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Financial Management Topic Submitted To Merger and Types of Merger

Roll No 04 14 24 34 44 54

Name Nirav Bhadra Govind Dhuri Kathireasan Anita Pansare Sachin Sangare Khushal Thakkar


Sr. No 1

Topic What is Merger

Page No 3 5 6

2 Advantages of Merger 3 Disadvantages of Merger

4 Procedure for Merger 5 Reasons of Merger 6 Types of Merger 7 Case Study

6 9 11 15

What is a Merger?

A merger occurs when two companies combine to form a single company. It is very similar to an acquisition or takeover, except that the existing stockholders of both companies involved retain a shared interest in the new corporation. By contrast, in an acquisition one company purchases a bulk of a second company's stock, creating an uneven balance of ownership in the new combined company. The entire merger process is usually kept secret from the general public, and often from the majority of the employees at the involved companies. Since the majority of attempts do not succeed, and most are kept secret, it is difficult to estimate how many potential mergers occur in a given year. It is likely that the number is very high, however, given the amount of successful ones and their desirability for many companies. There are a number of reasons by two companies may want to merge, some of which are beneficial to the shareholders and some of which are not. One reason, for example, is to combine a very profitable company with a losing company in order to use the losses as a tax write-off to offset the profits, while expanding the corporation as a whole. Increasing a company's market share is another major use of the merger, particularly among large corporations. By joining with major competitors, a company can come to dominate the market it competes in, giving it a freer hand with regard to pricing and buyer incentives. This form may cause problems when two dominating companies merge, as it may trigger litigation regarding monopoly laws.

Another type of popular merger brings together two companies that make different, but complementary, products. This may also involve purchasing a company that controls an asset that the other company uses somewhere in its supply chain. Major manufacturers buying out a warehousing chain in order to save on warehousing costs, as well as making a profit directly from the purchased business, is a good example of this. PayPal's merger with eBay is another good example, as it allowed eBay to avoid fees they had been paying, while tying two complementary products together. A merger is usually handled by an investment banker, who aids in transferring ownership of the company through the strategic issuance and sale of stock. Some have alleged that this relationship causes some problems, as it provides an incentive for investment banks to push existing clients towards merging, even in cases where it may not be beneficial for the stockholders. The process will no doubt change in the future, as dynamic technologies allow for the development of a more streamlined marketplace that manages to protect the privacy of interested companies while linking up companies that could benefit from combining.

Advantages of Merger

A merger does not require cash. A merger may be accomplished tax-free for both parties. A merger lets the target (in effect, the seller) realize the appreciation potential of the merged entity, instead of being limited to sales proceeds. A merger allows the shareholders of smaller entities to own a smaller piece of a larger pie, increasing their overall net worth. A merger of a privately held company into a publicly held company allows the target company shareholders to receive a public company's stock, despite the liquidity restrictions of SEC Rule 144a. A merger allows the acquirer to avoid many of the costly and time-consuming aspects of asset purchases, such as the assignment of leases and bulk-sales notifications. Of considerable importance when there are minority stockholders is the fact that upon obtaining the required number of votes in support of the merger, the transaction becomes effective and dissenting shareholders are obliged to go along.

Disadvantages of Merger

Diseconomies of scale if business become too large, which leads to higher unit costs. Clashes of culture between different types of businesses can occur, reducing the effectiveness of the integration. May need to make some workers redundant, especially at management levels - this may have an effect on motivation. May be a conflict of objectives between different businesses, meaning decisions are more difficult to make and causing disruption in the running of the business.

Procedure of Merger

Stage I Application to the court Parties are for compromise and arrangement A Company and its creditors A Company and its members

Application to the court can be made by the Company/Liquidator/creditor/member The Application must be accompanied by a scheme of compromise/arrangement.

Stage II - Direction by the court The court shall give direction for holding the meeting only if it is satisfied that the scheme of arrangement is workable and reasonable. Meeting shall be conducted in manner as directed by court. The court has no power to dispense with the holding of meeting even though the shareholders might have unanimously approved the scheme.

Stage III Notice of compromise and arrangement The notice shall be given by the court to CG. CG has right to make a representation (i.e. objections, comments and suggestions) in respect of compromise and arrangement. Representation must be considered by the court but it is not bound by representation. Notice calling the meeting shall be sent to the members or creditors The Notice shall contain Terms and Effect of compromise or arrangement, material interest of directors or manager and interest of debenture trustees.

