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Mergers & AcquisitionsMergers & Acquisitions

Strategic Tool for GrowthStrategic Tool for Growth

By: Ms. Chandni Sahgal

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M&A: Objectives, Effect and the Transaction itself

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CEOs’ Motives for Mergers

The Quest for “Bigness” Face Saving – To achieve pre-committed topline

goals Boredom and Monotonicity – Need a big deal to

allay Been there done that feeling Fear of Being left alone on the shelf Tit for tat – Matching rival’s moves

> Mobil merged with Exxon shortly after BP announced merger with Amoco

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Real Objectives of M&A

Higher Market Share leading to more Power in the Market> More or Complementary Customers> Geographical Expansion> Better or Complementary Technologies> Other industry specific factors like patents> Undervalued Talent

Economies of Scale Economies of Scope

> Synergy in the Vertical Chain (e.g. Content and Distribution in Media)

> Horizontal synergy (Complementary Work Profiles)

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Real Objectives of M&A

Globalization> Entry into foreign markets – Helps in lesser Time to

Market> Availability of Critical Resources

• Starbucks acquired London based Seattle Coffee Company that gave access to 61 Retail Stores across the city

> Defending Home Turf (Parle drinks with Coke) Growth in the era of Change

> Technological Changes in the Value Chain (e.g. Forced redundancy of elements in the chain)

> Changing Demography (e.g. Ageing of Customers in a particular category)

Essentially a “Make vs. Buy” decision !!

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M&A Effect on Shareholders’ Value – Slightly Positive

Series of studies on American firms since 1950> Modest Value Created by merged firms

• Various studies put down the figure in 5-7% range

> Most of the Value Accrues to Target> Multiple Bidding Creates twice as much value as

single bidding• High Value Creation Opportunities attract more bidders

> Mergers within same industry creates more value than Diversified Mergers.

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Foul!… Cry the Opponents

A Study* of 4136 American Mergers (1998-2001)> Combined value of Merged Firms falls by $134 Bn> Acquiring Firms lose 12 Cents on every Dollar spent

on acquisition• Aggregate loss of $240 Bn to Acquirers

> Next Worse 4-Year period of loss for acquirers• 1980-83, When Acquirers lost 2 Cents on every Dollar spent

*Source: Wealth Destruction on Massive scale, Journal of Finance

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The Silver Lining

Out of 4136 firms, 87 acquirers lost $1 Bn or more each> Combined loss to 87 firms was $397 Bn

All Other acquirers gain $157 Bn Many of the big loss deals were paid by Equity in

the times of a Stock-market boom> Suggests that over valued equity might have been

used to buy real assets> Boom time gave acquiring firms’ managers freedom

to make such deals

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Why some Mergers fail?

Overestimation of Synergies Neglect of dis-synergies like loss of customers. Under-estimation of one time costs needed to

produce synergies Competitive bidding and CEO’s Ego Cost cutting may not be effective or needed at all

in a high growth industry. The facilities shut might be required to re-open after a short while

Involvement of line managers may help in making better estimates

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While Making the Deal

Closely Examine your objectives. Are they worth a Merger?

Try to get other side’s objectives. It helps in realizing better terms of contract.

Typically, in a merger of unequals> Seller estimates Valuation on a going concern basis> Acquirer estimates on its Utility of Target. This is

usually higher than the going concern valuation.> It pays for the Seller to understand the true Utility to

Acquirer and negotiate the transaction value

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While Making the Deal

Due Diligence, done for> Verification of Claims> Assessment of feasibility of fulfilling objectives.> Exploring differences and possible hindrances

Deals Hinge on> Price> Acquisition of Assets, SBUs, debt and employee

liabilities> Tax arrangements and indemnities, SLAs etc.> The bridging arrangements for various functions and

staff in the intervening period> Regulatory Approvals and FDI Policies

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Making Mergers Successful

Merger Communication should be Candid and Consistent. Medium becomes the message itself.

It’s a Human issue. Deal it in a humane way Make the integration process a new nucleus for

evolution of Merged entity Identify conflicting values in pre-merger entities

and make Merger an opportunity to shed some of old baggage

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Alternative to M&A Alliance, when

> Companies are unwilling to sell> High Acquisition premium> Companies want to stay in business and gain scale

(Sony and Ericsson for mobiles)> Entering High risk markets or Next Generation

Technologies (High risk, probability of high return)> Scope of providing integrated solution

(Insurance and Retail Banking) Issues with Alliances

> Integration problems similar to those in large scale mergers

> Joint Ownership and thus clear division of responsibility is needed