Introductio1 Amit
Introductio1 Amit
Introductio1 Amit
Mergers and acquisitions (M&A) and corporate restructuring are a big part of
the corporate finance world. Every day, Wall Street investment bankers
arrange M&A transactions, which bring separate companies together to form
larger ones. When they're not creating big companies from smaller ones,
corporate finance deals do the reverse and break up companies
through spinoffs, carve-outs or tracking stocks.
Not surprisingly, these actions often make the news. Deals can be worth
hundreds of millions, or even billions, of dollars. They can dictate the
fortunes of the companies involved for years to come. For a CEO, leading an
M&A can represent the highlight of a whole career. And it is no wonder we
hear about so many of these transactions; they happen all the time. Next
time you flip open the newspaper's business section, odds are good that at
least one headline will announce some kind of M&A transaction.
Sure, M&A deals grab headlines, but what does this all mean to investors? To
answer this question, this tutorial discusses the forces that drive companies
to buy or merge with others, or to split-off or sell parts of their own
businesses. Once you know the different ways in which these deals
are executed, you'll have a better idea of whether you should cheer or weep
when a company you own buys another company - or is bought by one. You
will also be aware of the tax consequences for companies and for investors.
INTRODUCTION
This is an introduction to the subject of mergers, acquisitions, buyouts and
divestitures as covered in my Mergers & Acquisitions course. The purpose is to
delineate how and why a merger decision should be made. The course focuses on
mergers and acquisitions in the context of private as well as publicly traded
companies. Acquisitions of private companies account for the majority of
transactions. To properly assess a potential merger we need to perform
fundamental strategic and financial analysis, but remain aware of the
idiosyncrasies that each potential merger contains.
A merger is a pivotal event for the companies involved. Both parties hope to
benefit from the greater efficiency and competitive strength found in the combined
company. Strategies are altered and as a result product lines are broadened,
strengthened, or refocused; management systems and personnel are changed; and
levels and growth rates of profits are shifted. In many instances, however, one side
or the other (or both) lose substantial sums of money. Merger costs, including the
direct costs of attorneys, accountants, investment bankers, and consultants, are
substantial even though they are not a large percentage of the value of the merger.
There is also substantial cost in terms of time required by key employees to
evaluate, complete, and implement the merger. Perhaps half of all mergers and
acquisitions fail or do not achieve the desired results. Many mergers fail because
projected synergies do not materialize, often due to human obstacles. If a merger is
not well received by the employees of the new entity, then its chances of success
are greatly diminished. It is critical that the parties involved in a merger become
skilled in managing change. Sometimes acquisitions fail for the acquiring company
simply because it pays too much for the acquired company. An understanding of
pre- and post-merger valuation analysis is required to avoid this pitfall.
Because an entire company is acquired in a merger, determining the advisability of
a potential merger requires a much broader analysis of the factors involved than
most other areas of financial management. In addition to the usual tax, legal, cash
flow, and cash outlay considerations, competitive positions and strategies are
important.
The occurrence of a merger often raises concerns in antitrust circles. Devices such
as the Herfindahl index can analyze the impact of a merger on a market and what,
if any, action could prevent it. Regulatory bodies such as the European
Commission and the United States Department of Justice may investigate anti-trust
cases for monopolies dangers, and have the power to block mergers.
The remainder of this article will discuss several topics important to understanding
the basic nature of and issues surrounding mergers and acquisitions. These include
methods of business combinations, motives for mergers and acquisitions,
accounting for mergers, and before-and-after financial analysis.
METHODS OF BUSINESS COMBINATION
There are several methods for achieving a business combination. It is useful to
have an understanding of these different methods. Hereafter, the term acquisitions
will be used to refer to any type of business combination.
Acquisition
An acquisition usually refers to the purchase of the assets of a company. However,
in the remainder of this course, the term will be used in a much broader sense to
indicate the purchase of shares, assets, or companies in the merger process. Thus,
the narrow, distinct meaning of the term will not be used.
An acquisition can take the form of a purchase of the stock or other equity interests
of the target entity, or the acquisition of all or a substantial amount of its assets.
Share purchases - in a share purchase the buyer buys the shares of the
target company from the shareholders of the target company. The buyer will
take on the company with all its assets and liabilities.
Asset purchases - in an asset purchase the buyer buys the assets of the
target company from the target company. In simplest form this leaves the
target company as an empty shell, and the cash it receives from the
acquisition is then paid back to its shareholders by dividend or through
liquidation. However, one of the advantages of an asset purchase for the
buyer is that it can "cherry-pick" the assets that it wants and leave the assets
- and liabilities - that it does not.
Merger
In a merger, two separate companies combine and only one of them survives. In
other words, the merged (acquired) company goes out of existence, leaving its
assets and liabilities to the acquiring company. Usually when two companies of
significantly different sizes merge, the smaller company will merge into the larger
one, leaving the larger company intact.
BENEFIT:
Merger and acquisition has become the most prominent process in the corporateworld. The
key factor contributing to the explosion of this innovative form ofrestructuring is the massive number of
advantages it offers to the business world.
Following are some of the known advantages of merger and acquisition:
The very first advantage of M&A is synergy that offers a surplus power that enables enhanced
performance and cost efficiency. When two or more companies get together and are supported by each other, the
resulting business is sure to gain tremendous profit in terms of financial gains and work performance.
