Mergers and acquisitions

1. Mergers & AcquisitionsMergers & Acquisitions

2. Meaning of Mergers andMeaning of Mergers and
AcquisitionsAcquisitions
 MergersMergers refer to the fusion of one company into anotherrefer to the fusion of one company into another (Absorption)(Absorption)
or two companies coming together to form a new corporate entityor two companies coming together to form a new corporate entity
(Consolidation).(Consolidation).
 Tata Fertilizers Ltd (TFL:A) and Tata Chemicals Ltd (TCL:B)Tata Fertilizers Ltd (TFL:A) and Tata Chemicals Ltd (TCL:B)
merged throughmerged through absorptionabsorption to form Tata Chemicals Ltd ; TFL+ TCLto form Tata Chemicals Ltd ; TFL+ TCL
= TCL or,= TCL or, A +B = BA +B = B
 Hindustan Computers Ltd (A), Hindustan Instruments Ltd (B), IndianHindustan Computers Ltd (A), Hindustan Instruments Ltd (B), Indian
Software Company Ltd ( C) and Indian Reprographics Ltd (D)Software Company Ltd ( C) and Indian Reprographics Ltd (D)
merged into a new company (throughmerged into a new company (through ConsolidationConsolidation) called HCL Ltd) called HCL Ltd
(E) or,(E) or, A +B+C+D = EA +B+C+D = E
 AcquisitionsAcquisitions on the other hand denotes a company acquiringon the other hand denotes a company acquiring
controlling stake in another so that the acquirer can have managementcontrolling stake in another so that the acquirer can have management
control over the other firmcontrol over the other firm

3. Motives Behind M&A DealsMotives Behind M&A Deals

4. Motives Behind M&AMotives Behind M&A
 There can be a wide variety of motives behind Mergers &There can be a wide variety of motives behind Mergers &
Acquisitions. One of the most basic motives for M&A isAcquisitions. One of the most basic motives for M&A is growthgrowth..
Mergers and acquisitions provide a means whereby a company canMergers and acquisitions provide a means whereby a company can
grow quickly. Often the only alternative is to grow more slowlygrow quickly. Often the only alternative is to grow more slowly
through internal expansion. Competitive factors, however, may makethrough internal expansion. Competitive factors, however, may make
such internal growth ineffective.such internal growth ineffective.
 SynergySynergy is another factor which is often associated as a motive foris another factor which is often associated as a motive for
M&A. It refers to the type of reactions that occur when two substancesM&A. It refers to the type of reactions that occur when two substances
or factors combine to produce a greater effect together than thator factors combine to produce a greater effect together than that
which the sum of the two operating independently could account for.which the sum of the two operating independently could account for.
{AB> (A+B}{AB> (A+B}
 DiversificationDiversification could be another motive. It means growing outside acould be another motive. It means growing outside a
company’s current industry category. It could be a desire to entercompany’s current industry category. It could be a desire to enter
industries that are more profitable than the firm’s current industry.industries that are more profitable than the firm’s current industry.

5. Motives Behind M&AMotives Behind M&A
 Firms may acquire another firm with hope of experiencingFirms may acquire another firm with hope of experiencing economiceconomic
gainsgains. These economic gains may come as a result of. These economic gains may come as a result of economies of scaleeconomies of scale
or economies of scopeor economies of scope. Economies of scale are the reductions in per-. Economies of scale are the reductions in per-
unit costs that come as a size of company’s operations, in terms ofunit costs that come as a size of company’s operations, in terms of
revenues or units of production, increases. Economies of scope occurrevenues or units of production, increases. Economies of scope occur
when a business can offer a broader range of services to its customerwhen a business can offer a broader range of services to its customer
basebase
 CompaniesCompanies gaingain also throughalso through horizontal and vertical mergers andhorizontal and vertical mergers and
acquisitionsacquisitions. Horizontal deals involve mergers between competitors,. Horizontal deals involve mergers between competitors,
where as vertical transactions involve companies that have a buyer-where as vertical transactions involve companies that have a buyer-
seller relationship (in the supply chain). Although the pursuit ofseller relationship (in the supply chain). Although the pursuit of
monopolistic power is sometimes believed to be a cause of horizontalmonopolistic power is sometimes believed to be a cause of horizontal
mergers, the research in this area often fails to show that the othermergers, the research in this area often fails to show that the other
companies in the market perceive that a real increase in market powercompanies in the market perceive that a real increase in market power
will be achieved in many cases. Vertical transactions may sometimeswill be achieved in many cases. Vertical transactions may sometimes
provide valuable benefits, but sometimes generate unforeseen adverseprovide valuable benefits, but sometimes generate unforeseen adverse
effectseffects..

