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Conceptual Framework
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Mergers, Acquisitions &
Corporate Restructuring
“Any significant and permanent change in the capital structure of an organisation, long term assets, manufacturing
operations, organisation or marketing”
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Types of MA & CR
Mergers/Amalgamation
Acquisitions/Take -Over
Spin-offLBODivestitureESOP Joint VentureHolding Company
Split UpStrategic AllianceSell–offMBOMBIMLPReverse MergerEquity Carve-out
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Motives for M & A
I Strategic Motive
II Financial Motive
III Organisational Motive
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I Strategic Motive
GrowthScale of OperationsCompetitionMarket ShareAcquiring SizeBackward
IntegrationForward
Integration
SynergyCore CompetenceDiversificationReduction of RiskBalancing Product
CycleMgt of RecessionEntry into New
Markets/New Segment
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II Financial Motive
Investment of Surplus Funds Higher Market Capitalisation Reducing Costs Tax Planning/Tax Benefits Revival of Sick Units Increasing EPS Creation of Shareholder Value
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III Organisational Motive
Entrepreneur’s Personal Compulsions Retention of Management Talents Removal of Inefficient Management Quality of Management Lobby Power Emergence as an MNC Emergence as a Conglomerate
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Theories of Merger
I. Efficiency TheoryII. Information & SignallingIII.Market PowerIV.Tax ConsiderationsV. Agency Problems &
ManagerialismVI.Hubris Hypothesis
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I Efficiency Theories
A) Differential Efficiency TheoryB) Inefficient Management TheoryC) SynergyD) Pure DiversificationE) Strategic RealignmentF) Undervaluation
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A. Differential Efficiency Theory
Differences in Efficiency
Predator Attitude
Easeness of Take-over
Distress Sale
Usage of Surplus Managerial Personnel
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B. Inefficient Management Theory
Poor Valuation
Shareholders Support
Market & Funding Agencies Support
Better Image for Both
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C. Synergy
Value, Premium Paid & Expenses of Merger Financial Synergy -Different Cash flows -Different investment Opportunities -Better Funding ExternallySpecialised Funding Agencies provide funds Operating Synergy -Scale, Scope, indivisible Equipment,
Production, R&D and marketing Managerial Synergy -Restructuring, Better Allotment of Authority,
and Usage of Surplus Managerial Personnel
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D. Pure Diversification
Risk Management
Better Usage of Managerial Personnel
Better Exposure to Managerial Personnel
Better Visibility of the Company
Distributors Support
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E.Strategic Realignment
Changing Market
Changing Economic Environment
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F. Undervaluation
Perception of the Market
Underperformance
Target Company’s market Image
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II Information & Signalling
Coming into the news
Media Exposure
Higher Visibility
Market taking note
Hidden Valuation for the Target Company
Strength of the Acquiring Company
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III Market Power
Increasing Market share
Becoming a Trendsetter
Avoidance of Price War
Reduced Marketing Expenses
Avoidance of Duplicating Efforts
Rationalisation
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IV Tax Considerations
Assuming Losses of the Target Firm
Carry Over of Tax Credits
Avoidance of Dividend thus reducing Tax Liability
Saving Sales Tax in case of Vertical Integration
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V.Agency Problem & Managerialism Shareholders are the Principal and the
Managers are the Agents When Managers act in their own
interest, they benefit at the cost of Shareholders
By Takeover, such Managers are removed
Lesser Image in the Stock Market Target for the Acquirer Managerialism believes Takeover is the
result of Agency Problem
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VI Hubris Hypothesis
Winners Curse make the Acquirer to be overconfident of his estimates
Heavy Premium is explained Acquirer believes that he is a better
judge than others In a competitive tender offer, the urge
to win comprises the Hubris Happens due to the urge to avoid loss
of face, getting publicity in the media, inexperience, overestimation of synergy, over enthusiasm of Investment Bankers etc.
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THANK YOU