Attempt all the questions.

1. a Why do mergers fail?

b. Explain Synergy initiative behind Mergers and Acquisitions.
2. XYZ Company is being acquired by PQR Company on the basis of share exchange
basis. Their selected data is as follows:
PQR XYZ
Earnings per share(Rs) 5.6 2.5
Price- earnings ratio 12.5 7.5
Number of shares( in Lakh) 20 16.8
Profit after Tax( Rs Lakh) 112 42
Determine a) Pre- merger, market value per share
b) The maximum exchange ratio PQR Company should offer without the
dilution of i) EPS ii) market value per share.

3 Write short notes:

a. Defence Techniques for Takeovers.
b. Leveraged Buyout with suitable examples

Answer – 2 (a)

Pre Merger MPS

PQR:

P/E Ratio = MPS/EPS

12.5=MPS/5.6

MPS=12.5*5.6 = 70

XYZ:

P/E Ratio = MPS/EPS

7.5=MPS/2.5
MPS=7.5*2.5 = 18.75

2 (b)

EPS

PAT = 112+42 = 154

EPS should be the same (n=no. Of shares after merger)

Therefore, 154/n=5.6

N=27.5

No. Of shares = 27.5

Exchange Ratio = 7.5/16.8=0.446

Market Value per Share

Market cap of combined entity=No. Of shares*PE Ratio

=20*70+16.8*18.75

=1400+315

=1715

Answer – 1 (a)
Why do mergers and acquisitions fail? What are the most common
risks?

Mergers and acquisitions are high-stakes undertakings, with a lot of

risks involved. What if the company culture doesn't mesh? What if
there is too much debt? What if the new company has a toxic work
environment?

Find out in this article what are the most common reasons for
mergers and acquisitions to go wrong, what you can do about
them, and how you can make your merger or acquisition successful.
In this article, we'll cover the 12 most common reasons mergers
and acquisitions fail and what you can do to avoid these pitfalls.

1. Value Destruction

Often it might seem reasonable to acquire a company or merge two

organizations, but one of the biggest risks that lead to failure is in
fact the narrative. You might end up overpaying for a company, and
you might misunderstand the entire market. A great example could
be when Google bought Motorola in 2012 to make headsets for
them. When eventually, Google was not satisfied with the quality
of the headset, and Motorola was therefore divested.

Avoiding these general failures can easily be done by simply paying

more attention to detail rather than focusing on the story behind
it. 

2. Unrealistic expectations

One of the most common reasons why mergers and acquisitions fail
is unrealistic expectations. When two companies merge, they often
have different ideas about what the new company will be like. This
can lead to disagreements and conflict down the road.

For example, each organization likely has its own culture, values,
and operational setup. If management loses sight of aligning these
and finding a clear path to uniting the firms, the merger and
acquisition initiative is likely doomed to fail.

3. Lack of communication

Managers at both entities need to communicate properly and

champion the post-integration milestones step by step. They also
need to be attuned to the target company's branding and customer
base. The new company risks losing its customers if management is
perceived as aloof and impervious to customer needs.

4. Overpaying

An analysis looking at 2500 deals between 2013 and 2018 resulted

that the larger the transaction, it will most likely fail. Another
interesting observation was that mixed deals, including both cash
and stock, were also more likely to result in a failed business.

A classic overpaying example happened in 2001, between America

Online and Time Warner. Due to the extreme rush of leadership to
get into the market of new media, they largely overpaid. Just after
a year, this deal resulted in the biggest annual net loss ever
reported.

Generally, brokers tend to push to close such great deals “just to

get things done”, even if the investors’ deal does not make sense
for the organization as a whole. This leads to excessive amounts
spent on acquisition while the transaction will not deliver the
expected benefits.

5. Poor integration process

When two companies merge, it is important to carefully integrate

their operations in order to avoid any disruptions. Unfortunately,
many companies do not take the time to properly plan for the
integration process. As a result, they end up with two separate
companies that are unable to work together effectively. This can
lead to a lot of confusion and frustration among employees,
customers, and shareholders. If the two companies are not able to
effectively communicate and integrate, it can be very difficult to
make the merger a success.

