Mergers and Acquisitions Prepared by:Madhura Tilak Lecture 9 MADHURA TILAK

Sensible Reasons for Mergers: There are a number of reasons for mergers, why two companies may be worth more together, than when they are apart. These are given below: 1. Economies of Scale: For all Oil and Gas companies, scale of operations has been a driving force. Consider the examples of mergers of Exxon and Mobil, BP and Amoco, Chevron and Texaco. Same is the case with the steel giants Arcelor and Mittal. Economies are stated to accrue in terms of sharing central services such as procurement, accounting, financial control, human resources management and development, and top-level management and control. MADHURA TILAK

Sensible Reasons for Mergers: 2. Economies of Vertical Integration: Organizations seek to attain economies by moving both forward (towards the customer) and backward (towards supplies of raw materials and inputs). Reliance Industries is a classic case, as it set up its polymer plants to cater to its textile operations, moved back further to set up petroleum refinery and then moved forward to set up its own outlets for petroleum products. The current trend of all metallurgical companies such as Tata Steel, SAIL, JSW Steel, Vedanta and Hindalco to acquire mines across the globe is a classic example. MADHURA TILAK

Sensible Reasons for Mergers: Tata Steel’s acquisition of Corus in UK was stated to enable the company move up the value chain in terms of superior products. The rationale for Tata Motors’ recent acquisition of Jaguar and Land Rover was stated to be on similar lines, i.e., moving up the value chain. Tata’s earlier acquisition of Tetley was to get access to the high tea-consuming Europe. Tata Chemicals recent acquisition of General Chemicals of US was due to a number of Reasons. MADHURA TILAK

Sensible Reasons for Mergers: 3. Complementary Resources: When two companies have complimentary resources, that is each having what the other needs, they may see some logic to come together. The recently announced decision of HP to acquire EDS appears to be for theses reasons. MADHURA TILAK

Sensible Reasons for Mergers: 4. Investible Surplus Funds: When organizations have investible surplus funds, that had not been distributed to the shareholders as higher dividends or bonus stocks, they look for investment opportunities. Organizations that have excess cash and do not payout to their shareholders or invest it through acquisitions, may become targets of take-over. MADHURA TILAK

Sensible Reasons for Mergers: 5. Eliminating Inefficiencies: Organizations with unexploited opportunities to cut costs and improve revenues become take-over targets of organizations with better management. Consider Tata Motors’ recent acquisition of Jaguar and Land Rover: “The key here is the ability of Tata Motors to implement cost savings at JLR. What will help assess the long-term impact of the acquisition on the profitability of Tata Motors is how much of the marquee brands’ component sourcing can actually be done from India, …. MADHURA TILAK

Advantages and limitations of growth through mergers: While a wide range of capabilities may be added immediately, synergy estimates may turn out to be over-optimistic, and premiums paid may be excessive. Implementation of combining different organizations and cultures may not be successfully achieved. However, high-quality management, experienced with acquisition activity, increases the probability of success. MADHURA TILAK

Theories of Mergers & Acquisitions: There are three major theories of Mergers & Acquisitions: 1. Synergy or Efficiency: In this theory, the total value from the combination is greater than the sum of the values of the component companies operating independently. 2. Hubris: The result of the winner’s curse, causing bidders to overpay. It is possible that value is unchanged. 3. Agency: The total value here is decreased as a result of mistakes or managers who put their own preferences above the well-being of the company. While the target company always gains, the acquirer gains when synergy accrues from combined operations, and loses under the other two theories. The total value becomes positive under synergy, becomes zero under the second, and becomes negative under the third. MADHURA TILAK

ECONOMIES OF SCALE Reduction in cost per unit resulting from increased production realized through operational efficiencies. Economies of scale can be accomplished because as production increases cost of producing each unit falls. MADHURA TILAK