6. Economies of Scale (Concept)Economies of Scale (Concept)
 Economy of scale refers to the cost reduction in producing a product fromEconomy of scale refers to the cost reduction in producing a product from
increasing the scale of its production in a given period. Since productionincreasing the scale of its production in a given period. Since production
costs may have a fixed component that is largely invariant to volume ofcosts may have a fixed component that is largely invariant to volume of
production, e.g. ,rents, administrative costs, the per unit cost (fixed +production, e.g. ,rents, administrative costs, the per unit cost (fixed +
variable) falls when these fixed costs of production are spread over a largevariable) falls when these fixed costs of production are spread over a large
volume. This results in scale economies. Similar scale economies may alsovolume. This results in scale economies. Similar scale economies may also
exist in the case of non-production costs associated with marketing, selling,exist in the case of non-production costs associated with marketing, selling,
distribution, storage, after sales service, etc., provided they have a fixeddistribution, storage, after sales service, etc., provided they have a fixed
cost component invariant to volume. Since in a merger, the merging firmscost component invariant to volume. Since in a merger, the merging firms
jointly produce and sell a larger volume than each on its own, there isjointly produce and sell a larger volume than each on its own, there is
opportunity for scale economies through mergers.opportunity for scale economies through mergers.

7. Economies of Scope (Concept)Economies of Scope (Concept)
 With multiple products, a firm can achieve scope economy. ScopeWith multiple products, a firm can achieve scope economy. Scope
economy exists when the total cost of producing and selling severaleconomy exists when the total cost of producing and selling several
products by the multi-product firm is less than the sum of the costs ofproducts by the multi-product firm is less than the sum of the costs of
producing and selling the same products by individual firms specializingproducing and selling the same products by individual firms specializing
in each of those products. Examples of economy of scope include costs ofin each of those products. Examples of economy of scope include costs of
R&D, use of single umbrella brand to sell several products, sellingR&D, use of single umbrella brand to sell several products, selling
products through a common distribution channel etc. Scope economyproducts through a common distribution channel etc. Scope economy
depends on the existence of certain capabilities and resources that have adepends on the existence of certain capabilities and resources that have a
common applicability across several products.common applicability across several products.
 Scope economy may also be manifested in the form of increased salesScope economy may also be manifested in the form of increased sales
revenue and profits. It is nothing but effective use of existing commonrevenue and profits. It is nothing but effective use of existing common
resources and capabilities that creates added value through increasedresources and capabilities that creates added value through increased
volume and sales revenue as well as their cost effective utilization.volume and sales revenue as well as their cost effective utilization.

8. Motives Behind M&AMotives Behind M&A
 Other gains may come in the from of financial benefits when aOther gains may come in the from of financial benefits when a largerlarger
firmfirm that resulted from the combination of two or more smaller firmsthat resulted from the combination of two or more smaller firms
hashas better access to capital markets.better access to capital markets. This improved access could alsoThis improved access could also
come in the form of acome in the form of a lower cost of capitallower cost of capital
 Another motivation for M&As may take the form ofAnother motivation for M&As may take the form of improvedimproved
managementmanagement.. AA bidding firm may be able to pay a premium for abidding firm may be able to pay a premium for a
target because of anticipated gains it will experience when it applies itstarget because of anticipated gains it will experience when it applies its
superior management skills to the target’s business.superior management skills to the target’s business.
 One of the M&A motives could beOne of the M&A motives could be acquiring new technology.acquiring new technology.
 Various other motives exist for M&As, includingVarious other motives exist for M&As, including accelerating theaccelerating the
R&D processR&D process through acquiring companies that are strong in thatthrough acquiring companies that are strong in that
area. Other targets may havearea. Other targets may have good distribution systemsgood distribution systems that makethat make
them attractive. The motives are many and can vary from deal to deal.them attractive. The motives are many and can vary from deal to deal.
 Yet another motive of M&A could beYet another motive of M&A could be reduction of taxesreduction of taxes through athrough a
reverse mergerreverse merger

