Master in Business Administration Semester 3 MF0011 Mergers and
Acquisitions - 4 Credits Assignment Set- 1 (60 Marks)Note: Each
question carries 10 Marks. Answer all the questions. Q.1 What are
the basic steps in strategic planning for a merger? Basic steps in
Strategic planning in Merger Any merger and acquisition involve the
following critical activities in strategic planning processes. Some
of the essential elements in strategic planning processes of
mergers and acquisitions are as listed here below. 1. Assessment of
changes in the organization environment 2. Evaluation of company
capacities and limitations 3. Assessment of expectations of
stakeholders 4. Analysis of company, competitors, industry,
domestic economy and international economies 5. Formulation of the
missions, goals and polices 6. Development of sensitivity to
critical external environmental changes 7. Formulation of internal
organizational performance measurements 8. Formulation of long
range strategy programs 9. Formulation of mid-range programmes and
short-run plans 10. Organization, funding and other methods to
implement all of the proceeding elements 11. Information flow and
feedback system for continued repetition of all essential elements
and for adjustment and changes at each stage 12. Review and
evaluation of all the processes In each of these activities, staff
and line personnel have important Responsibilities in the strategic
decision making processes. The scope of mergers and acquisition set
the tone for the nature of mergers and acquisition activities and
in turn affects the factors which have significant influence over
these activities. This can be seen by observing the factors
considered during the different stages of mergers and acquisition
activities. Proper identification of different phases and related
activities smoothen the process of involved in merger. Q.2 What are
the sources of operating synergy?The third reason to explain the
significant premiums paid in most acquisitions is synergy. Synergy
is the potential additional value from combining two firms. It is
probably the most widely used and misused rationale for mergers and
acquisitions.
Sources of Operating Synergy Operating synergies are those
synergies that allow firms to increase their operating income,
increase growth or both. We would categorize operating synergies
into four types: 1. Economies of scale that may arise from the
merger, allowing the combined firm to become more cost-efficient
and profitable. 2. Greater pricing power from reduced competition
and higher market share, which should result in higher margins and
operating income. 3. Combination of different functional strengths,
as would be the case when a firm with strong marketing skills
acquires a firm with a good product line 4. Higher growth in new or
existing markets, arising from the combination of the two firms.
This would be case when a US consumer products firm acquires an
emerging market firm, with an established distribution network and
brand name recognition, and uses these strengths to increase sales
of its products. Operating synergies can affect margins and growth,
and through these the value of the firms involved in the merger or
acquisition
Q.3 Explain the process of a leveraged buyout.A leveraged buyout
(or LBO, or highly leveraged transaction (HLT), or "bootstrap"
transaction) occurs when an investor, typically financial sponsor,
acquires a controlling interest in a company's equity and where a
significant percentage of the purchase price is financed through
leverage (borrowing). The assets of the acquired company are used
as collateral for the borrowed capital, sometimes with assets of
the acquiring company. Typically, leveraged buyout uses a
combination of various debt instruments from bank and debt capital
markets. The bonds or other paper issued for leveraged buyouts are
commonly considered not to be investment grade because of the
significant risks involved.[1] If the company subsequently defaults
on its debts, the LBO transaction will frequently be challenged by
creditors or a bankruptcy trustee under a theory of fraudulent
transfer[2] Companies of all sizes and industries have been the
target of leveraged buyout transactions, although because of the
importance of debt and the ability of the acquired firm to make
regular loan payments after the completion of a leveraged buyout,
some features of potential target firms make for more attractive
leverage buyout candidates, including:Low existing debt loads; A
multi-year history of stable and recurring cash flows; Hard assets
(property, plant and equipment, inventory, receivables) that may be
used as collateral for lower cost secured debt; The potential for
new management to make operational or other improvements to the
firm to boost cash flows; Market conditions and perceptions that
depress the valuation or stock price
What Investors Need to Know about the Process of a Leveraged
Buyout
The actual process of a leveraged buyout financing using private
equity is actually not too complicated. The investment firm looks
for companies who appear to be in temporary financial stress, but
that have a past history of stability and growth. Generally,
company owners in this situation will start looking for others who
share a common goal in their industry and consider investment
opportunities. Once the company is identified and receptive to an
investment idea, the process of making an offer to finance a
company buy-out requires an assessment of the actual assets vs.
debt, capital is raised or obtained through a lending source, debt
is paid off, and the company undergoes a transfer of power to make
sure it is being managed more effectively for growth. For an
investor considering the leveraged buyout process, a good rule of
thumb is to understand that the investment comes with some degree
of risk, just as with any investment. Consider that the process of
a leveraged buyout using private equity is essentially financing
against the actual value of the company, minus any existing debt
that the company has. Once this debt is paid off, the company will
be worth more and the future plans of the company can be
established to grow it aggressively to make up for this
investment
Q.4 What are the cultural aspects involved in a merger. Give
sufficient examples. Q.5 Study a recent merger that you have read
about and discuss the synergies that resulted from the merger. Q.6
What are the motives for a joint venture, explain with an example
of a joint venture.
