MERGERS & DEMERGERS ARE THE TWO SIDES OF THE SAME COIN.

By:Jagadisha

Behura

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What does it specify:

1. Mergers.2. Reasons for Mergers.3. Types of Mergers.4. Examples of Mergers.5. Mergers & Demergers.6. What is Demerger actually? 7. Reasons for Demergers.8. Demergers in India.9. Conclusion.10. Research work.

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Mergers

A merger is a transaction that results in the transfer of ownership and control of a corporation.

Merger, which is adopted by the corporate world forged so as to achieve growth for the company as whole, in other words- union of two or more commercial interest, cooperative, undertakings, bodies or any other entities.

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Possible Reasons for Mergers/Takeovers

Synergy: The combined company is worth more than the sum of its parts. This includes cost reductions by removing duplicate departments. M&A means job losses!

Economies of scale: Better deals because of increased order size, bulk-buying discounts etc.

Increased revenue and market share: Increased size of the combined company increases market power and ability to set higher prices.

Cross-selling: This is when the two companies involved in the deal sell each others products and services, increasing sales.

Diversification: This helps smooth the earnings results of a company, which over the long term, is rewarded by a higher share price.

Acquiring unique capabilities and resources: Sometimes it’s simply impossible for a company to create the technology, resource etc it needs to sustain its growth. It can be a lot simpler to just buy it.

International Expansion: Acquiring a local competitor helps to get over culture issues, government policy, regulation and other issues related to international expansion. 11/17/2011

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3 Types of MergersEconomists distinguish between three types of mergers:

1. Horizontal

2. Vertical

3. Conglomerate

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1.Horizontal mergers

When the merger of such  two or more companies takes place which produce the similar kinds of products  and compete directly with each other. The merger of sick companies results “in the elimination of duplication of facilities and operations and broadening the product line, reduction in the finance for working capital, widening the market area and reducing unhealthy competition.”

Examples: AirIndia-Indian Airlines; Boeing-McDonnell Douglas; Staples-Office Depot(unconsummated); Chase Manhattan-Chemical Bank; Southern Pacific RR-Sante Fe RR; Pabst-Blatz; LTV-Republic Steel; Konishiroku Photo-Minolta; Arcellor with Mittal Steel.

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27th feb 2011

NACIL

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2. Vertical or streaming Mergers:

The process of vertical mergers are essentially a method of backward integration where the object is to ensure that the inputs of raw material are seamlessly available by merging the sources of their production with the main company which improves the efficiency of the merged entity besides also ensuring an outlet for the goods produced in the in the merged company.

Examples: Time Warner-TBS; Disney-ABC Capitol Cities; Cleveland Cliffs Iron-Detroit Steel; Brown Shoe-Kinney, Ford-Bendix.

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Time Warner: cable operationTBS: TV programming (CBS, CW, The abc

etc.)10th Oct 1996

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3. Conglomerate Mergers

When two or more companies carrying out different businesses merge with each other to diversify the product profile and thus ensure that the earnings are greater with the availability of resources and technology as well as staff that can ensure better productivity of the merged company. Perhaps the most important aspect of diversification is the aim to make the company simply too large to avert the threats of take over by other rival companies.

Examples: Cardinal Healthcare-Allegiance; AOL-Time Warner; Phillip Morris-Kraft; Citicorp-Travelers Insurance; Pepsico-Pizza Hut; Proctor & Gamble-Clorox. 11/17/2011

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Intel and McAfeeAug 2011

Conglomerate merger

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Ryannair attempts to takeover Aer Lingus

Failed mergers:

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Microsoft attempts to acquire Yahoo!

In the Microsoft Vs Yahoo! takeover battle, Microsoft had their initial offer of $31 a share, a 62% premium on Yahoo!’s pre-offer price, rejected,

so they offered $33. But Microsoft resolutely refused to go any higher and in the end gave up.

Failed mergers:

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Why mergers sometimes don’t workExperts’ surveys suggest that over 75% of

mergers/acquisitions fail to achieve the benefits which they are supposed to.