9. Motives Behind M&AMotives Behind M&A
 HUL acquired Lakme to enter cosmetics market through anHUL acquired Lakme to enter cosmetics market through an
established brandestablished brand
 Glaxo and Smithkline Beecham merged to gain market share andGlaxo and Smithkline Beecham merged to gain market share and
eliminate competitioneliminate competition
 Tata Tea acquired Tetley to leverage Tetley’s international marketingTata Tea acquired Tetley to leverage Tetley’s international marketing
strength.strength.
 Blackberry and Treo merged to introduce cell phone capability with e-Blackberry and Treo merged to introduce cell phone capability with e-
mail connectivitymail connectivity
 IBM acquired Daksh to acquire latter’s competency in BPO businessIBM acquired Daksh to acquire latter’s competency in BPO business
 Merger of Orange, Hutch and Vodafone helped in worldwide marketMerger of Orange, Hutch and Vodafone helped in worldwide market
expansionexpansion
 TDPL merged with Sun Pharma to have access to latter’s fundsTDPL merged with Sun Pharma to have access to latter’s funds
(liquidity)(liquidity)
 Ashok Leyland Information Technology (ALIT) was acquired byAshok Leyland Information Technology (ALIT) was acquired by
Hinduja Finance, a group company, so that it could set off theHinduja Finance, a group company, so that it could set off the

10. Synergy (Concept)Synergy (Concept)
 The anticipated existence of synergistic benefits allows firms to incur theThe anticipated existence of synergistic benefits allows firms to incur the
expenses of acquisition process and still be able to afford to give targetexpenses of acquisition process and still be able to afford to give target
shareholders a premium for their shares. Synergy may allow the combinedshareholders a premium for their shares. Synergy may allow the combined
firm to appear to have a positivefirm to appear to have a positive “Net Acquisition Value (NAV)”“Net Acquisition Value (NAV)”
NAV = V(AB) – [V(A) +V(B)] - P-ENAV = V(AB) – [V(A) +V(B)] - P-E
 = [V(AB) – {(V(A) + V(B)}]- (P+E)= [V(AB) – {(V(A) + V(B)}]- (P+E)
 V(AB)V(AB) = Combined Value of the two firms,= Combined Value of the two firms, V(A)V(A) andand V(B)V(B) are value ofare value of AA
and B;and B; PP= Premium paid for= Premium paid for BB;; EE = Expenses of the acquisition process= Expenses of the acquisition process
The term in the square brackets is the synergistic effect. This effect mustThe term in the square brackets is the synergistic effect. This effect must
be greater than the sum of P and E to justify going forward with the mergerbe greater than the sum of P and E to justify going forward with the merger

11. Merger SynergyMerger Synergy
Synergy
Operational Synergy Financial Synergy
Lowering of Cost
of Capital Synergy
Revenue-Enhancing
Synergy
Cost- Reducing
Synergy
Cross Marketing
Economies of
Scale & Scope
Bigger- less riskier
Risk premium reduces

12. Mini Case StudiesMini Case Studies

13. GE- What to do when you can’tGE- What to do when you can’t
achieve a leading position?achieve a leading position?
 General Electric (GE) had a large number conglomerate mergers to occupyGeneral Electric (GE) had a large number conglomerate mergers to occupy
leading positions in many industries. However, in spite of its best efforts itleading positions in many industries. However, in spite of its best efforts it
could not occupy a leading position in the insurance industry. In 2005, itcould not occupy a leading position in the insurance industry. In 2005, it
announced that it would sell its reinsurance business to Swiss Re for $8.5announced that it would sell its reinsurance business to Swiss Re for $8.5
billion. GE’s CEO at that time, Jeffrey Immelt, successor to the wellbillion. GE’s CEO at that time, Jeffrey Immelt, successor to the well
known Jack Welch, indicated that the insurance business was “a toughknown Jack Welch, indicated that the insurance business was “a tough
strategic Fit for GE”. It was an admission of failure by a very successfulstrategic Fit for GE”. It was an admission of failure by a very successful
company. GE cut its losses and sold the reinsurance business to anothercompany. GE cut its losses and sold the reinsurance business to another
company that was better at it than they were.In many ways this is a sign ofcompany that was better at it than they were.In many ways this is a sign of
good management as managers need to know when to cut losses and focusgood management as managers need to know when to cut losses and focus
on areas in which they can achieve greater returns rather than continueon areas in which they can achieve greater returns rather than continue
with a failing business just to avoid having to admit mistakes to thewith a failing business just to avoid having to admit mistakes to the
shareholders. Given the volume of business deals that GE does, all of themshareholders. Given the volume of business deals that GE does, all of them
are not going to be a success. The key is to quickly recognize and admitare not going to be a success. The key is to quickly recognize and admit
mistakes and refocus on the winners.mistakes and refocus on the winners.

