Concepts of Mergers and Acquisitions

C at wholeness timepts of unitings and accomplishmentsMA CONCEPTSIntroductionThe phrase jointures and attainments refers to the facet of merged system, corporate finance and circumspection sessing with the buying and merchandising and leave of polar companies that derriere aid, finance or help a increment confede circumscribe in a createn application mystify apace without having to get out an separate rail line of business entityThe above nitty-grittys up in a nut sheath the concept of unions and passments. There atomic tote up 18 triplex reasons for companies to bring forth into MA legal action whether to expand into a parvenu grocery or geography, to pull together groceryplace shargon in a current groceryplace, to everyplacecome disputation or for regulatory reasons as virtu eithery g everywherenments make a withdraw up mandatory to operate in their local economy. that it is demand to acknowledgment that in the current frugal scenari o MA has go an necessity pricking for companies to expand and grow, as successful MA strategy fanny be a distinguishableiating factor for successful com government agency.The words and Mergers and attainments be preferably a great deal work interchangeably in the current corporate foundation and wherefore brook be seen in the project as strong. present is an tackle to list out some salient features which differentiate mingled with the name Mergers and encyclopaedisms.MergerA Merger behind be descried as a combination of deuce companies into one mountainousr smart set such activities atomic telephone number 18 normally voluntary in nature and incriminate a phone line swap or immediate payment payment to the draw a bead on make-up. argument swaps leave alone the sh arholders of some(prenominal) companies to sh ar the stake involved in the deal. A fusion normally results in a late bon ton with a peeled brand and a cutting confedeproportionn n ame macrocosm created. Oxford dictionary of Business defines nuclear fusion reactions as A combination of two or to a great tip personal line of credites on an equal footing that results in the creation of a current reporting entity ye ard from the combining businesses. The shargonholders of the combining entities mutually shargon the risks and rewards of the spic-and-span entity and no one fellowship to the nuclear fusion obtains control over an recoiler(a).AcquisitionAcquisitions or fruitover atomic number 18 different from Mergers. In the event of an eruditeness a cut offy unilaterally relinquishes its independence and adopts to the getting reals plans. As a legal point of view the manoeuvre beau monde ceases to constitute as the buyer swallows the business.Acquisitions bedevil the side by side(p) characteristicsThey argon a part of a well- interpreted family beatment planIt is a unilateral service decease circumspection structure ordain convey fewe r problemscontractual regulations be simplerTime taken for an accomplishment is normally go arounder than a merger.However it is inwrought to mention here that whether a leveraging is to be considered as merger or an acquisition actually depends on the whether the purchase is prosperous or hostile or in the manner it is announced. The real variance wherefore lies in the course it is communicated and the way it is get holdd by the parcelholders, music directors and employees of the take troupe. narproportionn of MAMergers and Acquisition movements were normally defined and associated with the behavior of US organizations. assorted authors rich person tried to classify the merger movements into boom. The virtually bounteous was Weston who in 1953 described three major stops of merger movements while analyze the US business behavior.Merger ripples argon a very generic wine way to describe the predominant strategy that was universe adopted by organizations in tha t era. This has been interpreted by the different authors in different slipway depending on how they have perceived by them. However it would be persecute to consider that all organizations followed the uniform(p) strategy as described in the mingled.The break through and through or the first wave of the Merger movement is state to be have been status the Sherman Act in 1890. Prior to 1890 on that point was a predominance of the polypoly market structure, this was reduced post 1890 and partial monopolies started increasing.The economic fib has been dissever into Merger shudders ground on the merger activities in the business world asPeriodNameFacet1889 1904 starting curveHorizontal mergers1916 1929 bit WaveVertical mergers1965 1989 troika Wavediversify stack up mergers1992 1998Fourth WaveHostile takeovers Corporate assail2000 one- ordinal WaveCross- side shout mergersThe Great Merger Movement was primarily a US business phenomenon from 1895 to 1905. It is said th at during this time 1800 of small profligates disappe atomic number 18d into consolidations with sympathetic upstandings to form adult, regent(postnominal) institutions that dominated their markets. The relaxation of corporate laws in the United States helped the mergers, dit and communication dineroworks were developed which helped achieved economies of size.The second wave (1916 to 1929) apothegm even greater natural deal in mergers. The motive behind these mergers was vertical desegregations. Organizations tried to achieve obligation(a) contacts and to avoid their dependence on some other uncoiledhearteds for raw materials.The deuce-ace wave saw the large conglomerates looking at diversification in the 60s. the run actually r for to each one oneed its zenith during the merge wave and was carried to its logical extreme by the conglomerate firms that rose to prominence during that time.The fourth wave in 90s saw amplification in hostile takeovers and corporat e raiding by the large firms. This was a wave during which vulnerable companies were grabbed up by the larger firms.The fifth wave has been categorized as starting from the year 2000 onwards and has seen a stylus of increase in Cross border acquisitions. The work up of globalization has seen change magnitude the market for mar border MA. This rapid increase has taken some(prenominal) MA firms by surprise as most of them neer single-valued functiond to consider this repayable to the complexity involved in stupefy border MA. The success of these acquisitions was overly expressage and we saw a capacious legal age of them failing. Even and wherefore in 1997 alone in that respect were over 2300 cross border acquisition outlay a entire of or so $298 Million. microbe Boston Consulting Group Research Report The Brave refreshful creative activity of MA-How to Create lever from MA, July 2007Types of Mergers and AcquisitionsThere are unhomogeneous tokens of mergers and acquisitions depending on the theatrical role of the business structure. The classification buns be found on the image of companies merging or by the way the MA deal is being financed.Here is some graphic symbolcast of mergers on the posterior of the consanguinity amongst the two companies that are mergingHorizontal Merger- This type or a merger is between two companies that plow take the same ware line and markets and are in direct competition with each otherVertical Merger This is between a customer and caller-up of between a supplier and a conjunction play offet attachment Merger This between two companies that sell the same products in different geographies or markets yield Extension Merger This is between two companies that are selling different but related products in the same market. orbitual Merger A circular merger