Master in Business Administration Semester 3 MF0011 Mergers and
Acquisitions - 4 Credits Assignment Set- 2 (60 Marks)Note: Each
question carries 10 Marks. Answer all the questions. Q.1 What is
the basis for valuation of a target company?Paper Keywords: mergers
and acquisitions business valuation target Abstract: This paper
studies on the status of Chinese and foreign enterprises, from the
acquisition of theory with concrete examples, the target of mergers
and acquisitions business valuation method, to analyze the
advantages and disadvantages. And introduced the cash flow method
in the application of M & A valuation. First, the acquisition
method of valuation of the Target Enterprise M & A is a very
complicated system. The value of assessment is an essential part of
mergers and acquisitions. Only select the appropriate assessment
methods, the overall value of the enterprise can effectively
evaluate and get a reasonable assessment. The development of
practice business valuation techniques put forward new
requirements, how the value of this potential opportunity to
reasonable valuation, the value of a target company in M & A
assessment techniques in a new topic. (A) of the asset value method
1. The basic content of the value of assets. Asset value method is
the key to select the appropriate asset appraisal values. The
current assessment of the prevailing values of assets are book
value method, market value method and the liquidation value method.
Book value method is based on traditional accounting net assets
recorded in the book to determine the acquisition price method, the
market value method is the stock market The average price of a
recent actual transaction value as a business reference, the
current market value of listed companies is equivalent to the stock
price multiplied by the number of shares issued, in some basis. to
determine the appropriate ratio of M & A Price: liquidation
value of the method is in the enterprise as a whole have lost the
ability to add value in case of an asset assessment. This method is
mainly suitable for the target enterprise value of non-existence of
the circumstances and objectives of M & A business enterprise
may choose law as the basis of the transaction. 2. Evaluation of
the value of assets. Such method has the advantage of objectivity,
focuses on the history and status quo. Less uncertainty. Less risk.
Drawback is that it has a single enterprise assets as a starting
point, ignoring the overall profitability, without considering the
intangible assets balance sheet items. (B) the market comparison
method of valuation Market comparison method of valuation refers to
the property market, with the goal of using the same or similar
business transactions and market transactions, business transaction
price as a reference, by the target company and the contrast
between the light of business analysis. Differences necessary
adjustments. Fixed price of market
transactions in order to determine the overall value of the
assets of the target company an assessment method
Q.2 Discuss the factors in post-merger integration process.5.15
Answer to SAQs and TQs 5.1 Introduction This unit explains the
process involved in merger integration. To start with you need to
know the various aspects which need to be integrated in the
post-merger entity. You will also be able to understand about major
problems and challenges involved in the mergers and acquisition in
this unit. Objectives After studying this unit, you should be able
to: Discuss the alternative acquisition integration approaches
Describe the political, cultural and change management perspectives
on integration Discuss the problems that may arise in the
integration process Discuss about the Managerial challenges of
Mergers and acquisition The most difficult part of merger or
acquisition is the integration of the acquired company into the
acquiring company. The difficulty of integration also depends on
the degree of control desired by the acquirer. The post-merger and
acquisition integration of the firm is a crucial task to be
accomplished for effective performance. The post-merger integration
process starts after the successful deal of merger. Extent of
integration is defined by the need to maintain the separateness of
the acquired business. The value creation in merger depends upon
this integration. The rationalist view of acquisitions is as
below:
The acquirer may simply desire financial consolidation leaving
the entire management to the existing managers. On the other hand,
if the intention is total integration of manufacturing, marketing,
finance, personnel etc., integration become quite complex. There is
a need to determine the manner in which the acquired company will
be integrated into the acquiring firms culture. The process of
post-merger integration involves: Evaluation of organizational
cultural fit Development of integration approach
Matching strategy, organization and culture between acquirer and
acquired Results Integration of two organizations is not a matter
of just changing the organization structure and establishing a new
hierarchy of authority. There are various stages in the process of
integration. In involves integration of various functional areas at
the functional level in order to synergize. Some of the functional
areas of importance are: Accounting, R&D, Procurement,
Management Team, Marketing & Sales and Brands. Another
important aspect of integration is the cultural integration of
acquiring and acquired firms- policies, procedures and styles. The
human side of the M&A is another aspect of integration. This
involves the emotional integration of personnel of the
organization. 5.2 Integration Planning The success of an
integration process depends upon the role of acquisition and the
nature of managers involved in the transaction and implementation.
The process of integration itself has to be planned so that the
acquired or merged company integrates smoothly. Therefore, merger
and acquisition requires a detailed planning for integration as
given below: Integration plan Once the merger or acquisition took
place, the acquiring company should prepare a detailed strategic
plan for integration based on its own and the target companys
strength and weakness. Communication The plan of integration should
be communicated to all employees and also their involvement in
making integration smooth and easy and remove any ambiguity or fear
in the minds of the staff. Authority and responsibility In order to
avoid any confusion and indecisiveness, the acquiring company
should take all employees into confidence and decide the authority
and responsibility relationships. Cultural integration Management
should focus on the cultural integration of the employees. A proper
understanding of culture of two organizations, clear communication
and training can help to bridge the cultural gaps. Skill and
competencies up-gradation The acquired company can conduct a survey
of employees to make an assessment of the gaps in the skills and
competencies. If there is difference in the skills and competencies
of employees of merging company, management should prepare a plan
for skill and competencies up-gradation through training.
Structural Adjustments The acquired company may design the new
organization structure and redefine the roles, authorities and
responsibilities of the employees.
Control System It is to ensure that it is in control of all
resources and activities of the merged entity. It must put proper
financial control in place so that resources are optimally utilized
and wastage is avoided. 5.3 Factors in post-merger integration
There are many factors which require attention of the management
and tend to widen its role in postmerger integration. A list of
such factors is give below in brief: Legal obligation Fulfillment
of legal obligation becomes essential in post-merger integration.
