Introduction:

Most corporate growth occurs by internal expansion which takes place when a firm's
existing divisions grow through normal capital budgeting activities. However the most
dramatic examples of growth, often the largest increases in firms' stock prices, result
from mergers.
The phrase mergers and acquisitions (abbreviated M&A) refers to the aspect of
corporate strategy, corporate finance and management dealing with the buying, selling
and combining of different companies that can aid, finance, or help a growing company
in a given industry grow rapidly without having to create another business entity.
A 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 merger and
acquisitions (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.
Historically mergers have often failed (Strub.1007) to add significantly to the value of the
acquiring firm's shares (king, at al.'2004). Corporate mergers may be aimed at reducing
market competition, cutting costs (e.g. lying off employees), reducing taxes, removing
management, "empire building" by the acquiring managers, or other purposes which may
or may not be consistent with public policy or public welfare. In the U.S approval by both
the federal trade Commission and the Department of Justice.

MERGER:
"In business a MERGER is a combination of two companies into one larger company."
Such actions are commonly voluntary and involve stock swap or cash payments to the
target. Stock swap is often used as it allows the shareholders of the two companies to
share the risk involved in the deal. A merger can resemble a takeover but result in a new
company name, often combining the names of original companies and in new branding;
in some cases, terming the combination a "merger" rather than an acquisition is done
purely for political or marketing reasons.

TYPES OF MERGERS:
Economists classify mergers into four types:
1. HORIZENTAL MERGERS:
A combination of two firms that produce the same type of good and service. Such as the
Nation Bank/ America Bank.
2. VERTICAL MERGERS:
A merger occurs when two firms, each working at different stages in the production of
the same good, combine. Such as an oil producer's acquisition of a petrochemical firm
that uses oil as a raw material.
3. CONGENERIC MERGERS:
Congeneric means "allied in nature or action". Where two merging firms are in the
same general industry, but they have no mutual buyer/customer or supplier relationship,
such as a merger between a bank and a leasing company. Example: prudential' acquisition
of Bache & company.
There are two types of mergers that are distinguished by how the merger is financed.
Each has certain implications for the companies involved and for investors:
Purchase mergers - As the name suggests, this kind of merger occurs when one
company purchases another. The purchase is made with cash or through the issue of some
kind of debt instrument; the sale is taxable.

Acquiring companies often prefer this type of merger because it can provide them with
a tax benefit. Acquired assets can be written-up to the actual purchase price, and the
difference between the book value and the purchase price of the assets can depreciate
annually, reducing taxes payable by the acquiring company.
Consolidation mergers - With this merger, a brand new company is formed and both
companies are bought and combined under the new entity. The tax terms are the same as
those of a purchase merger.
4. CONGLOMERATE MERGER:
A merger of companies takes place when the two firms operate in different industry.
Such as Mobil oil/s acquisition of Montgomery Ward.
A unique type of merger called a reverse merger is used as a way of going public
without the expense and time required by an IPO.

FURTHER CLASSIFICATION:
FRIENDLY MERGER:
A merger transaction endorsed by the target firm's management and approved by its
stockholder.
HOSTILE MERGER:
A merger in which the target firm's management resists acquisition.
STRATEGIC MERGER:
A merger transaction `undertaken to achieve economies of scale.
FINANCIAL MERGER:
A merger transaction undertaken with the goal of restructuring the acquired company to
improve its cash flow and unlock its hidden value.

 ACCRETIVE MERGER:
These mergers are those in which an acquiring company's earnings per share (EPS)
increase. An alternative way of calculating this is if a company with a high price to
earning ratio (P/E) acquires one with a low P/E.
DILUTIVE MERGER:
These are the opposite of above, whereby a company's EPS decreases. The company will
be one with low P/E acquiring one with a high P/E.

ACQUISITION:
An Acquisition, also known as a Takeover, is the buying of one company,"the
Target" by another. An acquisition may be friendly or hostile. In the former case, the
companies cooperate in negotiation; in the latter case, the takeover target is unwilling to
be bought or the target's board has no prior knowledge of the offer. Acquisition usually
refers to a purchase of a smaller firm by a larger one. Sometimes, a smaller firm will
acquire management control of a larger or longer established known and keep its name
for the combined entity. This is known as a reverse takeover.
Acquiring Company:
The company in a merger transaction that attempt to acquire another company.
Target Company:
The company in a merger transaction that the acquiring company is pursing.

TYPES OF ACQUISITION:

The buyer buys the share of the target company.

The buyer buys the assets of the target company.

Distinction between mergers and acquisitions

The terms merger and acquisition mean slightly different things.

