C2N

Mergers and Acquisition

Tushar and Nitin Department of Computer Science and IT NSIT, University of Delhi

Merger

Example

Amalgamation

Example

Acquisition

Example

Mergers Vs Acquisition
A MERGER happens when two firms, often about same size, agree to go forward as a new single company rather than remain separately owned & operated by pooling all their resources together, to create a sustainable competitive advantage. For example,both Daimler-Benz & Chrysler ceased to exist when two firms merged, and a new company Daimler-Chrysler was created. When a Company takes over another one & clearly becomes the new owner ,the purchase is called ACQUISITION. Unlike mergers, acquisitions can sometimes be unfriendly. i.e., when a firm tries to takeover another by adopting hostile measures.

M&A means and includes

ACQUISITIONS MERGERS PURCHASE OF UNIT TAKE OVERS ALLIANCES

DIVESTITURES SELL OFFS DEMERGERS

OWN,RESTRUCT. GOING PRIVATE LEVERAGED Buy OUTS

ORG.RESTRUCT. REDESIGN PERFORMANCE ENHANCEMENT PROGRAMMES

M&A is all about..

The Synergy Matrix

Managerial Synergy
Improve management or replace inefficient one

Financial Synergy
Redeploy capital Increase ROI

Company-specific Risk
Cost-of-capital reduction

Operating Synergy
Scale Economies Improve margins

Market Valuation
Release value

Early Merger Movements

The 1895-1904 Merger Movement. The 1922-1929 Merger Movement. The 1940-1947 Merger Movement. The 1960s Merger Movement.

Post 1980 Merger Movement.

Framework for Successful Mergers

According to Drucker, financial factors provide stimulus for merger activity. He says that mergers should follow five rules, in order to be economically viable. The acquirer must contribute something to the acquired company. A common core of unity is required. The acquirer must respect the business of the acquired company. Within a year or so, the acquiring company must be able to provide top management to the acquired company. Within the first year of the merger, managements in both companies should receive promotions across the entities

Types of Mergers
Horizontal mergers:
A horizontal merger involves two firms operating and competing in the same kind of business activity. Textiles firm merges raw materials firm.
- Example:

Exxon - Mobil
production operation.

Vertical mergers: Vertical mergers occur between firms in different stages of

- Example: Helene Curtis and Unilever

Conglomerate Mergers: - Conglomerate mergers involve firms engaged in unrelated types of business activity
- Example: General Electric buying NBC television

Concentric Mergers - Based on specific management functions where as the conglomerate mergers are
based on general management functions

- Example: Citigroup (principally a bank) buying Salomon Smith Barney (an investment banker/stock brokerage operation

Reasons for M&A

Increased market power Overcome entry barriers Cost of new product development Increased speed to market Lower risk compared to developing new products Increased diversification Avoid excessive competition M&A

Problems in Achieving Success

Integration difficulties Inadequate evaluation of target Large or extraordinary debt Inability to achieve synergy Too much diversification Managers overly focused on acquisitions Too large

Reasons for M & A

Increased Market Power
Acquisition intended to reduce the competitive balance of the industry

Example: British Petroleums acquisition of U.S. Amoco

Overcome Barriers to Entry

Acquisitions overcome costly barriers to entry which may make start-ups economically unattractive Example: Belgian-Dutch Fortis acquisition of American Bankers Insurance Group

Lower Cost and Risk of New Product Development

Buying established businesses reduces risk of start-up ventures Example: Watson Pharmaceuticals acquisition of TheraTech

Reasons for M & A

Increased Speed to Market
Closely related to Barriers to Entry, allows market entry in a more timely fashion

Example: Kraft Foods acquisition of Boca Burger

Diversification
Quick way to move into businesses when firm currently lacks experience and depth in industry Example: CNETs acquisition of mySimon

Reshaping Competitive Scope

Firms may use acquisitions to restrict its dependence on a single or a few products or markets

Example: General Electrics acquisition of NBC

Problems with M & A

Integration Difficulties
Differing financial and control systems can make integration of firms difficult Example: Intels acquisition of DECs semiconductor division

Inadequate Evaluation of Target

Winners Curse bid causes acquirer to overpay for firm Example: Marks and Spencers acquisition of Brooks Brothers

