Final Print IB

8/2/2019 Final Print IB

1/12

1

AN ASSIGNMENT

ON

PRACTICAL APPLICATION WITH REFERENCE TO INVESTMENT

BANKING

STUDY OF

ANALYSIS OF REASONS FOR FAILURE OF

MERGER & ACQUISITION

FACULTY GUIDE: SUBMITTED BY:

PROF. PINAKIN JAISWAL AVINASH SOLANKI 43

NITIN AHIR 44

SECTION : A

M.B.AII, SEMESTER - IV

DR. J. K. PATEL INSTITUTE OF MANAGEMENTVADODARA

PARUL GROUP OF INSTITUTES

AFFILIATED TO

GUJARAT TECHNOLOGICAL UNIVERSITY


2/12

2

INTRODUCTION :-

* Mergers and acquisitions (abbreviated M&A) refers to the aspect of

corporate strategy, corporate finance and management dealing with the buying,selling, dividing and combining of different companies and similar entities that

can help an enterprise grow rapidly in its sector or location of origin, or a new field

or new location, without creating a subsidiary, other child entity or using a joint

venture. The distinction between a "merger" and an "acquisition" has become

increasingly blurred in various respects (particularly in terms of the ultimateeconomic outcome), although it has not completely disappeared in all situations.

Merger

Merger is primarily a strategy of

inorganic growth.

Example:

Indias largest private sector

corporate entity Reliance Industries

Limited (RIL) is indeed a result ofmany mega mergers of groupcompanies into RIL.

It involves combination of all the assets, liabilities, loans, and businesses (on a going

concern basis) of two (or more) companies such that one of them survives.
http://wiki/Managementhttp://wiki/Managementhttp://wiki/Companieshttp://wiki/Legal_personhttp://wiki/Legal_personhttp://wiki/Legal_personhttp://wiki/Companieshttp://wiki/Management


3/12

3

Acquisition :-

An acquisition is the purchase of one business or company by another company orother business entity. Consolidation occurs when two companies combine together

to form a new enterprise altogether, and neither of the previous companies survives

independently. Acquisitions are divided into "private" and "public" acquisitions,

depending on whether the acquireee or merging company (also termed a target) is

or is not listed on public stock markets. An additional dimension or categorization

consists of whether an acquisition isfriendlyorhostile.

Achieving acquisition success has proven to be very difficult, while various studieshave shown that 50% of acquisitions were unsuccessful

.The acquisition process is

very complex, with many dimensions influencing its outcome

Whether a purchase is perceived as being a "friendly" one or a "hostile" depends

significantly on how the proposed acquisition is communicated to and perceived by

the target company's board of directors, employees and shareholders. It is normal

for M&A deal communications to take place in a so-called 'confidentiality bubble'

wherein the flow of information is restricted pursuant to confidentiality agreementsIn the case of a friendly transaction, the companies cooperate in negotiations; in

the case of a hostile deal, the board and/or management of the target is unwilling to

be bought or the target's board has no prior knowledge of the offer. Hostile

acquisitions can, and often do, ultimately become "friendly", as the acquiror

secures endorsement of the transaction from the board of the acquiree company.

This usually requires an improvement in the terms of the offer and/or through

negotiation.

"Acquisition" usually refers to a purchase of a smaller firm by a larger one.

Sometimes, however, a smaller firm will acquire management control of a larger

and/or longer-established company and retain the name of the latter for the post-

