Unit 1: Mergers and
Acquisitions
What is a Merger
• A merger or an acquisition can be defined as the combination of two or more
companies into one new company or corporation
• 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".
• A merger refers to the process whereby at least two companies combine to
form one single company.
• Business firms make use of mergers and acquisitions for consolidation of
markets as well as for gaining a competitive edge in the industry.
• The phrase mergers and acquisitions refers to the aspect of corporate
strategy, corporate finance and management dealing with the buying, selling
and combining of different companies that can aid, finance, or help a growing
company in a given industry grow rapidly
•Merger – Combination and pooling of
equals, with newly created firm often
taking on a new name
•Acquisition – One firm, the acquirer,
purchases and absorbs operations of
another, the acquired
Motives for a merger
• 1. Effective Organizational growth
• 2 Increasing revenue/ market share and market power
• 3. Access to new markets
• 4. Obtaining new products
• 5. Overcoming entry barriers
• 6. Keeping pace with change
• 7. Political and regulatory challenges
• 8. Innovation and discovery in product and technology
• 9. lessen competition
• 10. Response to economic scenarios
• 11. Increased speed to market
• 12. Reshaping a firm’s competitive scope
Categories of Merger
• A merger is said to occur when two or more companies combine into
one company. Mergers may take any one of the following forms.
• Amalgamation
• Absorption
• Combinations
• Acquisitions
• Takeover
• Demergers
• 1. Amalgamation
• Ordinarily amalgamation means merger.
• Amalgamation: is used when two or more companies’ carries on similar business
go into liquidation and a new company is formed to take over their business.
• Example: the merger of Brooke Bond India Ltd., with Lipton India Ltd., resulted
in the formation of a new company Brooke Bond Lipton India Ltd.
2. Absorption
• Absorption is a combination of 2 or more companies into an existing co. All
co’s except one lose their identity in a merger through absorption.
• Ex: Absorption of Tata Fertilizer Ltd (TFL) by Tata Chemicals LTd (TCL)
• TCL an acquiring co (buyer); survived after merger while TFL an acquired
co ( a seller) ceased to exist.
• TFL transferred its assets, liabilities and shares to TCL under the scheme of
merger.
3. Combinations/ Consolidation
• Consolidation: two or more companies combine to form a new company. In
this form of merger all companies are legally dissolved and a new entity is
created.
• In a consolidation, the acquired company transfers its assets, liabilities and
shares to the new company for cash or exchange of share.
• Ex : Merger or amalgamation of Hindustan Computers Ltd, Hindustan
Instruments Ltd,Indian software co Ltd and Indian Reprographics ltd in
1986 to an entirely new co, called HCL ltd.
• 4. Acquisitions
• • Acquisition means acquiring the ownership in the company.
• When 2 companies become one , but with the name and control of the
acquirer, and the control goes automatically into the hands of the acquirer.
• • A classic example in this context is the acquisition of TOMCO by HLL.
• 5. Takeover
• A takeover generally involves the acquisition of a certain stake in the equity
capital of a company which enables the acquirer to exercise control over the
affairs of the company.
• Takeover implies acquisition of controlling interest in a company by another
company. It doesn’t lead to the dissolution of the company whose shares are
being / have been acquired.
• It simply means a change of controlling interest in a company through the
acquisition of its shares by another group.
• Ex: HINDALCO took over INDAL by acquiring a 54% stake in INDAL
from its overseas parent, Alcan. However, INDAL was merged into
HINDALCO
Types of merger
1. Horizontal Merger
• A merger occurring between companies in the same industry.
• Horizontal merger is a business consolidation that occurs between
firms who operate in the same space, often as competitors offering
the same good or service.
• Main purpose is to obtain economies of scale in production by
eliminating duplication of facilities and operations.
• Horizontal mergers occurs in industries with fewer firms, as
competition tends to be higher and synergies and potential gains in
market share are much greater
Pictorial Representation
Examples of Horizontal Mergers
Motives for a horizontal merger:
• Elimination or reduction in competition
• Putting an end to price cutting
• Economies of scale in production
• Research and development
• Better control over Marketing and management.
• Increase market power
2. Vertical Merger
• A vertical merger occurs when a firm merges with another to carry out multiple stages of the
production process to produce “components for a single product.”
• The two merging firms are in different stages of production and operation.
• Vertical merger occurs when a firm acquires firms ‘Upstream’ (supplier) from it or distributor
firms ‘downstream’ from it.
• When backward integration is done to assimilate sources of supply, it is called an ‘Upstream’
merger’
• Forward integration towards market outlets is considered a ‘down-stream’ merger
• EX: Vertical Forward Integration
• Indian Rayon’s acquisition of Madura Garments along with brand rights
• Vertical Backward Integration – Buying a supplier
• IBM’s acquisition of Daksh
• Amazon – Wholefoods
• Amazon was already in the grocery market with its Prime Pantry
business.
• Previously, it did not own the food distributors or local grown
produce.
• Now, Amazon has a distribution center and a company that has
contracts in place for local, organic produce. Instead of contracting
with other companies that do something similar so that it can sell
the products online, it owns the distribution channel to do that itself.