14. Achieving a Number- One or –TwoAchieving a Number- One or –Two
Ranking is not a panaceaRanking is not a panacea
 Simply achieving a number-one or-two ranking in an industry is notSimply achieving a number-one or-two ranking in an industry is not
sufficient to guarantee success. This was demonstrated in the farmsufficient to guarantee success. This was demonstrated in the farm
equipment business. In 1994, Case Corp, found itself mired in a distantequipment business. In 1994, Case Corp, found itself mired in a distant
third position in the firm equipment business with little hope of catchingthird position in the firm equipment business with little hope of catching
the leader, John Deere Corp. The success that companies like GE had inthe leader, John Deere Corp. The success that companies like GE had in
using a dominant position in various markets to outplace smaller rivalsusing a dominant position in various markets to outplace smaller rivals
surely was not lost on the management of Case Corp when it decided tosurely was not lost on the management of Case Corp when it decided to
merge with the number –two company in the business.. New Holland, themerge with the number –two company in the business.. New Holland, the
1999 $4.6 billion merger created CNH Global – a company with sales1999 $4.6 billion merger created CNH Global – a company with sales
almost $11 billion. However, merely being in the number two position didalmost $11 billion. However, merely being in the number two position did
not prevent the combined company from losing further ground to Johnnot prevent the combined company from losing further ground to John
Deere. Since the merger, CNH had trouble generating profits andDeere. Since the merger, CNH had trouble generating profits and
continued to try to cut costs and integrate the two companies better tocontinued to try to cut costs and integrate the two companies better to
realize economies that could yield greater profits.realize economies that could yield greater profits.

15. Mobil Merger with Exxon –Mobil Merger with Exxon –
Horizontal MergerHorizontal Merger
 In December 1998, Exxon announced that it was merging with the MobilIn December 1998, Exxon announced that it was merging with the Mobil
Oil Company. The $82 billion merger created the world’s largest oilOil Company. The $82 billion merger created the world’s largest oil
company. Both companies were vertically integrated with substantial oilcompany. Both companies were vertically integrated with substantial oil
reserves and a broad retail network. In spite of their substantial size, thereserves and a broad retail network. In spite of their substantial size, the
companies were able to convince regulators that the new oil behemothcompanies were able to convince regulators that the new oil behemoth
would not stifle competition. The success of this was underscored when inwould not stifle competition. The success of this was underscored when in
2006, Exxon-Mobil announced the highest annual profits of any corporate2006, Exxon-Mobil announced the highest annual profits of any corporate
history. The company’s 2005 annual profits were $36 billion on sales $371history. The company’s 2005 annual profits were $36 billion on sales $371
billion and a market capitalization of $377 billion, making it the largestbillion and a market capitalization of $377 billion, making it the largest
company in the world.company in the world.