6. Misunderstanding the company

One of the most common reasons that mergers and acquisitions fail
is because one company misunderstood the other. They did not
take the time to learn about the company's culture, values, and
goals. As a result, they were unable to properly integrate the two
companies.

When two companies merge, their employees often have different

working styles and values. This can lead to conflict and tension
between employees, which can ultimately lead to the failure of the
merger.

7. Lack of management plan

When a merger occurs, there is often great excitement and

optimism among employees. However, if the senior leadership is
not excited about the vision or has doubts about its success, then it
can be difficult to convince employees that it will work. If the senior
leadership does not communicate clearly with employees about
what they can expect in terms of benefits and rewards, then it can
lead to frustration when those expectations do not materialize.

Answer – 1 (b)

Understanding Synergies In M&A Transactions And Why They’re

Important
The prospect of achieving synergies in M&A transactions is an
important driver of value. The concept of a synergy is the idea that
two companies when combined are worth more together than they
are when valued separately.

For example, if Company A and Company B are worth $200m and

$50m on a stand-alone basis respectively, yet when combined
through an M&A transaction are valued at $285m, there is a
synergy of $35m.

In any deal, understanding the potential synergies in M&A

transaction is important to both the buyer and the seller. For an
overview of CFSG’s M&A services, please click here.

From a buyer’s perspective, synergies influence the maximum price

they can afford to pay for a company. In the example above, the
value of Company B on a stand-alone basis was only $50m.
However, with synergies, it was $85m. So, Company A could
theoretically afford to pay more than $50m and still have the deal
make economic sense.

From a seller’s perspective, understanding the potential synergies

that a purchaser may be able to extract from a transaction,
provides a basis for negotiating in favour of a higher purchase price.
Company B could argue that it is worth more than $50m because of
the $35m in synergies that it offers Company A.

A key point to recognise is that synergies vary from one

combination of businesses to the next. While combining Company
A and Company B offered $35m in synergies, combining Company A
and Company C may offer more, less or no synergies depending on
the specifics of those businesses.

Different Types of Synergies in M&A Transactions

There are broadly three different types of synergies in M&A

transactions to consider.
1. Revenue Synergies

A revenue synergy occurs when two companies are combined and

as a result can sell more products &/or services in total than they
would have otherwise achieved separately. In other words, if
Company A had revenue of $600m and Company B had revenue of
$70m, yet when combined, revenue was expected to climb to
$700m, that implies revenue synergies of $30m.

An example of a revenue synergy can be found in the justification

for Facebook’s 2012 acquisition of photo sharing site Instagram. At
the time of the acquisition, Instagram reportedly had zero revenue.
However, Facebook believed that combining the two sites would
create significant revenue opportunities or synergies.

2. Cost Synergies

The second kind of synergy in M&A transactions is cost synergies,

which represent the opportunity to reduce overall costs because of
combining businesses. There are several common ways in which
companies seek to extract cost synergies through mergers and
acquisitions, including:

Reducing staff headcount by identifying functional duplication;

Reducing rent by consolidating offices and other locations;

Consolidating suppliers &/or renegotiating supplier terms;

Increasing utilisation of capital assets such as factories,

transportation etc.;

Reducing professional services fees;

Reducing costs through exchange of best practices.

3. Financial Synergies
The final type of synergy in M&A transactions are financial
synergies, which relate to a company’s cost of capital – the costs
the company needs to meet to secure the various funding sources it
requires to finance its business.

When a smaller company seeks to borrow money, the lender will

charge a given interest rate to compensate for the risk attached to
the loan. All things being equal, when the borrower merges with a
larger business, the interest rate it will be charged should be lower
in recognition of the larger balance sheet and cash flows supporting
the loan.

