Module 1

Raghu.N
Department of management studies
CiTech

Merger
Definition:
Merger is defined as a combination of two or more
companies into a single company where one survives and
other lose their corporate existence.
Meaning :
Merger is a fusion between two or more enterprises,
whereby the identity of one or more is lost and the result
is a single enterprise.
Voluntary amalgamation of two firms on roughly equal
terms into one new legal entity. Mergers are effected by
exchange of the pre-merger stock (shares) for the stock
of the new firm. Owners of each pre-merger firm continue
as owners, and the resources of the merging entities are
pooled for the benefit of the new entity.

Types of Takeovers
General Guidelines

Takeover

The transfer of control from one ownership group to another.

Acquisition

The purchase of one firm by another

Merger

The combination of two firms into a new legal entity

A new company is created
Both sets of shareholders have to approve the transaction.

Amalgamation
A genuine merger in which both sets of shareholders must
approve the transaction
Requires a fairness opinion by an independent expert on the
true value of the firms shares when a public minority exists

15 - 3

Acquisitions

Acquisition refers to a situation where one

firm acquires another and the latter ceases
to exist.
An acquisition occurs when one company
takes controlling interest in another firm or
its legal subsidiary or selected assets of
another firm.
A firm that attempts to acquire or merger with

another company is called an acquiring

company or acquirer.
A firm which is being merged is called acquired
company.

Evolution of merger
Tracing back to history, merger and acquisitions have
evolved in five stages . As seen from past experience
mergers and acquisitions are triggered by economic
factors. The macroeconomic environment, which includes
the growth in GDP, interest rates and monetary policies
play a key role in designing the process of mergers or
acquisitions between companies or organizations.

First Wave Mergers

Second Wave Mergers
Third Wave Mergers
Fourth Wave Mergers
Fifth Wave Mergers

First wave merger

1897 1904
During

this phase merger occurred between companies, which

enjoyed monopoly over their lines of production like railroads,
electricity etc. the first wave mergers that occurred during the
aforesaid time period were mostly horizontal mergers that took place
between heavy manufacturing industries.
End Of 1st Wave Merger
Majority of the mergers that were conceived during the 1st phase ended in

failure since they could not achieve the desired efficiency. The failure was
fuelled by the slowdown of the economy in 1903 followed by the stock market
crash of 1904. The legal framework was not supportive either. The Supreme
Court passed the mandate that the anticompetitive mergers could be halted using
the Sherman Act.

Second Wave Mergers

1916 1929
It focused on the mergers between oligopolies, rather than monopolies as in
the previous phase. The economic boom that followed the post world war I
gave rise to these mergers. Technological developments like the development
of railroads and transportation by motor vehicles provided the necessary
infrastructure for such mergers or acquisitions to take place. The government
policy encouraged firms to work in unison. This policy was implemented in
the 1920s.
The 2nd wave mergers that took place were mainly horizontal or
conglomerate in nature. Te industries that went for merger during this phase
were producers of primary metals, food products, petroleum products,
transportation equipments and chemicals. The investments banks played a
pivotal role in facilitating the mergers and acquisitions.

End Of 2nd Wave Mergers

The 2nd wave mergers ended with the stock market crash in 1929 and the great

depression. The tax relief that was provided inspired mergers in the 1940s.

Third Wave Mergers

The mergers that took place during this period (1965-69)

were mainly conglomerate mergers. Mergers were inspired
by high stock prices, interest rates and strict enforcement
of antitrust laws. The bidder firms in the 3rd wave merger
were smaller than the Target Firm. Mergers were financed
from equities; the investment banks no longer played an
important role.
End Of The 3rd Wave Merger
The 3rd wave merger ended with the plan of the Attorney

General to split conglomerates in 1968. It was also due to the

poor performance of the conglomerates.Some mergers in the
1970s have set precedence. The most prominent ones were the
INCO-ESB merger; United Technologies and OTIS Elevator
Merger are the merger between Colt Industries and Garlock
Industries.
8