• This will significantly reduce the transaction costs, drive down
prices, and increase margins for these products. Ultimately, the
synergy created by the deal will be a great benefit to Amazon.
Motives for vertical merger
• Low buying cost of materials
• Lower distribution costs
• Assured supplies and market
• Increasing or creating barriers to entry for potential competitors
• lacing them at a cost disadvantage.
• Control over product specification
• Technological Economies
3. Conglomerate Merger
• A merger between two or more companies engaged in unrelated business
activities.
• The firms may operate in different industries or in different geographical
regions.
• A pure conglomerate involves two firms that have nothing in common.
• A mixed conglomerate takes place between organizations that, while operating
in unrelated business activities, are actually trying to gain product or market
extensions through the merger.
• Rationale for such merger:Diversification of risk
• 3 types of Conglomerate merger:
• a) Product-extension mergers broaden the product lines of firms. These are mergers between
firms in related business activities and may also be called concentric mergers. These mergers
broden the product lines.
• Product Extension: New product in Present territory
• P&G acquires Gillette to expand its product offering in the household sector and smooth out
fluctuations in earning.
• b)geographic market-extension merger involves two firms whose operations have been
conducted in non overlapping geographic areas.
• Ex: Pizza Hut a fast food chain restaurant centered in USA, sought to woo Indian customers by
opening their restaurant in all most all major urban centers of India.
• c) Pure conglomerate mergers involves unrelated business activities. These would not qualify
as either product-extension or market extension.
• New product & New territories
• Indian Rayon’s acquisition of PSI Data Systems.
• Mohta Steels with Vardhaman Spinning Mills Ltd.
4. Concentric Mergers
• A concentric merger occurs when two businesses in the same industry have
the same clients but offer distinct products and services.
• The products or services must complement one other for a merger to be
termed concentric.
• concentric M&A has a central common point, which is the target audience.
• The business entities may be belonging to different industries, yet they have
the same target audience.
• A cell phone firm merging with a cell phone case company is an example of a
concentric merger. Zomato and Grofers (now Blinkit)
• a car manufacturer and a car insurance company. Both have different
functionality areas, but, they have a common audience base
Examples
• Citi & Travelers - This merger between Citicorp (a commercial bank) and
Travelers (a financial service company) from the late '90s is often the prime
example of a concentric merger.
• The 2015 merger of Heinz and Kraft valued at around $100 billion, is thought to
be the largest concentric merger in history. The deal created Kraft-Heinz, a food
industry behemoth whose 2019 revenues were $24.97 billion.
• At the time of the transaction, Kraft was a leading producer of mayonnaise, salad
dressing, cottage cheese, natural cheese and lunch meat. Heinz, meanwhile, was
the world leader in meat sauce, pasta sauce and frozen appetizers.
• So in the nature of a concentric merger, their products were more complementary
than competing.
Advantages and disadvantages of
concentric mergers
• Advantages:
• Reduced costs/economies of scale - the sharing of resources and
locations/facilities results in reduced costs and achieving economies of scale
• Reduced risk - diversification always comes with risks, but since the acquirer is
operating in the same industry with the same or similar customers, diversification
via concentric mergers is considered less risky
• Reciprocal relationship of products/services - when one product or service
does well, it tends to positively impact the other
Disadvantages:
• Smaller scale of diversification - since the acquirer will be operating in the
same market, the level of diversification is generally considered smaller;
Reverse Merger
• A merger usually takes place when a smaller company
folds into a larger one through exchange of shares or
cash.
• But when the acquiring company is weaker or smaller
than the one being acquired, this is termed a reverse
merger.
• Typically, reverse mergers take place through a parent
company merging into a subsidiary, or a profit-making
firm merging into a loss-making one.
• ICICI (Industrial Credit and Investment Corp. of India,
which was the parent company) and two of its wholly-
owned subsidiaries, ICICI Personal Financial Services
Ltd and ICICI capital Services Ltd, reverse-merged with
ICICI Bank Ltd, in 2002.
• In 2005, Industrial Development Bank of India (IDBI)
was reverse-merged with its commercial banking arm,
IDBI Bank, and has since become IDBI Bank Ltd.
• More recently, in 2013, Indiabulls Financial Services Ltd
reverse-merged into its wholly-owned subsidiary,
Indianbulls Housing Finance Ltd.
Motives of M and A:
• a)Strategic Motives
• Expansion and growth Dealing with entry of MNC’s Economies of scale
Synergy Market penetration Market leadership Backward/ Forward
Integration New product entry New market entry Surplus resources
Minimize size Risk reductionBalancing product cycle Growth and
diversification strategy Re-fashioning
• b) Financial Motives
• Deployment of surplus funds Fund raising capacity Market capitalization
Tax planning Creation of shareholders value Tax benefits Revival of
sick units Asset stripping(Selling assets for profit as it is not productive for the
company) Undervaluation of target company Increasing EPS
• c) Organizational Motives
• Superior management Ego satisfaction Retention of managerial talent
Removal of inefficient management
