Mergers & Acquisitions
PPT Courtesy : CFA Institute
“Merger is a combination of two or more companies to
become a single existing company.”
TYPES OF MERGERS
1.Horizontal Merger
2.Vertical Merger
3.Conglomerate Merger
4.Marketing Extension Merger
5.Product Extension Merger
TYPES OF MERGERS
MERGER
Market-extension Product-extension Conglomerate
merger merger merger
Two companies that Two companies selling Two companies that
sell the same products different but related have no common
in different markets products in the same business areas
market
1.Horizontal merger
A horizontal merger occurs when two or more
firms in the same market, producing substitute
.products, join together to form a single firm. An
example of a horizontal merger is that of two
soft drink companies. The firms are competitors
producing similar products.
2.Vertical Merger
'Vertical Merger' A merger between two companies
producing different goods or services for one specific
finished product. A vertical merger occurs when two
or more firms, operating at different levels within an
industry's supply chain, merge operations.
3.Conglomerate Mergers
Conglomerate merger in which merging firms are not
competitors, but use common or related production
processes and/or marketing and distribution
channels.
4.Market Extension Merger
Market extension merger takes place between two
companies that deal in the same products but in
separate markets.
5.Product Extension Merger
Product extension merger takes place between two
business organizations that deal in products that are
related to each other and operate in the same market.
TRIVIAL FEW EXAMPLES OF LARGER
MERGERS
Tata Steel-Corus: $12.2 billion
•January 30, 2007
•Largest Indian take-over
•After the deal TATA’S became
the 5th largest STEEL co.
•100 % stake in CORUS paying Rs
428/- per share
Image: B Mutharaman, Tata Steel MD; Ratan Tata,
Tata chairman; J Leng, Corus chair;
and P Varin, Corus CEO.
Vodafone-Hutchison Essar: $11.1 billion
•TELECOM sector
•11th February 2007
•2nd largest takeover
deal
•67 % stake holding in
hutch
Image: The then CEO of Vodafone Arun
Sarin visits Hutchison Telecommunications
head office in Mumbai.
Hindalco-Novelis: $6 billion
•June 2008
•Aluminium and copper
sector
•Hindalco Acquired Novelis
•Hindalco entered the
Fortune-500 listing of
world's largest companies
by sales revenues
Image: Kumar Mangalam Birla
(center), chairman of Aditya Birla
Group.
HDFC Bank-Centurion Bank of Punjab: $2.4 billion
•February, 2008
•Banking sector
•Acquisition deal
•CBoP shareholders got
one share of HDFC Bank
for every 29 shares held
by them.
Image: Rana Talwar (rear) Centurion •9,510 crore
Bank of Punjab chairman, Deepak
Parekh, HDFC Bank chairman
Tata Motors-Jaguar Land Rover: $2.3 billion
•March 2008 (just a year
after acquiring Corus)
•Automobile sector
•Acquisition deal
•Gave tuff competition to
M&M after signing the
deal with ford
Image: A Union flag flies behind a Jaguar
car emblem outside a dealership in
Manchester, England.
Suzlon-RePower: $1.7 billion
•May 2007
•Acquisition deal
•Energy sector
•Suzlon is now the largest
wind turbine maker in
Asia
•5th largest in the world.
Image: Tulsi Tanti, chairman &
M.D of Suzlon Energy Ltd.
MERGER BETWEEN AIR INDIA AND INDIAN AIRLINES
•The government of India on 1
march 2007 approved the
merger of Air India and Indian
airlines.
• Consequent to the above a
new company called National
Aviation Company of India
limited was incorporated
under the companies act 1956
on 30 march 2007 with its
registered office at New Delhi.