is very similar to a product extension merger however in this case the products being interchange are completely unrelated. The merger brin gs in bene fulfils by utilizing the same take for marketing these unrelated products, allowing shared dealerships. An example of this miscell each of a merger is of McLeod Russel (A Team high society) with Eveready Industries ( A batteries association) in 1997. McLeod Russel however was de-merged from Eveready in 2005. conglobation This type of a merger is between two companies that have no vulgar business areas.Mergers mint similarly be classified depending on how the merger is being financed as described below acquire Mergers This kind of a merger occurs when a beau monde purchases a nonher. The purchase is made through hard currency or through the issue of a debt instrument.Consolidation Mergers In this type of a merger a peeled go with is organise and two the companies are bought and feature under the impertinently entity.Type of acquisitions force out be described as belowAmalgamation In this type of an acquisition a new corporation is created by uniting th e companies voluntarily.Acquisition/ takeover In this form one company acquires another companies number or controlling interest. The acquired company some(prenominal) operates as a adjunct or kindle be liquidated completely.Sale of Assets A company notify sell off all its pluss to another and cease to exist.Holding smart set Acquisition This involves the acquisition of either the total or legal age of a firms sprout by a company. The purpose of this form is mainly to gain management control of other companiesReverse Merger In this form of an acquisition a privy company with strong prospects buys a cosmosally listed shell company, usually one with no business or throttle assets. This helps the surreptitious company to get publicly listed in a short cut across of time.All mergers though have one common refinement and that is to create a synergy between two companies which makes the time pry of the unite companies to be greater than the sum of the two companies MA ProcessMA process set up be laid down in 3 staple phasesFirst course Start with an OfferThe getting firm once decides that they want to do a merger of acquisition, they start with an allow for. The getting company starts working with fiscal advisors and enthronisation bankers to initiate contact with the luff area company. The getting must have a strategy for a merger computer programmeme, hypothecate by company management and approved by the director and majority line of merchandiseholders. The getting company overly at this point does a overstuffed collect perseverance with the help of publicly benefitable data and financial advisors. The purpose of this is to mother at an overall expense that the acquiring company is willing to pay for its level in coin, shares or both.Second bod prats ResponseOnce the tenderise has been made the quarry company can do one of several(prenominal) things mentioned belowAccept the whirl If the sign companies top management and shareholders are happy with the offer they can hardly accept the offer and go ahead with the deal.Attempt to negociate If the target company management and shareholders are not satisfied with the offer they dexterity try and work out to a greater extent than agreeable legal injury with the acquiring company. Since a lot is stake for the management of the target i.e. their jobs in particular, they magnate want to work out mend deal to watch over their jobs or leave with a big compensations package. Target companies which are highly want subsequently with multiple bidders would obviously have a fracture mishap of negotiating a sweeter deal. Even manager who are crucial to the movement of an organization have a better chance of success into negotiating a good deal for them.Execute a Poison Pill or similar Hostile Takeover Defense A poison birth control pill can be initiated by a target company if it observers a effectiveness hostile suitor acquiring a prede termined lot of Target company hackneyed list. To execute its defense, the target company grants all shareholders leave out the acquiring company options to buy additional stock at a melodramatic discount. This trim downs the acquiring companys share and thwarts the cap great military unit hostile takeover attempt. stimulate a White Knight In this substitute(a) a target company seeks out a friendlier company as a potential acquiring company. The friendlier company would offer an equal or higher(prenominal) charge with better terms as compared to a hostile takeover bid.Third Phase or Closing the DealOnce the target company accepts the offer and all the regulatory requirements are met then the deal would be executed. The acquiring company will them pay for the target companies shares with hard currency, stock or both.A cash-for-stock motion is ordinaryly straightforward target company shareholders receive a cash payment for each share purchased. When a company is purch ased with stock, new shares from the acquiring companysstock are issued directly to the target companys shareholders, or the new shares are sent to a broker who manages them for target company shareholders ontogeny STRATEGIES apprehension of festeringGrowth in firms can be looked at by two broad views organic egress, or inorganic harvest-festival. perfect ripening is achieved through mainly internal elaboration while inorganic growth is achieved through external expansion, i.e. through consolidations, acquisitions and mergers.Growth is something for which most companies, large or small, strive. Small firms want to get big, big firms want to get bigger. As observed by Philip B. Crosby, author of The Eternally Successful Organization, if for no other reason than to accommodate the increased expenses that develop over the old age. ostentatiousness also raises the comprise of everything, and retaliatory outlay increases are not invariably possible. Salaries rise as employees g ain seniority. The speak tos of benefits rise because of their very structure, and it is operose to take any back, particularly if the endeavour is goodable. Therefore bell eliminations and meshwork return must be conducted on a continuing basis, and the revenues of the organization must continue to increase in order to broaden the base. some firms, of course, appetite growth in order to prosper, not just to survive. organizational growth, however, subject matter different things to different organizations. Indeed, at that place are many parameters a company can select to measure its growth. The most meaningful yard measure is one that shows progress with respect to an organizations stated goals. The ultimate goal of most companies is profit, so net profit, revenue, and other financial data are a good deal utilized as bottom-line indications of growth. Other business owners, meanwhile, whitethorn use gross revenue projects, number of employees, physical expansion, or other criteria to judge organizational growth. Companies which are do by a product minded entrepreneur are more concerned with the growth and profit mightiness of a firm as an organization for the production of goods and go. While companies run by empire builders type of entrepreneurs are continuously looking at expanding the scope of the enterprise. Empire builders are not satisfied are not satisfied with product avail or maintaining competitive edgeIn terms of access to finance in that respect are broadly five growth stages in a companys sprightliness inception, organic growth, purchased, IPO and Beyond IPO as shown in the figure below. Each