Sometimes businesses ‘demerge’ - split into two or more independent businesses.

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What is Demerger actually?

What does it specify?

Demerger as the name suggest converse of Merger/Acquisition, where the shareholders or owner of the parent company gains direct ownership of the demerged entity .Or in other words Demerger refer to the process of the separation of companies or Business units which are operating under one single umbrella.In simple words when one company, say X Ltd. having 10 undertakings, transfers one or more of its undertakings to a new company, say Y Ltd., it is a case of demerger. X Ltd. is the demerged company and Y Ltd. Is the resulting company.

“JOINT FAMILY” Vs. “NUCLEAR FAMILY”

All know that a Joint family have lots of advantages regarding all round development of a child ,sharing of thoughts and emotions with each other ,economies of scale by sharing expenses and savings with each other ,better capability to adjust with unforeseen circumstances and many more .But it is also true that all that sounds well is not necessary well all times. So the popular proverb —

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"Two utensils bought together will definitely produce sound"

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The same theory may apply here to the process of demerger. But this is probably one of the reason for Demerger.

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Reasons for Demergers

Lack of Synergy and Diseconomies of ScaleSynergy is the belief that the merging of two or more firms will have a greater outcome than the sum of the two individual firms. 1+1=3

In reality there may not be this synergy – the two combined businesses do not impact on each other positively. There could be diseconomies as managers have to divide their time between two businesses which have little to do with each other11/17/2011

Diseconomies of Scale

LACCosts

Output

Economies of Scale

Diseconomies of Scale

Said to occur when long-run average

cost rises as output increases

Common source: ManagementAs the business grows it gets more complex

Minimum efficient scale

Productive efficiency

The level of output at which

long-run average cost stops falling

as output increases

Reasons 4 Demerger

1. Inability to maximize return, thus giving chance for others.2. Correction of To adjust with changing economic and political conditions.3. Parent company's any false investment decision made regarding stepping into a totally different field of no expertise.4. To raise capital gains from the assets acquired at the time of underperformance of the entity.5. Utilization of financial and human resources for better profitable opportunities compared to the prevailing entity.6. Selling of unwanted surplus in the business thereby carrying out the restructuring/reorganization strategy and get rid of the sick entity.7. One more reason for demerger can be facilitating Indian entity to get demerged from the foreign entity with whom it has merged before so that foreign company draws out its investment.

Reasons 4 Demerger

8. Maximization of shareholder's value -since it is felt that the value of the business when separated will be more than the value of the group.9. To Focus more on the activities of various business units which is not possible by the giant corporate.(Similar to the proposition of forming a separate state for better administration and development —Jharkand and Bihar ).10.To get relief from strict government regulations which the entity may face before demerger as a result of other business.11. Rating of the corporate becomes an easy affair relating to the specific business in which they have the expertise.12. Changes in IT act 1999, which have made demergers tax neutral have motivated the companies to go for demergers 13. Split between family members lead to the demerger gaining its importance thereafter.Reasons are unending and continue………..

Demergers in INDIA:

Demerger of Dabur India in July 2003 —FMCG group and Pharma group.

Beneficial for both the group — After demerger FMCG Group registered a compounded annual sales growth of around 12 per cent over the past three years, with net sales of Rs. 1,048.5 crore and net profit of Rs.72 crore in 2002-03.For The pharmacy business, on the other hand, net sales have doubled in three years . This division reported a net profit of Rs 13.1 crore on net sales of Rs 184 crore in 2002-03.There after Dabur Pharma have not looked behind — development came one by one by strategic alliance with Abbott Laboratories for generic oncology products in the United States, November 03, 2003.Followed by Dabur Pharma Acquiring Sales & Distribution Business in Thailand- January 09, 2007 , Agreement with Spanish market — Oct 2007, launch of Irinotecan injection in Italy & Denmark —march 11 2008 and many more .