When one company takes over another and clearly establishes 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.
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. It is quite normal though for
M&A deal communications to take place in a so called 'confidentiality bubble' whereby
information flows are restricted due to confidentiality agreements (Harwood, 2005).

Motives behind the M&A:

The dominant rational used to explain M&A activity is that acquiring firms seek
improved financial performance. The following motives are considered to improve
financial performance:

SYNERGIES:
This refers to the fact that the combined company can often reduce its fixed costs by
removing duplicate departments or operations, lowering the costs of the company relative
to the same revenue stream, thus increasing profit margins.

Increased Revenue/increased Market Share:

This assumes that the buyer will be absorbing a major competitor and thus increase its
market power (by capturing increased market share) to set prices.

Cross selling:

For example, a bank buying a stock broker could then sell its banking product to the
stock broker's customers, while the broker can sign up the bank's customers for brokerage
accounts. Or' a manufacturer can acquire and sell complementary products.

Economies of scale:
For example, managerial economies such as the increased opportunity of managerial
specialization .Another example are purchasing economies due to the increased order size
and associate bulk-buying discounts.

Taxes:
A profitable company can buy a loss marker to use the target's loss as their advantage by
reducing their tax liability. In the United States and many other countries, rules are in
place to limit the ability of profitable companies to "shop" for loss making companies,
limiting the tax motive of an acquiring company.

Geographical or other diversification:

This is designed to smooth the earnings results of a company, which over the long term
smoothens the stock price of a company, giving conservative investors more confidence
in investing in the company. However, this does not always deliver value to shareholders.

Resource transfer:
Resources are unevenly distributed across firms (Barny,1991) and the integration of the
target and acquiring firm resources can create value through either overcoming
information asymmetry or by combining scarce resources.

Vertical integration:
Vertical integration occurs when an upstream and downstream firm mergers (or one
acquires the other). There are several reasons for this to occur. One reason is to
internalize an externality problem. A common example is such externality is double
marginalization. Double marginalization occurs when both the upstream and downstream
firms have monopoly power; each firm reduces output from the competitive level to the
monopoly level, creating two deadweight losses. By merging vertically integrates firm

can collect one deadweight loss by setting the upstream firm's output to the competitive
level. This increases profits and consumer surplus. A merger that creates a vertically
integrated firm can be profitable.
However, on average and across the most commonly studied variable, acquiring firm's
financial performance does not positively change as a function of their acquisition
activity.
Therefore, additional motives for merger and acquisition that add shareholder value
include:
Diversification:
While this may hedge a company against a downturn in an individual industry it fails to
deliver value, since it is possible for individual shareholders to achieve the same hedge
by diversifying associated with a merger.
Manager's Hubris:
Manager's overconfidence about expected synergies from M&A which results in
overpayments for the target company.
Empire Building:
Managers have lager companies to manage and hence more power.
Manger's compensation:
In the past, certain executive management teams had their payout based on the total
amount of profit of the company, instead of the profit per share, which would give the
team a perverse incentive to buy companies to increase the total profit while decreasing
the profit per share (which huts the owners of the company, the shareholder); although
some empirical studies show that compensation is linked to profitability rather than mere
profits of the company.

Business Valuations:
The five most common ways to valuate a business are
Asset valuation,

 Historical earnings valuation,

Future maintainable earnings valuation,
Relative valuation (comparable company & comparable transactions),
Discounted cash flow (DCF) valuation
Professionals who valuate businesses generally do not use just one of these methods but a
combination of some of them, as well as possibly others that are not mentioned above, in
order to obtain a more accurate value. These values are determined for the most part
looking at a company's balance sheet and income statement and withdrawing the
appropriate information. The information in the balance sheet or income statement is
obtained by one of the three accounting measures: a Notice to Reader, a Review
Engagement and an Audit.
Accurate business valuation is one of the most important aspects of M&A as valuations
like these will have a major impact on the price that a business will be sold for. Most
often this information is expressed in a letter of Opinion of Value LOV) when the
business is being valuated for interest's sake. There are other, more detailed ways of
expressing the value of a business. These reports generally get more detailed and
expensive as the size of a company increases; however, this is not always the case as
there are many complicated industries which require more attention to detail, regardless
of size.

Financing Merger & Acquisition:

Mergers are generally differentiated from acquisitions partly by the way in which they are
financed and partly by the relative size of the companies. Various methods of financing
an M&A deal exist:

1. Cash:
Such transactions are usually termed acquisitions rather than mergers because the
shareholders of the target company moved from the picture and the target comes under
the (indirect) control of the bidder's shareholders alone.