16. Scale Economy in a MergerScale Economy in a Merger
Deutsche Bank & Dresdner BankDeutsche Bank & Dresdner Bank
 In Germany, because of strong competition, retail banking was a lowIn Germany, because of strong competition, retail banking was a low
return operation. In March 2000, Deutsche Bank, the largest commercialreturn operation. In March 2000, Deutsche Bank, the largest commercial
bank in Germany and Dresdner Bank, one of its oldest rivals and the thirdbank in Germany and Dresdner Bank, one of its oldest rivals and the third
largest German Bank proposed a merger to address the suboptimal size oflargest German Bank proposed a merger to address the suboptimal size of
each bank .Deutsche Bank judged that it needed ten to twelve million retaileach bank .Deutsche Bank judged that it needed ten to twelve million retail
customers to achieve the critical mass necessary to generate decent profitscustomers to achieve the critical mass necessary to generate decent profits
in the retail business. The merger would have produced a retail businessin the retail business. The merger would have produced a retail business
exceeding the critical size and yielded scale economies. Although this logicexceeding the critical size and yielded scale economies. Although this logic
was sound, the negotiation between the two banks failed for other reasons.was sound, the negotiation between the two banks failed for other reasons.

17. Scope Economy in a MergerScope Economy in a Merger
Pearson Plc.Pearson Plc.
 Pearson PLC, the UK firm that inter alia, publishes the Financial times,Pearson PLC, the UK firm that inter alia, publishes the Financial times,
also produces several products for the education market, particularly thealso produces several products for the education market, particularly the
first growing e-education market .It made several acquisitions and enteredfirst growing e-education market .It made several acquisitions and entered
into alliances to expand its online product portfolio concerned withinto alliances to expand its online product portfolio concerned with
developing and distributing curriculum content. In august 2000, Pearsondeveloping and distributing curriculum content. In august 2000, Pearson
acquired the Minneapolis-based firm, National Computer Systems (NCS)acquired the Minneapolis-based firm, National Computer Systems (NCS)
for $2.5 billion. NCS provided software and internet-based technologiesfor $2.5 billion. NCS provided software and internet-based technologies
for collecting, managing and interpreting education data and was alsofor collecting, managing and interpreting education data and was also
leader in testing and assessment technology that had access to 40% of USleader in testing and assessment technology that had access to 40% of US
Schools. The acquisition extended Pearson’s product range and allowedSchools. The acquisition extended Pearson’s product range and allowed
the merged companies to to tailor individual learning programs thatthe merged companies to to tailor individual learning programs that
enabled students to learn from home with the participation of their parents,enabled students to learn from home with the participation of their parents,
while cutting the cost of reaching a wider number of students. The annualwhile cutting the cost of reaching a wider number of students. The annual
estimated cost savings was of the order of $50 million by 2002.estimated cost savings was of the order of $50 million by 2002.

18. Types of MergerTypes of Merger

19. Types of MergersTypes of Mergers
 1.Horizontal Merger1.Horizontal Merger
 2.Vertical Merger2.Vertical Merger
 3.Concentric Merger3.Concentric Merger
 4.Conglomerate Merger4.Conglomerate Merger
 5.Accretive Merger5.Accretive Merger
 6.Dilutive Merger6.Dilutive Merger

20. Horizontal MergerHorizontal Merger
 Under this strategy, two companies that are in directUnder this strategy, two companies that are in direct
competition and sharing the same product lines andcompetition and sharing the same product lines and
market merge. The merger is based on the assumption thatmarket merge. The merger is based on the assumption that
it will provide synergy and allow enhanced cost efficienciesit will provide synergy and allow enhanced cost efficiencies
to the new business.to the new business.
 Noteworthy popular horizontal mergers includeNoteworthy popular horizontal mergers include :: Daimler-Daimler-
Benz and Chrysler, Glaxo Wellcome Plc and Smith KilneBenz and Chrysler, Glaxo Wellcome Plc and Smith Kilne
Beecham Plc, Exxon and Mobil, Volkswagen and RollsBeecham Plc, Exxon and Mobil, Volkswagen and Rolls
Royce, Lipton India and Brooke Bond, Bank of MaduraRoyce, Lipton India and Brooke Bond, Bank of Madura
with ICICI Bank etc.with ICICI Bank etc.
 Large horizontal mergers are sometimes perceived as anti-Large horizontal mergers are sometimes perceived as anti-
competitive, for they give new entity an unfair competitivecompetitive, for they give new entity an unfair competitive
advantage over its competitors.advantage over its competitors.