Reliance industries —Demerger— August 2005Reliance Industries, which focuses on exploration and production (E&P),refining and retailing, and petrochemicals is under the chairmanship ofMIukesh Ambani and his younger brother Anil took charge of businessescomprising Reliance Communication Ventures, Reliance Energy Ventures,Reliance Capital Ventures, and Reliance Natural Resources.The reason probably was rift between brothers but the move hasbenefited both.Earlier Reliance was basically into industrial products but now withdemerger it has entered into other segments like reliancetelecommunication with a vision to bring mobile communication to postcard cost .And other privates are fighting back to break the imagewhich Reliance mobile have created in the mind of customers by theslogan "kalo Duniya Mutthi Me".Even the newer entity under Anil Ambani is trying to tap the untapped food processing segment. Also RIL is making its way into retail industries by developing a model of promoting partnership with farmers, logistic operations, small shopkeepers, traders. The demergers have not affected Mukesh’s Petrochemical business.

L & T(Larsen & Toubro) – demerger- 2004Demerger of L & T cement division to a new entity

CEMCO. The demerger process need to take place in 3 steps.In the 1st phase L & T would hive off the cement business into a separate company, Ultra Tech Cemco, where it hold 20% the balance 80% will be held by he existing L & T shareholders proportionately.In the second phase, Grasim will buy 8.5 per cent in CemCo from L &T at Rs. 342.60 per share and make an open offer for another 30 per cent at the same price.If fully subscribed, the open offer will make the Aditya Birla group's holding in CemCo to 51 per cent and L&T will realize Rs. 362 crores on sale of its stake in Ultra Tech CemCo.In the third step, L &T Employee Welfare Foundation will acquire the Birla's 15.3 per cent stake in the residual engineering company.

Various other demergers have taken a row Great Eastern Shipping, which is demerging its offshore business; Eveready Industries separated its tea business into McLeod Russell; Auto ancillary company Rane Madras transferred its investments into separate company and the investment company was also listed. The demerger list also includes Vardhman Spinning and Morarjee Realities. Also demergers of Bajaj Auto group are on the process. Gabriel Indiais also looking at demerging its engine bearings division and may also sell its Mumbai property. Cairn India on the reorganization of Cairn Energy PLC's Indian business prior to flotation.

Mergers & Demergers- 2 parts of the same coin

Merger and Demerger can be rightly described as the head and tail part of the same coin. The demerger process is now gaining importance more and more because of the added benefits, so corporate are not only interested in going for mergers but also are opting for demergers. Mergers have many advantages ,so there is always a question when 2 big giant joining hands bring fruitful result to the entity formed then why the need for demerger.But there is also an answer to this -- joining is not always better than disjoint and this can be proved by the help of some live examples where bigger giants have disjointed into several segments and the result is very outstanding . Our point is how demerger have been a success and is going to gain more and more success in long run.

ConclusionSo now trend is changing,after the long merger process taking place ,demerger is now taking its seat .The main aim behind demerger is to concentrate on the specific business in which they have expertise and allow other business units to raise their own capital .Also we are aware of the concept of "shareholder wealth maximization" which is thereby enhanced more due to demergers than by mergers.

Despite the challenges, mergers and demergers are the two tools that hold an answer to the Indian corporate community’s thirst and relentless enterprise for a global presence today. Today, as the waves of globalization are lashing at the doors of an ever prospering Indian economy and drowning it in an insatiable appetite to develop and become an economic superpower, mergers and demergers could well be the magical talisman for India Inc. to achieve its dreams.

Thus mergers & demergers sound like the opposite sites of a coin but iin the resultant they r the same, they only see one conclusion- PROFIT and more PROFIT in the business.

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Merger and Demerger Research

Each of the following are planned or completed mergers/demergers. For each of them research:

The reasons for the merger (EG growth, economies of scale)

The type of integration (EG horizontal or vertical)Was it agreed or hostile?How did stakeholders react e.g employeesFor mergers that did not complete, what was the

reasonBritish Airways and Iberia

Kraft and CadburysAsda and Netto

L’Oreal and Body ShopVodafone and Mannersmann

ICI and Zenneca Fosters sells off wine businessBoots and Dolland & Aitchison

Daimler and Chrysler

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BibliographyInternetWikipediaTimes of NewyorkEconomic Times of India

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