• http://www.jagranjosh.com/articles/top-10-mergers-
and-acquisitions-of-2016-1483014451-1
• https://gadgetstouse.com/featured/india-mergers-ac
quisitions-2017/62390
• https://www.moneycontrol.com/news/business/com
panies/top-7-ma-deals-in-india-who-joined-hands-wi
th-whom-and-for-how-much-2538437.html
Ways of merger – A merger can take place in following ways:
By purchasing of assets
By purchase of common shares
By exchanging of shares for assets
By exchanging of shares for shares
The assets of company Y may
be sold to company X.
By purchase of Once this is done company Y is
assets then legally terminated and
company X survives.
The common share of
By purchase of company Y may be purchased
common shares by company X. When company
X holds all the share of
company Y, it is dissolve.
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The company X may give their
shares to stakeholders of
By exchanging of company Y for its net assets.
shares for assets The company Y terminated by
its shareholder who now holds
share of company X.
By exchanging of Company X gives its shares to
shares for shares the shareholder of company Y
and then company X is
terminated.
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2. Mergers and acquisitions Definition
Merger with Consolidation Acquisition
Company
Company
A
X
Company Company
AB or C X
Company
Company
B
Y
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Mergers and Acquisitions Definitions
• Parties to the acquisitions:
– The target company (or target) is the company being
acquired.
– The acquiring company (or acquirer) is the company
acquiring the target.
• Classified based on endorsement of parties’ management:
– A hostile takeover is when the target company’s board of
directors objects to a takeover offer.
– A friendly transaction is when the target company board
of directors endorses the merger or acquisition offer.
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Mergers and Acquisitions Definitions
Classified by the relatedness of business activities of
the parties to the combination:
Type Characteristic Example
Horizontal merger Companies are in the same Walt Disney Company buys
line of business, often Lucasfilm (October 2012).
competitors.
Vertical merger Companies are in the same Google acquired Motorola
line of production (e.g., Mobility Holdings (June
supplier–customer). 2012).
Conglomerate Companies are in unrelated Berkshire Hathaway
merger lines of business. acquires Lubrizol (2011).
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3. Motives for merger
• Synergy
• Growth
Creating Value • Increasing market power
• Acquiring unique capabilities or resources
• Unlocking hidden value
• Exploiting market imperfections
• Overcoming adverse government policy
Cross-Border • Technology transfer
Mergers
• Product differentiation
• Following clients
• Diversification
• Bootstrapping earnings
Dubious Motives • Managers’ personal incentives (agency benefit)
• Tax considerations
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Motives Behind Mergers of The Company
(i) Economies of Scale: This generally refers to a method in which the average cost per unit is
decreased through increased production.
(ii) Increased revenue /Increased Market Share: This motive assumes that the company will be
absorbing the major competitor and thus increase its to set prices.
(iii) Cross selling: For example, a bank buying a stockbroker could then sell its banking products to
the stock brokers customers, while the broker can sign up the bank’ customers for brokerage
account.
(iv) Corporate Synergy: Better use of complimentary resources. It may take the form of revenue
enhancement and cost savings.
(v) Taxes
(vi) Geographical or other diversification
In other words, theories of merger…
• Efficiency Theories
1. Differential Efficiency Theory
2. Inefficient Management Theory
3. Operating Synergy
4. Pure Diversification
5. Strategic Realignment to changing environment
6. Undervaluation
7. Overvaluation
8. Agency problem
9. Free Cash Flow Hypothesis
10. Market Power Hypothesis
11. Information Hypothesis
12. Bankruptcy Avoidance Hypothesis
13. Accounting and Tax Effects
Example: Bootstrapping earnings
Bootstrapping earnings is the increase in earnings per share as a result of a merger,
combined with the market’s use of the pre-merger P/E to value post-merger EPS.
Assumptions:
• Exchange ratio: One share of Company One for two shares of Company Two
• Market applies pre-merger P/E of Company One to post-merger earnings.