stage has its own characteristics, risks and potential financial sources. innate Growth without MAIn Organic growth, growth depends on the ability to avail the available opportunities and lively resources in a more effectual way. The extent of growth of a firm is actually determined by the ability of managers, product or market factors. There is no landmark to the unquestioning size of the firm keeping in mind the precondition that at that place is no fixity of cracking, labor and management and the firm is equal to(p) of acquiring these resources at a bell. In addition it is also expect that there are opportunities in the economy for investments.The economies available within the firm (such as excess productive resources or managerial capabilities) disappear afterwards the expansion is completed as they get utilized in a new activity. This means that it is only an entry advantage. However the firm whitethorn have these advantages in its new trading operations, often set up as new subsidiaries or divisions, which whitethorn grow in rejoinder to the economies in the same manner as the rest of the firm. New operations may later be spun off from the original firm without any vent of efficiency. Further, both the original and the spun off firms will have some out of work productive resources which can t hen be used to develop new activitiesInorganic growth through MAThe inorganic growth strategy is dependent on MA. The bringing close together of acquisition is that it accelerates the business model, promiscuoushand it greater impetus than organic growth. Because acquisition gives the business what it cannot get readily or incrementally. It may be a joint venture an placement that gives both parties something they want that the other has. Acquisition targets can take both antonymous and competitive businesses complementary when the target can give something an merchant bank inevitably or competitive when the target can stop somebody else having what the acquirer wants.The risks in growth through acquisitions are significant, but they can be contained through planning and delinquent diligence. The primary(a) risk is desegregation post the acquisition is completed the new arrangements have to work and hatful who were not party to the negotiation have to work together. T he same goes for systems and expectations as different business would have grown in different ways. A arranged floriculture is laudable but a wholly agreeable culture will be impossible. Add regional diversity to this and the risk would become even higher.Motivations for MAMergers and acquisitions can be motivated by either the share-holder wealth maximizing approach or the widening share ownership. The primary objectives of MA activities are diversifications, market expansion, improving competitive position and belief immunity. Given these basic objectives a different rationale can be assigned at both exclusive and collective levels.From the pedestal of shareholders enthronization made by shareholders in the companies subject to merger should compound in place. The sale of shares from one companys shareholders to another and holding investment in shares should give rise to greater take to be i.e. the opportunity gains in alternative investments. Shareholders may gain from merger in different ways viz. from the gains and achievements of the company i.e. throughRealization of monopoly doughEconomies of scalesDiversification of product lineAcquisition of human assets and other resources not available otherwise best(p) investment opportunity in combinations.One or more features would usually be available in each merger where shareholders may have draw play and favor merger.From the standpoint of managersManagers are concerned with improving operations of the company, managing the affairs of the company effectively for all round gains and growth of the company which will provide them better deals in raising their status, perks and fringe benefits. Mergers where all these things are the guaranteed outcome get restrain from the managers. At the same time, where managers have dread of displacement at the hands of new management in commix company and also resultant dispraise from the merger then support from them becomes difficult.Promoters gainsMerge rs do offer to company promoters the advantage of increasing the size of their company and the financial structure and strength. They can convert a nigh held and private limited company into a public company without contribute much(prenominal) wealth and without losing control.Benefits to usual publicImpact of mergers on general public could be viewed as aspect of benefits and equals toConsumer of the product or servicesWorkers of the companies under combinationGeneral public affected in general having not been user or consumer or the worker in the companies under merger plan.VALUATION OF TARGET COMPANIESValuation of target companies is an inhering step in the MA process. referable sedulousnessDue Diligence of a company says the question of whether a deal is being make at the right time at the right price for the right reasons. It involves an investigation into the affairs of an entity and results in the production of a report elaborate germane(predicate) data and points. The investigation is performed prior to the businesss acquisition, flotation, restructuring or other proceedingsDue Diligence is performed by many advisors on the squad. For example there may be a separate legal ascribable diligence, financial cod diligence, tax due diligence, environmental due diligence, mercenary due diligence, and data technology due diligence. Financial due diligence is a merry part of the MA process. Often a problem in the financial due diligence raises point to be dealt by other areas as well, for example a financial due diligence may display an unusual lease obligation which then feeds into the legal due diligence.What a due diligence involvesEach MA transaction is peculiar in its own sense thereof the scope and extent of a due diligence process inescapably to be tailored to fit the postulate of the buyer. However broadly it should cover the following aspectsThe history and commercial activities of the businessThe organizational structure and emp loyeesEmployee benefits and labor mattersIts narrationing policiesThe tuition systemsA expand review of financial statementsA review of the financial projectionsAnything else the team may uncover that is relevant for the transactionMethods of ValuationThe military rank of a target company normally depends on a lot of factors, it is not decent to evaluate the financial aspect alone. This is possible through a rating of the 5 Ps which arePersonnel - senior management of the target company play an important role in an acquisition. The acquiring firm considers the motivation, energy and intelligence levels of the existing personnel in the lead victorious them on.Product Proprietary products of a Target company increase the value of the company. do The plant capacity and condition of equipments also affect the e valuation of a company.Potential The potential of a firms growth as compared to the industry is also a factor in its valuationProfit The declare profits of the fi rm is the basis of determining price.It is normally considered easier to evaluate public limited since most of the above data is publicly available in their per annum published reports. In the case of a Private company it is a little more challenging to get the same information and the getting company has to depend on a proper due diligence process to complete its valuation.Financial ValuationFinancial