Such obligations depend upon the size of the company, debt
structure and controlling regulations, distribution channels, and
dealer net-work, suppliers relations etc. In all or some of these
cases legal documentation would be involved. The rights and the
interests of the stake holders should be protected with the new or
changed management of the acquiring company. Regulatory bodies like
RBI, Stock Exchanges, SEBI etc would also ensure adherence to their
respective guidelines and regulations. It should be ensured at the
time of integration that the company out its legal obligations in
all related and requisite areas. Consolidation of operations
Acquiring company has to consolidate the operations, blending the
acquired companys operations with its own operation. The
consolidation of operation covers not only the production process,
adoption of new technology and engineering requirements in the
production process, but also the entire technical aspects covering
technical know-how, project engineering, plant layout, schedule of
implementation, product designs, plant and equipments, manpower
requirements, work schedule, pollution control measure etc. in the
process leading to the final product. Installation of top
management Merger and acquisition affect the top management
structure. A cohesive team is required at board level as well as
senior executive level. Installation of management in the process
of integration involves combination of issues related to: Selection
or transfer of managers Changes in organizational structure
Development of consistent corporate culture, including a frame of
reference to guide strategic decisions making Commitment and
motivation of personnel Establishment of new leadership The
integration would involve induction of the directors of the
acquired company on the Board of acquiring company, or induction of
persons outside who have expertise in directing and policy
planning. At top level also, changes are required, particularly
depending upon terms and conditions
of the merger to adjust in suitable positions the top executive
of the acquired company to create congenial environment within the
organization. The mechanism of corporate control encompassing
delegation of power and power of control, accounting
responsibility, MIS and communication channels are the important
factors to be taken into consideration in the process of
integration. Rationalizing financial resources It is important to
revamp the financial resources of the company to ensure
availability of financial resources and liquidity. Sometimes on
happening of certain uncontrollable events, the financing plans
have got to be verified, reviewed and changed. Integration of
financial structure This is an important aspect which concerns most
of stake holders of the company. Generally, financial structure is
reorganized as per the scheme of arrangement, merger or
amalgamation approved by the shareholders and creditors. But in the
case of takeover or acquisition of an undertaking made by one
company of the other through acquiring financial stake by way of
acquisition of shares, the integration of financial structure would
be a post-merger event which might compel the company to change its
capital base, revalue its assets and reallocate reserves. Toning up
production and marketing management With regard to the size of the
company and its operational scale, its production line is to be
adjusted during post-merger period. Decisions are taken on the
basis of feasibility studies done by the experts. For tuning up of
production, it is also necessary that resources be properly
allocated for planned programme for utilization of scarce and
limited resources available to a firm so as to direct the
production process to result into optimal production and
operational efficiency. Revamping of marketing strategy is also
essential in post-merger integration. This is done on the basis of
market surveys and recommendations of the marketing experts.
Pricing policy also deserve attention for gaining competitive
strength in the different market segments. Corporate planning and
control Corporate planning to a large extent is guided by the
corporate policy. Corporate policy prescribes guidelines that
govern the decision making process and regulates the implementation
of the decisions. Control as an activity of management involves
comparison of performance with predetermined standards. In each
area of corporate activities whether it is personnel, material,
financial management, planning is associated with control. 5.4
Implementation of integration process There are many ways to
implement integration. You must send senior-level leaders out to
talk with employees; encourage cross-organizational reflections at
the end of partnering experiments (to capture and pass on lessons
learned); and establish one company measurement processes to
minimize the natural tendency to compare one groups results to the
others. To carry off this approach, however, the integration must
be: Driven by a crystal-clear vision of the new organization,
including its intended mission (core purpose), strategy, and
essential values
Owned and executed by and with key stakeholders Fluidly
coordinated and flexibly self-adjusting Continually providing
communication laterally, as well as vertically, across the system
and in sync with the needs of ongoing day-to-day operations Open,
interactive, and responsive to feedback Cognizant of human needs
for inclusion, order, self-control, and choice In addition, the
merging companies need to form a dedicated merger project
organization, which should be networked together to create an
integrated learning system. Specifically, the Merger Executive
Committee is the driving force behind the transition to the new
entity. Members of this group must make a commitment to work
together to ensure the success of the new system. From the
beginning, the way the team members are selected and the way they
act, individually and collectively, will be the two strongest
messages the new organization receives about what is to be expected
and valued. 5.5 Post-merger integration model This stage of the
acquisition process is a major determinant of the success of the
acquisition in creating value. There are four broad sources of
added value as given below: Operating resources sharing - The
capabilities and benefits under this source are: sales force,
manufacturing facilities, trade marks, brand names, distribution
channels, office space etc. Functional skills - The specific
capabilities and benefits transferable under this are: design,
product development, production, techniques, material handling,
quality control, packaging, marketing, promotion, training and
organizational routines General management - The capabilities and
benefits are: strategic direction, leadership, vision, resource
allocation, financial planning and control, human resource
management, relations with suppliers, management style to motivate
staff Size benefits - Market power, purchasing power, access to
financial resources, risk diversification, cost of capital
reduction are the important capabilities and benefits under this
heading. Out of the above four sources of added value, the first
three require operational capability transfer between the acquiring
and the acquired firms. The fourth is size related and derives from
the increased size of the combined entity relative to the
pre-combination firms. These capabilities and benefits lead to one
or more of the three broad sources of value: cost savings, revenue
enhancement
and real options. The extent of integration depends upon the
degree of strategic interdependence between the two firms as a
precondition for capability transfer and value creation. 5.6
Strategic interdependence and autonomy Haspeslagh and Jemison model
the trade-off between the need for strategic interdependence and
the need for autonomy for the acquired firm as shown here
below:
At the two extremes is complete preservation and complete
absorption. Most acquisitions require a mixture of interdependence
and autonomy. This leads to four types of post-acquisition
integration: Absorption - Under this, integration implies a full
consolidation of the operations, organization and culture of both
firms over time - Operational resourced need to be pooled to
eliminate duplication - Acquisition aimed at reducing production
capacity in a declining industry dictates an absorption approach.
