A PROJECT
REPORT
ON
STRATEGIC
FINANCIAL
MANAGE MENT
SUBMITTED BY- BISWAJIT MAJHI
ROLL- 14MFC031
MERGER & ACQUISITIONS :
Mergers and acquisitions represent the ultimate in change for a business. No
other event is more difficult, challenging, or chaotic as a merger and acquisition.
It is imperative that everyone involved in the process has a clear understanding
of how the process works
When we use the term "merger", we are referring to the merging of two
companies where one new company will continue to exist. The term
"acquisition" refers to the acquisition of assets by one company from another
company. In an acquisition, both companies may continue to exist. However,
throughout this course we will loosely refer to mergers and acquisitions ( M &
A ) as a business transaction where one company acquires another company.
The acquiring company will remain in business and the acquired company
(which we will sometimes call the Target Company) will be integrated into the
acquiring company and thus, the acquired company ceases to exist after the
merger
Mergers can be categorized as follows:
Horizontal: Two firms are merged across similar products or services.
Horizontal mergers are often used as a way for a company to increase its market
share by merging with a competing company. For example, the merger between
Exxon and Mobil will allow both companies a larger share of the oil and gas
market
Vertical: Two firms are merged along the value-chain, such as a manufacturer
merging with a supplier. Vertical mergers are often used as a way to gain a
competitive advantage within the marketplace. For example, Merck, a large
manufacturer of pharmaceuticals, merged with Medco, a large distributor of
pharmaceuticals, in order to gain an advantage in distributing its products.
Conglomerate: Two firms in completely different industries merge, such as a
gas pipeline company merging with a high technology company. Conglomerates
are usually used as a way to smooth out wide fluctuations in earnings and
provide more consistency in long-term growth. Typically, companies in mature
industries with poor prospects for growth will seek to diversify their businesses
through mergers and acquisitions.
For example, General Electric (GE) has diversified its businesses through
mergers and acquisitions, allowing GE to get into new areas like financial
services and television broadcasting.
Reasons for M & A
Every merger has its own unique reasons why the combining of two companies
is a good business decision. The underlying principle behind mergers and
acquisitions ( M & A ) is simple: 2 + 2 = 5. The value of Company A is $ 2
billion and the value of Company B is $ 2 billion, but when we merge the two
companies together, we have a total value of $ 5 billion. The joining or merging
of the two companies creates additional value which we call "synergy" value.
Synergy value can take three forms:
1. Revenues: By combining the two companies, we will realize higher revenues
then if the two companies operate separately.
2. Expenses: By combining the two companies, we will realize lower expenses
then if the two companies operate separately.
3. Cost of Capital: By combining the two companies, we will experience a
lower overall cost of capital.
Positioning - Taking advantage of future opportunities that can be exploited
when the two companies are combined. For example, a telecommunications
company might improve its position for the future if it were to own a broad
band service company. Companies need to position themselves to take
advantage of emerging trends in the marketplace.
Gap Filling - One company may have a major weakness (such as poor
distribution) whereas the other company has some significant strength. By
combining the two companies, each company fills-in strategic gaps that are
essential for long-term survival.
Organizational Competencies - Acquiring human resources and intellectual
capital can help improve innovative thinking and development within the
company.
Broader Market Access - Acquiring a foreign company can give a company
quick access to emerging global markets.
Mergers can also be driven by basic business reasons, such as:
Bargain Purchase - It may be cheaper to acquire another company then to
invest internally. For example, suppose a company is considering expansion of
fabrication facilities. Another company has very similar facilities that are idle. It
may be cheaper to just acquire the company with the unused facilities then to go
out and build new facilities on your own.
Diversification - It may be necessary to smooth-out earnings and achieve more
consistent long-term growth and profitability. This is particularly true for
companies in very mature industries where future growth is unlikely. It should
be noted that traditional financial management does not always support
diversification through mergers and acquisitions. It is widely held that investors
are in the best position to diversify, not the management of companies since
managing a steel company is not the same as running a software company.
Short Term Growth - Management may be under pressure to turnaround
sluggish growth and profitability. Consequently, a merger and acquisition is
made to boost poor performance.