21. Vertical MergerVertical Merger
 Vertical mergersVertical mergers are usually mergers of non-competing companies whereare usually mergers of non-competing companies where
one’s product is a necessary component or complement of the other. Theseone’s product is a necessary component or complement of the other. These
mergers enable a firm to deal with different aspects of business such asmergers enable a firm to deal with different aspects of business such as
growing / procuring raw materials, manufacturing, packaging, transporting,growing / procuring raw materials, manufacturing, packaging, transporting,
marketing and distributing (retailing).marketing and distributing (retailing).
 Vertical integrationVertical integration can lower transaction costs, lead to synergic improvementcan lower transaction costs, lead to synergic improvement
in design, production and distribution of final output in a cost-effectivein design, production and distribution of final output in a cost-effective
efficient way.efficient way.
 Vertical mergers can be classified as: (a)Vertical mergers can be classified as: (a) Market Extension MergerMarket Extension Merger (enabling(enabling
sale of the same product in different markets) (b)sale of the same product in different markets) (b) Product Extension MergerProduct Extension Merger
( increasing the range of products a company sells in a particular market) (c )( increasing the range of products a company sells in a particular market) (c )
Forward IntegrationForward Integration (a supplier of raw material merging with the procurer of(a supplier of raw material merging with the procurer of
raw materials) (d)raw materials) (d) Backward integrationBackward integration (a manufacturer of a product merges(a manufacturer of a product merges
with the provider of raw materials) (e)with the provider of raw materials) (e) Balanced integrationBalanced integration ( a company sets( a company sets
up a subsidiary which supplies it with inputs and distributes the outputs.)up a subsidiary which supplies it with inputs and distributes the outputs.)

22. Vertical MergerVertical Merger
 The basic objective of a vertical merger is to eliminate costs ofThe basic objective of a vertical merger is to eliminate costs of
searching for vendors & procuring raw materials, contracting prices,searching for vendors & procuring raw materials, contracting prices,
payment collection and coordinating productionpayment collection and coordinating production.. Such a mergerSuch a merger
usually has a positive impact on company’s profitability.usually has a positive impact on company’s profitability.
 Some examples of vertical mergers are:Some examples of vertical mergers are: Tata Industrial Finance andTata Industrial Finance and
Tata finance, HUL and TOMCO, Apple and Intel, Reliance IndustriesTata finance, HUL and TOMCO, Apple and Intel, Reliance Industries
Ltd and Reliance petrochemicals Ltd.Ltd and Reliance petrochemicals Ltd. Usha Martin and Usha Beltron,Usha Martin and Usha Beltron,
Time Warner Inc (cable operation) and Turner CorporationTime Warner Inc (cable operation) and Turner Corporation
(Producer of CNN) .(Producer of CNN) .
 Vertical mergers are also viewed as anti-competitive as they can robVertical mergers are also viewed as anti-competitive as they can rob
the supply business of its competition.the supply business of its competition.

23. Concentric MergerConcentric Merger
 A type of merger where two companies are in the same or relatedA type of merger where two companies are in the same or related
industries but do not offer the same products. In a concentric merger,industries but do not offer the same products. In a concentric merger,
the companies may share similar distribution channels, providingthe companies may share similar distribution channels, providing
synergies for the mergersynergies for the merger. .
 An example of a concentric merger isAn example of a concentric merger is Citigroup's acquisition ofCitigroup's acquisition of
Travelers InsuranceTravelers Insurance. While both were in the financial services. While both were in the financial services
industry, they had different product linesindustry, they had different product lines..

24. Conglomerate MergerConglomerate Merger
 Conglomerate mergers involve firms engaged in unrelated types ofConglomerate mergers involve firms engaged in unrelated types of
business activities.business activities.
 Time Warner and Walt Disney, A leading manufacturer of athleticTime Warner and Walt Disney, A leading manufacturer of athletic
shoes, merges with a soft drink firm.shoes, merges with a soft drink firm.
 ITC Limited is a classic case of conglomerate diversification. ITC isITC Limited is a classic case of conglomerate diversification. ITC is
into many unrelated businesses, from cigarettes to hotels and paperinto many unrelated businesses, from cigarettes to hotels and paper
and biscuits and “Atta” (flour)and biscuits and “Atta” (flour)