Preservation - In a preservation acquisition, there is a great need
for autonomy. - Acquired firms capabilities must be nurtured by the
acquirer with judicious and limited intervention, such as financial
control while allowing the acquired firm to develop and exploit its
capabilities to the full - The acquirer uses the acquisition as a
learning opportunity that may be central to a strategy such as
platform building Symbiosis - Two firms initially co-exist but
gradually become interdependent. - Need simultaneous protection and
permeability of the boundary between two firms - No sharing of
operational resources takes place, but there may be a gradual
transfer of functional skills. Holding Company - Intervention by
the parent is passive and more in the nature of a financial
portfolio motivated by risk reduction, reduction in capital
costs
- Parent seeks no interaction among the portfolio companies -
Line between preservation and holding company types may not be
quite distinct in some acquisitions Acquired company managers
select an appropriate integration approach that will lead to
exploitation of the capabilities of the two firms for securing
sustainable competitive advantage. If the capabilities to be
transferred are not properly identified owing to deficiencies of
the pre-acquisition decision making, the value creation may not
result from the integration process. 5.7 Political and cultural
aspects of integration The value chains of the acquirer and the
acquired, need to be integrated in order to achieve the value
creation objectives of the acquirer. This integration process has
three dimensions: the technical, political and cultural. The
technical integration is similar to the capability transfer
discussed above. The integration of social interaction and
political relationships represents the informal processes and
systems which influence peoples ability and motivation to perform.
At the time of integration, the acquirer should have regard to
these political relationships, if acquired employees are not to
feel unfairly treated. An important aspect of integration is the
cultural integration of the acquiring and acquired firms. The
culture of an organization is embodied in its collective value
systems, beliefs, norms, ideologies myths and rituals. They can
motivate people and can become valuable sources of efficiency and
effectiveness. The following are the illustrative organizational
diverse cultures which may have to be integrated during post-merger
period: Strong top leadership versus Team approach Management by
formal paper work versus management by wandering around Individual
decision versus group consensus decision Rapid evaluation based on
performance versus Long term relationship based on loyalty Rapid
feedback for changes versus formal bureaucratic rules and
procedures Narrow career path versus movement through many areas
Risk taking encouraged versus one mistake you are out Risky
activities versus low risk activities Narrow responsibility
arrangement versus Everyone in this company is salesman (or cost
controller, or product quality improver etc.) Learn from customer
versus We know what is best for the customer The above illustrative
culture may provide basis for the classification of organizational
culture. There are four different types of organizational culture
as mentioned below:
Power - The main characteristics are: essentially autocratic and
suppressive of challenge; emphasis on individual rather than group
decision making Role - The important features are: bureaucratic and
hierarchical; emphasis on formal rules and procedures; values fast,
efficient and standardized culture service Task/achievement - The
main characteristics are: emphasis on team commitment; task
determines organization of work; flexibility and worker autonomy;
needs creative environment Person/support - The important features
are: emphasis on equality; seeks to nurture personal development of
individual members Poor cultural fit or incompatibility is likely
to result in considerable fragmentation, uncertainty and cultural
ambiguity, which may be experienced as stressful by organizational
members. Such stressful experience may lead to their loss of
morale, loss of commitment, confusion and hopelessness and may have
a dysfunctional impact on organizational performance. Mergers
between certain types can be disastrous. Differences in culture may
lead to polarization, negative evaluation of counterparts, anxiety
and ethnocentrism between top management teams of the acquired and
acquiring firms. In assessing the advisability of an acquisition,
the acquirer must consider cultural risk in addition to strategic
issues. The differences between the national and the organizational
culture influence the cross-border acquisition integration. Thus,
merging firms must consciously and proactively seek to transform
the cultures of their organizations 5.8 Cultural profiling and
assessment of cultural compatibility The steps for cultural
profiling and assessment of cultural compatibility are as follows:
The first step towards cultural integration and aligning culture to
strategy is the profiling of the cultures of the merging firms. The
next step is the evaluation of the compatibility of the cultures
and identifying the areas of potential conflict. Thirdly, a
cultural awareness programme through education, workshops and
working together needs to be set up. Finally, a new culture has to
be evolved. 5.9 Human resources management issues In the course of
integration the merging firms have to confront the following
issues:
Board-level changes Board-level positions may have to be
revamped to align directorial expertise with the emerging needs of
the post-merger business. The new board should change leaders so
that they can carry out the change process dictated by the merger.
Board-level changes could also be inspirational for the rest of the
organization. This is particularly so where the merging partners
had experienced performance problems which triggered the merger.
