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Thursday, November 19, 2009

Merger and Acquisition

Explain the concept of merger and acquisition. Describe the role of agencies in the formation of mergers and acquisitions. Illustrate the process of merger and acquisition with reference to an organization.

Ans : Management theory and practice has given change theories, models and tools but intense competition forces organizations to grapple the change which is changing faster than change itself. One of the successful ways of meeting such contingencies is restructuring. The current restructuring modes all over the world appear to be the phenomenon of mergers and acquisitions.

Every mergers or acquisition goes through a learning process of its own. Peter Drucker, for instance provides a set of ‘rules’ of successful acquisition. If managed properly merger and acquisition (M & A) can help the organization take a path of growth and prosperity.

Concept of merger and acquisition : 

Most of these terms originated either in the American or British usage. Mergers, Takeovers, Amalgamations and Management Buy Outs are typically British. While the corresponding American terms are Mergers, Acquisitions, Consolidations and Leveraged Buy Outs respectively. Sometimes the broader terms, Reorganisation, Restructuring are also used.

On the surface, the distinction in meaning may not really matter, since the net result is often the same- two companies (or more) that had separate ownership are now operating under the same roof, usually to obtain some strategic or financial objective. Yet the strategic, financial tax and the even cultural impact of the deal may be very different, depending on which transaction is made.

A merger typically refers to two companies coming together (usually through the exchange of shares) to become one. An Acquisition typically has one company- the buyer – who purchases the assets or shares of the seller, with the form payments being cash, the securities, of the buyers, or other assets of value to the seller. In a stock purchase transaction, the sellers shares are not necessarily combined with the buyers existing but often kept separate as new subsidiary or operating division. In an asset purchage transaction, the assets conveyed by the seller to the buyer become additional assets of the buyers company, with the hope and expectation that the value of the assets purchased will exceed the prize paid over time, thereby enhancing the shareholder value as a result of the strategic of financial benefits of the transaction.

The term Takeover represents a transaction where cash changes hands in exchange for shares. Though every such share transaction in itself is by consent, in so far as the existing controlling interests are concerned and whose control over the displaced, a takeover attempt may be with their consent or it could be hostile to their interest. The former is referred to as consent takeover and the later referred to as hostile takeovers.

Leveraged Buy Outs : A term is typically American, whose British equivalent is management buyout. The term is so used because of the high degree of leveraging that goes into acquisition. Leveraged buy out is taken to mean any takeover that is effected with a high degree of borrowing.

Leveraged Mergers is a term employed to describe a transaction that is highly leveraged in acquisition. That is the consideration is paid in a combination of cash and securities.

Management Buy outs are conducted between existing managers of the corporation and the dominant or controlling shareholders. Since the managers do not have the where-with-all for heavy investments, their purchase is highly leveraged through investment bankers, often at high rates of interest. The payment could either be in cash or securities including the combination of various types of securities. Taking together mergers, acquisitions, takeovers, amalgamations, management buy outs are all part of the strategies for expansion and growth of corporations.

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Types of Mergers:

Mergers are often categorized as horizontal, vertical or conglomerate mergers. A Horizontal Merger occurs when two competitors combine. The recent Hewlett Packard and Compaq merger is an example of horizontal merger. If a horizontal merger causes the combined firm to experience an increase in the market power that will have anti competitive effects, the merger may be opposed on anti trust regulators even though the combination clearly resulted in more powerful firm.

A conglomerate merger occurs when the companies are not competitors and do not have a buyer-seller relationship. For instance, Phillip Morris, a tobacco company acquired General Foods and these companies were in very different lines of business.

Purpose of Merger and Acquisition :

The company which proposes to acquire another company is known differently in different modes of acquisition, the familiar ones are predator, offerer, corporate raider etc. the transferee company is also denoted as victim, offeree, aquiree or target etc.