Undervalued Target - The Target Company may be undervalued and thus, it
represents a good investment. Some mergers are executed for "financial"
reasons and not strategic reasons. For example, Kohlberg Kravis & Roberts
acquires poor performing companies and replaces the management team in
hopes of increasing depressed values.
The Overall Process
The Merger & Acquisition Process can be broken down into five phases:
Phase 1 - Pre Acquisition Review: The first step is to assess your own situation
and determine if a merger and acquisition strategy should be implemented. If a
company expects difficulty in the future when it comes to maintaining core
competencies, market share, return on capital, or other key performance drivers,
then a merger and acquisition (M & A) program may be necessary.
It is also useful to ascertain if the company is undervalued. If a company fails to
protect its valuation, it may find itself the target of a merger. Therefore, the pre-
acquisition phase will often include a valuation of the company - Are we
undervalued? Would an M & A Program improve our valuations?
The primary focus within the Pre Acquisition Review is to determine if growth
targets (such as 10% market growth over the next 3 years) can be achieved
internally. If not, an M & A Team should be formed to establish a set of criteria
whereby the company can grow through acquisition. A complete rough plan
should be developed on how growth will occur through M & A, including
responsibilities within the company, how information will be gathered, etc.
Phase 2 - Search & Screen Targets: The second phase within the M & A
Process is to search for possible takeover candidates. Target companies must
fulfill a set of criteria so that the Target Company is a good strategic fit with the
acquiring company. For example, the target's drivers of performance should
compliment the acquiring company. Compatibility and fit should be assessed
across a range of criteria - relative size, type of business, capital structure,
organizational strengths, core competencies, market channels, etc.
It is worth noting that the search and screening process is performed in-house
by the Acquiring Company. Reliance on outside investment firms is kept to a
minimum since the preliminary stages of M & A must be highly guarded and
independent.
Phase 3 - Investigate & Value the Target: The third phase of M & A is to
perform a more detail analysis of the target company. You want to confirm that
the Target Company is truly a good fit with the acquiring company. This will
require a more thorough review of operations, strategies, financials, and other
aspects of the Target Company. This detail review is called "due diligence."
Specifically, Phase I Due Diligence is initiated once a target company has been
selected. The main objective is to identify various synergy values that can be
realized through an M & A of the Target Company. Investment Bankers now
enter into the M & A process to assist with this evaluation.
Phase 4 - Acquire through Negotiation: Now that we have selected our target
company, it's time to start the process of negotiating a M & A. We need to
develop a negotiation plan based on several key questions:
How much resistance will we encounter from the Target Company?
What are the benefits of the M & A for the Target Company?
What will be our bidding strategy?
How much do we offer in the first round of bidding?
The most common approach to acquiring another company is for both
companies to reach agreement concerning the M & A; i.e. a negotiated merger
will take place. This negotiated arrangement is sometimes called a "bear hug."
The negotiated merger or bear hug is the preferred approach to a M & A since
having both sides agree to the deal will go a long way to making the M & A
work. In cases where resistance is expected from the target, the acquiring firm
will acquire a partial interest in the target; sometimes referred to as a "toehold
position." This toehold position puts pressure on the target to negotiate without
sending the target into panic mode.
In cases where the target is expected to strongly fight a takeover attempt, the
acquiring company will make a tender offer directly to the shareholders of the
target, bypassing the target's management. Tender offers are characterized by
the following:
The price offered is above the target's prevailing market price.
The offer applies to a substantial, if not all, outstanding shares of stock.
The offer is open for a limited period of time.
The offer is made to the public shareholders of the target.
A few important points worth noting:
1-Generally, tender offers are more expensive than negotiated M & A's due to
the resistance of target management and the fact that the target is now "in play"
and may attract other bidders.
2-Partial offers as well as toehold positions are not as effective as a 100%
acquisition of "any and all" outstanding shares. When an acquiring firm makes a
100% offer for the outstanding stock of the target, it is very difficult to turn this
type of offer down.
Phase 5 - Post Merger Integration: If all goes well, the two companies will
announce an agreement to merge the two companies. The deal is finalized in a
formal merger and acquisition agreement. This leads us to the fifth and final
phase within the M & A Process, the integration of the two companies.