Large or Extraordinary Debt

Costly debt can create onerous burden on cash outflows Example: AgriBioTechs acquisition of dozens of small seed firms

Problems with M & A

Inability to Achieve Synergy
Justifying acquisitions can increase estimate of expected benefits Example: Quaker Oats and Snapple

Overly Diversified
Acquirer doesnt have expertise required to manage unrelated businesses Example: GE--prior to selling businesses and refocusing

Managers Overly Focused on Acquisitions

Managers may fail to objectively assess the value of outcomes achieved through the firms acquisition strategy

Example: Ford and Jaguar

Strategic approach To Mergers and Acquisitions

Present Situation Growing steadily but in a mature market with limited growth Operating at maximum productive capacity Strategy Acquire a company in a younger market with higher growth rate Acquire a company making similar products operating substantially below capacity Acquire a company into which the talents can be extended Acquire a company with product range which is complementary

Under-utilizing management resources

Marketing an incomplete product range , or having the potential to sell other products or services to your existing customers

Lacking key clients in a targeted sector

Acquire a company with right customer profile

Need to increase market share Need to widen capability

Acquire an important competitor Acquire a company with key talents and/or technology

Need more control of suppliers or customers

Acquire a company which is, or which gives access to a significant customer or supplier

Preparing for floatation but need to improve balance sheet

Acquire a company with the right customer profile

Some Examples of the MAs

The M & A Process

1. 2. Develop a strategic plan for the business.(Business Plan) Develop an acquisition plan related to the strategic plan.( Acquisition Plan) 3. Search companies for acquisitions.(Search) 4. Screen and prioritize potential companies.(Screen) 5. Initiate contact with target. 6. Refine valuation, structure the deal and develop financial plan.( Negotiation) 7. Develop plan for integrating the acquired business. (Integration Plan) 8. Obtain all necessary approvals and implement closing. 9. Implement post closing integration. 10. Conduct a post closing evaluation.

Market Leadership

TATA-CORUS: 12.2bn $

TATA-CORUS

CORUS:
1.Not just a steel company but consists of wide variety of products and services 2.Core business in Manufacturing, Development and Allocation of Aluminum and Steel 3. Largest producer of steel in UK 4. Triple the size of TATA in terms of steel production

TATA-CORUS HOW DOES IT BENEFIT EITHER:

Tata: 1 .Taps the European market without setting up green field plant and marketing and distribution channel. 2. Gets a R&D facility and high, low quality of steel. Corus: 1. Gets raw materials at lower costs. 2. Easy to minimize operational expenditure.

TATA-CORUS

FEATURES:
1. Largest takeover of a foreign company by an Indian. 2. Together, 5th largest steel manufacturing company in world. 3. Auction war with CSN. 4. Cash Deal: Immediate takeover 5. PM Chidambaram, the then FM came out in support.

Synergies:
1. Technology transfer possible as well as R&D facilities co-operation 2. TATA could produce cheap steel and Corus was fighting to keep its production costs down 3. On one side , theres Europe- high quality seeking market, while on the other hand, India and south east Asia- high growth low cost, hence best of both worlds 4. Back ward Integration for Corus while its Forward for TATA. 5. Economies of Scale

Pitfalls:
1. 2. 3. 4. Corus bought at a price much higher than its valuation 6.14 bn $ in debt Iron ores consumption increased from 5.3 to 27 million tons per annum EBITDA- Tata: 30%, Corus: 8%

Whats in store for Google:

1. Google is battling Apple and Microsoft, among others, over patent issues. With Motorolas 17,000 patents and 7000 pending , mobile partners such as LG, Sony Ericsson can finally breathe a sigh of relief. 2. Google has already made it clear that Android will still be available to other OEM. HTC was paying 15$ for every Android handset but Motorola not. Why? Because Motorola has X-box related patents. Happy suing now, Google! 3. Use the sales network and low cost phone- experience. 4. Save Google TV- Motorola has deep interests in set top boxes and modems. 5. End to end user experience- iOS competitor.

Speculation:
1.Google could keep Motorola as a kind of test lab for Android, and Motorola phones might get eventually phased out. 2.RIM, Microsoft could take a backseat. 3.Even though Android has a greater market share than iOS, yet iPhones popularity exceed any Android sets. So Apple might continue to lead the market. 4.Other OEM might get alienated.