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Master of Business Administration- MBA Semester 3MF0011 Mergers and Acquisitions
- 4 Credits
(Book ID: B1036)
Assignment Set- 1 (60 Marks)
Q.1 Give some examples of synergies from Merger .Ans:-
Synergyis the magic force that allows for enhanced cost efficiencies of the new
business.Synergy takes the form of revenue enhancement and cost savings. By
merging, the companieshope to benefit from the following:
Staff reductions
- As every employee knows, mergers tend to mean job losses. Consider all the mon
ey saved from reducing the number of staff members from accounting,marketing and
other departments. Job cuts will also include the former CEO, whotypically leav
es with a compensation package.
Economies of scale-
Yes, size matters. Whether it's purchasing stationery or a newcorporate IT syste
m, a bigger company placing the orders can save more on costs.Mergers also trans
late into improved purchasing power to buy equipment or officesupplies - when pl
acing larger orders, companies have a greater ability to negotiate priceswith th
eir suppliers.
Acquiring new technology -
To stay competitive, companies need to stay on top of technological development
s and their business applications. By buying a smaller company with uni
que technologies, a large company can maintain or develop acompetitive ed
ge.
Improved market reach and industry visibility -
Companies buy companies to reachnew markets and grow revenues and earnings. A me
rge may expand two companies'marketing and distribution, giving them new sales o
pportunities. A merger can alsoimprove a company's standing in the investment co
mmunity: bigger firms often have aneasier time raising capital than smaller ones
.That said, achieving synergy is easier said than done - it is not automatic
ally realized once twocompanies merge.Sure, there ought to be economies of scale
when two businesses are combined,but sometimes a merger does just the opposite.
In many cases, one and one add up to less thantwo.Sadly, synergy opportunities
may exist only in the minds of the corporate leaders and the dealmakers. Where t
here is no value to be created, the CEO and investment bankers - who havemuch to
gain from a successful M&A deal - will try to create an image of enhanced value
. The
market, however, eventually sees through this and penalizes the company by assig
ning it adiscountedshare price. We'll talk more about why M&A may fail in a late
r section of thistutorial.
Varieties of Mergers
From the perspective of business structures, there is a whole host of different
mergers. Here are afew types, distinguished by the relationship between the two
companies that are merging:
Horizontal merger-
Two companies that are in direct competition and share the sameproduct lines and
markets.
Vertical merger-
A customer and company or a supplier and company. Think of a conesupplier mergin
g with an ice cream maker.
Market-extension merger
- Two companies that sell the same products in differentmarkets.
Product-extension merger
- Two companies selling different but related products in thesame market.
Conglomeration-
Two companies that have no common business areas.There are two types of mergers
that are distinguished by how the merger is financed. Each hascertain implicati
ons for the companies involved and for investors:
Purchase Mergers -
As the name suggests, this kind of merger occurs when onecompany purchases anoth
er. The purchase is made with cash or through the issue of somekind of debt in
strument; the sale is taxable.Acquiring companies often prefer this type of
merger because it can provide them with atax benefit. Acquired assets can be wri
tten-up to the actual purchase price, and thedifference between thebook valueand
the purchase price of the assets candepreciate annually, reducing taxes payabl
e by the acquiring company. We will discuss this further in part four of this tu
torial.
Consolidation Mergers
- With this merger, a brand new company is formed and bothcompanies are bought a
nd combined under the new entity. The tax terms are the same asthose of a purcha
se merger.The following are examples of the types of synergies commonly anticipa
ted. Although thesebenefits have been categorized as marketing, operating,
financial and strategic, theseclassifications sometimes overlap.
Marketing
Benefits associated with increased market share, such as savings in advertising
costs or increased corporate awareness;

The elimination of a competitor, thereby reducing price competition and the thre
at of newproducts being introduced by that competitor;
Improved market coverage resulting from the integration of product lines;
Access to new customers to whom the acquirers' existing products can be sold; an
d
Improved distribution of products from better utilization of the marketing organ
izationand distribution channels of the combined entities.
Operating
The ability to immediately transfer technology of the purchaser's business to th
e vendor'sbusiness (or vice versa), thereby increasing profitability and elimina
ting the time that thevendor would otherwise require to develop the same capabil
ities internally;
Higher capacity utilization leading to incremental throughput, utilization of en
gineeringand design services, and overall operating efficiencies;
Increased purchasing power; and headcount reductions.
Financial
Accelerated growth potential for the vendor's business through access to lower c
ostand/or more varied financial resources enjoyed by the purchaser;
Benefits associated with a more efficient capital structure for the combined fir
m arisingfrom its greater consolidated asset base, and improved cash flow genera
tion capabilityfollowing the transaction; and
Where the acquirer is a publicly held company, greater size may lead to increase
dinvestor interest and stock analyst coverage, thereby reducing the acquirers' c
ost of raising equity capital.
Strategic
Acquisition of additional capacity and/or existing know-how and market presence
on a'buy' rather than 'build' basis;
Potential risk reduction resulting from upstream/downstream integration opportun
ities;

Entry into a new strategically important market, from either a product or geogra
phicstandpoint;
A reduction in risk through greater diversification of products and/or markets;
and
So-called 'scarcity value' related to the unusual or unique attributes of the ta
rget companyas viewed by acquirers.
Costs of realizing synergies
While corporate acquirers frequently emphasize the anticipated benefits from an
acquisition, theyoften do not give adequate pre-acquisition consideration to the
costs of integration, the timing of the anticipated proceeds, and the probabili
ty factors related to the actual realization of theperceived benefits. This may
occur because synergy assessments are overly optimistic as a resultof inadequate
analysis, overly optimistic to rationalize the price that is perceived necessar
y tosecure the acquisition, or do not adequately consider post-acquisition compe
titor strategies andactivities.Examples of incremental expenditures that may be
required to obtain anticipated synergiesinclude the following:
Severance costs associated with headcount reductions;
Lease termination payments and facilities disposition costs, including r
elocationexpenses;
General integration and monitoring costs related to the implementation of polici
es andprocedures, quality standards, computer system integration, and so on;
Turnover of key personnel in the acquired business due to uncertainty, differin
gmanagement philosophies, or those who seek other career opportunities;
Deferred costs, where the vendor has deferred certain expenses (such as equipmen
tmaintenance, research and development, and advertising) in the months (or years
) prior tosale in order to improve its financial results;
Contingent or inadequately accrued liabilities, including pending litigat
ion, post-retirement benefits, warranty reserves, environmental and cleanup cos
ts, for example; and
MF0011 Mergers and Acquisitions -
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