Company One
Company One Company Two Post-Acquisition
Earnings $100 million $50 million $150 million
Number of shares 100 million 50 million 125 million
Earnings per share $1 $1 $1.20
P/E 20 10 20
Price per share $20 $10 $24
Market value of stock $2,000 million $500 million $3,000 million
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Example: Bootstrapping earnings
$100 $50
Weighted P/ E= ( $150 ) (
× 20 +
$150 )
× 10 = 16.67
Assumptions:
• Exchange ratio: One share of Company One for two shares of Company Two
• Market applies weighted average P/E to the post-merger company.
Company One
Company One Company Two Post-Acquisition
Earnings $100 million $50 million $150 million
Number of shares 100 million 50 million 125 million
Earnings per share $1 $1 $1.20
P/E 20 10 16.67
Price per share $20 $10 $20
Market value of stock $2,000 million $500 million $2,500 million
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Parties in Acquisition
1. Acquiring company is a single existing company that
purchases the majority of equity shares of one or
more companies.
2. Acquired companies are those companies that
surrender the majority of their equity shares to an
acquiring company.
4. Transaction characteristics
Form of the • Stock purchase
Transaction • Asset purchase
• Cash
Method of • Securities
Payment
• Combination of cash and securities
Attitude of • Hostile
Management • Friendly
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Form of an Acquisition
• In a stock purchase, the acquirer provides cash, stock, or
combination of cash and stock in exchange for the stock of
the target firm.
– A stock purchase needs shareholder approval.
– Target shareholders are taxed on any gain.
– Acquirer assumes target’s liabilities.
• In an asset purchase, the acquirer buys the assets of the
target firm, paying the target firm directly.
– An asset purchase may not need shareholder approval.
– Acquirer likely avoids assumption of liabilities.
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Method of Payment
• Cash offering Merger Transactions in history
– Cash offering may be cash from
existing acquirer balances or from a
debt issue. Cash only
• Securities offering Stock only
– Target shareholders receive shares of
Cash and
common stock, preferred stock, or securities
debt of the acquirer.
Other
– The exchange ratio determines the securities
number of securities received in
exchange for a share of target stock.
• Factors influencing method of payment:
– Sharing of risk among the acquirer
and target shareholders.
Based on data from Mergerstat Review, 2018. FactSet
– Signaling by the acquiring firm. Mergerstat, LLC (www.mergerstat.com).
– Capital structure of the acquiring firm.
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Mindset of Managers
Friendly merger: Offer made through the Hostile merger: Offer made directly to
target’s board of directors the target shareholders
Types
Approach target management.
• Bear hug
• Tender offer
• Proxy fight
Enter into merger discussions.
Perform due diligence.
Enter into a definitive merger agreement.
Shareholders and regulators approve.
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Hostile vs. Friendly mergers
• The classification of a merger as friendly or hostile is
from the perspective of the board of directors of the
target company.
• A friendly merger is one in which the board
negotiates and accepts an offer.
• A hostile merger is one in which the board of the
target firm attempts to prevent the merger offer
from being successful.
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6. Regulation
• Section 390 to 395 of Companies Act, 1956 deal
with arrangements, amalgamations, mergers and
the procedure to be followed for getting the
arrangement, compromise or the scheme of
amalgamation approved.
• Antitrust law,
• Securities law
• https://blog.ipleaders.in/purchasing-shares-beyond-
open-offer/
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Merger analysis
• The discounted cash flow (DCF) method is often used in the
valuation of the target company.
• The cash flow that is most appropriate is the free cash flow
(FCF), which is the cash flow after capital expenditures
necessary to maintain the company as an ongoing concern.
• The goal is to estimate future FCF.
– We can use pro forma financial statements to estimate FCF
– We use a two-stage model when we can more accurately
estimate growth in the near future and then assume a
somewhat slower growth out into the future.
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Estimating CalculateFree Cash
Net Interest after Tax Flow (FCF)
(Interest expense – Interest income) × (1 – Tax rate)
Calculate Unlevered Net Income
Net income + Net interest after tax
Calculate NOPLAT
Unlevered net income + Change in deferred taxes
Calculate FCF
NOPLAT + Noncash charges – Change in working capital – Capital expenditures
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Who benefits from Mergers?