Every company is different - differences in culture, differences in information
systems, differences in strategies, etc. As a result, the Post Merger Integration
Phase is the most difficult phase within the M & A Process. Now all of a sudden
we have to bring these two companies together and make the whole thing work.
This requires extensive planning and design throughout the entire organization.
The integration process can take place at three level:
1. Full: All functional areas (operations, marketing, finance, human resources,
etc.) will be merged into one new company. The new company will use the
"best practices" between the two companies.
2. Moderate: Certain key functions or processes (such as production) will be
merged together. Strategic decisions will be centralized within one company,
but day to day operating decisions will remain autonomous.
3. Minimal: Only selected personnel will be merged together in order to reduce
redundancies. Both strategic and operating decisions will remain decentralized
and autonomous.
TAKEOVER:
General term referring to transfer of control of a firm from one group of shareho
lders to another group ofshareholders. Change in the controlling interest of a cor
poration, either through a friendly acquisition or anunfriendly, hostile, bid. A h
ostile takeover (with the aim of replacing current existing management) is usual
lyattempted through a public tender offer.
Example- In 2000,Tata Tea took over Tetley Tea, the company which was twice
Tata Tea’s size and had introduced the world to tea bags, for £271 million via a
leverage buyout. The move turned the company into the world’s second-largest
tea marketer. While Tata was strong on the production front, Tetley’s strengths
lay in marketing.
AMALGAMATION:
Amalgamation is an agreement (deal) between two or more companies to
consolidate (strengthen) their business activities by establishing a new company
having a separate legal existence.
1-Amalgamating companies are those two or more companies which willingly
unite (combine) to carry on their business activities jointly.
2-Amalgamated company is a newly formed union (alliance) of two or more
amalgamating companies. It has a separate legal existence with a new unique
name.
Two good examples of amalgamations are as follows:
1-Maruti Motors operating in India and Suzuki based in Japan amalgamated to
form a new company called Maruti Suzuki (India) Limited.
2-Tata Sons operating in India and AIA Group based in Hong Kong
amalgamated to form a new company called TATA AIG Life Insurance.
doc_516336567.docx
REPORT
ON
STRATEGIC
FINANCIAL
MANAGE MENT
SUBMITTED BY- BISWAJIT MAJHI
ROLL- 14MFC031
MERGER & ACQUISITIONS :
Mergers and acquisitions represent the ultimate in change for a business. No
other event is more difficult, challenging, or chaotic as a merger and acquisition.
It is imperative that everyone involved in the process has a clear understanding
of how the process works
When we use the term "merger", we are referring to the merging of two
companies where one new company will continue to exist. The term
"acquisition" refers to the acquisition of assets by one company from another
company. In an acquisition, both companies may continue to exist. However,
throughout this course we will loosely refer to mergers and acquisitions ( M &
A ) as a business transaction where one company acquires another company.
The acquiring company will remain in business and the acquired company
(which we will sometimes call the Target Company) will be integrated into the
acquiring company and thus, the acquired company ceases to exist after the
merger
Mergers can be categorized as follows:
Horizontal: Two firms are merged across similar products or services.
Horizontal mergers are often used as a way for a company to increase its market
share by merging with a competing company. For example, the merger between
Exxon and Mobil will allow both companies a larger share of the oil and gas
market
Vertical: Two firms are merged along the value-chain, such as a manufacturer
merging with a supplier. Vertical mergers are often used as a way to gain a
competitive advantage within the marketplace. For example, Merck, a large
manufacturer of pharmaceuticals, merged with Medco, a large distributor of
pharmaceuticals, in order to gain an advantage in distributing its products.
Conglomerate: Two firms in completely different industries merge, such as a
gas pipeline company merging with a high technology company. Conglomerates
are usually used as a way to smooth out wide fluctuations in earnings and
provide more consistency in long-term growth. Typically, companies in mature
industries with poor prospects for growth will seek to diversify their businesses
through mergers and acquisitions.
For example, General Electric (GE) has diversified its businesses through
mergers and acquisitions, allowing GE to get into new areas like financial
services and television broadcasting.