Cost efficiency is another beneficial aspect of merger and acquisition. This is because any kind of
merger actually improves the purchasing power as there is more negotiation with bulk orders. Apart from that
staff reduction also helps a great deal in cutting cost and increasing profit margins of the company. Apart from
this increase in volume of production results in reduced cost of production per unit that eventually leads to raised
economies of scale.
With a merger it is easy to maintain the competitive edge because there are many issues and strategies
that can e well understood and acquired by combining the resources and talents of two or more companies.
A combination of two companies or two businesses certainly enhances and strengthens the business
network by improving market reach. This offers new sales opportunities and new areas to explore the possibility
of their business.
With all these benefits, a merger and acquisition deal increases the market power of the company which
in turn limits the severity of the tough market competition. This enables the merged firm to take advantage of hitech technological advancement against obsolescence and price wars.
TYPES:
There are many types of mergers and acquisitions that redefine the business world with new strategic alliances
and improved corporate philosophies. From the business structure perspective, some of the most common and
significant types of mergers and acquisitions are listed below:
Horizontal Merger
This kind of merger exists between two companies who compete in the same industry segment. The two
companies combine their operations and gains strength in terms of improved performance, increased capital, and
enhanced profits. This kind substantially reduces the number of competitors in the segment and gives a higher
edge over competition.
Vertical Merger
Vertical merger is a kind in which two or more companies in the same industry but in different fields
combine together in business. In this form, the companies in merger decide to combine all the operations and
productions under one shelter. It is like encompassing all the requirements and products of a single industry
segment.
Co-Generic Merger
Co-generic merger is a kind in which two or more companies in association are some way or the other related to
the production processes, business markets, or basic required technologies. It includes the extension of
the product line or acquiring components that are all the way required in the daily operations. This kind offers
great opportunities to businesses as it opens a hue gateway to diversify around a common set of resources and
strategic requirements.
Conglomerate Merger
Conglomerate merger is a kind of venture in which two or more companies belongingto different industrial sectors
combine their operations. All the merged companies are no way related to their kind of business and product line
rather their operations overlap that of each other. This is just a unification of businesses from
differentverticals under one flagship enterprise or firm.
History
ICICI Bank was originally promoted in 1994 by ICICI Limited, an Indian financial institution, and was
its wholly-owned subsidiary. ICICI's shareholding in ICICI Bank was reduced to 46% through a public
offering of shares in India in fiscal 1998, an equity offering in the form of ADRs listed on the NYSE in
fiscal 2000, ICICI Bank's acquisition of Bank of Madura Limited in an all-stock amalgamation in fiscal
2001, and secondary market sales by ICICI to institutional investors in fiscal 2001 and fiscal 2002.
ICICI was formed in 1955 at the initiative of the World Bank, the Government of India and
representatives of Indian industry. The principal objective was to create a development financial
institution for providing medium-term and long-term project financing to Indian businesses.
In the 1990s, ICICI transformed its business from a development financial institution offering only
project finance to a diversified financial services group offering a wide variety of products and
services, both directly and through a number of subsidiaries and affiliates like ICICI Bank. In 1999,
ICICI become the first Indian company and the first bank or financial institution from non-Japan Asia to
be listed on the NYSE.
After consideration of various corporate structuring alternatives in the context of the emerging
competitive scenario in the Indian banking industry, and the move towards universal banking, the
managements of ICICI and ICICI Bank formed the view that the merger of ICICI with ICICI Bank
would be the optimal strategic alternative for both entities, and would create the optimal legal structure
for the ICICI group's universal banking strategy. The merger would enhance value for ICICI
shareholders through the merged entity's access to low-cost deposits, greater opportunities for
earning fee-based income and the ability to participate in the payments system and provide
transaction-banking services. The merger would enhance value for ICICI Bank shareholders through
a large capital base and scale of operations, seamless access to ICICI's strong corporate
relationships built up over five decades, entry into new business segments, higher market share in
various business segments, particularly fee-based services, and access to the vast talent pool of
ICICI and its subsidiaries.
In October 2001, the Boards of Directors of ICICI and ICICI Bank approved the merger of ICICI and
two of its wholly-owned retail finance subsidiaries, ICICI Personal Financial Services Limited and
ICICI Capital Services Limited, with ICICI Bank. The merger was approved by shareholders of ICICI
and ICICI Bank in January 2002, by the High Court of Gujarat at Ahmedabad in March 2002, and by
the High Court of Judicature at Mumbai and the Reserve Bank of India in April 2002. Consequent to
the merger, the ICICI group's financing and banking operations, both wholesale and retail, have been
integrated in a single entity.
Business line
Financial Daily
from THE HINDU group of publications
Sunday, December 10, 2000
pointed out here that although Bank of Madura has not been insulated
from problems associated with the banking industry, it had begun a
process of revamping itself quietly over the past two years.
It had closed a couple of overlapping branches and had become more
``transaction oriented'' in its business. It had launched a co-branded credit
card, had plans to launch a debit card, was expanding its limited ATM base
and networking its main branches.
Its cash management business was known to be among the top five in
terms of volumes. It had begun to expand beyond its native borders and
had a presence in 29 of the top 30 banking centres in the country. As Mr.
Raghuttama Rao, Executive Director, ICRA Advisory Services, pointed
out: ``Regional banks will be forced tosell out or get acquired unless they
look outside their area to outgrow their concentrated asset and funding
base.'' Yet, the decision to merge has been a difficult one to take for old
private banks, many of whom remain regional in character and community
linked and family controlled in ownership. Many of them were sitting
ducks for hostile takeovers.
ut it.