1. Mergers and Acquisitions
Madhura Tilak
MADHURA TILAK

2. Rationale for Mergers and Acquisitions
1. Increased Market power:
The Primary reason for M&A is their desire to increase their market power.A firms gain market power,when it is able to sell its goods or services at a price lower than competitors or cost of producing the product or service is much less as compared to its competitors.
A firm may have core competencies but may lack required resources & size to compete in market.So most M&A takes place with intention of increasing market power target competitors,suppliers, distributors or businesses in related industries.May go from ay 3 types of mergers.
MADHURA TILAK

3. 2. Overcoming Entry Barriers:
When firms try to enter new markets they often face many problems,some of which may act as barriers to its entry.
Well established firms may sell their products and services in large volumes thereby gaining economies of scale.Economies of scale becomes a barrier to entry.
MADHURA TILAK

4. Economies are stated to accrue in terms of sharing central services such as procurement, accounting, financial control, humanresources management and development, and top-level management and control.
MADHURA TILAK

5. Another barrier that a new entrant faces is “Product Loyalty”.
2. Contd.
Another barrier that a new entrant faces is “Product Loyalty”.
Creating enduring relationships with customers leads to product loyalty which may be difficult to overcome by a new entrant.
Also,a new entrant has to spend huge amt.on advertising.M&A can be taken to overcome this barriers.
MADHURA TILAK

6. 3. Cost of New Product Development:
Developing new products and launching them successfully in market requires commitment of firms resources & return on Investment may take long time.
Firms prefer M&A to avoid internal costof developing new products.Also,M&A reduce risk with launch of new product,as product is already tested in market.
MADHURA TILAK

7. 3.Contd.
Pharmaceutical co.’s use M&A to gain quick entry into market &overcomehigh cost of pro.devp.As patents on many key drugs expire after certain period ,firm which donot have strong R&D center are likely to be left behind.M&A is better option preferred.
MADHURA TILAK

8. 4.Increased Speed to market:
M&A leads to faster market entrywhen compared to time taken for New product development.
Research has shown M&A are the quickest route to mew markets & new capabilities.
MADHURA TILAK

9. 5. Lower Risk compared to developing new products:
Managers view M&A as risk free method of getting entry into new markets.
MADHURA TILAK

10. 6. Increased Diversification:
Firms generally find easy to develop &introduce new products in market,in which they have some experience.On the Contrary---If firm launches product that has no relation to its existing portfolio of products ,there are lower chances of success.
So to diversify ,firms would prefer M&A route.
MADHURA TILAK

11. M&A can be used for both related & unrelated diversification.
6. contd.
M&A can be used for both related & unrelated diversification.
M&A are more common when firms want to diversify on global level.
MADHURA TILAK

12. Many MNC engaged in production of Household Appliances Industry used M&A excessively to diversify their product portfolio in India.
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13. Case-M&A in Household Appliances Industry limited.(given)
Two renowned MNC catering to household appliances goods market—Whirlpool and Electrolux have used M&A as mode of entry into Indian market.
MADHURA TILAK

14. 7. Reshaping the firms competitive scope:
To reduce the negative effect of competition and reduce their dependence on single product or few products, firms acquire other firms.To avoid dependence on single product ,many firms venture into new industries through Acquisition.
MADHURA TILAK

15. Reasons for Cross Border M&A
1. Growth
2.Technology
3.Govt. policy
4. source of raw materials
5.Differential labor costs, productivity.
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16. 1. Growth:
Growth is primary motivating factors for cross border M&A .M&A provide an opportunity for firms to grow fast.
Firms which have operations in one particular co.may not have cost advantage because of limited sales.If the operations are expanded to other countries due to economies of scale firm can get cost advantage.
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17. 2. Technology: A firm which lacks technological advantage may go for M&A to gain access to superior technology of acquired firm,the acquirer can improve its competitive position and profitability both at home and abroad.
MADHURA TILAK

18. 3. Differential labor costs, productivity:
Labor costs comprises a significant portion of cost of production.
Many MNC go for M&A to take advantage of availability of cheap labor.It is because of this reason many MNC are heading towards developing countries like India and China to set up their manufacturing bases.
Higher productivity of labor also influences cross border M&A.
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19. Example: HLL Growth through M&As : A list of HLL’s M&A is given.
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20. Govt.policy:
Govt.policies and regulations relating to tariffs etc. can have major impact on M&A.
If a country imposes tariffs to protect its domestic industry,exports will suffer.The threat of such restrictions
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21. THEORIES OF MERGERS AND ACQUISITIONS
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.
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22. 2. Hubris:
The result of the winner’s curse, causing bidders to overpay. It is possible that value is
unchanged.
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23. preferences above the well-being of the company.
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