Choosing the right people for the right position In all integration
types, there will be rival claims for senior executive positions
such as the chairman, CEO, CFO, COO, heads of divisions, heads of
functions such as R & D, etc., if both merging firms had these
positions prior to the merger. The choice of the right person for
the right job is important. Such choices are based on tribal
affiliations of the acquirer. Accent on merit is as important as
the integrity of the process of managerial appointments. Management
and workforce redundancy In merger with its emphasis on efficiency
savings through consolidation of duplicate functions or production
sites, head count reduction is perhaps inevitable. However, head
count reduction should be driven not by legal minimalism but by
transparently genuine concern for the welfare of the people being
made redundant. Companies often arrange for counselling, training
and outplacement programme to alleviate the distress to the
employees. Aligning performance evaluation and reward system The
balance between basic compensation (salary) and performance-related
compensation (bonuses, stock options) may differ between two firms,
and altering the balance to introduce more pay-toperformance
sensitivity may engender resentment and resistance. However,
changing the performance evaluation and reward system may be a
necessary element in evolving a new culture because of their power
to motivate staff and influence their behaviour. Key people
retention The uncertainty during a merger often leads senior
managers to end it by leaving. Key people retention may be achieved
through devices such as golden hand cuffs (i.e., special bonuses or
stock options or generous earn-outs etc). Often these people
probably already wealthy may be empted to stay not with offers of
more wealth but with positions of power and prestige that reflect
their merit. 5.10 Problems in integration The post-merger
integration problems may arise from three possible sources:
Determinism Determinism is a characteristic of managers who believe
that the acquisition blue print can be implemented without change
and without regard for ground realities. They tend to forget that
the blueprint was based on incomplete information. They do not
consider that the implementation process is one where mutual
learning between the acquirer and the acquired takes place and the
process is especially adaptive in the light of this learning.
Determinism leads to a rigid and
unrealistic programme of integration and builds up hostility
from managers. Such hostility leads to a non-co-operative attitude
among managers and vitiating the atmosphere for a healthy transfer.
Value Destruction At personal level, the acquisition is value
destroying for managers, if integration experience is contrary to
their expectations. Value destruction may take the form of reduced
remuneration in the post acquisition firm or loss of power or of
symbols of corporate status. For instance, the target firm managers
may be given positions which fail to acknowledge their seniority in
the pre acquisition target or their expertise. Where there is
perceived value destruction of this kind, again smooth integration
is not possible. Leadership Vacuum The management of the interface
requires tough and enlightened leadership from the top managers of
the acquirer. Where the integration task is delegated to the
operational managers of the two firms without visible involvement
or commitment of the top management, the integration process can
degenerate into mutual frictions. The top management must be
intervened to avoid frictions that arise between groups of managers
in the integration process. Information system (IS) integration IS
integration is a critical, but often neglected part of the overall
integration programme. IS compatibility between acquirer and the
acquired companies must be seriously considered even at the
pre-deal stage. This is particularly important in mergers that seek
to leverage each companys information on customers, markets or
processes with that of the other company as in banking and
insurance merger, or in the merger of two banks. The compatibility
of IS must be considered as thoroughly as any strategic,
operational, organizational or political issue. IS integration in
merger depends on a mix of both technical and organizational
factors. Organizational compatibility must be considered alongside
IS synergies. 5.11 Five rules for integration process Peter Drucker
provides the following five rules for the integration process:
Ensure that the acquired firm has common core unit with the parent.
They should have overlapping characteristics like shared technology
or markets to exploit synergies. The acquirer should think through
what potential skill contribution it can make to the acquiree The
acquirer must respect the products, markets and customers of the
acquired firm. The acquirer should provide appropriately skilled
top management for the acquiree within a year The acquirer should
make several cross-company promotions within a year. 5.12
Managerial Challenges Clearly, an urgent need to rationalize,
streamline, and eliminate duplication will drive the first weeks
and months of post-merger integration. However, rationalization
increases only the potential
of the new company to yield greater value to its shareholders.
It is one thing to design a new architecture and relationships on
paper, quite another to bring them to life. No matter how visionary
the leader or competent the financier, each quickly learns that
synergy cannot be generated solely from above or realized simply by
reducing headcount. Synergy requires the engagement and commitment
of the whole organization. And therein lies the challenge. Most
mergers are seen as times of chaos, fear, uncertainty, distraction,
limitation, and dehumanization. The process is painful, and the
results costly. When knowledge capital is lost through turnover of
key individuals during a merger, when pride in the company and
pride in ones work are eroded through ill treatment at the hands of
merger managers, when innovations are abandoned in favour of
outdated practices just because one group is considered the home
team and the new one deemed expendable, the webs that make the
organization work break down and fall apart. When people stop
caring, they lose interest in making business processes better. If
they are not asked for their opinions, they have no means or
motivation to tell the new system designers the hidden secrets of
success and supportability. When selection processes do not seem
fair and open, good people do not step forward they walk away to
take on new challenges elsewhere. These are not the conditions
under which synergistic growth is likely. Fortunately, it doesnt
have to be this way. Managed in a holistic way, a merger can become
an opportunity for people to learn, grow, and have a voice. Shared
visioning activities and cross-company merger project teams can
provide opportunities to meet new people and gain new perspectives
and skills. Work-redesign processes give functional team members
the chance to innovate, to show what they are capable of. Changes
in organizational design or expansions in job scope offer many the
challenge of taking on a new job, function, or level of
responsibility even, perhaps, moving closer to fulfilling some of
their own, long-held aspirations for their work and their lives.
Another challenge is that merger managers must juggle strategy,
organization, staffing, systems, and culture, on top of keeping the
day-to-day business performing. They feel pressure most urgently to
demonstrate the wisdom and value of the investment decision by
recovering the costs of the merger and boosting short-term and
intermediate-term share price performance. So they focus on
restructuring to realize the benefits of creating economies of
scale, streamlining operations, capitalizing on product and market
synergies, and spinning off non-core businesses. Most post-merger
implementation plans seem to assume that if the mergers financial
priorities are thoroughly addressed, the human foundation will take
care of itself. The synergy created by a successful merger is a
dynamic energy. It arises from ongoing encounters between people
and groups with different world views, knowledge, and experience,
and it transforms the whole into something greater than the sum of
its parts. But it never happens automatically. To harness the
valuable differences between two merging companies and convert them
into opportunities for innovation, performance excellence, and
market leadership, the merging companies need to take a very
careful
Q.3 List out the defense strategies in the face of a hostile
takeover bid.
offeror intends to obtain effective control of the offeree
through voting powers. Such bids are made for equity shares
carrying voting rights. Partial bid is also understood when the
offeror bids all the issued non-voting shares in a company.
