Merger PPt

MERGERIntroduction:

An outstanding feature of the liberalised Indian economy has been the rise of mergers and acquisitions. M&As continue to be the preferred option for businesses seeking to grow rapidly and change the rules of the game in their sector.

Over the last few years, mergers and acquisitions have become much more important part of Indian landscape as Indian corporations recognised the need to improve their business fundamentals and competitive position, while more and more multinational corporations are looking for ways to enter this growing, dynamic market.

MERGER

Concept:

• Merge or merger is the technique of risk management in which two or more companies combine for reducing the side-effect of destructive competition.

• A decision by two companies to combine all operations, officers, structure, and other functions of business.

MERGER

Concept:

• Merger is said to occur when two or more companies combine into one company.

• Merger is defined as ‘a transaction involving two or more companies in the exchange of securities & only one company survives’.

MERGER

Concept:• In business or economics a merger is a

combination of two company into one larger company.

Difference Between Merger & Amalgamation

• Mergers and amalgamations are procedures that are undertaken in business circle by two or more companies with a view to increase profits & to gain access to wider markets.

• The final outcome of both mergers and amalgamations is same that is to have a larger company with more assets and customers, there are technical differences in the two terms.

Difference Between Merger & AmalgamationMERGER AMALGAMATION

Fusion of two or more entities and it is a process in which the identity of one or more entities is lost (as is often seen when political parties merge).

(Or)Two or more smaller companies lose their identities as they fuse into a larger company.

Amalgamation is blending together of two or more business entities in a fashion that both lose their identities & a new separate entity is born.

(Or)All combining companies may lose their identities & a new, independent company may be born.

Difference Between Merger & AmalgamationMERGER AMALGAMATION

The assets and liabilities of a company get vested into the assets and liabilities of another company.

The shareholders of the company being merged become shareholders of the larger company (as when two or more smaller banks merge with a larger bank).

Shareholders of both (or more) companies get new shares allotted that are of a new company altogether.

MERGER

Objectives/Reasons/Need (in General)

Economies of Large Scale OperationDesire for DiversificationNeed for Additional FinancingNeed for Change of ManagementManagerial MotivesTax BenefitsReduction of CompetitionIncrease in EPS

MergerEconomies of Scale

Types of Economies of Scale

• Technical economies, when producing the good by using expensive machinery intensively.

• Managerial economies, by employing specialist managers.

• Financial economies, by borrowing at lower rates of interest.

MergerEconomies of Scale

Types of Economies of Scale

Commercial Economies, by buying materials in bulk.

Marketing Economies, spreading the cost of advertising and promotion.

Research & Development Economies, from developing better products.

Merger Reason

Combining Complementary Resources

Merging may result in each firm filling in the “missing pieces” of their firm with pieces from the other firm.

Firm B

Firm A

Merger Reason

Combining Complementary Resources

Merging may result in each firm filling in the “missing pieces” of their firm with pieces from the other firm.

Firm A

Firm B

MERGER

Merging CompanyBuying Company

Merged Company Selling Company

Merger

REASONS FROM THE POINT OF VIEW OF

Merging Company Merged Company

Quick Entry in the Business:Good source of entry into an area which is denied for an organisation under the provision for licensing. Merger can be used as a back door entry in the business.

Liquidation Strategy:Merger can be treated as a liquidation strategy from merged company’s point of view.Quite beneficial specially when the business is continuously a losing proposition.

MergerREASONS FROM THE POINT OF VIEW OF


Faster Growth Rate:Provide opportunities for faster growth than can be ahieved by internal sources because it offers advantages in various areas i.e. production, marketing and distribution, research & development etc. The better utilisation of resources, better planning of capital expenditure etc. result in much faster growth rate than what the organisation can achieve itself.

Liquidation Strategy:Provide better realisation of value of the Co. as compared to other methods of disposing assets.

Through merger, business can be saved & at the same time & better value can be realised.



DiversificationAdvantages:Besides rapid growth, merger provides opportunities for diversification in short period. Advantages – better use of resources,increased organisational capabilities through increased competitive competence,balance portfolio of business,safety against impacts of business cycles and son on.

Growth Opportunities:Specially when future holds good but the present might not be as promising.

When the troubles which cannot be overcome by the present management, or revival cannot be taken within the framework of the existing financial & other resources of the organisation, the existence & subsequently growth may be ensured by merger.



Reduction in Competition & Dependence:Merger can be used to reduce competition & dependence.Competition:Horizontal & Concentric Mergers-Organisation is in a position to eliminate the competition because it merges the organisation using same marketing channels or technology.

Growth Opportunities:In fact, such type of merger is encouraged by the Govt. & financial institutions which may hold sizable shares in these Cos.

The fates of may sick units have turned through mergers.

Merger



Reduction in Competition & Dependence:Dependence:Vertical Integration-Organisation can reduce dependence on others for the supply of raw materials & disposal of its products.Eg.Yarn manufacturing co. will be in a better position to dispose off its products if it merges a weaving co.

Imbalanced Growth:Distinctive advantages in one field but lack in other fields.Tech people → Organisation based on technical competence manageable within the present capability. Beyond that start ↓because the present management will analyse problems with the framework of technology whereas problems may lie somewhere else. Overcome – so merger.

Merger



Tax Advantages:Merger-effective source of tax planning special if merging & merged companies have different tax liabilities. If one of them is tax paying com & other is having accumulated losses, the merger may result into considerable tax savings.