The purpose for an offerer company for acquiring another company shall be reflected in the corporate objectives. It has to decide the specific objectives to be achieved through acquisition. The possible purpose for acquisition are :

1. Procurement of supplies : Acquisition could be to safeguard the source of supplies of raw material or intermediary product, to obtain economies of purchases in the form of discount,savings in transportation costs, overhead costs etc. and also finally to standardize the materials.
2. Revamping production facilities : one of the most important purpose of acquisition is to achieve economies of scale by amalgamating production facilities through more intensive utilization of plants and resources. Acquisitions also are resorted to standardizing products specifications, improving the quality of product etc. Obtaining improved production technology and know how from the offeree company to reduce cost and improve quality is one of the purposes of acquisitions.
3. Market expansion and strategy : the most important purpose behind M&A is to eliminate competition and protect existing market. In the process acquisitions also aim at obtaining new market outlets of the offeree for new product development or diversification and enhancing product range. Market expansion also reduces advertising costs, improves public image and allows strategic control of patents and copy rignts.
4. Financial strength : one of the most important purpose of M&A is to improve liquidity and cash. The financial strengths lie in the disposal of surplus and outdated assets, which automatically enhance capacity and enable them to avail tax benefits.
5. Genaral gain : The purpose of M&A is to improve its own image and attract superior managerial talent to manage its affairs. The general gains from M&A also include offering better customer satisfaction and services to the users of the products.
6. Development plans : The purpose of acquisition is backed by offeror company’s own development plans. The plan might include expansion of operations, supplementing funds, eliminating competition, strengthen its market position etc. Thus, the purpose and the requirement of the offeror company go a long way in selecting a suitable partner for merger or acquisition in business combinations.


The task of acquiring another company invites skills of experts for expeditious and successful completion of the transaction adhering to all formalities and procedures as required under the law, accounting convention and practices. Moreover in-house talents available with an acquirer company with its executives are required to be supplemented with advice from outside experts. Thus a number of agencies and their role assume significance in the merger

1. Advisors : The advise of Chattered Accountants or Financial Consultants, Merchant Bankers, Stock Brokers and Legal Consultants are important.

The Chartered Accountants and Financial Consultants offer a wide range of services in the matter of mergers. Firstly, he has to give opinion on the financial strength of the acquirer. Secondly, he examines in detail the accounting position of the offeree company. This is followed by a critical assessment of all related aspects of the merger and concludes his comments with summery of basic findings. He must also give his opinion to the acquirer on the commercial viability or otherwise.

The role of Merchant Bankers is complementary to the role of Accountants of Financial Consultants. He has to advise the management about the commercial soundness of the merger plan. He also advices on the status of legal requirements and helps in the preparation of offer documents and circular to be sent to shareholders of both the companies. He has to ensure compliance of all formalities prescribed by SEBI.

The stoke brokers in the developed nations have multifarious activities. Their role covers consultancy to the acquirers and raiders. In UK and USA, they also find a client and promote sale and purchase of undertaking and charge for the transaction. Because of their knowledge on the functioning of the companies, they can render first hand knowledge about the corporate raids, possible target companies, etc.

The Advocates and Legal Consultants provide the Jugglery of law. No proposal of merger or takeover can go through without involving the legal experts. The requirement of law ad formalities under different statutes applicable to companies can be complied with only under the expert advice and supervision of legal experts. Hence, very specific expertise is given by the legal advisers.

2. Financial Institutions, Banks, and BIFR : In mergers and takeovers between the companies where one or both of them are debtors to the financial institutions like IDBI,LIC,UTI,GIC, Banks etc, the proposal of merger is required to be approved by institutions and banks jointly so that they could safeguard their institutional interest as lender / creditors. The BFIR established under Sick Industries Act, 1985 plays with the creditor financial institutions and banks with regard to means for future finance, continued business activities, major changes to be introduced in business, continued employment of employees of offeree company and its subsidiaries etc. Thus all these agencies help leading to meeting their future requirement.

The process of merger and acquisition with reference to an organization :

Merger and Acquisition Process is probably the most important thing in a merger or acquisition deal as it influences the benefits and profitability of the merger or acquisition. The Merger and Acquisition Process is carried out in some steps which are discussed in the following page.

Merger and Acquisition Process is a great concern for all the companies who intend to go for a merger or an acquisition. This is so because, the process of merger and acquisition can heavily affect the benefits derived out of the merger or acquisition. So, the Merger and Acquisition Process should be such that it would maximize the benefits of a merger or acquisition deal.

