Mergers and Acquisitions Madhura Tilak MADHURA TILAK

Mergers and acquisitions have become the most frequently used methods of growth for companies in the twenty first century. They present a company with a potentially larger market share and open it up to a more diversified market. MADHURA TILAK

A merger is considered to be successful, if it increases the acquiring firm’s value; most mergers have actually been known to benefit both competition and consumers by allowing firms to operate more efficiently. MADHURA TILAK

The merger between JP Morgan Chase and Bank One presented JP Morgan Chase with the opportunity to expand its perspective through providing the firm with access to retail banking markets and clientele in the regions where its previous exposure had been virtually inexistent. The merger gave the firm that extra growth and competitive edge that it was looking for to compete with Citigroup and other rivals. MADHURA TILAK

Research has shown, that due to increasing advances in technology and banking processes, which make transactions, among other aspects of business, more effective and efficient, mergers and acquisitions have become more frequent today then ever before. MADHURA TILAK

In the world of growing economy and globalization, major companies on both domestic and international markets struggle to achieve the optimum market share possible. Every day business people from top to lower management work to achieve a common goal – being the best at what you do, and getting there as fast as possible. MADHURA TILAK

As companies work hard to beat their competitors they assume various tactics to do so. Some of their tactics may include competing in the market of their core competence, thus, insuring that they have the optimal knowledge and experience to have a fighting chance against their rivals in the same business; hostile takeovers; or the most popular way to achieve growth and dominance – “mergers and acquisitions”. MADHURA TILAK

At times, a merger or an acquisition simply makes a company larger, expands its staff and production, and gives it more financial and other resources to be a stronger competitor on the market. MADHURA TILAK

Term "acquisition" tends to be used when a larger firm absorbs a smaller firm, and "merger" tends to be used when the combination is portrayed to be between equals. In case of a merger between two firms that are approximately equal, there often is an exchange of stock in which one firm issues new shares to the shareholders of the other firm at acertain ratio. MADHURA TILAK

An article which was published by the Federal Trade Commission (FTC) noted that the United States is heavily involved in the so called right "merger wave.“ The number of mergers reported rose from “1,529 in 1991 to a record 3,702 in a 142 percent jump.” MADHURA TILAK

The topic of mergers is extremely controversial at times and involves a great number of legal aspects in order for any merger to become finalized. Most mergers have actually been known to benefit both competition and consumers by allowing firms to operate more efficiently. MADHURA TILAK

However, it has to be noted that some mergers and acquisitions have the capacity to decrease competition. This is very dangerous for both us, the consumers, and the companies on the market, because declines in competition may cause higher prices, decreased availability of goods or services, products of lower quality, as well as declines in innovation. MADHURA TILAK

This is mainly due to some companies merging and creating a more concentrated market, with fewer suppliers, which leads to fewer options for the consumers, and thus gives some companies the advantage of raising prices since the consumers have no other choice of suppliers. MADHURA TILAK

Merger: MERGER:-When two or more companies combine into one company. one or more companies may merge with an existing company or they merge to form a new company. In merger there is complete amalgamation of assets and liabs.as well as shareholders interest & business of merging co. MADHURA TILAK

Section 21 (A) of Income Tax Act 1961 defines Amalgamation as merger of one or more companies(called Amalgamating co.)with another co.(called Amalgamated co.)or Merger of two or more co’s to form new co. in such a way that all assets and liabs.of amalgamating co. become assets and liabs. of Amalgamated co. MADHURA TILAK

ACQUISITION:- Acquisition defined as an act of acquiring effective control over assets or management of co. by another co.without any combination of business or co’s. The purchase of an asset such as plant,division,or even entire co. MADHURA TILAK

Example: Procter & Gamble made a major acquisition in 2005 when it purchased The Gillette Company, in order to extend its reach in the consumer products industry. MADHURA TILAK

Mergers or Amalgamation may take two forms: Merger through Absorption Merger through Consolidation MADHURA TILAK

Mergers through Absorption: Absorption is a combination of two or more co’s into an existing co. All co’s except one lose their identity in a merger through Absorption. MADHURA TILAK