acquisition combined entity. This is known as areverse takeover. Another type of

acquisition is the reverse merger, a form of transaction that enables a private

company to be publicly listed in a relatively short time frame.
http://w/index.php?title=Stock_listing&action=edit&redlink=1http://wiki/Takeover#Friendly_takeovershttp://wiki/Takeover#Friendly_takeovershttp://wiki/Takeover#Friendly_takeovershttp://wiki/Takeover#Hostile_takeovershttp://wiki/Takeover#Hostile_takeovershttp://wiki/Takeover#Hostile_takeovershttp://wiki/Board_of_directorshttp://wiki/Board_of_directorshttp://wiki/Bargaininghttp://wiki/Reverse_takeoverhttp://wiki/Reverse_takeoverhttp://wiki/Reverse_takeoverhttp://wiki/Reverse_mergerhttp://wiki/Reverse_mergerhttp://wiki/Private_companyhttp://wiki/Private_companyhttp://wiki/Private_companyhttp://wiki/Private_companyhttp://wiki/Reverse_mergerhttp://wiki/Reverse_takeoverhttp://wiki/Bargaininghttp://wiki/Board_of_directorshttp://wiki/Takeover#Hostile_takeovershttp://wiki/Takeover#Friendly_takeovershttp://w/index.php?title=Stock_listing&action=edit&redlink=1


4/12

4

A reverse merger occurs when a privately held company (often one that has strong

prospects and is eager to raise financing) buys a publicly listed shell company,

usually one with no business and limited assets

* Acquisition :-

Acquisition is an attempt or a process by which a company or an individual

or a group of individuals acquires control over another company called

target company.

Acquiring control over a company means acquiring the right to control its

management and policy decisions.

It also means the right to appoint (and remove) majority of the directors of a

company.

In acquisition, the target companys identity remains intact.

Ways to acquire a control over a company (a target company):

By acquiring ,i.e. purchasing a substantial percentage of the voting capital

of the target company.

By acquiring voting rights of the target company through power of

attorney or through a proxy voting arrangement.

By acquiring control over an investment or holding company , whether

listed or unlisted, that in turn holds controlling interest in the target

company.


5/12

5

By simply acquiring management control through a formal or informal

understanding or agreement with the existing person (s) in control of the

target company.

Acquisition of a target company through acquisition of its shares

The most common method is to acquire i.e. purchase substantial voting capital

(i.e. equity capital) of the target company.

What percentage would be considered as adequate to qualify as controlling

interest?

To understand that, one should understand various levels or degrees of

control that are relevant.

This unreferenced section requires citations to ensure verifiability.

The buyer buys the shares, and therefore control, of the target company

being purchased. Ownership control of the company in turn conveys

effective control over the assets of the company, but since the company is

acquired intact as a going concern, this form of transaction carries with it all

of the liabilities accrued by that business over its past and all of the risks thatcompany faces in its commercial environment.

The buyer buys the assets of the target company. The cash the target

receives from the sell-off is paid back to its shareholders by dividend or

through liquidation. This type of transaction leaves the target company as an

empty shell, if the buyer buys out the entire assets. A buyer often structures

the transaction as an asset purchase to "cherry-pick" the assets that it wants

and leave out the assets and liabilities that it does not. This can be
http://wiki/Wikipedia:Citing_sourceshttp://wiki/Wikipedia:Verifiabilityhttp://wiki/Going_concernhttp://wiki/Empty_shell_(corporation)http://wiki/File:Question_book-new.svghttp://wiki/Empty_shell_(corporation)http://wiki/Going_concernhttp://wiki/Wikipedia:Verifiabilityhttp://wiki/Wikipedia:Citing_sources


6/12

6

particularly important where foreseeable liabilities may include future,

unquantified damage awards such as those that could arise from litigation

over defective products, employee benefits or terminations, or

environmental damage. A disadvantage of this structure is the tax that many

jurisdictions, particularly outside the United States, impose on transfers of

the individual assets, whereas stock transactions can frequently be structured

as like-kind exchanges or other arrangements that are tax-free or tax-neutral,both to the buyer and to the seller's shareholders.

The terms "demerger", "spin-off" and "spin-out" are sometimes used to

indicate a situation where one company splits into two, generating a secondcompany separately listed on a stock exchange.

As per knowledge-based views, firms can generate greater values through

the retention of knowledge-based resources which they generate andintegrate. Extracting technological benefits during and after acquisition is

ever challenging issue because of organizational differences. Based on the

content analysis of seven interviews authors concluded five following

components for their grounded model of acquisition:

1. Improper documentation and changing implicit knowledge makes it difficult

to share information during acquisition.