Every director, manager and debenture trustee shall their interest in the scheme and how their interest will be effected by scheme.

Stage IV Approval of the scheme by creditors/members- conditions The scheme must be approved by a majority in number of creditors or members (any class of them) who are present and voting. The creditors or members (or any class of them) approving the scheme must represent in value of creditors/members who are present and voting. The Scheme must be approved by equity shareholder as well as preference shareholders. Such approval may be received in a meeting of Equity and preference shareholders or in a separate meeting as per order of the court.

Stage V Court to be satisfied that scheme is bonafide Compliance of direction of the court in holding the meeting, provision of the companies act. Arrangement is a real and was accepted by a competent authority. Disclosure of material facts including latest financial position, auditors report and other information. Members or creditors or any class of them are fairly represented by those who attended the meeting.

The majority is not coercing minority There is no oblique motive of the scheme. Scheme is based on commercial consideration, workable, feasible, financially viable and in public interest Scheme is in interest of company, members or creditors. Majority is acting reasonably, prudently and bonafide.

Stage VI Sanction of the Scheme It is discretion of the court to sanction or reject the scheme.

Stage VII Filing of the order of the court with the Registrar The Scheme becomes binding only on the filing of the courts order with the Registrar.

Reason for Mergers There are generally two types of mergers: (a) horizontal between competing firms in the same sector and in the same part of the value chain; and (b) vertical - between firms in the same sector but in different parts of the value chain. Mergers are often described as a marriage since it normally involves two partners more or less equal in strength which have decided to combine their managerial and operational functions

to form a new company with shared resources and corporate objectives. There are a number of reasons that companies pursue mergers: Industry Consolidation Most industries are fragmented and consist of many competitors. A merger is a tactical move that enables a company to reposition itself (with a merger partner) into a stronger operational and competitive industry position.

Improve Competitive Position One important reason that companies combine is to improve their competitive market position. Merging with a competitor is an excellent way to improve a company's position in the marketplace. It reduces competition, and allows the combined firm to use its resources more effectively.

Defensive Move A merger is an attractive tactical move in any economic environment - particularly in a cyclical down-turn where a merger can be a strong defensive move. Synergies Reduce costs and improve earnings. One of the most common reasons for a merger are synergies 10

allowing two companies to work more efficiently together than either would separately. Such synergies may result from the ability to exploit economies of scale, eliminate duplicated functions, share managerial expertise and raise capital. Generally, the assumption is that larger firms are more cost-effective than are smaller companies (i.e. exhibit "economies of scale").

Market / Business / Product Line Issues Often mergers occur simply because one firm is in a market that another wants to enter or in order to gain a critical size that can justify the expense of geographic expansion. All of the target firm's experience and resources (the employees' expertise, business relationships, etc.) are available by merging with the other party. Whether the market is a new product, a business line, or a geographical region, market entry or expansion is a powerful reason for a merger. Closely related to these issues are product line issues. A firm may wish to expand, balance, fill out or diversify its product lines.

Acquire Resources and Skills One firm may simply wish to obtain access to the resources of another company or to combine the resources of the two companies. These resources may be tangible resources such a plant and equipment, or they may be intangible resources such as trade secrets, patents, copyrights, leases, etc., or they may be talents of the target company's employees.

Types of Mergers Horizontal Mergers

Horizontal mergers occur when two companies sell similar products to the same markets. A merger between CocaCola and the Pepsi beverage division, for example, would be horizontal in nature. The goal of a horizontal merger is to create a new, larger organization with more market share. Because the merging companies' business operations may be very similar, there may be opportunities to join certain operations, such as manufacturing, and reduce costs. Example

A merger between Coca-Cola and the Pepsi beverage division, for example, would be horizontal in nature. The goal of a horizontal merger is to create a new, larger organization with more market share. Because the merging companies' business operations may be very similar, there may be opportunities to join certain operations, such as manufacturing, and reduce costs.