valuation should answer the simple, but vital, question What is something worth? The analysis of target is hence based on either current projections or of the rising. The process of valuations differ comfortably for a listed and unlisted companiesMany types of valuation metrics are used, involving several sets of metrics. On of the most common is the standard P/E ration ( set to earnings ratio) however some of the other metrics include assets value, bullyized earnings, market value, investment value, carry value, costs basis valuation, enterprise value and some combined systems as well.P/E Ratio and grocery store Price For an unlisted company the P/E ratio of a interchangeable listed company is referred to and discounted based on the voting rights in the company. For listed companies the modes of valuation can be based on either earnings or assets. The market price of shares reflects the earnings per share (EPS).P/E ratio deliberate asThe P/E ratio is the current price of shares divided by the EPS. The higher the P/E ratio the higher are the future earnings expectation The P/E multiple is calculated as the multiple of net profit used to estimate the companys purchase price. For example, an investor attempting to recover his initial investment in 10 years would have to earn an after-tax return of 10% on investment, plus enrollment for discounted cash flow and pompousness. Discounted hard currency Flow (DCF) analysis uses future free cash flow projections and discounts them (most often using the weighted average cost of capital letter) to arrive at a present value.DCF is calculated asAssets prise unmistakable assets, such as land and buildings, and intangible assets are assessed as per existing business practices. Goodwill is based on the companys excess earning power for trustworthy number of years. The asset basis valuation is either on the fair value or the open market value. The dividend approach and the top-notch profit approach can also be used for asset valuation. In the dividend, the present share prices are taken as the determine of future dividends. While the super profit approach expects to get more value for a firm in addition to the value of the net assets.Capitalized loot This method acting is based on the rate of return on the capital employedMarket nurture This is on the basis of quoted share values at the stock exchange.Investment prize This is the cost of establishing an enterprise such as the target company and the interest on the same. oblige Value This is the secondary factor in valuations and takes into sexual conquest the total worth of the assets after depreciation. If the P/E multiplier is less than the countersign value then the book value has to be adjusted to reflect the true value. It takes into account the present net value of the real estate, machinery and equipment. Sometimes the book value may be understated in times of inflation and mislead during depression.Cost Basis Valuation This is cost minus depreciation. intangible assets are not taken into account.Reproduction Cost This is the current cost of alternate of properties with similar design and material.Substitution Cost Substitution cost is the cost of construction of the same utility and capacity. first step Value The valuation of a company is based on the Enterprise Value (EV) and its ratio to the companys sales and operating profit (PBIDT Profit before interest, depreciation and tax). Enterprise Value is calculated asA = Market Capitalization of shopworn + primitive Debt on Companys book sB = Investments + CashEV = (B A)Accounting MethodsThe method accountancy also has a significant impact on the valuation and price the seller will receive. The acquiring firm can use two principal accounting methods for valuations, they can either use the pooling of interests method or the purchase method. The main difference between them is the value that the combined firms ease sheet places on the assets of the acquired firm, as well as the depreciation allowances and charges against income following the merger.Pooling of Interests Method The pooling of interests method assumes that the transaction is simply an exchange of righteousness securities. Therefore, the capital stock account of the target firm is eliminated, and the acquirer issues new stock to replace it. The two firms assets and liabilities are combined at their historical book values as of the acquisition date. The end result of a pooling of interests transaction is that the total assets of the combined firm are equal to the sum of the assets of the somebody firms. No goodwill is generated, and there are no charges against earnings. A tax-exempt acquisition would normally be reported as a pooling of interests.Purchase Method In this method, assets and liabilities are shown on the merged firms books at their market (not book) values as of the acquisition date. This method is based on the idea that the resulting values should reflect the market values established during the talk terms process. The total liabilities of the combined firm equal the sum of the two firms individual liabilities. The paleness of the acquiring firm is increased by the amount of the purchase price.Mark Up Pricing/ PremiumMarkup pricing or reward is the region difference between the trading price of the target companies stock before the announcement of acquisition and the price per share paid by the acquiring firm. Bidding firms pay large agios to acquire control of exchange-listed target firms. commonly premium s include pre-bid run up in the target firms stock price as part of the control premium paid by the engaging bidders. The valuations by the bidder and the target depend on the information each party has at the time of the negotiation.Mark Up or premium is part decided on the basis of the relationship exemplar of the acquiring firm. The pattern in some cases is that if locking directorship among firms. Most firms have invariable and eagle-eyed standing relationships with professionals such as attorneys, investment bankers and accountants. These are seeming to have similar effects as to interlock directorships. Managers take advice from both their interlock partners and professional firms when deciding how much to pay.Financing an MAOrganizations use various methods for financing an MA deal. Often combinations of the below mentioned methodsCash Cash payments. These are normally preferred since the organization does not have to dilute blondness and there will be no change in th e number of shares outstanding. Also cash transactions save time and cash can be re-invested at the face value.Financing Financing capital may be borrowed from banks or raised from issue of bonds. Acquisitions that are financed through debt are called as leveraged buyouts if they take the target private, and the debt will often be locomote down into the balance sheet of the acquired company.Hybrids An acquisition can involve a combination of cash and debt or of cash and stock of the buying entity. blank space ACQUISITION INTEGRATIONAfter the acquisition is completed, the acquired company take to be integrated with the acquiring company. The process of integration actually call for to be planned during the acquisition itself to ensure that the company integrates smoothly. The success of integration also depends on the managers who are responsible for the implementation.PlanningThe acquiring company needs to plan the post acquisition integration period. IN the initial period the ta rget company is more receptive to drastic changes to make the company viable. Some of the basic approaches are as followsAdapting a program