Reasons for M & A
Every merger has its own unique reasons why the combining of two companies
is a good business decision. The underlying principle behind mergers and
acquisitions ( M & A ) is simple: 2 + 2 = 5. The value of Company A is $ 2
billion and the value of Company B is $ 2 billion, but when we merge the two
companies together, we have a total value of $ 5 billion. The joining or merging
of the two companies creates additional value which we call "synergy" value.
Synergy value can take three forms:
1. Revenues: By combining the two companies, we will realize higher revenues
then if the two companies operate separately.
2. Expenses: By combining the two companies, we will realize lower expenses
then if the two companies operate separately.
3. Cost of Capital: By combining the two companies, we will experience a
lower overall cost of capital.
Positioning - Taking advantage of future opportunities that can be exploited
when the two companies are combined. For example, a telecommunications
company might improve its position for the future if it were to own a broad
band service company. Companies need to position themselves to take
advantage of emerging trends in the marketplace.
Gap Filling - One company may have a major weakness (such as poor
distribution) whereas the other company has some significant strength. By
combining the two companies, each company fills-in strategic gaps that are
essential for long-term survival.
Organizational Competencies - Acquiring human resources and intellectual
capital can help improve innovative thinking and development within the
company.
Broader Market Access - Acquiring a foreign company can give a company
quick access to emerging global markets.
Mergers can also be driven by basic business reasons, such as:
Bargain Purchase - It may be cheaper to acquire another company then to
invest internally. For example, suppose a company is considering expansion of
fabrication facilities. Another company has very similar facilities that are idle. It
may be cheaper to just acquire the company with the unused facilities then to go
out and build new facilities on your own.
Diversification - It may be necessary to smooth-out earnings and achieve more
consistent long-term growth and profitability. This is particularly true for
companies in very mature industries where future growth is unlikely. It should
be noted that traditional financial management does not always support
diversification through mergers and acquisitions. It is widely held that investors
are in the best position to diversify, not the management of companies since
managing a steel company is not the same as running a software company.
Short Term Growth - Management may be under pressure to turnaround
sluggish growth and profitability. Consequently, a merger and acquisition is
made to boost poor performance.
Undervalued Target - The Target Company may be undervalued and thus, it
represents a good investment. Some mergers are executed for "financial"
reasons and not strategic reasons. For example, Kohlberg Kravis & Roberts
acquires poor performing companies and replaces the management team in
hopes of increasing depressed values.
The Overall Process
The Merger & Acquisition Process can be broken down into five phases:
Phase 1 - Pre Acquisition Review: The first step is to assess your own situation
and determine if a merger and acquisition strategy should be implemented. If a
company expects difficulty in the future when it comes to maintaining core
competencies, market share, return on capital, or other key performance drivers,
then a merger and acquisition (M & A) program may be necessary.
It is also useful to ascertain if the company is undervalued. If a company fails to
protect its valuation, it may find itself the target of a merger. Therefore, the pre-
acquisition phase will often include a valuation of the company - Are we
undervalued? Would an M & A Program improve our valuations?
The primary focus within the Pre Acquisition Review is to determine if growth
targets (such as 10% market growth over the next 3 years) can be achieved
internally. If not, an M & A Team should be formed to establish a set of criteria
whereby the company can grow through acquisition. A complete rough plan
should be developed on how growth will occur through M & A, including
responsibilities within the company, how information will be gathered, etc.
Phase 2 - Search & Screen Targets: The second phase within the M & A
Process is to search for possible takeover candidates. Target companies must
fulfill a set of criteria so that the Target Company is a good strategic fit with the
acquiring company. For example, the target's drivers of performance should
compliment the acquiring company. Compatibility and fit should be assessed
across a range of criteria - relative size, type of business, capital structure,
organizational strengths, core competencies, market channels, etc.
It is worth noting that the search and screening process is performed in-house
by the Acquiring Company. Reliance on outside investment firms is kept to a
minimum since the preliminary stages of M & A must be highly guarded and
independent.
Phase 3 - Investigate & Value the Target: The third phase of M & A is to
perform a more detail analysis of the target company. You want to confirm that
the Target Company is truly a good fit with the acquiring company. This will
require a more thorough review of operations, strategies, financials, and other
aspects of the Target Company. This detail review is called "due diligence."