2. For acquired firm symbolic and cultural independence which is the base of

technology and capabilities are more important than administrative

independence.3. Detailed knowledge exchange and integrations are difficult when the

acquired firm is large and high performing.

4. Management of executives from acquired firm is critical in terms of

promotions and pay incentives to utilize their talent and value their

expertise.

5. Transfer of technologies and capabilities are most difficult task to manage

because of complications of acquisition implementation. The risk of losing

implicit knowledge is always associated with the fast pace acquisition.

* Distinction between mergers and acquisitions

The terms merger and acquisition mean slightly different things. The legal

concept of a merger (with the resulting corporate mechanics, statutory

merger or statutory consolidation, which have nothing to do with the
http://wiki/Demergerhttp://wiki/Corporate_spin-offhttp://wiki/Spin-outhttp://wiki/Spin-outhttp://wiki/Corporate_spin-offhttp://wiki/Demerger


7/12

7

resulting power grab as between the management of the target and the

acquirer) is different from the business point of view of a "merger", which

can be achieved independently of the corporate mechanics through

various means such as "triangular merger", statutory merger, acquisition, etc.

When one company takes over another and clearly establishes itself as the

new owner, the purchase is called an acquisition. From a legal point of view,

the target company ceases to exist, the buyer "swallows" the business andthe buyer's stock continues to be traded.

In the pure sense of the term, a merger happens when two firms agree to go

forward as a single new company rather than remain separately owned and

operated. This kind of action is more precisely referred to as a "merger of

equals". The firms are often of about the same size. Both companies' stocksare surrendered and new company stock is issued in its place.For example,

in the 1999 merger of Glaxo Wellcome and SmithKline Beecham, both

firms ceased to exist when they merged, and a new company,

GlaxoSmithKline, was created. In practice, however, actual mergers of

equals don't happen very often. Usually, one company will buy another and,

as part of the deal's terms, simply allow the acquired firm to proclaim that

the action is a merger of equals, even if it is technically an acquisition. Being

bought out often carries negative connotations; therefore, by describing the

deal euphemistically as a merger, deal makers and top managers try to make

the takeover more palatable. An example of this would be the takeover ofChrysler by Daimler-Benz in 1999 which was widely referred to as a merger

at the time.

A purchase deal will also be called a merger when both CEOs agree that

joining together is in the best interest of both of their companies. But when

the deal is unfriendly (that is, when the target company does not want to bepurchased) it is always regarded as an acquisition.
http://wiki/GlaxoSmithKlinehttp://wiki/Euphemismhttp://wiki/Chryslerhttp://wiki/Daimler-Benzhttp://wiki/Daimler-Benzhttp://wiki/Chryslerhttp://wiki/Euphemismhttp://wiki/GlaxoSmithKline


8/12

8

Different Types of M&A

Types of M&A by functional roles in market

The M&A process itself is a multifaceted which depends upon the type of

merging companies.

- A horizontal merger is usually between two companies in the same business

sector. The example of horizontal merger would be if a health cares system

buys another health care system. This means that synergy can obtained

through many forms including such as; increased market share, cost savings

and exploring new market opportunities. - A vertical merger represents the

buying of supplier of a business. In the same example as above if a health

care system buys the ambulance services from their service suppliers is an

example of vertical buying. The vertical buying is aimed at reducingoverhead cost of operations and economy of scale. - Conglomerate M&A is

the third form of M&A process which deals the merger between two

irrelevant companies. The example of conglomerate M&A with relevance to

above scenario would be if health care system buys a restaurant chain. Theobjective may be diversification of capital investment.

