A PROJECT REPORT ON

‘MERGERS AND ACQUISITIONS’

AMITY UNIVERSITY

SUBMITTED BY:
KAVYA JINDAL
SEM - VIII (2015-2020)
A11911115027

SUBMITTED TO:
MR. INDRANIL BANERJEE

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 ACKNOWLEDGEMENTS

I would like to express my sincere gratitude to my internal guide Mr. Indranil Banerjee, for
his continuing support during and after my field study. I would also like to thank all the
contributors for my project from various sources for providing me with this stimulating opportunity
and encouragement to explore and study practical aspects on analytical study on working of Merger
& Acquisition.

(Kavya Jindal)

CONTENTS
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SR. NO. PARTICULARS PAGE NO.

1 EXECUTIVE SUMMARY 4

2 INTRODUCTION 5-6

3 DISTINCTION BETWEEN M & A 7

4 CLASSIFICATION OF MERGERS 8-9

5 HISTORY OF MERGERS 10

6 IMPORTANCE OF M & A 11

7 PHASES OF M & A 12-13

8 DISTADVANTAGES OF M & A 14-15

9 BIBLIOGRAPHY 16

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 EXECUTIVE SUMMARY

Industrial maps across the world have been constantly redrawn over the years through various
forms of corporate restructuring. The most common method of such restructuring is Mergers and
Acquisitions (M&A). The term "mergers & acquisitions (M&As)" encompasses a widening range
of activities, including joint ventures, licensing and synergising of energies. Industries facing
excess capacity problems witness merger as means for consolidation. Industries with growth
opportunities also experience M&A deals as growth strategies. There are stories of successes and
failures in mergers and acquisitions. Such stories only confirm the popularity of this vehicle.

Merger is a tool used by companies for the purpose of expanding their operations often aiming at
an increase of their long term profitability. There are 15 different types of actions that a company
can take when deciding to move forward using M&A. Usually mergers occur in a consensual
(occurring by mutual consent) setting where executives from the target company help those from
the purchaser in a due diligence process to ensure that the deal is beneficial to both parties.
Acquisitions can also happen through a hostile takeover by purchasing the majority of outstanding
shares of a company in the open market against the wishes of the target's board. In the United
States, business laws vary from state to state whereby some companies have limited protection
against hostile takeovers. One form of protection against a hostile takeover is the shareholder rights
plan, otherwise known as the "poison pill”.
Mergers and acquisitions (M&A) have emerged as an important tool for growth for Indian
corporates in the last five years, with companies looking at acquiring companies not only in India
but also abroad.

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 INTRODUCTION

The words Mergers and Acquisitions are often used as an interchangeable term, a convenient but
inaccurate usage. Mergers refer to deals where two or more companies take virtually equal stakes in
each other’s businesses, whereas an acquisition is the straightforward purchase of a target company
by another company.

What is a Merger?
A "merger" or "merger of equals" is often financed by an all stock deal (a stock swap). An all stock
deal occurs when all of the owners of the outstanding stock of either company get the same amount
(in value) of stock in the new combined company. The terms "demerger," "spin-off" or "spin-out"
are sometimes used to indicate the effective opposite of a merger, where one company splits into
two, the second often being a separately listed stock company if the parent was a stock company.
Merger is a legal process and one or more of the companies lose their identity.

What is an Acquisition?
In a layman’s language an “acquisition” is one company acquiring a controlling interest in another
company. An acquisition (of un-equals, one large buying one small) can involve a cash and debt
combination, or just cash, or a combination of cash and stock of the purchasing entity, or just stock.
An acquisition occurs when an organization acquires sufficient shares to gain control/ownership of
another organization. Acquisitions can also happen through a hostile takeover by purchasing the
majority of outstanding shares of a company in the open market against the wishes of the target's
board. In an acquisition there are clear winners or losers; power is not negotiable, but is
immediately surrendered to the new parent on completion of the deal. `Those who hold the title also
hold the pen to draw the organisational chart'.

High-yield
In some cases, a company may acquire another company by issuing high-yield debt (high interest
yield, "junk" rated bonds) to raise funds (often referred to as a leveraged buyout). The reason the
debt carry a high yield is the risk involved. The owner can not or does not want to risk his own

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money in the deal, but third party companies are willing to finance the deal for a high cost of capital
(a high interest yield).
The combined company will be the borrower of the high-yield debt and it will be on its balance
sheet. This may result in the combined company having a low shareholders' equity to loan capital
ratio (equity ratio).
Examples
In a 1985 merger between Pantry Pride and Revlon, Pantry Pride had to issue 2.1 billion dollars of
high-yield debt to buy Revlon. The target Revlon was worth 5 times the acquirer.