This will, clearly, not always be the case, but it is a possible synergy
that might flow from an M&A transaction.

Answer – 3 (a)

What Is Takeover Defence?

Takeover defences incorporate all activities by directors to oppose

having their firms acquired. Endeavours by target managers to
overcome extraordinary takeover proposition are strong types of
takeover defences. Resistance likewise incorporates activities that
happen before a takeover offer is made which make the firm
harder to acquire.

Two Types Of Defence Strategies:

Preventive Measures:

The preventive measures are those which lessen the probability of

a likely takeover. The preventive measures, otherwise called pre
bid defence strategies are the actions taken by target firm before
any takeover endeavour is made on the firm, with the perspective
of long-haul defending interest of the firm. the short-term
strategies are viewed as an attempt to overcome the bidder in its
attempt to take over the firm or to give strength against such an
attack.

Reactive Measures:

The reactive measures are those which are brought into execution
if any activity of takeover happens on the target firm. Reactive
measures famously known as the post-bid defence mechanism are
those which are embraced in case of a takeover attempt on the
objective firm by a bidder. The long-term defence instruments are
considered to be a method of making the target unappealing for
takeover by a bidder, with the goal that the company's
administration can channelize their assets and spotlight on
powerful running of association's activities and worth creation.

Commonly Adopted Defence Strategies

Staggered Board: This protection includes a correction of the by-

laws of the organization to make a staggered board of directors. A
staggered board is a board whose individuals are chosen in various
years or as such just a part of the board comes for elections every
year. In India, Section 256 of the Companies Act actually requires
companies to maintain staggered boards by default.

Execution of a staggered board might make an acquirer need to sit

tight for a considerable length of time or possibly till the following
yearly general meeting before it controls the board of directors.
Since the acquirer would not control the board at first, the acquirer
would not have the ability to change the corporates or the
organization's strategy. Likewise with the other pre-tender offer
defences, courts will permit correction of the sanction to make an
amazed top managerial staff gave the revision is permitted under
the concerned corporate law for the right business reason.

Blowfish: One of the defence instruments took on by firms which

joins a system by which the organization centres around purchasing
new resources to develop its resource base and driving the firm
towards development in a manner lessening the liquid resource
base of the firm and expected overabundance cash exchange at
hand.

The essential rationale behind this defence system is that the

higher firm worth might possibly threaten the bidder from seeking
after their course of obtaining, since the expanded (higher) firm
worth would prompt a more exorbitant cost and along these lines
premium to be paid over the span of procurement. Further, the
diminished liquidity of the resources fills in as an optional guide in
rebuking the acquirer by restricting the appeal of the target
organization.

Poison pill: poison pill is a procedure that attempts to make a

safeguard against a takeover bid by one more organization by
setting off a new, restrictive expense that should be paid after the
takeover. There are many poison pill ways that have been utilized
by organizations against hostile takeovers and corporate bandits.
For instance, offering a favoured investment opportunity to current
investors permits them to practice their buy freedoms at a colossal
premium to the organization, making the expense of the
procurement out of nowhere unattractive.

Another technique is to take a debt that would leave the

organization overleveraged and possibly unrewarding. A few
organizations have made employee stock ownership plans that vest
just when the takeover is concluded. Another model is to offer a
progression of freebies for organization leaders. This could likewise
make the takeover of the organizationrestrictively costly the
purchaser had intended to supplant the top administration.

At last, one non-monetary technique for a poison pill is to amaze

the appointment of the leading group of an organization, causing
the getting organization to confront an antagonistic load up for a
delayed timeframe. At times, this deferral in overseeing the load up
(and subsequently the votes important to support specific key
activities) is an adequate impediment for a takeover endeavour. An
outrageous execution of a poison pill is known as a self-destruction
pill. Poison pills raise the expense of mergers and acquisitions.

