NOTE ON MERGERS AND ACQUISITIONS
MERGER- Merger is an economic tool that is employed for elevating the long-standing success which is achieved by developing their functional competence. Mergers take place when the two firms mutually decide to combine their business. However, the process can take the form of an unfriendly subjugation.
ACQUISITIONS can be either friendly or intimidating and takes place between the bidding and the targeted firm. Reverse acquisition take place when the target company is bigger than the firm which offered the takeover proposal. During the process the bidder has the right to buy the share of the targeted firm.
DIFFERENCE BETWEEN MERGERS AND ACQUISITIONS
Though the two words mergers and acquisitions are often spoken in the same breath and are also used in such a way as if they are synonymous, however, there are certain differences between mergers and acquisitions
| Merger | Acquisition |
| The case when two companies (often of same size) decide to move forward as a single new company instead of operating business separately. | The case when one company takes over another and establishes itself as the new owner of the business. |
| The stocks of both the companies are surrendered, while new stocks are issued afresh. | The buyer company “swallows” the business of the target company, which ceases to exist. |
| For example, Glaxo Wellcome and SmithKline Beehcam ceased to exist and merged to become a new company, known as Glaxo SmithKline. | Dr. Reddy’s Labs acquired Betapharm through an agreement amounting $597 million. |
A buyout agreement can also be known as a merger when both owners mutually decide to combine their business in the best interest of their firms. But when the agreement is hostile, or when the target firm is unwilling to be bought, it is considered as an acquisition.
THE REAL PICTURE
It’s quite rare to find actual mergers in practice. In majority of the cases, when one company buys another, according to the terms of the deal, it allows acquired company to proclaim that it’s a merger, in spite of the fact that, it’s actually an acquisition. Being bought out may send negative impression about the company, and hence the acquired company prefers to call it merger.
A MERGER OR AN ACQUISITION?
So, the big question is when a purchase should be called a merger and when it should be described as an acquisition? It depends on how the two parties involved want to announce it like and how is it communicated to the board of directors, employees and shareholders of the company.
IMPORTANT TERMINOLOGY RELATED TO MERGERS AND ACQUISITIONS
- Asset Stripping – Asset Stripping is the process in which a firm takes over another firm and sells its asset in fractions in order to come up with a cost that would match the total takeover expenditure.
- Demerger or Spin off – Demerger refers to the practice of corporate reorganization. During this process a fraction of the firm may break up and establish itself as a new business identity.
- Black Knight – The term generally refers to the firm which takes over the target firm in a hostile manner.
- Carve – out – The procedure of trading a small part of the firm as an Initial Public Offering is known as carve-out.
- Poison Pill or Suicide Pill Defense – Poison Pill is an approach which is adopted by the target firm to present itself as less likable for an unfriendly subjugation. The shareholders have full privilege to exchange their bonds at a premium if the buyout takes place.
- Greenmail – Greenmail refers to the state of affairs where the target firm buys back its own assets or shares from the bidding firm at a greater cost.
- Dawn Raid – The process of purchasing shares of the target firm anticipating the decline in market costs till the completion of the takeover is known as Dawn Raid.
- Grey Knight – A firm that acquires another under ambiguous conditions or without any comprehensible intentions is known as a grey knight.
- Macaroni Defense – Macaroni Defense is an approach that is implemented by the firms to protect them from any hostile subjugation. A company can prevent itself by issuing bonds that can be exchanged at a higher price.
- Management Buy In – This term refers to the process where a firm buys and invests in another and employs their managers and officials to administer the new established business identity.
- Hostile Takeover – Unfriendly or Hostile acquisitions takes place when the management of the target firm does not have any prior knowledge about it or does not mutually agree for the proposal. The disagreements between the chief executives of the target firm may not be long-lasting and the hostile subjugation may take up the form of friendly takeover. This practice is prevalent among the British and American firms. However, some of them are still against hostile subjugations.
- Management Buy Out – A management buy out refers to the process in which the management buys a firm in collaboration with its undertaking entrepreneurs.
MERGER AND ACQUISITION PROCESS
It’s a strategic process for many organizations. Involves through analysis, some of the main steps involved are
Market valuation
Before going for any merger and acquisition, it is of utmost important that company must know the present market value of the organization as well as its estimated future financial performance. The information about organization, its history, products/services, facilities and ownerships are reviewed. Sales organization and marketing approaches are also taken into consideration
Exit Planning
The decision to sell business largely depends upon the future plan of the organization – what does it target to achieve and how is it going to handle the wealth etc. Various issues like estate planning, continuing business involvement, debt resolution etc. as well as tax issues and business issues are considered before making exit planning
Structured Marketing Process
This is merger and acquisition process involves marketing of the business entity. While doing the marketing, selling price is never divulged to the potential buyers. Serious buyers are also identified and then encouraged during the process. Following are the features of this phase.
- Seller agrees on the disseminated materials in advance. Buyer also needs to sign a Non-Disclosure agreement.
- Seller also presents Memorandum and Profiles, which factually showcases the business.
- Database of prospective buyers are searched.
- Assessment and screening of buyers are done.
- Special focuses are given on he personal needs of the seller during structuring of deals.
Letter of Intent
Both, buyer and seller take the letter of intent to their respective attorneys to find out whether there is any scope of further negotiation left or not. Issues like price and terms, deciding on due diligence period, deal structure, purchase price adjustments, earn out provisions liability obligations, ISRA and ERISA issues, Non-solicitation agreement, Breakup fees and no shop provisions, pre closing tax liabilities, product liability issues, post closing insurance policies, representations and warranties, and indemnification issues etc. are negotiated in the Letter of Intent. After reviewing, a Definitive Purchase Agreement is prepared.
Buyer Due Diligence
This is the phase in the merger and acquisition process where seller makes its business process open for the buyer, so that it can make an in-depth investigation on the business as well as its attorneys, bankers, accountants, advisors etc.
Definitive Purchase Agreement
Finally Definitive Purchase Agreement are made, which states the transaction details including regulatory approvals, financing sources and other conditions of sale.
Ten biggest Mergers and Acquisitions deals in India
- Tata Steel acquired 100% stake in Corus Group on January 30, 2007. It was an all cash deal which cumulatively amounted to $12.2 billion.
- Vodafone purchased administering interest of 67% owned by Hutch-Essar for a total worth of $11.1 billion on February 11, 2007.
- India Aluminium and copper giant Hindalco Industries purchased Canada-based firm Novelis Inc in February 2007. The total worth of the deal was $6-billion.
- Indian pharma industry registered its first biggest in 2008 M&A deal through the acquisition of Japanese pharmaceutical company Daiichi Sankyo by Indian major Ranbaxy for $4.5 billion.
- The Oil and Natural Gas Corp purchased Imperial Energy Plc in January 2009. The deal amounted to $2.8 billion and was considered as one of the biggest takeovers after 96.8% of London based companies’ shareholders acknowledged the buyout proposal.
- In November 2008 NTT DoCoMo, the Japan based telecom firm acquired 26% stake in Tata Teleservices for USD 2.7 billion.
- India’s financial industry saw the merging of two prominent banks – HDFC Bank and Centurion Bank of Punjab. The deal took place in February 2008 for $2.4 billion.
students hope this information is useful, try to analyze the process for the above 10 deals.