Regulation 12 of SEBI Takeover Regulations, 1997, it is necessary
to make public announcement in accordance with the Regulations. -
Competitive Bid This can be made by any person within 21 days of
public announcement of the offer made by the acquirer. Such bid
shall be made through public announcement in pursuance of
provisions of regulation 25 of the SEBI take over regulation 1997.
Such competitive bid shall be for the equal number of shares or
more for which first offer was made. Tender Offer In the earlier
cases, negotiations were confined to the managements and boards of
directors of the companies involved. However, the acquiring company
can make a tender offer directly to the shareholders of the company
it wishes to acquire. A tender offer is an offer to buy current
shareholders stock at a specified price, often with the objective
of gaining control of the company. The offer is often made by
another company, usually for more than the present market price as
an incentive to tender. Use of the tender offer allows the
acquiring company to bypass the management of the company it wishes
to acquire and therefore serves as a treat in any negotiations with
that management. The tender offer can also be used when there are
no negotiations, but when one company simply wants to acquire
another. It is not possible to surprise another company with its
acquisition, however, because the SEBI requires rather extensive
disclosure. The primary selling tool is the premium that is offered
over the existing market price of the stock. The tender offer
itself is usually communicated through financial newspapers. Direct
mailings are made to the shareholders of the company being bid for,
if the bidder is able to obtain a list of shareholders. Tender
offer can be used in two situations: The acquiring co. may directly
approach the target company for its takeover. If target company
does not agree, then the acquiring co. may directly approach the
shareholders by means of a tender offer. The tender offer may be
used without any negotiations like hostile takeover. The
shareholders are generally approached through announcement in the
financial press or through direct communication individually. They
may or may not react to a tender offer. The reaction exclusively
depends upon difference between the market price and offered price.
The tender offer may or may not be acceptable to the management of
the target company. The management may use techniques to discourage
its shareholders from accepting tender offer by announcing higher
dividends, issue of bonus or rights shares etc., and make it
difficult for the acquirer to acquire controlling shares.
The target company may also launch a counter publicity programme
by informing that the tender offer is not in the interest of the
shareholders. As per latest SEBI guidelines, public announcement is
necessary as mandatory bid for tender offer to acquire the shares
or control in the target company. 7.4 Defenses against Takeover Bid
The following Defensive method measures can be adopted to face
takeover bids: 7.4.1 Advance preventive measures for Defenses The
target company should take precautions when it feels that takeover
bid is imminent through market reports or available information.
Some of the advance measures are discussed below: Joint Holdings or
Joint Voting Agreement - Two or more major shareholders may enter
into agreement for block voting or block sale of shares rather than
separate voting or sale of shares. This agreement is entered into,
in collaboration with or without cooperation of target companys
directors who wish to exercise effective control of the company.
Inter locking Share Holdings or Cross Share Holdings - Two or more
group companies acquire share of each in large quantity or one
company may distribute share to the shareholders of its group
company to avoid threats of takeover bids. If the interlocking of
share holdings is accompanied by joint voting agreement, then the
joint system of advance defense could be termed as Pyramiding, the
safest device of defense. Issue of Block Shares to Friends and
Associates - The directors issue block shares to their friends and
associates to continue maintaining their controlling interest and
as a safeguard to the threats of dislodging their control position.
This may also be done by issue of right shares. Defensive Merger -
The directors of a threatened company may acquire another company
for shares as a defensive measure to forestall two unwelcome
takeover bids. For this purpose they put long block shares of their
own company in the hands of shareholders of friendly to make their
own company least attractive for takeover bid. Share with
non-voting rights like preference shares - Non-voting shares are a
convenient method of providing for any desired adjustment of
control on a merger of two companies. Convertible Securities - It
is necessary that the companys capital structure should contain
loan capital by way of debentures to make the company less
attractive to corporate raiders.
Dissemination to shareholders of favourable financial
information. - The dissemination of information about the companys
favourable features of operations and profitability go a long way
in bringing the market price of share nearer to its true assets
value. This type of behaviour on the part of the directors of the
company elicit confidence of shareholders in their management and
control which will in many ways help preventing any takeover bid to
be in or to succeed. Making the possession of two companys asset
less attractive. - This is possibly done by putting the assets
outside the control of the shareholders by entering into various
types of financial arrangements like sale and lease back, mortgage
of assets to FIs for long term loans etc. Long Term services
Assessments - Directors having specialized skills in any specific
technical field may enter into contract with the company with the
specific approval of shareholders or the Companies Act 1956. The
prospective bidder would not be attracted due to: Fear of
non-co-operation by such director High compensation for terminating
the agreement. In view of these circumstances, the takeover game
becomes unattractive to the bidders. Other preventive measures 1.
Maintaining a fraction of share capital uncalled, which can be
called up during any emergency like takeover bid or liquidation
threat. Such strategy is known as Rainy day call 2. Companies may
form group or cartel to fight against any future bid of takeover by
way of pooling funds to use it to counter the takeover bids. 7.4.2
Defense in face of takeover bid (Strategies) A company is supposed
to take defensive steps when it comes to know that some corporate
raider has been making efforts for takeover. For defense against
takeover bid, two types of strategies could be as below: Commercial
Strategies 1. Dissemination of favourable information among
shareholders. 2. Step up dividend and update share price record
(i.e. pushing up share price) 3. To revalue the fixed assets
periodically and incorporate them in the balance sheet 4.