Consolidation
Technically speaking consolidation is the fusion of two existing companies into a new company in
which both the existing companies extinguish.
Merger and Consolidation can be differentiated on the basis that, in a merger one of the two merged
entities retains its identity whereas in the case of consolidation an entire new company is formed.

Takeovers
A takeover bid is the acquisition of shares carrying voting rights in a company with a view to
gaining control over the management. The takeover process is unilateral and the offer or company
decides the maximum price.

Demerger
It means hiving off or selling off a part of the company. It is a vertical split as a result of which
one company gets split into two or more.

Amalgamation
Halsbury’s Laws of England describe amalgamation as a blending of two or more existing
undertaking into one undertaking, the shareholders of each blending company becoming
substantially the shareholders in the company which is to carry on the blended undertaking.

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 DISTINCTION BETWEEN MERGERS AND ACQUISITIONS

Although they are often uttered in the same breath and used as though they were synonymous, the
terms merger and acquisition mean slightly different things.
When one company takes over another and clearly established 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 and the buyer's stock continues to be traded.
In the pure sense of the term, a merger happens when two firms, often of about the same size, 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." Both companies' stocks are
surrendered and new company stock is issued in its place. For example, both Daimler-Benz and
Chrysler ceased to exist when the two firms merged, and a new company, DaimlerChrysler, 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's technically an acquisition. Being bought out often carries
negative connotations, therefore, by describing the deal as a merger, deal makers and top managers
try to make the takeover more palatable.
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 be purchased - it is always regarded as an acquisition.
Whether a purchase is considered a merger or an acquisition really depends on whether the
purchase is friendly or hostile and how it is announced. In other words, the real difference lies in
how the purchase is communicated to and received by the target company's board of directors,
employees and shareholders.

CLASSIFICATIONS OF MERGERS

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Mergers are generally classified into 5 broad categories. The basis of this classification is the
business in which the companies are usually involved. Different motives can also be attached to
these mergers. The categories are:
Horizontal Merger
It is a merger of two or more competing companies, implying that they are firms in the same
business or industry, which are at the same stage of industrial process. This also includes some
group companies trying to restructure their operations by acquiring some of the activities of
other group companies.
The main motives behind this are to obtain economies of scale in production by eliminating
duplication of facilities and operations, elimination of competition, increase in market segments and
exercise better control over the market.
There is little evidence to dispute the claim that properly executed horizontal mergers lead to
significant reduction in costs. A horizontal merger brings about all the benefits that accrue with an
increase in the scale of operations. Apart from cost reduction it also helps firms in industries like
pharmaceuticals, cars, etc. where huge amounts are spent on R & D to achieve critical mass and
reduce unit development costs.

Vertical Mergers
It is a merger of one company with another, which is involved, in a different stage of production
and/ or distribution process thus enabling backward integration to assimilate the sources of
supply and / or forward integration towards market outlets.
The main motives are to ensure ready take off of the materials, gain control over product
specifications, increase profitability by gaining the margins of the previous supplier/ distributor,
gain control over scarce raw materials supplies and in some case to avoid sales tax.

Conglomerate Mergers
It is an amalgamation of 2 companies engaged in the unrelated industries. The motive is to
ensure better utilization of financial resources, enlarge debt capacity and to reduce risk by
diversification.
It has evinced particular interest among researchers because of the general curiosity about the nature
of gains arising out of them. Economic gain arising out of a conglomerate is not clear.
Much of the traditional analysis relating to economies of scale in production, research, distribution
and management is not relevant for conglomerates. The argument in its favour is that in spite of the
absence of economies of scale and complimentaries, they may cause stabilization in profit stream.

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Even if one agrees that diversification results in risk reduction, the question that arises is at what
level should the diversification take place, i.e. in order to reduce risk should the company diversify
or should the investor diversify his portfolio? Some feel that diversification by the investor is more
cost effective and will not hamper the company’s core competence.
Others argue that diversification by the company is also essential owing to the fact that the
combination of the financial resources of the two companies making up the merger reduces the
lenders risk while combining each of the individual shares of the two companies in the investor’s
portfolio does not.

Concentric Mergers
This is a mild form of conglomeration. It is the merger of one company with another which is
engaged in the production / marketing of an allied product. Concentric merger is also called product
extension merger. In such a merger, in addition to the transfer of general management skills, there is
also transfer of specific management skills, as in production, research, marketing, etc, which have
been used in a different line of business. A concentric merger brings all the advantages of
conglomeration without the side effects, i.e., with a concentric merger it is possible to reduce risk
without venturing into areas that the management is not competent in.