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Synergistic Advantages:2+2=5.Marketing Synergy: ↑ Both cos. Can use same sales force, sales point, distribution channels, warehousing & advertising.Investment Synergy:↑Use of same plant, machinery, R&D facilities, better access to capital markets, & better position to negotiate terms for raising funds.

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Synergistic Advantages:2+2=5.Operating Synergy: Resulting from higher utilisation of common facilities, personnel & Overheads by various products.Management Synergy: ↑ Managerial Competence in one business can be utilised in other business.

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MergerTypes of Mergers

Horizontal Base Mergers

When two companies are selling same product in same geographical market, they have to face competition. For abolishing competition, they merge with each other. That merger is called horizontal base mergers.

Horizontal Merger

Merger is horizontal if it involves the joining together of two companies which are producing essentially the same products or services or products or services which compete directly with each other (for example sugar and artificial sweetness).

Horizontal MergerMerit Demerit

Result in reduction in number of competing companies in an industry.

Increase scope for economies of scale.

Elimination of duplicate facilities.

Promote monopolistic trend in the industrial sector.

Easier for industry members to collude for monopoly profits.

Types of Mergers

Vertical Base Mergers

When two companies have deep relationship as good buyer and seller, they can create new company for reducing the prices of products and to control over the system of manufacturing because raw material is not supplied by any other company but it is supplied by any one of merged company, so it will be easy to gear up the speed of production without any delay of raw material at minimum cost.

Types of Mergers• Vertical Mergers

Vertical Mergers occur between firms in different stages of production operation.

Here one of the companies engaged in the manufacture of a particular product & the other is established & expert in marketing or is engaged in production of raw material or ancillary items used by the other company in manufacturing or assembling the final & finished product.

Types of Mergers

• Vertical Mergers• It may be in the form of Backward or Forward

Merger.

Backward Merger:

Company combines with supplier of raw material.

Forward Merger:

Company combines with customer.

Vertical Mergers• Merit:Result in to a smooth & efficient flow of

production & distribution of a particular product.

Reduction in handling inventory costs.

• Demerit:It may post a risk of monopolistic trend in the

industry.

Types of Mergers• Conglomerate Merger:

This involves coming together of 2 or more companies engaged in different industries and/or services.

Types of Mergers

• Conglomerate Merger

• The joining of companies, in completely unrelated products.

A simple example would be, a clothing company, like Aeropostale joining a company that sells jewelry, like Kay Jewelers.

Types of Mergers

Market Base Mergers

It is that type of mergers in which two companies join for increasing the sale of product under same brand. Suppose, A company is famous in India and B Co. is famous in US. If both are merged, it will easy to sell product in US and in India. It will also helpful for both companies to succeed in different part of world.

Types of Mergers

Product Base Mergers

If two companies deal different products in same geographical area, after that, if they merge, they can make the hub market where customers can buy everything without going any other place.

Methods of Merger/AmalgamationScheme of compromise or arrangement.Purchase of Shares.In Public Interest under orders of the

Central Govt.Through holding company.Scheme of Winding up.Exchange of shares followed by winding

up.

Preliminary Steps in MergersSystematic manner from general to more specific.

a)Identifying Industries:Set of industries to be selected which meet the strategic conditions outlined by the company for a merger.(Scale of Investment).

b)Selecting Sectors: Acceptable sectors identification (Based on turnover, growth, ROI). More desirable to be selected.

Preliminary Steps in Mergersc)Choosing Companies:Potential Companies to

be looked.(Competitive environment, Strength). 5 to 10% in size of the bidding company is a common rule.

d)Comparative Cost & Returns:

(i)Consider financial obligations associated with merger – based on which potential companies are reduced further on the basis of their likely returns.

Preliminary Steps in Mergersd)Comparative Cost & Returns:

(ii)Companies are listed & compared based on their ROI (Return on Investment).

(iii)Future expected returns are also developed on the basis of different market

scenarios.

(iv)Risk & uncertainities which have impact on variations on returns.

(v)Companies to be ranked.

Preliminary Steps in Mergerse)Short-listing Good Companies:

Merger Idea – if it increases the overall economic value of Co. To achieve this, it is necessary to identify the companies by its:

(i)High Market share

(ii)Large Sales Volume,

(iii)Good Management System,

(iv)Diversified portfolio or its potential,

(v)A return on investment above a benchmark.

Preliminary Steps in Mergersf)Assessing the Suitability:

Suitability is to be judged by strategic criteria:

(i)Business fit,

(ii)Management,

(iii)Financial Strength.

Once above criteria satisfied – Other factors such as dividend track record, earnings, share price movements etc. to be collected.

SWOT analysis of both cos. To be carried out.

Both benefits & risks to be considered.

Preliminary Steps in Mergersg)Appropriateness of Timing:(Right Time)

(i)Affordability to spare time.

(ii)In terms of business cycles etc.

h)Negotiation Stage:

(i)Proper valuation,

(ii)Payment terms,

(iii)Exchange ratio of shares,

Preliminary Steps in Mergersi)Approval of Proposal by Board of Directors

(j)Approval of Shareholders

(k)Approval of Creditors / Financial Institutions / Banks

(l)Approvals of Respective High Court(s).

(m)Integration Stage.

Legal Aspects of Merger/Amalgamation

Documents

Merger PPt