This should be completely aligned with the companies goals and objectives of the company and should also take into account the limitations of the company. strong organization and leadership structure The integration process involves creating a separate which focuses on creating value through specific activities and actions. A true partnership would mean involving the senior leadership of the acquired company as well in this strategic group.Minimize post acquisition exodus of slender resources It is circumstantial to have a preventing plan in place to minimise the victimize that maybe caused to the new enterprise. Any loss of critical things like market standing, key employees, brand has to be avoided.Employee issues The emplConcepts of Mergers and AcquisitionsConcepts of Mergers and AcquisitionsMA CONCEPTSIntroductionThe phrase Mergers and Acquisitions refers to the aspect of corporate strategy, corporate finance and management dealing with the buying and 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 entityThe above sums up in a nutshell the concept of mergers and acquisitions. There are multiple reasons for companies to get into MA activity whether to expand into a new market or geography, to gain market share in a current market, to overcome competition or for regulatory reasons as some governments make a tie up mandatory to operate in their local economy. However it is essential to mention that in the current economic scenario MA has become an essential tool for companies to expand and grow, as successful MA strategy can be a differentiating factor for successful organization.The words and Mergers and Acquisitions are quite often used interchangeably in the current corporate world and hence can be seen in the project as well. Here is an attempt to list out some salient features which differentiate between the terms Mergers and Acquisitions.MergerA Merger can be descried as a combination of two companies into one larger company such activities are normally voluntary in nature and involve a stock swap or cash payment to the target organization. Stock swaps allow the shareholders of both companies to share the risk involved in the deal. A merger normally results in a new company with a new brand and a new company name being created. Oxford Dictionary of Business defines mergers as A combination of two or more businesses on an equal footing that results in the creation of a new reporting entity formed from the combining businesses. The shareholders of the combining entities mutually share the risks and rewards of the new entity and no one party to the merger obtains control over another.AcquisitionAcquisitions or takeover are different from Mergers. In the case of an acqui sition a company unilaterally relinquishes its independence and adopts to the acquiring firms plans. As a legal point of view the target company ceases to exist as the buyer swallows the business.Acquisitions have the following characteristicsThey are a part of a well-considered company development planIt is a unilateral processTop management structure will have fewer problemsContractual regulations are simplerTime taken for an acquisition is normally shorter than a merger.However it is essential to mention here that whether a purchase is to be considered as merger or an acquisition actually depends on the whether the purchase is friendly or hostile or in the manner it is announced. The real difference hence lies in the way it is communicated and the way it is received by the shareholders, directors and employees of the target company.History of MAMergers and Acquisition movements were normally defined and associated with the behavior of US organizations. Various authors have tried to classify the merger movements into wave. The most prominent was Weston who in 1953 described three major periods of merger movements while studying the US business behavior.Merger waves are a very generic way to describe the predominant strategy that was being adopted by organizations in that era. This has been interpreted by the different authors in different ways depending on how they have perceived by them. However it would be wrong to consider that all organizations followed the same strategy as described in the various.The start or the first wave of the Merger movement is said to be have been post the Sherman Act in 1890. Prior to 1890 there was a predominance of the polypoly market structure, this was reduced post 1890 and partial monopolies started increasing.The economic history has been divided into Merger Waves based on the merger activities in the business world asPeriodNameFacet1889 1904First WaveHorizontal mergers1916 1929Second WaveVertical mergers1965 1989Third WaveDiversified conglomerate mergers1992 1998Fourth WaveHostile takeovers Corporate Raiding2000 Fifth WaveCross-border mergersThe Great Merger Movement was primarily a US business phenomenon from 1895 to 1905. It is said that during this time 1800 of small firms disappeared into consolidations with similar firms to form large, powerful institutions that dominated their markets. The relaxation of corporate laws in the United States helped the mergers, transportation and communication networks were developed which helped achieved economies of size.The second wave (1916 to 1929) saw even greater activity in mergers. The motive behind these mergers was vertical integrations. Organizations tried to achieve technical gains and to avoid their dependence on other firms for raw materials.The third wave saw the large conglomerates looking at diversification in the 60s. the process actually reached its zenith during the merge wave and was carried to its logical extreme by the conglomerate fir ms that rose to prominence during that time.The fourth wave in 90s saw increase in hostile takeovers and corporate raiding by the large firms. This was a wave during which vulnerable companies were grabbed up by the larger firms.The fifth wave has been categorized as starting from the year 2000 onwards and has seen a trend of increase in Cross border acquisitions. The rise of globalization has seen increased the market for cross border MA. This rapid increase has taken many MA firms by surprise as most of them never used to consider this due to the complexity involved in cross border MA. The success of these acquisitions was also limited and we saw a vast majority of them failing. Even then in 1997 alone there were over 2300 cross border acquisition worth a total of approximately $298 Million.Source Boston Consulting Group Research Report The Brave New World of MA-How to Create value from MA, July 2007Types of Mergers and AcquisitionsThere are various types of mergers and acquisiti ons depending on the type of the business structure. The classification can be based on the type of companies merging or by the way the MA deal is being financed.Here is some type of mergers on the basis of the relationship between the two companies that are mergingHorizontal Merger- This type or a merger is between two companies that share the same product line and markets and are in direct competition with each otherVertical Merger This is between a customer and company of between a supplier and a companyMarket Extension Merger This between two companies that sell the same products in different geographies or marketsProduct Extension Merger This is between two companies that are selling different but related products in the same market.Circular Merger A circular merger is very similar to a product extension merger however in this case the products being sold are completely unrelated. The merger brings in benefits