MOTIVES BEHIND

MERGERS

By Amar Arora
MBA-IB
MERGERS

refers to the aspect of corporate strategy,

corporate finance and management dealing
with the combining of different companies
that can aid, finance, or help a growing
company in a given industry grow rapidly
without having to create another business
entity.
MOTIVES
 Economy of scope
 Economy of scale
 Increased revenue or market share
 Cross-selling
 Synergy
 Geographical or other diversification
 Resource transfer
 Vertical integration
 Horizontal integration
 Growth
 Tax evasion
 Technology sharing
 Guard against acquisitions
ECONOMY OF SCOPE

This refers to the fact that the combined company

can often reduce its fixed costs by removing
duplicate departments or operations, lowering the
costs of the company relative to the same revenue
stream, thus increasing profit margins.
ECONOMY OF SCALE

The common sources of economies of scale are

 purchasing
 managerial
 financial
 Marketing
 technological
 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.
CROSS-SELLING
For example, a bank merging with a stock broker
could then sell its banking products to the stock
broker's customers, while the broker can sign up the
bank's customers for brokerage accounts. Or, a
manufacturer can acquire and sell complementary
products.
SYNERGY
Corporate synergy occurs when corporations
interact congruently.
A corporate synergy refers to a financial benefit
that a corporation expects to realize when it
merges with or acquires another corporation.
There are two distinct types of corporate
synergies:

 Revenue synergy
 Management synergy
 REVENUE SYNERGY
 A revenue synergy refers to the opportunity
of a combined corporate entity to generate
more revenue than its two predecessor stand
alone companies would be able to generate.
For example, if company A sells product X
through its sales force, company B sells
product Y, and company A decides to buy
company B then the new company could use
each sales person to sell products X and Y
thereby increasing the revenue that each
sales person generates for the company.
MANAGEMENT SYNERGY
 Synergy in terms of management and in
relation to team working refers to the
combined effort of individuals as participants
of the team.
 Positive or negative synergy can exist. The
condition that exists when the organization's
parts interact to produce a joint effect that
is greater than the sum of the parts acting
alone.
GEOGRAPHICAL OR OTHER
DIVERSIFICATION

This is designed to smooth the earnings results of a

company, which over the long term smoothens the
stock price of a company, giving conservative
investors more confidence in investing in the
company. However, this does not always deliver
value to shareholders
RESOURCE TRANSFER
Resources are unevenly distributed across firms
and the interaction of target and acquiring firm
resources can create value through either
overcoming information asymmetry or by combining
scarce resources.
VERTICAL INTEGRATION
Vertical integration is the degree to which a
firm owns its upstream suppliers and its
downstream buyers
These are of three types:

 Backward vertical integration

 Forward vertical integration
 Balanced vertical integration
 MOTIVES BEHIND VARIOUS
MERGERS

1. Reliance infratel and GTL merger

This deal would help reduce Rcom’s debt

which has shot up following the 3G auctions.
RIL-RPL MERGER: $1.68 BILLION

Trying to have a common source for purchase

of raw materials, consumables and other
stores because that brings down the cost to a
great extent and gives them a bargaining
power with the supplier.
VOLTAS INTERNATIONAL LTD –
VOLTAS LTD MERGER

Voltas international ltd was catering to

various international markets hence the
motive behind the deal for Voltas ltd was to
capture these markets. Their vast skill and
experience was also a major factor for
merger.
HP-COMPAQ MERGER
 Became an it giant (larger customer base)
 One stop shop spanning system, printers,
services and more
 HP gained service business, distribution
network specially for consumer desktops, its
hand helds and of course business customers.
 Compaq has good distribution network
globally.
BPL WITH BIRLA-TATA-AT&T

 To achieve economies of scale.

BPL- 7 lakh subscriber base

Birla-tata-AT&T- 3.8 lakh subscriber base.

REFRENCES
 Ramanujan
 Merger, acquisition and corporate
restructuring by Krishnamurti and vishwanath
 Merger and acquisition ( ICFAI Books)
 Corporate mergers and acquisitions
 Merger, acquisition and takeovers by
H.R.Machiraju.
Thank You