Consolidation Mergers:
It involves a merger of a subsidiary company with its parent. Reasons behind such a merger are to
stabilize cash flows and to make funds available for the subsidiary.

Market-extension merger
Two companies that sell the same products in different markets.

Product-extension merger
Two companies selling different but related products in the same market.

HISTORY OF MERGERS IN THE 20TH CENTURY

In 1998 there were a large number of “blockbuster” mergers and acquisitions that made past
mergers and acquisitions look small by comparison. For example, the largest announced mergers in
1998 were the marriage between Citicorp and Traveler’s Group estimated at $77 billion in value
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and Exxon’s acquisition of Mobil for an estimated $79 billion. Closely following were transactions
between SBC and Ameritech values at approximately $61.8 billion and between Nations Bank Corp
and BancAmerica Corp. valued at approximately $60 billion. AT&T announced the acquisition of
Tele-Communications, Inc, valued at approximately $43 billion. One of the largest industrial
mergers and acquisition was between Chrysler Group and Daimler Benz AG Valued at $45.5
billion, was also announced. These were all larger than the acquisition of MCI by WorldCom
announced in 1997 and characterized as a megamerger by many at approximately $37 billion.

The size and number of M&A transactions continue to grow worldwide. For example one of the
largest mergers in history was announced in 1999 MCI WorldCom and Sprint agreed to a merger
values by analyst at $ 115 billion and $129 billion. But it did not receive regulatory approval and
the respective boards of directors called off the merger agreement in July 2000. Had the merger
been completed it would have been the second largest global telecommunications company behind
only AT&T.

IMPORTANCE OF MERGERS AND ACQUISITIONS

The 1980’s produced approximately 55,000 mergers and acquisitions in the United States alone.
The value of the acquisitions during this decade was approximately $1.3 trillion as impressive as
these figures are; they are small in comparison to the merger wave that began in the earlier 1990’s
approximately in 1993. The number and value of mergers and acquisitions have grown each year
since 1993. For example in 1997 there were approximately 22,000 mergers and acquisitions roughly
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40% of the total acquisitions during the whole decade of the 1980s. Perhaps more significant, the
value of these mergers in 1997 was $1.6 trillion. In other words, the acquisitions completed in 1997
were valued at $300 billion more than the value of acquisitions during the 1980s. Interestingly
1980s was often referred to as the decade of “Merger Madness”. The year 1998 was no different, as
noted by the huge Merger and Acquisitions transactions listed earlier; it was predicted to be another
record year. Interestingly the 6,311 domestic mergers and acquisitions announced in 1993 had a
total value of $234.5 billion for an average $37.2 million, whereas the mergers and acquisitions
announced in 1998 had an average value of $168.2 million for an increase of 352% over those of
1993. Approximately $2.5 trillion in mergers were announced in 1999, continuing the upward trend.

The merger and acquisitions in the 1990s represent the fifth merger wave of the twentieth century
and their size and numbers suggest that the decade of 1990s might be remembered for the
megamerger mania. With five merger waves throughout the twentieth century, we must conclude
that mergers and acquisitions are an important, if not dominant. Strategy for twenty first century
organizations.

PHASES OF MERGERS & ACQUISITIONS

PHASE I: STRATEGIC PLANNING

Stage 1: Develop or Update Corporate Strategy
To identify the Company’s strengths, weaknesses and needs
1) Company Description
2) Management & Organization Structure
3) Market & Competitors
4) Products & Services

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 5) Marketing & Sales Plan
6) Financial Information
7) Joint Ventures
8) Strategic Alliances

Stage 2: Preliminary Due Diligence

1) Financial
2) Risk Profile
3) Intangible Assets
4) Significant Issues

Stage 3: Preparation of Confidential Information memorandum

1) Value Drivers
2) Project Synergies

PHASE II: TARGET/BUYER IDENTIFICATION & SCREENING

Stage 4: Buyer Rationale
1) Identify Candidates
2) Initial Screening

Stage 5: Evaluation of Candidates

1) Management and Organization Information
2) Financial Information (Capabilities)
3) Purpose of Merger or Acquisition
PHASE III: TRANSACTION STRUCTURING
Stage 6: Letter of Intent