by utilizing the same channels for marketing these unrelated pro ducts, allowing shared dealerships. An example of this kind of a merger is of McLeod Russel (A Team company) with Eveready Industries ( A batteries company) in 1997. McLeod Russel however was de-merged from Eveready in 2005.Conglomeration This type of a merger is between two companies that have no common business areas.Mergers can also be classified depending on how the merger is being financed as described belowPurchase Mergers This kind of a merger occurs when a company purchases another. The purchase is made through cash or through the issue of a debt instrument.Consolidation Mergers In this type of a merger a new company is formed and both the companies are bought and combined under the new entity.Type of acquisitions can be described as belowAmalgamation In this type of an acquisition a new corporation is created by uniting the companies voluntarily.Acquisition/Takeover In this form one company acquires another companies total or controlling interest. The acquired company either operates as a subsidiary or can be liquidated completely.Sale of Assets A company can sell off all its assets to another and cease to exist.Holding Company Acquisition This involves the acquisition of either the total or majority of a firms stock by a company. The purpose of this form is mainly to gain management control of other companiesReverse Merger In this form of an acquisition a private company with strong prospects buys a publicly listed shell company, usually one with no business or limited assets. This helps the private company to get publicly listed in a short span of time.All mergers though have one common goal and that is to create a synergy between two companies which makes the value of the combined companies to be greater than the sum of the two companiesMA ProcessMA process can be laid down in 3 basic phasesFirst Phase Start with an OfferThe acquiring firm once decides that they want to do a merger of acquisition, they start with an offer. The acquiring co mpany starts working with financial advisors and investment bankers to initiate contact with the target company. The acquiring must have a strategy for a merger programme, formulated by company management and approved by the director and majority stockholders. The acquiring company also at this point does a soft due diligence with the help of publicly available data and financial advisors. The purpose of this is to arrive at an overall price that the acquiring company is willing to pay for its target in cash, shares or both.Second Phase Targets ResponseOnce the offer has been made the target company can do one of several things mentioned belowAccept the offer If the target companies top management and shareholders are happy with the offer they can simply accept the offer and go ahead with the deal.Attempt to Negotiate If the target company management and shareholders are not satisfied with the offer they might try and work out more agreeable terms with the acquiring company. Since a lot is stake for the management of the target i.e. their jobs in particular, they might want to work out better deal to keep their jobs or leave with a big compensations package. Target companies which are highly sought after with multiple bidders would obviously have a better chance of negotiating a sweeter deal. Even manager who are crucial to the operation of an organization have a better chance of success into negotiating a good deal for them.Execute a Poison Pill or similar Hostile Takeover Defense A poison pill can be initiated by a target company if it observers a potential hostile suitor acquiring a predetermined percentage of Target company stock. To execute its defense, the target company grants all shareholders except the acquiring company options to buy additional stock at a dramatic discount. This dilutes the acquiring companys share and thwarts the potential hostile takeover attempt. Find a White Knight In this alternative a target company seeks out a friendlier c ompany as a potential acquiring company. The friendlier company would offer an equal or higher price with better terms as compared to a hostile takeover bid.Third Phase or Closing the DealOnce the target company accepts the offer and all the regulatory requirements are met then the deal would be executed. The acquiring company will them pay for the target companies shares with cash, stock or both.A cash-for-stock transaction is fairly straightforward target company shareholders receive a cash payment for each share purchased. When a company is purchased with stock, new shares from the acquiring companysstock are issued directly to the target companys shareholders, or the new shares are sent to a broker who manages them for target company shareholdersGROWTH STRATEGIESConcept of GrowthGrowth in firms can be looked at by two broad views organic growth, or inorganic growth. Organic growth is achieved through mainly internal expansion while inorganic growth is achieved through external e xpansion, i.e. through consolidations, acquisitions and mergers.Growth is something for which most companies, large or small, strive. Small firms want to get big, big firms want to get bigger. As observed by Philip B. Crosby, author of The Eternally Successful Organization, if for no other reason than to accommodate the increased expenses that develop over the years. Inflation also raises the cost of everything, and retaliatory price increases are not always possible. Salaries rise as employees gain seniority. The costs of benefits rise because of their very structure, and it is difficult to take any back, particularly if the enterprise is profitable. Therefore cost eliminations and profit improvement must be conducted on a continuing basis, and the revenues of the organization must continue to increase in order to broaden the base.Most firms, of course, desire growth in order to prosper, not just to survive. Organizational growth, however, means different things to different organi zations. Indeed, there are many parameters a company can select to measure its growth. The most meaningful yardstick is one that shows progress with respect to an organizations stated goals. The ultimate goal of most companies is profit, so net profit, revenue, and other financial data are often utilized as bottom-line indications of growth. Other business owners, meanwhile, may use sales figures, number of employees, physical expansion, or other criteria to judge organizational growth. Companies which are run by a product minded entrepreneur are more concerned with the growth and profitability of a firm as an organization for the production of goods and services. While companies run by empire builders type of entrepreneurs are continuously looking at expanding the scope of the enterprise. Empire builders are not satisfied are not satisfied with product improvement or maintaining competitive edgeIn terms of access to finance there are broadly five growth stages in a companys lifespa n inception, organic growth, purchased, IPO and Beyond IPO as shown in the figure below. Each stage has its own characteristics, risks and potential financial sources.Organic Growth without MAIn Organic growth, growth depends on the ability to avail the available opportunities and existing resources in a more efficient way. The extent of growth of a firm is actually determined by the ability of managers, product or market factors. There is no limit to the absolute size of the firm keeping in mind the assumption that there is no fixity of capital, labor and management and the firm is capable of acquiring