Reorganization of Capital structure
5. Research based arguments should be prepared to show and
convince the shareholders that the offer is incapable of managing
the business. 6. Trace out the various discouraging commercial
features of the functioning of the acquiring company (e.g. Pending
cases in labour/consumer/tax tribunal) Tactical / Defense
Strategies 1. The directors of the company may persuade their
friends and relatives to purchase the shares of the offeree company
2. The board may make attempt to win over the shareholders through
raising their emotional attachment, loyalty and patriotism etc. 3.
Recourse to legal actions In order to defuse situation of hostile
takeover attempts, companies have been given power to refuse to
register the transfer of shares under relevant sections of
Companies Act 1956. If this is done, a company must inform the
transferee and the transferor within 60 days. It is the
responsibility of the directors to accept a takeover bid. A refusal
to register is permitted if: - A legal requirement relating to the
transfer of shares is not complied with - The transfer is in
contravention of the law - The transfer is prohibited by a court
order - The transfer is not in the interest of the company and
public. 4. Operation White Knights - The white knight defense
involves choosing another company with which the target prefers to
be combined. A target company is said to use a white knight when
its management offers to be acquired by a friendly company to
escape from a hostile takeover. An alternative company might be
preferred by the target because it sees greater compatibility, or
the new bidder might promise not to break up the target or engage
in massive employees dismissal. The possible motive for the
management of the target company to do so is not to lose the
management of the company. White knight offers a higher bid to the
target company than the present predator to avert the takeover bid
by hostile suitor. With the higher bid offered by the white knight
the predator might not remain interested in acquisition and hence
the target company is protected from losing to corporate raid. 5.
White Square - The white square is a modified form of a white
knight. The difference being that the white square does not acquire
control of the target. In a white square transaction, the target
sells a block of its stock to a third party it considers to be
friendly. The white square sometimes is required to vote its shares
with the target management. These transactions often are
accompanied by a stand-still agreement that limits the amount of
additional target stock the white square can purchase for a
specified period of time and restricts the sale of its target
stock, usually giving the right of first refusal to the target. In
return, the white square often receives a seat on the target board,
generous dividends, and/or a discount on the target shares.
Preferred stock enables the board to tailor the characteristics of
that stock to fit the transaction and so usually is used in white
square transaction. 6. Disposing of Crown Jewel - When a target
company uses the tactics of divestiture, it is said to sell the
Crown Jewel. The precious assets in the company are called crown
jewel to depict the greed of the acquirer under the takeover bid.
These precious assets attract the rider to bid for the companys
control. The company as a defense strategy, in its own interest,
sells these valuable assets at its own initiative leaving the rest
of the company intact. Instead of selling these valuable assets,
the company may also lease them or mortgage them to creditors so
that the attraction of free assets to the predator is over. As per
SEBI takeover regulation, the above defense can be used only before
the predator makes public announcement of its intention to take
over the target company 7. Pac-Man strategy: - It is making counter
bid for the bidder. The Pac-Man defense is essence involves the
target counter offering for the bidder. Under this strategy the
target company attempts to takeover the hostile raider. This
happens when the target company is quite larger than predator. This
severe defense is rarely used and in fact usually is designed not
to be used. If the Pac Man defense is used, it is extremely costly
and could have devastating financial effects for both firms
involved. There is a risk that under state law, should both firms
buy substantial stakes in each other, each would be ruled as
subsidiaries of the other and be unable to vote its shares against
the corporate parent. The severity of the defense may lead the
bidder to disbelieve that the target actually will employ the
defense. 8. Golden Parachutes - Golden parachutes are separation
provisions of an employment contract that compensate managers for
the loss of their jobs under a change-of- control clause. The
provision usually calls for a lumpsum payment or payment over a
specified period at full or partial rates of normal compensation.
When a company offers hefty compensations to its managers if they
get ousted due to takeover, the company is said to offer golden
parachutes. This reduces their resistance to takeover. This
envisages a termination packages for senior executives and used as
a protection to the directors of the company against the takeover
bid. 9. Shark Repellent character - The companies change and amend
their bylaws and regulations to be less attractive for the
corporate raider company. Such features in the bylaws are called
Shark Repellent character. Companies adopt this tactic as
precautionary measure against prospective bids. Eg: Share holders
approvals for approving combination proposal are fixed at minimum
by 80-95% of the shareholders meeting. 10. Swallowing Poison Pills
strategy - Poison pills represent the creation of securities
carrying special rights exercisable by a triggering event. The
triggering event could be the accumulation of a specified
percentage of target shares or the announcement of a tender offer.
The special rights take many forms but they all make it
costlier
to acquire control of the target firm. As a tactical strategy,
the target company might issue convertible securities, which are
converted into equity to deter the efforts of the offer, or because
such conversion dilutes the bidders shares and discourages
acquisition. Another example, Target Company might rise borrowing
distorting normal Debt to Equity ratio. Poison pills can be adopted
by the board of directors without shareholder approval. Although
not required, directors often will submit poison pill adoptions to
shareholders for ratification. 11. Green Mail - It refers to an
incentive offered by the management of the target company to the
potential bidder for not pursuing the takeover. The management of
the target company may offer the acquirer for its shares a price
higher than the market price. A large block of shares is held by an
unfriendly company which forces the target company to repurchase
the stock at a substantial premium to prevent the takeover. The
purpose of the premium buyback presumably is to end a hostile
takeover threat by the large block holder or green mailer. This is
an expensive defense mechanism. The large block investors involved
in greenmail help bring about management changes either changes in
corporate personnel, or changes in corporate policy, or have
superior skills at evaluation potential takeover targets. 12.