A cash deal would make more sense during a downward trend in the interest rates.
Another advantage of using cash for an acquisition is that these trends to lesser chances
of EPS dilution for the acquiring company. But a caveat in using cash is that it places
constraints on the cash flow of the company.

2. Debt Financing:
Financing capital may be borrows from a bank, or raised by an issuing of bonds.
Alternatively, the acquirer's stock may be offered as consideration. Acquisitions financed
through debt are known as leveraged buyouts if they take the target private, and the debt
will often be moved down onto the balance sheet of the acquired company.

3. Hybrids:
An acquisition can involved a combination of cash and debt, or a combination of cash
and stock of the purchasing entity.

4. Factoring:
Factoring can provide the necessary extra to make a merger or sale work; it is out right
sale of account receivables.

Specialist M&A advisory firms:

Although at present the majority of M&A advice is provided by full-service investment
banks, recent years have seen a rise in the prominence of specialist M&A advisors, who
only provide M&A advice (and not financing). To perform these services in the US, an
advisor must be a licensed broker dealers and subject to SEC (FINRA) regulation. More
information on M&A advisory firms is provided at corporate advisory.

M&A Marketplace Difficulties:

No marketplace currently exists in many states for the mergers and acquisitions of
privately owned small to mid-sized companies. Market participants often wish to
maintain a level of secrecy about their efforts to buy or sell such companies. Their
concern for secrecy usually arises from the possible negative reactions a company's
employees, bankers, suppliers, customers and other might have if the effort or interest to

seek a transactions were to become known .This need for secrecy has thus far thwarted
the emergence of a public forum or marketplace to serve as a clearinghouse for this large
volume of business. In some states, a multiple listing service (MLS) of small businesses
for sale is maintained by organization s such as business brokers of Florida (BBF).
Another MLS is maintained by international Business Brokers Association (IBBA).
At present, the process by which a company is bought or sold can prove difficult, slow
and expensive. A transaction typically requires six to nine months and involves many
steps. Locating parties with whom to conduct a transaction forms one step in the overall
process and perhaps the most difficult one. Qualified and interested buyers of
multimillion dollar corporations are hard to find. Even more difficulties attend brining a
number of potential buyers forward simultaneously during negotiations. Potential
acquirers in an industry simply cannot effectively "monitor" the economy at large for
acquisition opportunities even though some may fit well within their company's
operations or plans.
One part of the M&A process which can be improve d significantly using networked
computers is the improved access to "data rooms" during the due diligence process
however only for large transaction. For the purposes of small-medium sized business,
these data rooms serve no purpose and are generally not used. Reasons for frequent
failure of M&A was analyzed by Thomas Straub in Reasons for frequent failure in
mergers and acquisition- a comprehensive analysis, DUV Gabbler Edition, 2007.

Short rum & Long run Factors:

Short run Factor:
One of the major short rub factors that sparked in the Great Merger Movement was the
desire to keep prices high. During the panic of 1893, the demand declined. When demand
for the good falls, firms found it profitable to collude and manipulate supply to counter
any changes in demand for the good. This type of cooperation led to widespread
horizontal integration amongst firms of the era. Focusing on mass production allowed
firms to reduce unit costs to a much lower rate.

Long run Factors:

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In the long run, due to the desire to keep cost low, it was advantageous for firms to merge
and reduce their transportation costs thus producing and transporting from one location
rather than various sites of different companies as in the past. This resulted in shipment
directly to market from this one location. In addition, technological changes prior to the
merger movement within companies increased the efficient size of plants with capital
intensive assembly lines allowing for economies of scale. Thus improved technology and
transportation were forerunners to the Great Merger Movement. In the part due to the
government, however, many of these initially successful mergers were eventually
dismantled.

Major M&A in the 2000s:

Top 10 M&A deals worldwide by value (in mil. USD) from 2000 to 2009:

Rank Year

Purchaser
Fusion: America

2000

2000 Glaxo Wellcome Plc.

2004

2006

2001

2004 Sanofi-Synthelabo SA

2000

2002

Online Inc. (AOL)

Royal Dutch
Petroleum Co.
AT&T Inc.
Comcast Corporation

Purchased
Time Warner
SmithKline
Beecham Plc.
Shell Transport &
Trading Co
BellSouth
Corporation
AT&T Broadband &
Internet Svcs
Aventis SA

Spin-off: Nortel

USD)
164,747

75,961
74,559
72,671
72,041
60,243
59,974

Networks Cop
Pfizer Inc.

Transaction value (in mil.

Pharmacia
Corporation

59,515

11

2004

10 2008

JP Morgan Chase &

Co
Inbev Inc.

Bank One Corp

Anheuser-Busch
Companies, Inc

58,761
52,000

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