• Mergers create value for the target company shareholders
in the short run.
• Acquirers tend to overpay in merger bids.
– The transfer of wealth is from acquirer to target company
shareholders.
– Roll: Overpayment results from “hubris.”
• Acquirers tend to underperform in the long run.
– They are unable to fully capture any synergies or other
benefit from the merger.
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Mergers that create value
• Buyer is strong.
• Transaction premiums are relatively low.
• Number of bidders are low.
• Initial market reaction to the news is favorable.
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Internal & external change forces contributing to M&A
Internal & external change forces contributing to M&A
External change forces
• Market Penetration
• Market Development
• Product Development
• Diversification
Internal change forces (internal growth strategies)
• Knowledge improvement: organic growth strategies improve the
company’s knowledge through direct involvement in a new market or
technology, thus providing deeper first-hand knowledge that is likely to be
internalized in the company
• Investment spread: gradually growing internally helps to spread
investment over time, which allows a reduction of upfront costs and
commitments, making it easier to reverse or adjust a strategy if conditions
in the market change
• No availability constraints: the company is not dependent on the
availability of suitable acquisition targets or potential alliance partners.
Organic developers also do not have to wait for a perfectly matched
acquisition target to come on to the market
• Strategic independence: this means that a company does not need
to make the same compromises as might be necessary in an
alliance, for example, which is likely to involve constraints on certain
activities and may limit future strategic choices
• Culture management: organic growth allows new activities to be
created in the existing cultural environment, which reduces the risk
of culture clash—a common difficulty with mergers, acquisitions,
and alliances
• Internal growth strategies have a few disadvantages. For instance,
developing internal capabilities can be slow and time-consuming,
expensive, and risky if not managed well.
Empirical/research evidences on factors contributing to M&A
• Business extension
• Consolidation
• Building capabilities
• Speedy response and growth
• Financial efficiency
• Tax efficiency
• Asset stripping or unbundling
Major Strategic alliances
• Joint venture- Tata Sons and Singapore Airlines (SIA)
Vistara is an excellent example of a Joint Venture company
in India with a foreign firm. While Tata Sons holds a 51%
stake, SIA controls the rest 49% in the carrier airlines
• Equity alliances/consortium alliance- Tesla Inc &
Panasonic.
• Non-equity alliances – Mc D and Subway, Starbucks and
Kroger
Other Strategic alliances in M&A
SCALE ALLAINCES
ACCESS ALLIANCES
COMPLEMENTARY ALLIANCES
COLLUSIVE ALLIANCES
• Scale alliances involve companies combining to achieve
necessary scale. The capabilities of each partner may be
quite similar, but together they can achieve advantages that
they could not easily achieve on their own.
• Access alliances involve a company allying in order to
access the capabilities of another company that are
required to produce or sell its own products and services.
For example, in countries such as Mexico a Western
company might need to partner with a local distributor to
access effectively the national market for its products and
services. The local company is critical to the international
company’s ability to sell.
• Complementary alliances involve companies at similar points in the
value network combining their distinctive but complementary
resources so that each partner is bolstered where it has particular
gaps or weaknesses. The Renault-Nissan Alliance is a great example
of two companies combining their strengths to overcome their
individual weaknesses.
• Collusive alliances involve companies colluding secretly to increase
their market power. By combining into cartels, they reduce
competition in the marketplace, enabling them to extract higher
prices from customers or lower prices from suppliers. Such collusive
cartels among for-profit businesses are discouraged by regulators.
For instance, mobile phone and energy companies are often accused
of collusive behavior.
Motives of M&A and the Industry’s Life Cycle
• The motives for a merger are influenced (in part at
times) by the industry’s stage in its life cycle.
• Factors include
– Need for capital.
– Need for resources.
– Degree of competition and the number of
competitors.
– Growth opportunities (organic vs. external).
– Opportunities for synergy.
