Mergers & Acquisition...Strategic Finance

7/31/2019 Mergers & Acquisition...Strategic Finance

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Muhammed Azharudeen

S4, MBA

College of Engineering, Trivandrum


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Mergers and acquisitions

Mergers and acquisitions (abbreviated M&A) refersto the aspect of corporate strategy, corporate financeand management dealing with the buying, selling,dividing and combining of different companies and

similar entities that can help an enterprise growrapidly in its sector or location of origin, or a new fieldor new location, without creating a subsidiary, otherchild entity or using a joint venture.


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Acquisition

An acquisition is the purchase of one business orcompany by another company or other business entity.

Private and Public acquisitions.

Friendly or Hostile acquisitions.

Consolidation occurs when two companies combinetogether to form a new enterprise altogether, and

neither of the previous companies survivesindependently.


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Reverse Merger & Reverse Take

Over Reverse Merger

A reverse merger occurs when a privately held company(often one that has strong prospects) buys a publiclylisted shell company, usually one with no business andlimited assets.

Reverse Take Over

A smaller firm acquiring management control of a largercompany and retains the name of the latter for the post-acquisition combined entity.


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Distinction between mergers and

acquisitionsWhen one company takes over another and clearly

establishes itself as the new owner, the purchase iscalled an acquisition.

Merger happens when two firms agree to go forward asa single new company rather than remain separatelyowned and operated (merger of equals).


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Motivations for Mergers and

Acquisitions The primary motive should be the creation of

synergy.

Synergy value is created from economies ofintegrating a target and acquiring a company; theamount by which the value of the combined firmexceeds the sum value of the two individual firms.


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Synergy is the additional value created (V) :

Where:VT = the pre-merger value of the target firm

VA - T = value of the post merger firm

VA = value of the pre-merger acquiring firm

)V-(VVV TATA [ 1


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Value Creation Motivations for

M&AsOperating Synergies

1. Economies of Scale Reducing capacity (consolidation in the number of firms in

the industry)

Spreading fixed costs (increase size of firm so fixed costs perunit are decreased)

Geographic synergies (operations to operate on a national orinternational basis)

2. Economies of Scope Combination of two activities reduces costs

3. Complementary Strengths Combining the different relative strengths of the two firms

creates a firm with both strengths that are complementary to

one another.


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M&AEfficiency Increases and Financing Synergies

Efficiency Increases

New management team will be more efficient and addmore value than what the target now has.

The combined firm can make use of unusedproduction/sales/marketing channel capacity

Financing Synergy

Reduced cash f low variability Increase in debt capacity

More Working Capital


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M&ATax Benefits and Strategic Realignments

Tax Benefits A profitable company can buy a loss maker to use the

target's loss as their advantage by reducing their tax

liability. Make better use of tax deductions and credits. Use of deduction in a higher tax bracket to obtain a

large tax shield.

Strategic Realignments Permits new strategies that were not feasible for prior

to the acquisition because of the acquisition of newmanagement skills, connections to markets or people,and new products/services.


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Increased revenue or market share: This assumes that the buyer will be absorbing a major competitor

and thus increase its market power (by capturing increased market

share) to set prices. Resource transfer:

Resources are unevenly distributed across firms (Barney, 1991) andthe interaction of target and acquiring firm resources can create

value through either overcoming information asymmetry or by

combining scarce resources. Vertical integration:

Vertical integration occurs when an upstream and downstream firmmerge (or one acquires the other). A merger that creates a verticallyintegrated firm can be profitable.

Hiring: Some companies use acquisitions as an alternative to the normal

hiring process. This is especially common when the target is a smallprivate company or is in the start-up phase.


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Managerial Motivations for M&AsManagers may have their own motivations to pursue M&As.The two most common, are not necessarily in the best interestof the firm or shareholders, but do address common needs ofmanagers

1. Increased firm size Managers are often more highly rewarded financially for

building a bigger business (compensation tied to assets underadministration for example)

Many associate power and prestige with the size of the firm.

2. Reduced firm risk through diversification

Managers have an undiversified stake in the business (unlikeshareholders who hold a diversified portfolio of investments anddont need the firm to be diversified) and so they tend to dislikerisk (volatility of sales and profits)

M&As can be used to diversify the company and reduce volatility(risk) that might concern managers.


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Laws Regulating Merger The Companies Act , 1956

The Competition Act ,2002

Foreign Exchange Management Act,1999

SEBI Take over Code 1994

The Indian Income Tax Act (ITA), 1961

Mandatory permission by the courts

Stamp Act


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Legal Procedure of Merger

(1) Examination of object clauses:The object clause of the merging company should permit it to

carry on the business of the merged company. If such clauses do notexist, necessary approvals of the share holders, board of directors,

and company law board are required.(2) Intimation to stock exchanges:The stock exchanges where merging and merged companies are

listed should be informed about the merger proposal.

(3) Approval of the draft merger proposal by therespective boards:

The draft merger proposal should be approved by the respectiveBODs. The board of each company should pass a resolutionauthorizing its directors/executives to pursue the matter further.


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(4) Application to high courts:Once the drafts of merger proposal is approved by the respectiveboards, each company should make an application to the high court of

the state where its registered office is situated so that it can convene themeetings of share holders and creditors for passing the mergerproposal.

(5) Dispatch of notice to share holders and creditors:In order to convene the meetings of share holders and creditors, a

notice and an explanatory statement of the meeting, as approved by thehigh court, should be dispatched by each company to its shareholdersand creditors so that they get 21 days advance intimation. The notice ofthe meetings should also be published in two news papers.

(6) Holding of meetings of share holders and creditors:A meeting of share holders should be held by each company forpassing the scheme of mergers at least 75% of shareholders who voteeither in person or by proxy must approve the scheme of merger. Sameapplies to creditors also.


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(7) Petition to High Court for confirmation and passing of HCorders:Once the mergers scheme is passed by the share holders andcreditors, the companies involved in the merger should present apetition to the HC for confirming the scheme of merger. A notice

about the same has to be published in 2 newspapers.

(8) Filing the order with the registrar:Certified true copies of the high court order must be filed with theregistrar of companies within the time limit specified by the court.

(9) Transfer of assets and liabilities:After the final orders have been passed by both the HCs, all theassets and liabilities of the merged company will have to betransferred to the merging company.

(10) Issue of shares and debentures:The merging company, after fulfilling the provisions of the law,should issue shares and debentures of the merging company. Thenew shares and debentures so issued will then be listed on the stockexchange.


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Costs of Merger

The costs of a merger is related to the following factors:

Impact of revenue

Cost of dealing

Cost of integration

Cost of transaction (money that is paid for acquiring thecompany).

This costs can create some short-term problems for thecompany regarding the cash f low. To handle this crucial partof a merger process, the acquiring companies depend on theexperienced professionals of the field.


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ThankYou

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Mergers & Acquisition...Strategic Finance