Stage 7: Evaluation of Deal Points

1) Continuity of Management
2) Real Estate Issues
3) Non-Business Related Assets
4) Consideration Method
5) Cash Compensation
6) Stock Consideration
7) Tax Issues

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 8) Contingent Payments
9) Legal Structure
1) Financing the Transaction

Stage 8: Due Diligence

1) Legal Due Diligence
2) Seller Due Diligence
3) Financial Analysis
4) Projecting Results of the Structure

Stage 9: Definitive Purchase Agreement

1) Representations and Warranties
2) Indemnification Provisions

Stage 10: Closing the Deal

PHASE IV: SUCCESSFUL INTEGRATION

1) Human Resources
2) Tangible Resources
3) Intangible Assets
4) Business Processes
5) Post Closing Audit
DISADVANTAGES OF MERGERS AND ACQUISITIONS

1) All liabilities assumed (including potential litigation)

2) Two thirds of shareholders (most states) of both firms must approve
3) Dissenting shareholders can sue to receive their “fair” value
4) Management cooperation needed
5) Individual transfer of assets may be costly in legal fees
6) Integration difficult without 100% of shares
7) Resistance can raise price
8) Minority holdouts
9) Technology costs - costs of modifying individual organizations systems etc.
10) Process and organisational change issues – every organisation has its own culture and
business processes
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 11) Human Issues – Staff feeling insecure and uncertain.
12) A very high failure rate (close to 50%).

A SURE GUIDE TO UNSUCESSSFUL MERGERS / REASONS FOR

FAILURE OF MERGERS

Costly Oversights
Overlooking the scientific development of new competitive materials and new is only one of the
faults that sometimes lead to unhappy merger results. Another costly oversight is failure to consider
those new developments in chemistry, physics, metallurgy, plastics and so on which are now still in
the pre-patent stage but which, when in full boom, may completely wipe out the market of the for
the acquired company’s chief product. Patents maybe developed for new scientific processes which
chop production costs radically, may make machinery and equipment obsolete and undermine many
of the older processes.

For example, a major manufacturer of electronic organ part decided it was sound strategy to
diversification was a sound move. With the help pf its major bank, this manufacturer acquired a
well-run electronic company which specialized in electronic circuitry. This west coast producer had
a new process in its lab it was of creating circuitry on glass and plastics this was done by specially
treating glass and plastics and then scratching a circuit on its surface with a mechanical stylus. The
result was a sort of primitive printed circuit which had an excellent potentiality for savings in
material and labour costs.

About two years after this costly acquisition, the parent manufacturer discovered that new chemical
techniques were available which would produce uniform circuits on plastics and glass, outmoding
the entire process of scratching such circuits with a mechanical stylus.

How can this sad but common error be avoided? The answer lies in understanding how scientific
innovations are detected in every industry. Many branches of the various scientific disciplines run
along parallel path. In this above case actually clues to the new chemical development were all in
the scientific literature of the industry at the time of the acquisition – but no one had been asked to
look.

The Need for Research

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The likelihood of making acquisitions mistakes is especially strong among large companies which
are buying a scattered selection of smaller companies operating in many diverse fields in which
technical products or processes are involved. That this approach is quite common today is
evidenced by the Federal Trade Commission, which indicated that conglomerate acquisitions were
on the rise in many manufacturing industries. For example purchase if a canning-machinery concern
by a diesel engine manufacture.

The variety of actual conglomerate acquisitions is truly astounding, for example a truck assembler
acquiring a chain of department stores.
Some of these companies have taken the plunge because of a variety of reasons like they had a lot
of cash in the corporate till and were in a hurry to grow. Others have wanted a leap out of a stagnant
industry in one jump. Still others have chosen to diversify in order to escape their own industry’s
bust-or-boom cycle. A few have decided to move into new fields because they might run afoul of
antitrust laws if they acquired firms in their own industry.

BIBLIOGRAPHY

Books
1) Global Alliances in the Motor Vehicle Industry
- Leslie S. Hiraoka

2) Mergers and Acquisitions – A Guide to creating value for Stakeholder

-Micheal A. Hilt
-Jefferey S. Harrison
-R. Duane Ireland

3) Independent Project on Mergers and Acquisitions in India –A Case Study

-Kaushik Roy Choudry
-K. Vinay Kuma

4) Cases in corporate Acquisitions, Mergers and Takeovers

-Edited by Kelly Hill

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5) SUCESSFUL MERGERS getting the people issues right
– Marion Devin

Websites

1) www.investopedia.com

2) www.wallstreetjournal.com

3) www.economictimes.com

4) www.google.com

5) www.wikipedia.com

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