Capital Mkt

CONTENTS

Mergers & Acquisitions

* Differential Efficiency & Financial Synergy: Theory of Mergers

* Operating Synergy & Pure Diversification: Theory of mergers

* Costs and Benefits of Merger

* Evaluation of Merger as a Capital Budgeting Decision

* Calculation of Exchange Ratio

Mergers & Acquisitions

When two or more companies agree to combine their operations, where one company survives and the other loses its corporate existence, a merger is affected. The surviving company acquires all the assets and liabilities of the merged company. The company that survives is generally the buyer and it either retains its identity or the merged company is provided with a new name.

Types of Mergers

1. Horizontal Mergers

2. Vertical Mergers

3. Conglomerate Mergers

Horizontal Mergers

This type of merger involves two firms that operate and compete in a similar kind of business. The merger is based on the assumption that it will provide economies of scale from the larger combined unit.

Example: Glaxo Wellcome Plc. and SmithKline Beecham Plc. megamerger

The two British pharmaceutical heavyweights Glaxo Wellcome PLC and SmithKline Beecham PLC early this year announced plans to merge resulting in the largest drug manufacturing company globally. The merger created a company valued at $182.4 billion and with a 7.3 per cent share of the global pharmaceutical market. The merged company expected $1.6 billion in pretax cost savings after three years. The two companies have complementary drug portfolios, and a merger would let them pool their research and development funds and would give the merged company a bigger sales and marketing force.

Vertical Mergers

Vertical mergers take place between firms in different stages of production/operation, either as forward or backward integration. The basic reason is to eliminate costs of searching for prices, contracting, payment collection and advertising and may also reduce the cost of communicating and coordinating production. Both production and inventory can be improved on account of efficient information flow within the organization.

Unlike horizontal mergers, which have no specific timing, vertical mergers take place when both firms plan to integrate the production process and capitalize on the demand for the product. Forward integration take place when a raw material supplier finds a regular procurer of its products while backward integration takes place when a manufacturer finds a cheap source of raw material supplier.

Example: Merger of Usha Martin and Usha Beltron

Usha Martin and Usha Beltron merged their businesses to enhance shareholder value, through business synergies. The merger will also enable both the companies to pool resources and streamline business and finance with operational efficiencies and cost reduction and also help in development of new products that require synergies.

Conglomerate Mergers

Conglomerate mergers are affected among firms that are in different or unrelated business activity. Firms that plan to increase their product lines carry out these types of mergers. Firms opting for conglomerate merger control a range of activities in various industries that require different skills in the specific managerial functions of research, applied engineering, production, marketing and so on. This type of diversification can be achieved mainly by external acquisition and mergers and is not generally possible through internal development. These types of mergers are also called concentric mergers. Firms operating in different geographic locations also proceed with these types of mergers. Conglomerate mergers have been sub-divided into:

* Financial Conglomerates

* Managerial Conglomerates

* Concentric Companies

Financial Conglomerates

These conglomerates provide a flow of funds to every segment of their operations, exercise control and are the ultimate financial risk takers. They not only assume financial responsibility and control but also play a chief role in operating decisions. They also:

* Improve risk-return ratio

* Reduce risk

* Improve the quality of general and functional managerial performance

* Provide effective competitive process

* Provide distinction between performance based on underlying potentials in the product market area and results related to managerial performance.

Managerial Conglomerates

Managerial conglomerates provide managerial counsel and interaction on decisions thereby, increasing potential for improving performance. When two firms of unequal managerial competence combine, the performance of the combined firm will be greater than the sum of equal parts that provide large economic benefits.

Concentric Companies

The primary difference between managerial conglomerate and concentric company is its distinction between respective general and specific management functions. The merger is termed as concentric when there is a carry-over of specific management functions or any complementarities in relative strengths between management functions.

ACQUISITIONS

The term acquisition means an attempt by one firm, called the acquiring firm, to gain a majority interest in another firm, called target firm. The effort to control may be a prelude

* To a subsequent merger or

* To establish a parent-subsidiary relationship or

* To break-up the target firm, and dispose off its assets or

* To take the target firm private by a small group of investors.

There are broadly two kinds of strategies that can be employed in corporate acquisitions. These include:

Friendly Takeover

The acquiring firm makes a financial proposal to