M&A

Mergers & Acquistions 2

Types of Merger
• Horizontal
• Vertical
• Concentric
• Conglomerate
• Reverse Merger

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Horizontal Merger
• A Type of Merger occurred when two companies competing
in the same line of Business Activities.
• The Effect on the Market Would be Either Large or a little to
No Effects.
• Number of firms in an industry will be reduced due to
Horizontal Mergers and this may lead firms to Earn huge
monopoly profits.
• Horizontal mergers are regulated by government for their
negative effect on competition.
• Synergies and potential gains in market share are much
greater for merging firms in such an industry.

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Eg:
1. In May 2010 Bank of Rajasthan with ICICI bank
2. ING Vysya with Kotak Mahindra Bank
3. Bank of Punjab with Centurian Bank –later Centurian Bank of
Punjab with HDFC Bank
4. Kelvinator, Allwyn,Inalsa with Electrolux –later Electrolux India
opearations with Videocon.
5. Facebook and Instagram (both in Social Media)
6. Walt Disney acquisition of Pixar Animation studios
7. Exxon buying Mobil for$ 73 Bn
8. ACC cement With Damodar cement,
9. L&T Cement with Ultratech cement
10. Wallmart acquisition of Flipkart

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Vertical Merger
• A Merger between two companies producing different goods or services for
one Specific Finished Products.( If a car manufacturer buys a Tyre company )
• For ex: It refers to a situation where a product manufacturer merges with the
supplier of Inputs or Raw Materials. Also Known as Vertical Foreclosure. This
helps in cost reduction and reducing transportation cost
• Reasons for Vertical Merger
• Reduce operating costs
• Realize higher profits
• Ensure tighter quality control
• Better flow and control of information along the supply chain
• Synergies: operating synergy, financial synergy, managerial synergy, etc.
• There are two types of vertical mergers
• Backward Vertical Mergers
• Forward Vertical Mergers

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IB Corp Restructuring RV 5
• Backward Integration:
• Backward integration occurs when a company initiates a vertical
integration by moving backward in its industry's chain.
• Ex.: Backward integration is when a bakery business moves up the
supply chain to purchase a wheat processor and/or a wheat farm.
• A retail supplier is purchasing one of its manufacturers, therefore
cutting out the middle man, and hindering competition.
• Forward Integration:
• forward integration is a type of vertical integration that involves the
purchase or control of distributors.
• An example of forward integration is if the bakery sold its goods
directly to consumers at local farmers markets, or if it owned a chain of
retail stores through which it could sell its goods.
• If the bakery did not own a wheat farm, a wheat processor or a retail
outlet, it would not be vertically integrated at all.

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Backward Vertical Mergers.
1. HLL &TATA tea with tea gardens in Assam & west
Bengal.
2. BPL. with Uptron color picture Tube

Forward Vertical Mergers

1. Oil companies buying up service stations
2. Disney’s With American Broadcasting Co

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Vertical & Horizontal Mergers

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Co centric Merger
• A type of merger where the two companies coming
together to share some common expertise that they may
posses which are mutually advantageous.
• The Common Expertise may be Managerial or Technological
Know How that may not be Industry or Product Specific.
• In short combining two or more businesses in order to pool
expertise.
• A Merger between a Motor cycle Manufacturer and an
Automobile Manufacturer would be co centric Merger

Ex.Merger of LinkedIn with Microsoft owing to expertise in

Cloud computing
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Conglomerate Merger
• A Merger Between Firms that are involved in totally
unrelated business activities .
• The main reason behind this kind of Merger are increasing
Market Share, Synergy and Cross Selling.
• They also Merged to diversify and reduce their risk
Exposure.
Ex: the Merger between Walt Disney company and the
American Broadcasting Company.

P&G with Gillette

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Reverse Merger
• This is where a larger company mergers with a smaller
company
• Generally done to get the benefit of smaller company’s
accumulated losses, or if it has a patent or license etc. which
cant be transferred.
• In the conventional method, thus a company is absorbed by
the profitable one (called normal merger). On the other
hand, if reverse situation takes place i.e. if sick company
extends its embracing arm to the profitable company and in
turn absorbs it in its fold, this action is called reverse
merger. It’s a merger of healthy company into a loss making
company as compared to a normal merger where weaker
units merge into stronger one.

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Example:
1. ICICI with ICICI Bank
2. Godrej soaps (TO Rs. 470 Crores) with the loss
making Gujarat Godrej Innovative chemicals (TO
Rs.60 crores)

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Procedure for Merger
• Approval from Board of Directors of both the companies for
the merger
• Approval of merger by shareholders ,bankers, trustees
• Intimation to stock Exchange where these firms are listed.
• Submission of application to the High court
• Submission of general meeting report of the chairman to
court
• Hearing the petition & confirmation of merger.
• Filling Court Order with ROC by the firms.
• Integration of assets and liabilities

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Framework for analysis of Mergers
• Identifying Type of Merger
• Market Definition, and Market Share and
Concentration
• Competitive Analysis
• Unilateral Effects
• Coordinated Effects
• Entry and Expansion
• Efficiency
• Failing Firm

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Market Definition, and Market Share and
Concentration
• Relevant Market
• Product Market
• Geographic Market
• Market Definition
• Demand-side Substitutability
• Supply-side Substitutability
• Market Share and Concentration
• Market Share and HHI (Herfindahl- Hirschman Index- a
commonly accepted measure of Market concentration)
• Safe Harbor

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Competitive Analysis
• Unilateral Effects
• Entry and Expansion
• Buyer Power
• Product Differentiation
• Competitors’ Characteristics
• Alternative Products
• etc.