Arm's length mergers

An arm's length merger is a merger:

1. Approved by disinterested directors

2. Approved by disinterested stockholders:

The two elements are complementary and not substitutes. The first elementis important because the directors have the capability to act as effective and

active bargaining agents, which disaggregated stockholders do not. But,

because bargaining agents are not always effective or faithful, the second

element is critical, because it gives the minority stockholders the opportunity

to reject their agents' work. Therefore, when a merger with a controllingstockholder was: 1) negotiated and approved by a special committee of

independent directors; and 2) conditioned on an affirmative vote of a

majority of the minority stockholders, the business judgment standard of

review should presumptively apply, and any plaintiff ought to have to plead

particularized facts that, if true, support an inference that, despite the faciallyfair process, the merger was tainted because of fiduciary wrongdoing


9/12

9

Strategic Mergers

A Strategic merger usually refers to long term strategic holding of target

(Acquired) firm. This type of M&A process aims at creating synergies in the

long run by increased market share, broad customer base, and corporate

strength of business. A strategic acquirer may also be willing to pay a

premium offer to target firm in the outlook of the synergy value created after

M&A process.

RIL-RPL Merger

The merger of Reliance Petroleum Limited (RPL) with Reliance Industries Limited

(RIL) in 2002 represents the largest ever merger in India creating the country'slargest private sector company on all financial parameters; including sales, assets,net worth, cash profits, and net profits.

Defending the merger, the management claimed that the merger will contributeto the following substantial benefits for RIL, thereby enhancing shareholdervalue:

Scale Integration Global competitiveness Operational synergies Logistics advantages Cost efficiencies Productivity gains Rationalisation of business

Processes Optimisation of fiscal incentives


10/12

10

FAILURE OF MERGERS AND ACQUISITIONS:-

Despite the highest degree of strategy and planning and investments of hundreds of

crores, the majority of the mergers and acquisitions cannot create a value and fail

miserably. In 1987, the professor of Harvard, Michael Porter found that around

50% to 60% of the mergers and acquisitions ended in a failure. In 2004, McKinsey

also found that only 23% acquisitions ended in a positive note on investment.

There are several explanations for failure of mergers and acquisitions. Let's find

out why majority of the mergers and acquisitions fail.

Why Mergers and Acquisitions Fail?

There could be several reasons behind the failure of mergers and acquisitions.

Many company look mergers and acquisitions as the solution to their problems.

But before going for merger and acquisition, they do not introspect themselves.

Before an organization can go for mergers and acquisitions, it needs to consider a

lot. Both the parties, viz. buyer and seller need to do proper research and analysis

before going for mergers and acquisitions. Following could be the reasons behind

the failure of mergers and acquisitions.

Cultural Difference

One of the major reasons behind the failure of mergers and acquisitions is the

cultural difference between the organizations. It often becomes very tough to

integrate the cultures of two different companies, who often have been the

competitors. The mismatch of culture leads to deterring working environment,

which in turn ensure the downturn of the organization.


11/12

11

Flawed Intention

Flawed intentions often become the main reason behind the failure of mergers and

acquisitions. Companies often go for mergers and acquisitions getting influenced

by the booming stock market. Sometimes, organizations also go for mergers just to

imitate others. In all these cases, the outcome can be too encouraging.

Often the ego of the executive can become the cause of unsuccessful merger. Topexecutives often tend to go for mergers under the influence of bankers, lawyers and

other advisers who earn hefty fees from the clients

Mergers can also happen due to generalized fear. The incidents like technological

advancement or change in economic scenario can make an organization to go for a

change. The organization may end up in going for a merger.

Due to mergers, managers often need to concentrate and invest time to the deal. As

a result, they often get diverted from their work and start neglecting their core

business. The employees may also get emotionally confused in the new

environment after the merger. Hence, the work gets hampered.


12/12

12

How to Prevent the Failure

Several initiatives can be undertaken in order to prevent the failure of mergers and

acquisitions. Following are those:

Continuous communication is of utmost necessary across all levels employees, stakeholders, customers, suppliers and government leaders.

Managers have to be transparent and should always tell the truth. By this

way, they can win the trust of the employees and others and maintain a

healthy environment.

During the merger process, higher management professionals must be ready

to greet a new or modified culture. They need to be very patient in hearingthe concerns of other people and employees.

Management need to identify the talents in both the organizations who may

play major roles in the restructuring of the organization. Management must

retain those talents.

Final Print IB

Documents

Transcript of Final Print IB