these resources at a price. In addition it is also assumed that there are opportunities in the economy for investments.The economies available within the firm (such as excess productive resources or managerial capabilities) disappear after the expansion is completed as they get utilized in a new activity. This means that it is only an entry advantage. However the firm may have these advantages in its new operations, often set up as new subsidiaries or divisions, which may grow in response to the economies in the same manner as the rest of the firm. New operations may later be spun off from the original firm without any loss of efficiency. Further, both the original and the spun off firms will have some unused productive resources which can then be used to develop new activitiesInorganic growth through MAThe inorganic growth strategy is dependent on MA. The idea of acquisition is that it accelerates the business model, giving it greater impetus than organic growth. Because acquisition gives the business what it cannot get quickly or incrementally. It may be a joint venture an agreement that gives both parties something they want that the other has. Acquisition targets can include both complementary and competitive businesses complementary when the target can give something an acquirer needs or competitive when the target can stop someone else having what the a cquirer wants.The risks in growth through acquisitions are significant, but they can be contained through planning and due diligence. The primary risk is integration post the acquisition is completed the new arrangements have to work and people who were not party to the negotiation have to work together. The same goes for systems and expectations as different business would have grown in different ways. A consistent culture is laudable but a wholly consistent culture will be impossible. Add regional diversity to this and the risk would become even higher.Motivations for MAMergers and acquisitions can be motivated by either the share-holder wealth maximizing approach or the widening share ownership. The primary objectives of MA activities are diversifications, market expansion, improving competitive position and depression immunity. Given these basic objectives a different rationale can be assigned at both individual and collective levels.From the standpoint of shareholdersInvestmen t made by shareholders in the companies subject to merger should enhance in value. The sale of shares from one companys shareholders to another and holding investment in shares should give rise to greater values i.e. the opportunity gains in alternative investments. Shareholders may gain from merger in different ways viz. from the gains and achievements of the company i.e. throughRealization of monopoly profitsEconomies of scalesDiversification of product lineAcquisition of human assets and other resources not available otherwiseBetter investment opportunity in combinations.One or more features would generally be available in each merger where shareholders may have attraction and favor merger.From the standpoint of managersManagers are concerned with improving operations of the company, managing the affairs of the company effectively for all round gains and growth of the company which will provide them better deals in raising their status, perks and fringe benefits. Mergers where a ll these things are the guaranteed outcome get support from the managers. At the same time, where managers have fear of displacement at the hands of new management in amalgamated company and also resultant depreciation from the merger then support from them becomes difficult.Promoters gainsMergers do offer to company promoters the advantage of increasing the size of their company and the financial structure and strength. They can convert a closely held and private limited company into a public company without contributing much wealth and without losing control.Benefits to general publicImpact of mergers on general public could be viewed as aspect of benefits and costs toConsumer of the product or servicesWorkers of the companies under combinationGeneral public affected in general having not been user or consumer or the worker in the companies under merger plan.VALUATION OF TARGET COMPANIESValuation of target companies is an essential step in the MA process.Due DiligenceDue Diligence of a company answers the question of whether a deal is being done at the right time at the right price for the right reasons. It involves an investigation into the affairs of an entity and results in the production of a report detailing relevant data and points. The investigation is performed prior to the businesss acquisition, flotation, restructuring or other transactionsDue Diligence is performed by many advisors on the team. For example there may be a separate legal due diligence, financial due diligence, tax due diligence, environmental due diligence, commercial due diligence, and information technology due diligence. Financial due diligence is a vital part of the MA process. Often a problem in the financial due diligence raises point to be dealt by other areas as well, for example a financial due diligence may uncover an unusual lease obligation which then feeds into the legal due diligence.What a due diligence involvesEach MA transaction is unique in its own sense hence the scope and extent of a due diligence process needs to be tailored to fit the needs of the buyer. However broadly it should cover the following aspectsThe history and commercial activities of the businessThe organizational structure and employeesEmployee benefits and labor mattersIts accounting policiesThe information systemsA detailed review of financial statementsA review of the financial projectionsAnything else the team may uncover that is relevant for the transactionMethods of ValuationThe valuation of a target company normally depends on a lot of factors, it is not sufficient to evaluate the financial aspect alone. This is possible through a valuation of the 5 Ps which arePersonnel - senior management of the target company play an important role in an acquisition. The acquiring firm considers the motivation, energy and intelligence levels of the existing personnel before taking them on.Product Proprietary products of a Target company increase the value of the company.Plant The plant capacity and condition of equipments also affect the valuation of a company.Potential The potential of a firms growth as compared to the industry is also a factor in its valuationProfit The declared profits of the firm is the basis of determining price.It is normally considered easier to evaluate public limited since most of the above data is publicly available in their annually published reports. In the case of a Private company it is a little more challenging to get the same information and the Acquiring company has to depend on a proper due diligence process to complete its valuation.Financial ValuationFinancial valuation should answer the simple, but vital, question What is something worth? The analysis of target is hence based on either current projections or of the future. The process of valuations differ substantially for a listed and unlisted companiesMany types of valuation metrics are used, involving several sets of metrics. On of the most common is the standard P /E ration (Price to earnings ratio) however some of the other metrics include assets value, capitalized earnings, market value, investment value, book value, costs basis valuation, enterprise value and some combined methods as well.P/E Ratio and Market Price For an unlisted company