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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
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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.
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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.
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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.
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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
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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
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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.
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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
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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
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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.
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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.
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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.