HR etc). DD must expose all of the major risks associated with the proposed merger.

M&A in Nepalese Context

• With the setting up of public enterprises in Nepal during 1960s, the concept of M&A also became relevant in the context of improving productivity, economic conditions, capacity utilization and achieving cost effectiveness of these enterprises.

• The first formal such case in Nepal was the merger of Eastern Electricity Corporation with Nepal Electricity Authority followed by the merger between Land Reform Saving corporation and Cooperative Development Bank (now the ADB/N).

• Standard Chartered took Grindlays from ANZ group.

• Teliasonera acquired Spice Nepal to form Ncell

• Merger of dish/home TV• Regarding bank mergers the move is from a

regime of large number of small banks to small number of large banks.

• The more recent merger in financial sector includes the merger between Laxmi Bank Ltd and HISEF Finance.

• The merger between Narayani Finance Ltd and National Finance Ltd to form Narayani National Finance.

• The merger between Nepal Bangladesh Bank and Nepal Sri Lanka Merchant Finance.

• The initiation among Himchuli, Birgunj finance etc.

Legal and Regulatory Approaches

• Article 177 of the Company Act 2063 has provisioned for the amalgamation of company.

• Articles 68 and 69 of Bank and Financial Institutions Act 2063 have provisions for amalgamations among bank and financial institutions.

• The monetary and fiscal policies of 2067/68 also initiated and encouraged for mergers and acquisitions.

• NRB Board has recently passed the by laws regarding the M&A of banks and financial institutions.

• The by laws have provisioned various facilities to encourage amalgamations among banks and financial institutions.

• It covers both voluntary as well as Forced mergers.

• For effective implementation of the policy there is a need of coordination among various regulatory authorities in Nepal.

• There are a number of common and country specific problems and challenges of M&A in Nepal.

Thank You.