Fourth Wave Merger

1981-1989
It was characterized by acquisition targets that
wren much larger in size as compared to the 3rd
wave mergers. Mergers took place between the
oil and gas industries, pharmaceutical
industries, banking and airline industries.
Foreign takeovers became common with most
of them being hostile takeovers. The 4th Wave
mergers ended with anti takeover laws,
Financial Institutions Reform and the Gulf War.
9

Fifth Wave Merger

The 5th Wave Merger (1992-2000) was inspired

by globalization, stock market boom and
deregulation. The 5th Wave Merger took place
mainly in the banking and telecommunications
industries. They were mostly equity financed
rather than debt financed. The mergers were
driven long term rather than short term profit
motives. The 5th Wave Merger ended with the
burst in the stock market bubble.

10

Types of merger

Horizontal merger - Two companies that are in direct competition and share the
same product lines and markets.
Vertical merger - A customer and company or a supplier and company. Think of
a cone supplier merging with an ice cream maker.
Conglomeration - Two companies that have no common business areas.
Managerial conglomerates
Financial Conglomerates
Congeneric -A type of merger where two companies are in the same or related
industries but do not offer the same products. In a congeneric merger,
the companies may share similar distribution channels, providing synergies for
the merger.
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.
Circular combination - companies producing distinct products seek
amalgamation to share common distribution and research facilities to obtain
economies by elimination of cost duplication and promoting market enlargement.

11

Horizontal and Vertical Mergers

Raw Material
Producer/Supplier

Raw Material
Producer/Supplier

Raw Material
Producer/Supplier

Manufacturer

Manufacturer

Manufacturer

Wholesaler

Wholesaler

Wholesaler

Retailer

Retailer

Consumer

Consumer

Retailer
Consumer

12

Motives/ objectives of
merger

Synergistic benefits
Synergy is the magic force that allows for enhanced cost
efficiencies of the new business. Synergy takes the form of
revenue enhancement and cost savings.

Staff reductions
Economies of scale
Improved market reach and industry visibility.

Diversification
Taxation benefits
Increase in liquidity for owners
Managerial motives
Acquiring new technology/asset/ Managerial skill.

Overcome entry barriers

To dominate market
Procurement of supplies
13

Recent mergers
NEW DELHI: The total value of merger and
acquisition (M&A) deals in the country so far
for 2012 has crossed $16 billion mark, largely
on account of a major intra-group deal in Anil
Agarwal-led Vedanta group last month.
Deals worth $14.75 billion were recorded last
month alone - the largest for the month of
February in three years.
The companies announced a total of 50 M&A
deals during February 2012, as against 57
deals worth $1.31 billion in the previous
month, global consultancy firm Grant Thornton
said in a report.

14

Top M&A Deals

Bharti's talk with MTN for a $23-billion merger deal

fell apart due to various regulatory hurdles,
The Vodafone Hutchison deal ($10.8 billion),
The Hindalco-Novelis transaction ($6 billion),
Daiichi- Ranbaxy ($4.50 billion),
ONGC-Imperial ($2.80 billion)
NTT DOCOMO-Tata Teleservices ($2.70 billion).
The top deals in Asia-Pac include Rio-BHP JV,
China Yangtze Power-China Three Gorges ($15
billion), and Nippon Oil-Nippon Mining ($12 billion)

15

M&A Financial Advisors

Ernst and Young comes out at the top of league

tables for financial advisors to Indian M&As for
2009, with 22 deals worth $5.6 billion, while
Morgan Stanley looks set to topple Goldman
Sachs as the world's top M&A deal advisor by
value for the first time in recent years.
Boutique firm Rothschild was the busiest M&A
advisor, doing the maximum amount of work, while
JP Morgan, though still at number three, has
fallen off in Europe and Asia Pacific.

16

Indian Advisors

Others in the top ten Indian M&A advisors include

Citigroup at third sport, UBS Investment Bank,
Enam, JM Financial, Kotak Investment
Banking, Bansi Mehta and Co, Credit Suisse,
with RBS and Barclays Capital at 10th place.

17