Example: Tata Fertilizers ltd. By Tata Chemicals ltd. Here TCL an acquiring co.(buyer), survived after merger while TFL, an acquire co.(Seller) Ceased to exist. TFL (seller)transferred its assets, liabs.,and Shares to TCL (buyer). MADHURA TILAK

Merger through Consolidation: Consolidation is the combination of two or more co’s into a new co. In this form of Merger,all co’s are legally dissolved and new entity is created. MADHURA TILAK

Example: Consolidation is merger/consolidation of Hindustan Computers ltd., Hindustan instruments ltd., Indian Software Co. ltd., Indian Reprographics ltd., in 1986 to an entirely new co. called HCL ltd. MADHURA TILAK

Going deeper into the subject of mergers, it is important to present and distinguish between three kinds of mergers: Horizontal mergers, vertical mergers, and potential competition or conglomerate mergers. MADHURA TILAK

Horizontal Merger: This is a combination of two or more firms in similar type of production, distribution,or area of business. Examples: Combining of two book publishers or two luggage manufacturing companies to gain dominant market share. MADHURA TILAK

Horizontal merger is an acquisition of a competitor with an intention to increase the market concentration, and often also to increase the probability of collusions. A vivid example of this was Staples’ attempt to merge with Home Depot. (not carried out) MADHURA TILAK

Vertical merger can impair competition by preventing other companies who use the same suppliers or distribution channels to operate normally. If companies A, B, and C both use supplier Y and no other effective supplier exists, and company A merges with supplier Y, this forces companies B and C out of business, because they have lost their connection with supplies Y. Company A has thus eliminated two of its competitors, companies B and C. MADHURA TILAK

Vertical Merger: This is a combination of two or more firms involved in the different stages of production. For Example: Joining of a T.V manufacturing (assembling )co. and a T.V marketing co. OR Joining of a spinning Co. and a Weaving Co.OR Joining of Car Manufacturing Spares co. and Car Marketing co. MADHURA TILAK

Vertical Merger may take a form of forward merger or backward merger. When it combines with a supplier of material it is called Backward merger. When it combines with a customer it is known as forward merger. MADHURA TILAK

Conglomerate Merger: This is a combination of the firms engaged in unrelated lines of business activity. A typical example is merging of different businesses like manufacturing of Cement products, fertilizers products, electronic products, insurance investment and advertising agencies. MADHURA TILAK

VOLTAS Ltd. is an example of a Conglomerate Merger. MADHURA TILAK

Mergers and Acquisitions Trends in India: Economic reforms and Deregulation of the Indian economy has brought in more domestic as well as international players in Indian Industries. M & A is a part of the restructuring strategy of Indian Industries. MADHURA TILAK

The First M & A wave in India took place towards the end of 1990s. The substantial growth in the M & A activities in India occurred in The total number of M & A deals in was estimated 1117 which is 54% higher than the total number of deals in MADHURA TILAK

Year Number Amount(Rs. in crore) MADHURA TILAK

Ref:Table 1 The amount involved in deals has shown variation; after falling to Rs crore in , the amount increased to Rs crore in MADHURA TILAK

Table 2: Shares of mergers in M & A in India: Year M & A Merger % % % % % % % MADHURA TILAK

The total mergers in was 284,down from 381 mergers in the previous period. From data in table 2, it appears that mergers account for around one-third of total M & A deals in India. It implies that acquisitions are the dominant feature of M & A activity in India, similar to the trend in most of the developed countries. MADHURA TILAK

Motives and Benefits of M &A Why do mergers take place? It is believed that me in mergers and acquisitions are strategic decisions leading the maximization of Company’s growth by enhancing its Production and Marketing operations. MADHURA TILAK

They have become popular in recent times because of enhanced competition,free flow of capital across countries and globalization of business. Mergers & Acquisitions are intended to: Limit Competition Overcome the problem of slow growth and profitability in one’s own industry. MADHURA TILAK

Achieve Diversification Utilise under- utilised resources—human and physical and managerial skills. Displace existing management. Other imp. Adv.: Maintaining or accelerating co’s growth --- particularly when the internal growth is constrained due to paucity of resources. MADHURA TILAK

Enhancing profitability. Limiting the severity of competition by increasing the co’s market power. Reduction in Tax liability—because of the provision of setting off accumulated losses of one company against the profits of another. MADHURA TILAK