Vertical Mergers

A vertical merger joins two companies that may not compete with each other, but exist in the same supply chain. An automobile company joining with a parts supplier would be an example of a vertical merger. Such a deal would allow the automobile division to obtain better pricing on parts and have better control over the manufacturing process. The parts division, in turn, would be guaranteed a steady stream of business. Example


A vertical merger joins two companies that may not compete with each other, but exist in the same supply chain. An automobile company joining with a parts supplier would be an example of a vertical merger. Such a deal would allow the automobile division to obtain better pricing on parts and have better control over the manufacturing process. The parts division, in turn, would be guaranteed a steady stream of business. Synergy, the idea that the value and performance of two companies combined will be greater than the sum of the separate individual parts is one of the reasons companies merger.

Market Extension Mergers The main benefit of a market extension merger is to help two organizations that may provide similar products and services grow into markets where they are currently weak. Rather than try to establish a retail presence in Europe, Wal-Mart could merge with a European retailer that is already successful and has good brand recognition. Even though the two organizations are both big-box retailers selling similar products, they have found success in different parts of the world. As a single organization, they have a diverse, global presence.

Example A very good example of market extension merger is the acquisition of Eagle Bancshares Inc by the RBC Centura. Eagle Bancshares is headquartered at Atlanta, Georgia and has 283 workers. It has almost 90,000 accounts and looks after assets worth US $1.1 billion. Eagle Bancshares also holds the Tucker Federal Bank, which is one of the ten biggest banks in the metropolitan

Atlanta region as far as deposit market share is concerned. One of the major benefits of this acquisition is that this acquisition enables the RBC to go ahead with its growth operations in the North American market. With the help of this acquisition RBC has got a chance to deal in the financial market of Atlanta , which is among the leading upcoming financial markets in the USA. This move would allow RBC to diversify its base of operations.

Product Extension Mergers Two companies may merge when they sell products into different niches of the same markets. A manufacturer of highend stoves may merge with a company that makes budgetconscious models. The combined organization now has a complete product line that spans various price points.

Example The acquisition of Mobilink Telecom Inc. by Broadcom is a proper example of product extension merger. Broadcom deals in the manufacturing Bluetooth personal area network hardware systems and chips for IEEE 802.11b wireless LAN. Mobilink Telecom Inc. deals in the manufacturing of product designs meant for handsets that are equipped with the Global System for Mobile Communications technology. It is also in the process of being certified to produce wireless networking chips that have high speed and General Packet Radio Service technology. It is expected that the products of Mobilink Telecom Inc. would be complementing the wireless products of Broadcom.


Conglomerate Mergers

Conglomerate mergers occur when two organizations sell products in completely different markets. There may be little or no synergy between their product lines or areas of business. The benefit of a conglomerate merger is that the new, parent organization gains diversity in its business portfolio. A shoe company may join with a water filter manufacturer in accordance with a theory that business would rarely be down in both markets at the same time. Many holding companies are built upon this theory.

Example A leading manufacturer of athletic shoes, merges with a soft drink firm. The resulting company is faced with the same competition in each of its two markets after the merger as the individual firms were before the merger. One example of a conglomerate merger was the merger between the Walt Disney Company and the American Broadcasting Company

Case Study of HDFC Bank and Centurion Bank of Punjab The largest merger and perhaps the beginning of the consolidation wave in the BFSI sector. Banks main task was to harmonize the accounting policies and, as a result, HDFC Bank took a hit of Rs. 70 Crs to streamline the policies of erstwhile CBoP itself. Of this 70% went toward the harmonization of accounting policies relating to loan- loss provisioning and depreciation of assets,

And the balance 30% reserves write-offs were toward the merger- related restructuring costs like stamp duty, HR and IT integration expenses. The cost/income ratio of the merged entity has increased to around 56% from 50% levels for standalone HDFC Bank HDFC Bank has retained almost all the employees of CBoP and expects to achieve full synergies and efficiencies, in terms of the restructured HR and IT processes, in the next 2-3 quarters This merger with CBoP would result in the combined entity having 1148 branches at present, which is the largest branch distribution network for a private bank in India This apart, HDFC Bank would gain dominance in states like Punjab, Haryana, Delhi, Maharashtra and Kerala. The merger will add close to 394 branches to HDFC Banks network of 750 branches, almost 50% increase in the existing network, while adding close to 19% to its asset base On the product portfolio side, both the banks have a strong foothold in vehicle financing, which is a natural synergy CBoP has a strong and experienced management team. The management has demonstrated its capability to integrate diverse organizations by successfully reaping synergies of the merger with Bank of Punjab. CBoP team has strengthen HDFC Banks management bandwidth and consequently the latter added international banking to its services kitty.