On occasion, they make a sufficient disincentive to dissuade

takeovers by and large. Organizations ought to be cautious, be that
as it may, in building poison pill techniques. As a methodology,
poison pills are just compelling as an obstacle. At the point when
really put into impact, they regularly make devastatingly significant
expenses and are typically not in the best long-haul interests of the
investors.

White Knight And White Squire:

White Knight and White squire methodologies are based around

the possibility that the target organization is more open to a
friendly firm and in this way to a cordial takeover when contrasted
with an unfriendly takeover attempt by an acquirer. White knight is
an essential merger that doesn't include a change in control and
relieves the target's administration of the obligation to look for the
best price accessible.

Buyback Of Shares, Open Market Repurchase, Self-Tenders:

Critics of the buyback techniques contend that the prejudicial
effects on target shareholders will overcome value increasing bids.
Open market buys will in general contort shareholder inclination
and rout value increasing bids. In a model given by Bradley and
Rosenzweig the aftereffect of open market buys is that it adds up to
an exceptional profit pay out to selling investors that contorts
shareholder decision.

Anyway, selftenders can be protected on the ground that buyback

makes an auction for the organizations' assets among contending
management teams. Defenders contend that they will in general
value diminishing offers and not value expanding ones. Target
management is spending the shareholders' money and not its own
funds.

Crown Jewels:

These are valuable resources of the objective regularly named as

Crown Jewels, which draw in the raider to bid for the organization's
control. On confronting a hostile bid the organization sells these
resources at its own drive leaving the remainder of the organization
flawless and consequently eliminates the motivator for which bid
was advertised. Rather than selling the resources, the organization
may likewise lease them or mortgage them so that the fascination
of free assets for the predator is smothered. By selling these gems
the organization eliminates the prompting that might have caused
the bid.

Golden Parachutes:

This defence expects the executives to arrange employment

contracts between the administration and key representatives to
build their post work pay in case of a hostile takeover. At the point
when Golden Parachutes are made for the executives and key
representatives, an organization turns out to be less alluring to the
acquirer in light of the fact that payments to department
management and workers could monetarily exhaust the company.

Greenmail:

Greenmail, is the buyback of the shares possessed by a specific

investor of the target who has made a takeover bid. The greenmail
payment is commonly at a higher cost than expected market cost.
An enormous square of share is held by an unfriendly organization,
which leaves no other option for the target organization to
repurchase the stock at a significant premium to forestall the
takeover. The investigate of this hypothesis is that the
administration, which has fumbled the objective's resources, pays
greenmail to propagate its capacity to take advantage of the
targets. As indicated by this view greenmail ought to be disallowed
on the grounds that it diminishes shareholders wealth and
discriminates unreasonably.

Corporate Restructuring:

Asset removals declaration by the target firm that parts of its

current business will be sold off, e.g., offer of subsidiaries, the
removal of possessions in different organizations, sale of resources
like land or property, de- merging of totally irrelevant
organizations, choice to focus on centre organizations and hiving off
non-centre interests and so on Thusly the objective tries to make
the organization less alluring for an expected acquirer.
Lawful/Political Defences:

Where the target firms look for the mediation of the regulatory
bodies or enjoy political campaigning to repulse the hostile bidder.
This may be as an appeal yo the competition regulatory bodies that
the resultant entity would disregard the antitrust standards. in
nations like India, political/legal interventions can create
impressive setbacks which can either baffle the initial bidder driving
it to pull out or expenses might heighten such a great amount
because of postpone that the bidder might be compelled to pull out
on reasonable monetary considerations.

Answer – 3 (b)

A leveraged buyout (LBO) is a type of acquisition where a company

is purchased using a combination of equity and debt. A classic
example of an LBO is when a private equity firm purchases a target
company using a combination of its own funds (equity) and a large
amount of debt financing.

An LBO is a deal where the acquiring company funds the debt it

raises for the acquisition using cash flow of the acquired entity. For
example, Nirma would be raising Rs 4,000-4,500 crore via corporate
bonds or loans to fund the acquisition. The company will use
Lafarge cash flow to repay.