Mergers and the Industry Life Cycle
Industry Life
Cycle Stage Industry Description Motives for Merger Types of Mergers
Pioneering Industry exhibits Younger, smaller companies may sell Conglomerate
development substantial themselves to larger companies in Horizontal
development costs mature or declining industries and
and has low, but look for ways to enter into a new
slowly increasing, growth industry.
sales growth. Young companies may look to merge
with companies that allow them to
pool management and capital
resources.
Rapid Industry exhibits Explosive growth in sales may require Conglomerate
accelerating high profit margins large capital requirements to expand Horizontal
growth caused by few existing capacity.
participants in the
market.
Mergers and the Industry Life Cycle
Industry Life
Cycle Stage
Industry Description Motives for Merger Types of Mergers
Matured Industry experiences Mergers may be undertaken to achieve Horizontal
growth a drop in the entry economies of scale, savings, and Vertical
of new competitors, operational efficiencies.
but growth potential
remains.
Stabilization Industry faces Mergers may be undertaken to achieve Horizontal
and market increasing economies of scale in research,
maturity competition and production, and marketing to match the
capacity constraints. low cost and price performance of other
companies (domestic and foreign).
Large companies may acquire smaller
companies to improve management and
provide a broader financial base.
Mergers and the Industry Life Cycle
Industry Life
Cycle Stage Types of
Industry Description Motives for Merger Mergers
Deceleration Industry faces Horizontal mergers may be Horizontal
of growth and overcapacity and undertaken to ensure survival. Vertical
decline eroding profit Vertical mergers may be carried out Conglomerate
margins. to increase efficiency and profit
margins.
Companies in related industries may
merge to exploit synergy.
Companies in this industry may
acquire companies in young
industries.
Product life cycle and M&A
• Introduction and exploitation stage-
• New/small firms will become targets for related or conglomerate mergers initiated by larger firms
in mature or declining industries.
• Horizontal mergers b/w smaller firms may occur to pool managerial &financial resources.
• Maturity stage-
• Horizontal and related mergers may be undertaken to match the low cost &price performance of
other firms, domestic/ foreign, by achieving economies of scale in research, marketing &
production.
• Some horizontal acquisitions of smaller firms by larger firms take place to provide management
skills & broader financial base.
Contd….
• Decline stage-
• •
• Horizontal mergers to ensure survival take place.
• •
• Vertical mergers are carried out to increase efficiency and profit margins.
• •
• Concentric mergers- to obtain opportunities for synergy and carry-over of managerial capabilities.
• •
• Conglomerate acquisitions of firms in growth industries are undertaken toutilize financial slack of
mature firms in declining industries.
• •
• The firms that had been acquired previously in conglomerate mergers maynow be divested.
Analysis in M&A decision
• The issue of capability transference is also fundamental to the framework developed to explain
horizontal and related industry mergers.
• The firm is viewed as a combination of organizational Capital & investment. Opportunities.
• •
• Organization capital results from team effects & organization learning, defined as the improvement
in the capabilities of managers & other employees through experience.
The 3 types of organisation learning vary in their transferability.
• Generic mgmt capabilities are generally obtainable on the open market, but it is more
difficult to obtain industry-specific mgmt capabilities this way because of development
time & team effects.
• Industry-specific mgmt capabilities are transferable only in mergers within the same or a
related industry.
• Firm-specific human capital develops through a long-term earning process and is
otherwise obtainable only through mergers.
• From this basis, characteristics of bidder-& target-type of firms are projected.
• Target firms are likely to have high growth rates; in fact, they have grown so fast
there has not been time to develop needed mgmt. capabilities. As a
result performance measures may be low.
• Bidder firms, in the other hand, are likely to have a long history in a mature
industry, & over time have developed excess capabilities which can be used to
complement the needs of target firms.
Significance of SWOT analysis
• Strategic approaches to M&A- SWOT analysis:
• SWOT analysis is an instrumental framework in Value Based Management and Strategy
Formulation to identify the Strengths, Weaknesses, Opportunities and Threats for a
particular company/target company.