Poison Put - A covenant allowing the bondholder to demand repayment
in the event of a hostile takeover. This poison put feature seeks
to protect against risk of takeover-related deterioration of target
bonds, at the same time placing a potentially large cash demand on
the new owner, thus raising the cost of an acquisition. Merger and
acquisition activity in general has had negative impacts on
bondholders wealth. This was particularly true when leverage
increases where substantial. 13. Grey Knight - A friendly party of
the target company who seeks to takeover the predator. The target
company may adopt a combination of various strategies for
successfully averting the acquisition bid. All the above strategies
are experience based and have been successfully used in developed
nations and some of them have been tested by Indian companies also.
7.4.3 Financial Defensive Measures The firm could become a takeover
target of another firm seeking to benefit from an association with
highly efficient firm in terms of: High sales growth High profit
margin Low stock price Highly liquid balance sheet
A combination of these factors can simultaneously make a firm an
attractive investment opportunity and facilitate its financing. A
firm fitting the afore-mentioned description would do well to take
at least some of the following steps as defensive measure against
takeover: Increase debt with borrowed funds used to repurchase
equity Increase dividends on remaining shares Structure loan
covenants to force acceleration of repayment in the event of
takeover Liquidate the securities portfolio and draw down excess
cash Invest continuing cash flows from operations in profitable
projects Use some of the excess liquidity to acquire other firms
Divest subsidiaries Realize the true value of undervalued assets by
selling them of or restructuring. 7.5 Anti takeover amendments Anti
takeover amendments generally impose new conditions on the transfer
of managerial control of the firm through a merger or tender offer
or by replacement of the board of directors. There are four major
types of anti takeover amendments as below: Supermajority
Amendments It requires shareholders approval by at least two-thirds
vote and sometimes as much as 90 percent of the voting power of
outstanding capital stock for all transactions involving change of
control. In most existing cases, however, the supermajority
provisions have a board-out clause that provides the board with the
power to determine when and if the super majority provision will be
in effect. Pure supermajority provisions would seriously limit
managements flexibility in takeover negotiations. Fair-price
Amendments Fair price amendments are supermajority provisions with
a board-out clause and additional clause waiving the supermajority
requirement if a fair price is paid for all the purchased shares.
The fair price is defined as the highest price paid by the bidder
during a specified period. Fair price amendments defend against
two-tier tender offers that are not approved by the targets board.
A uniform offer for all shares to be purchased in a tender offer
and in a subsequent cleanup merger or tender offer will avoid the
supermajority requirement. The fair price amendment is the
restrictive in the class of supermajority amendments. Classified
Board This anti takeover amendment provides for staggered or
classified boards of directors to delay effective transfer of
control in a takeover. The rationale here is to ensure continuity
of policy and experience. For instance, a nine member board might
be divided into three classes, with only three members standing for
election to a three year term, each year. Thus, a new majority
shareholder
would have to wait at least two annual meetings to gain control
of the board of directors. Under this type, a greater shareholder
vote is required to elect a single director. Authorization of
Preferred stock The board of directors is authorized to create a
new class of securities (like preferred stock) with special voting
rights. This may be issued to friendly parties in a control
contest. This device is a defense against hostile takeover bids.
Other anti takeover actions Other amendments that management may
propose as a takeover defense include: - Abolition of cumulative
voting where it is not required by state law - Reincorporation in a
state with more accommodating anti takeover laws - Provisions with
respect to the scheduling of shareholders meetings and introduction
of agenda items, including nomination of candidates to the board of
directors. 7.6 Legal measures against Takeovers Company Act 1956
restricts individual or a company or a group of individual from
acquiring shares, together with the shares held earlier, in a
public company to 25% of the total paid up capital. Also the
central government needs to be intimated whenever such holding
exceeds 10% of the subscribed capital. The approval of the central
government is necessary if such investment exceeds 10% of the
subscribed capital of another company. These precautionary measures
are against the takeover bids of public limited company. 7.7
Guidelines for Takeovers SEBI has provided guidelines for
takeovers. The salient features of the guidelines are: Notification
of Takeover - If an individual or a company acquires 5% or more of
the voting capital of a company, the target company and the stock
exchange shall be notified Limit to Share Acquisition - An
individual or a company can continue acquiring the shares of
another company without making any offer to the other shareholders,
until the individuals or the company acquire 10% of the voting
capital. Public Offer - If holding company of the acquiring company
exceeds 10%, a public offer to purchase a minimum of 20% of the
shares shall be made to the remaining share holders through a
public announcement. Offer price
- The offer price shall not be less than the average of the
weekly high or low of the closing prices during the last six months
preceding the date of announcement. Disclosure - The offer should
disclose the detailed terms of the offer, identity of the offerer,
details of the offerers existing holdings in the offerer company
etc., Offer Documents - The offer document should contain the
offers financial information, its intention to continue the offer
companys business and to make major change and L.T commercial
justification for the offer
Q.4 What are the legal compliance issues a company has to adhere
to in case of a merger. Explain through an example. Q.5 Take a
cross border acquisition by an Indian company and critically
evaluate. Q.6 Choose any firm of your choice and identify suitable
acquisition opportunity and give reasons for the same.