the P/E ratio of a comparable listed company is referred to and discounted based on the voting rights in the company. For listed companies the modes of valuation can be based on either earnings or assets. The market price of shares reflects the earnings per share (EPS).P/E ratio Calculated asThe P/E ratio is the current price of shares divided by the EPS. The higher the P/E ratio the higher are the future earnings expectation The P/E multiple is calculated as the multiple of net profit used to compute the companys purchase price. For example, an investor attempting to recover his initial investment in 10 years would have to earn an after-tax return of 10% on investment, plus adjustment for discounted cas h flow and inflation. Discounted Cash Flow (DCF) analysis uses future free cash flow projections and discounts them (most often using the weighted average cost of capital) to arrive at a present value.DCF is calculated asAssets Value Tangible assets, such as land and buildings, and intangible assets are assessed as per existing business practices. Goodwill is based on the companys excess earning power for certain number of years. The asset basis valuation is either on the fair value or the open market value. The dividend approach and the super profit approach can also be used for asset valuation. In the dividend, the present share prices are taken as the values of future dividends. While the super profit approach expects to get more value for a firm in addition to the value of the net assets.Capitalized Earnings This method is based on the rate of return on the capital employedMarket Value This is on the basis of quoted share values at the stock exchange.Investment Value This is the cost of establishing an enterprise such as the target company and the interest on the same.Book Value This is the secondary factor in valuations and takes into account the total worth of the assets after depreciation. If the P/E multiplier is less than the book value then the book value has to be adjusted to reflect the true value. It takes into account the present net value of the real estate, machinery and equipment. Sometimes the book value may be understated in times of inflation and overstated during depression.Cost Basis Valuation This is cost minus depreciation. Intangible assets are not taken into account.Reproduction Cost This is the current cost of replacement of properties with similar design and material.Substitution Cost Substitution cost is the cost of construction of the same utility and capacity.Enterprise Value The valuation of a company is based on the Enterprise Value (EV) and its ratio to the companys sales and operating profit (PBIDT Profit before int erest, depreciation and tax). Enterprise Value is calculated asA = Market Capitalization of Stock + Total Debt on Companys booksB = Investments + CashEV = (B A)Accounting MethodsThe method accounting also has a significant impact on the valuation and price the seller will receive. The acquiring firm can use two principal accounting methods for valuations, they can either use the pooling of interests method or the purchase method. The main difference between them is the value that the combined firms balance sheet places on the assets of the acquired firm, as well as the depreciation allowances and charges against income following the merger.Pooling of Interests Method The pooling of interests method assumes that the transaction is simply an exchange of equity securities. Therefore, the capital stock account of the target firm is eliminated, and the acquirer issues new stock to replace it. The two firms assets and liabilities are combined at their historical book values as of the acq uisition date. The end result of a pooling of interests transaction is that the total assets of the combined firm are equal to the sum of the assets of the individual firms. No goodwill is generated, and there are no charges against earnings. A tax-free acquisition would normally be reported as a pooling of interests.Purchase Method In this method, assets and liabilities are shown on the merged firms books at their market (not book) values as of the acquisition date. This method is based on the idea that the resulting values should reflect the market values established during the bargaining process. The total liabilities of the combined firm equal the sum of the two firms individual liabilities. The equity of the acquiring firm is increased by the amount of the purchase price.Mark Up Pricing/ PremiumMarkup pricing or premium is the percentage difference between the trading price of the target companies stock before the announcement of acquisition and the price per share paid by the acquiring firm. Bidding firms pay large premiums to acquire control of exchange-listed target firms. Normally premiums include pre-bid run up in the target firms stock price as part of the control premium paid by the winning bidders. The valuations by the bidder and the target depend on the information each party has at the time of the negotiation.Mark Up or premium is partly decided on the basis of the relationship pattern of the acquiring firm. The pattern in some cases is that if interlocking directorship among firms. Most firms have stable and long standing relationships with professionals such as attorneys, investment bankers and accountants. These are likely to have similar effects as to interlock directorships. Managers take advice from both their interlock partners and professional firms when deciding how much to pay.Financing an MAOrganizations use various methods for financing an MA deal. Often combinations of the below mentioned methodsCash Cash payments. These are normal ly preferred since the organization does not have to dilute equity and there will be no change in the number of shares outstanding. Also cash transactions save time and cash can be re-invested at the face value.Financing Financing capital may be borrowed from banks or raised from issue of bonds. Acquisitions that are financed through debt are called as leveraged buyouts if they take the target private, and the debt will often be moved down into the balance sheet of the acquired company.Hybrids An acquisition can involve a combination of cash and debt or of cash and stock of the purchasing entity.POST ACQUISITION INTEGRATIONAfter the acquisition is completed, the acquired company needs to be integrated with the acquiring company. The process of integration actually needs to be planned during the acquisition itself to ensure that the company integrates smoothly. The success of integration also depends on the managers who are responsible for the implementation.PlanningThe acquiring com pany needs to plan the post acquisition integration period. IN the initial period the target company is more receptive to drastic changes to make the company viable. Some of the basic approaches are as followsAdapting a program This should be completely aligned with the companies goals and objectives of the company and should also take into account the limitations of the company.Effective organization and leadership structure The integration process involves creating a group which focuses on creating value through specific activities and actions. A true partnership would mean involving the senior leadership of the acquired company as well in this strategic group.Minimize post acquisition exodus of critical resources It is critical to have a preventing plan in place to minimize the damage that maybe caused to the new enterprise. Any loss of critical things like market standing, key employees, brand has to be avoided.Employee issues The empl