• Strengths and Weaknesses are internal value creating (or destroying) factors such as
assets, skills or resources a company has at its disposal relatively to its competitors.
They can be measured using internal assessments or external benchmarking.
• Opportunities and Threats are external value creating (or destroying) factors a company
cannot control, but emerge from either the competitive dynamics of the
industry/market or from demographic, economic, political, technical, social, legal or
cultural factors.
Example….
• Wal-Mart SWOT Analysis.
• Strengths - Wal-Mart is a powerful retail brand. It has a reputation for value for money,
convenience and a wide range of products all in one store.
• Weaknesses - Wal-Mart is the World's largest grocery retailer and control of its empire,
despite its IT advantages, could leave it weak in some areas due to the huge span of
control.
• Opportunities - To take over, merge with, or form strategic alliances with other global
retailers, focusing on specific markets such as Europe or the Greater China Region.
• Threats - Being number one means that you are the target of competition, locally and
globally
Example…
• Nike SWOT Analysis.
•
• Strengths - Nike is a very competitive organization. Phil Knight (Founder and CEO) is often quoted
as saying that 'Business is a war without bullets.
• 'Weaknesses - The organization does have a diversified range of sports products.
• Opportunities - Product development offers Nike many opportunities.
• Threats - Nike is exposed to the international nature of trade.
BCG model Vs M&A
• Strategic approaches to M&A- BCG matrix
• The BCG matrix or also called BCG model relates to marketing. The BCG model is a well-
known portfolio management tool used in product life cycle theory. BCG matrix is often used
to prioritize which products within company product mix get more funding and attention.
• The BCG matrix model on M&A decision making
• This model was developed by Bruce Henderson of the Boston Consulting Group in the early
1970's
• The BCG model is based on classification of products (and implicitly also company business
units) into four categories based on combinations of market growth and market share relative
to the largest competitor. Merger and Acquisition of firms based on the BCG matrix analysis.
BCG matrix in M&A
Porter's Five Forces
Application of the model for analyzing the industry before taking the decision of M&A
Michael E. Porter
Born in 1947.
Professors in Harvard
Business School.
Introduced Porter's 5
Forces Model.
Written 18 books & over
125 Articles.
“AN INDUSTRY’S PROFIT POTENTIAL IS LARGELY DETERMINED BY THE INTENSITY OF
COMPETITIVE RIVALRY WITHIN THAT INDUSTRY.”
------- Micheal Porter
Porters Five Forces …
* Threat of new Entry
* Bargaining Power of Suppliers
* Bargaining Power of Buyers
* Development of Substitute
Products or Services
* Rivalry among Competitors
Porter’s Five Forces Chart
Importance of The 5 Forces
Measure and monitor
strategy effectiveness
Strategize :
* Competitive advantage
* Cost advantage
* Market dominance
* New product development
* Contraction / Diversification
* Price leadership
Industry analysis : * Global
1) Industry relevance * Re-engineering
2) Industry players * Downsizing
3) Industry structure * De-layering
4) Future changes * Restructuring
Basic knowledge
of business strategy How to deal with competition? Sell/buy/Join ven
What strategy & forces that influence
to use? the decision making
Analysis
5 Forces Facts
Rivalry among the •Reliance Retail, Aditya Birla Group , Vishal Retail’s,
competitor Bharti and Walmart, etc
Threat of entrants FDI policy not favorable for international players.
• Domestic conglomerates looking to start retail chains.
•International players looking to foray India.
Bargaining power of supplier •The bargaining power of suppliers varies depending upon
the target segment.
•The unorganised sector has a dominant position.
• There are few players who have a slight edge over others
on account of being established players and enjoying brand
distinction.
Bargaining power of buyers • Consumers are price sensitive..
•Availability of more choice.
•Unorganized retail
Threat of substitutes