The Merger and Acquisition Process can be divided in to some steps. The stepwise implementation of any merger process ensures its profitability.

Preliminary Assessment or Business Valuation
In this first step of Merger and Acquisition Process, the market value of the target company is assessed. In this process of assessment not only the current financial performance of the company is examined but also the estimated future market value is considered. The company which intends to acquire the target firm, engages itself in an thorough analysis of the target firm's business history. The products of the firm, its' capital requirement, organizational structure, brand value everything are reviewed strictly.

Phase of Proposal
After complete analysis and review of the target firm's market performance, in the second step, the proposal for merger or acquisition is given. Generally, this proposal is given through issuing an non-binding offer document.

Exit Plan
When a company decides to buy out the target firm and the target firm agrees , then the latter involves in Exit Planning. The target firm plans the right time for exit. It consider all the alternatives like Full Sale, Partial Sale and others. The firm also does the tax planning and evaluates the options of reinvestment.

Structured Marketing
After finalizing the Exit Plan, the target firm involves in the marketing process and tries to achieve highest selling price. In this step, the target firm concentrates on structuring the business deal.

Origination of Purchase Agreement or Merger Agreement

In this step, the purchase agreement is made in case of an acquisition deal. In case of Merger also, the final agreement papers are generated in this stage.

Stage of Integration

In this final stage, the two firms are integrated through Merger or Acquisition. In this stage, it is ensured that the new joint company carries same rules and regulations throughout the organization.

Adidas Reebok Merger Case Study

The sporting goods industry has seen many mergers and acquisitions (M&A) driven by rising competition and industrial growth. In 1997, Adidas acquired the Salomon Group for $1.4 billion. In 2003, Nike acquired Converse for $305 million and in 2004 Reebok acquired The Hockey Company for $330 million.

Adidas and Reebok - Two mega brands, with great strengths

In August 2005, German adidas-Salomon AG announced plans to acquire Reebok at an estimated value of € 3.1 billion ($3.78 billion). At the time, Adidas had a market capitalization of about $8.4 billion, and reported net income of $423 million a year earlier on sales of $8.1 billion. Reebok reported net income of $209 million on sales of about $4 billion. While analysts opined that the merger made sense, the purpose of the merger was very clear. Both companies competed for No. 2 and No. 3 positions following Nike (NKE).

Competition with Nike and Puma

Nike was the leader in U.S. and had made giant strides in Europe even surpassing Adidas in the soccer shoe segment for the first time. According to 2004 figures by the Sporting Goods Manufacturers Association International, Nike had about 36%, Adidas 8.9% and Reebok 12.2% market share in the athletic-footwear market in the U.S. Adidas was the No. 2 sporting goods manufacturer globally, but it struggled in the U.S. – the world’s biggest athletic-shoe market with half the $33 billion spent globally each year on athletic shoes. Adidas was perceived to have good quality products that offered comfort whereas Reebok was seen as a stylish or hip brand. Nike had both and was a favorite brand because of its fashion status, colors, and combinations. Adidas focused on sport and Reebok on lifestyle. Clearly the chances of competing against Nike were far better together than separately. Besides Adidas was facing stiff competition from Puma, the No. 4 sporting-goods brand. Puma had then recently disclosed expansion plans through acquisitions and entry into new sportswear categories. For a successful merger, the challenge was to integrate Adidas's German culture of control, engineering, and production and Reebok's U.S. marketing- driven culture.

The ADDYY and RBK Merger – Impossible is Nothing

On January 31, 2006, adidas closed its acquisition of Reebok International Ltd. The combination provided the new adidas Group with a footprint of around €9.5 billion ($11.8 billion) in the global athletic footwear, apparel and hardware markets.

Adidas-Salomon AG Chairman and CEO Herbert Hainer said, "We are delighted with the closing of the Reebok transaction, which marks a new chapter in the history of our Group. By combining two of the most respected and well-known brands in the worldwide sporting goods industry, the new Group will benefit from a more competitive worldwide platform, well-defined and complementary brand identities, a wider range of products, and a stronger presence across teams, athletes, events and leagues.”

Hainer also said, "The brands will be kept separate because each brand has a lot of value and it would be stupid to bring them together. The companies would continue selling products under respective brand names and labels."


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