Specifically, Phase I Due Diligence is initiated once a target company has been
selected. The main objective is to identify various synergy values that can be
realized through an M & A of the Target Company. Investment Bankers now
enter into the M & A process to assist with this evaluation.
Phase 4 - Acquire through Negotiation: Now that we have selected our target
company, it's time to start the process of negotiating a M & A. We need to
develop a negotiation plan based on several key questions:
How much resistance will we encounter from the Target Company?
What are the benefits of the M & A for the Target Company?
What will be our bidding strategy?
How much do we offer in the first round of bidding?
The most common approach to acquiring another company is for both
companies to reach agreement concerning the M & A; i.e. a negotiated merger
will take place. This negotiated arrangement is sometimes called a "bear hug."
The negotiated merger or bear hug is the preferred approach to a M & A since
having both sides agree to the deal will go a long way to making the M & A
work. In cases where resistance is expected from the target, the acquiring firm
will acquire a partial interest in the target; sometimes referred to as a "toehold
position." This toehold position puts pressure on the target to negotiate without
sending the target into panic mode.
In cases where the target is expected to strongly fight a takeover attempt, the
acquiring company will make a tender offer directly to the shareholders of the
target, bypassing the target's management. Tender offers are characterized by
the following:
The price offered is above the target's prevailing market price.
The offer applies to a substantial, if not all, outstanding shares of stock.
The offer is open for a limited period of time.
The offer is made to the public shareholders of the target.
A few important points worth noting:
1-Generally, tender offers are more expensive than negotiated M & A's due to
the resistance of target management and the fact that the target is now "in play"
and may attract other bidders.
2-Partial offers as well as toehold positions are not as effective as a 100%
acquisition of "any and all" outstanding shares. When an acquiring firm makes a
100% offer for the outstanding stock of the target, it is very difficult to turn this
type of offer down.
Phase 5 - Post Merger Integration: If all goes well, the two companies will
announce an agreement to merge the two companies. The deal is finalized in a
formal merger and acquisition agreement. This leads us to the fifth and final
phase within the M & A Process, the integration of the two companies.
Every company is different - differences in culture, differences in information
systems, differences in strategies, etc. As a result, the Post Merger Integration
Phase is the most difficult phase within the M & A Process. Now all of a sudden
we have to bring these two companies together and make the whole thing work.
This requires extensive planning and design throughout the entire organization.
The integration process can take place at three level:
1. Full: All functional areas (operations, marketing, finance, human resources,
etc.) will be merged into one new company. The new company will use the
"best practices" between the two companies.
2. Moderate: Certain key functions or processes (such as production) will be
merged together. Strategic decisions will be centralized within one company,
but day to day operating decisions will remain autonomous.
3. Minimal: Only selected personnel will be merged together in order to reduce
redundancies. Both strategic and operating decisions will remain decentralized
and autonomous.
TAKEOVER:
General term referring to transfer of control of a firm from one group of shareho
lders to another group ofshareholders. Change in the controlling interest of a cor
poration, either through a friendly acquisition or anunfriendly, hostile, bid. A h
ostile takeover (with the aim of replacing current existing management) is usual
lyattempted through a public tender offer.
Example- In 2000,Tata Tea took over Tetley Tea, the company which was twice
Tata Tea’s size and had introduced the world to tea bags, for £271 million via a
leverage buyout. The move turned the company into the world’s second-largest
tea marketer. While Tata was strong on the production front, Tetley’s strengths
lay in marketing.
AMALGAMATION:
Amalgamation is an agreement (deal) between two or more companies to
consolidate (strengthen) their business activities by establishing a new company
having a separate legal existence.
1-Amalgamating companies are those two or more companies which willingly
unite (combine) to carry on their business activities jointly.
2-Amalgamated company is a newly formed union (alliance) of two or more
amalgamating companies. It has a separate legal existence with a new unique
name.
Two good examples of amalgamations are as follows:
1-Maruti Motors operating in India and Suzuki based in Japan amalgamated to
form a new company called Maruti Suzuki (India) Limited.
2-Tata Sons operating in India and AIA Group based in Hong Kong
amalgamated to form a new company called TATA AIG Life Insurance.
doc_516336567.docx