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• Coordinated Effects
• Number of Firms
• Frequency of Trade
• Product Homogeneity
• Market Transparency
• Existence of Maverick firms
• Market Stability
• Cross-shareholding
• Multi-market Contact and Symmetry
• etc.

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Entry and Expansion
• Entry
• Likelihood of Entry
• Sufficiency of Entry
• Timeliness of Entry
• Expansion

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Efficiency
• Efficiency Criteria
• Verifiability
• Benefit to Consumers
• Merger Specificity

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Failing Firm
• Failing Firm Criteria
• Financial Difficulties without the Merger
• Inevitability of Exit in the absence of a Merger
• No Less Anti-Competitive Alternative to the Merger

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Motives for Merger and the Industry Life cycle
• The motives for a merger are influenced, in part, by the
industry’s stage in its life cycle.
• Factors include
• Need for capital.
• Need for resources.
• Degree of competition and the number of competitors.
• Growth opportunities (organic vs. external).
• Opportunities for synergy.

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contd
Industry Life
Cycle Stage Industry Description Motives for Merger Types of Mergers
Pioneering  Industry exhibits  Younger, smaller companies may sell  Conglomerate
development substantial themselves to larger companies in  Horizontal
development costs mature or declining industries and look
and has low, but for ways to enter into a new growth
slowly increasing, industry.
sales growth.  Young companies may look to merge
with companies that allow them to
pool management and capital
resources.
Rapid  Industry exhibits  Explosive growth in sales may require  Conglomerate
accelerating high profit margins large capital requirements to expand  Horizontal
growth caused by few existing capacity.
participants in the
market.

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Industry Life Industry Types of
Cycle Stage Description Motives for Merger Mergers
Mature  Industry  Mergers may be undertaken to  Horizontal
growth experiences a achieve economies of scale,  Vertical
drop in the entry savings, and operational
of new efficiencies.
competitors, but
growth potential
remains.
Stabilization  Industry faces  Mergers may be undertaken to  Horizontal
and market increasing achieve economies of scale in
maturity competition and research, production, and
capacity marketing to match the low cost
constraints. and price performance of other
companies (domestic and foreign).
 Large companies may acquire
smaller companies to improve
management and provide a
broader financial base.

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Industry Life
Cycle Stage Industry Description Motives for Merger Types of Mergers
Deceleration  Industry faces  Horizontal mergers may be undertaken  Horizontal
of growth and overcapacity and to ensure survival.  Vertical
decline eroding profit  Vertical mergers may be carried out to  Conglomerate
margins. increase efficiency and profit margins.
 Companies in related industries may
merge to exploit synergy.
 Companies in this industry may acquire
companies in young industries.

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Industry Life-Cycle Stages: Strategic Implications
• Industry life cycle
• refers to the stages of introduction, growth, maturity,
and decline that typically occur over the life of an
industry

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Stages of the Industry Life Cycle

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Strategies in the Introduction Stage
• Introduction stage
• the first stage of the industry life cycle,
characterized by
(1) new products that are not known to customers,
(2) poorly defined market segments,
(3) unspecified product features,
(4) low sales growth,
(5) rapid technological change,
(6) operating losses, and
(7) a need for financial support.

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Industry Life-Cycle Strategies
For the Introduction Stage:
• Develop product and get users to try it
• Generate exposure so product becomes “standard”

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Industry Life-Cycle Strategies
• Growth stage
• The second stage of the product life cycle,
characterized by
(1) strong increases in sales;
(2) growing competition;
(3) developing brand recognition; and
(4) a need for financing complementary value-chain
activities such as marketing, sales, customer
service, and research and development.

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Industry Life-Cycle Strategies
For the Growth Stage:
• Brand recognition
• Differentiated products
• Financial resources to support value-chain activities

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Industry Life-Cycle Strategies
• Maturity stage
• The third stage of the product life cycle,
characterized by
(1) slowing demand growth,
(2) saturated markets,
(3) direct competition,
(4) price competition, and
(5) strategic emphasis on efficient operations.
• Reverse positioning, breakaway positioning

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Industry Life-Cycle Strategies
• Decline stage
• The fourth stage of the product life cycle,
characterized by (1) falling sales and profits, (2)
increasing price competition, and (3) industry
consolidation

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Strategies in the Decline Stage
For the Decline Stage
• Maintaining
• Harvesting (discontinuation of any further investment
/expenses on that product and reaping the benefits of
the past )
• Exiting the market
• Consolidation

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Turnaround Strategies in the Life Cycle
• Turnaround strategy
• a strategy that reverses a firm’s decline in
performance and returns it to growth and
profitability.
• Asset and cost surgery
• Selective product and market pruning
• Piecemeal productivity improvements

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Thank you

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