25. Accretive mergerAccretive merger
 Accretion is natural growth in size or extent by gradual externalAccretion is natural growth in size or extent by gradual external
addition. Accretion implies value creation. Accretive merger occursaddition. Accretion implies value creation. Accretive merger occurs
when a company with high P/E ratio merges with a company withwhen a company with high P/E ratio merges with a company with
low P/E ratio, which leads to increase in EPS of the acquiringlow P/E ratio, which leads to increase in EPS of the acquiring
companycompany..
 In RIL merger with IPCL, the swap ratio was one share of RIL forIn RIL merger with IPCL, the swap ratio was one share of RIL for
every 5 shares of IPCL. This was believed to be EPS accretive for theevery 5 shares of IPCL. This was believed to be EPS accretive for the
shareholders of RILshareholders of RIL

26. Dilutive MergerDilutive Merger
 In a Dilutive merger the EPS of the acquiring company falls afterIn a Dilutive merger the EPS of the acquiring company falls after
merger. Since the EPS declines, the acquiring company’s share pricemerger. Since the EPS declines, the acquiring company’s share price
also falls, as the market expects a decrease in company’s futurealso falls, as the market expects a decrease in company’s future
earnings. This type of merger takes place when the P/E ratio of theearnings. This type of merger takes place when the P/E ratio of the
acquiring firm is lower than the P/E ratio of the target firm.acquiring firm is lower than the P/E ratio of the target firm.

27. Limits of Value Creation in M&ALimits of Value Creation in M&A
 An important consideration in mergers driven by scale economies is theAn important consideration in mergers driven by scale economies is the
limit to such economies in the form oflimit to such economies in the form of Minimum Efficient Scale (MES)Minimum Efficient Scale (MES)..
As the scale of production increases, the cost of production falls initiallyAs the scale of production increases, the cost of production falls initially
rapidly and then slowly before turning flat. Beyond the MES, further scalerapidly and then slowly before turning flat. Beyond the MES, further scale
economies are unlikely. If the merging firm’s plants are already operatingeconomies are unlikely. If the merging firm’s plants are already operating
at or beyond the MES, any production based scale economy is difficult toat or beyond the MES, any production based scale economy is difficult to
achieve.achieve.
 While focusing onWhile focusing on scale economiesscale economies, firms should also be aware of, firms should also be aware of
diseconomies of scale, which arise from diffusion of control, complexitiesdiseconomies of scale, which arise from diffusion of control, complexities
of monitoring, ineffectiveness of communication and multiple layers ofof monitoring, ineffectiveness of communication and multiple layers of
management. These diseconomies may be compounded by the process ofmanagement. These diseconomies may be compounded by the process of
scaling up through a merger.scaling up through a merger.

28. Limits of Value Creation in M&ALimits of Value Creation in M&A
 The extent for scope economy may often be very elusive. To get the sameThe extent for scope economy may often be very elusive. To get the same
medical sales people to sell drugs aimed at treating different ailments maymedical sales people to sell drugs aimed at treating different ailments may
often be a prescription for greater ailment. This may be the case if theoften be a prescription for greater ailment. This may be the case if the
drugs are highly specialized and require a considerable amount of expertdrugs are highly specialized and require a considerable amount of expert
knowledge of them on the part of the sales force. This could lead toknowledge of them on the part of the sales force. This could lead to
diseconomies of scope.diseconomies of scope.
 In case of vertical integration the following could pose challenges- (a)In case of vertical integration the following could pose challenges- (a)
Absence of market discipline can make internal production inefficient andAbsence of market discipline can make internal production inefficient and
costly. (b) Small production volume reduces opportunity for scale andcostly. (b) Small production volume reduces opportunity for scale and
learning economics © Incentives to keep up with new technology getslearning economics © Incentives to keep up with new technology gets
diminisheddiminished

29. Types of AcquisitionsTypes of Acquisitions
 Asset PurchaseAsset Purchase
Under this method, the acquiring firm purchases specific identifiableUnder this method, the acquiring firm purchases specific identifiable
assets. In some cases, it may also assume specific liabilities. The targetassets. In some cases, it may also assume specific liabilities. The target
company, however, may not like this as it has to pay capital gain tax on thecompany, however, may not like this as it has to pay capital gain tax on the
difference between the assets sold and the purchase price allocated to suchdifference between the assets sold and the purchase price allocated to such
assets (less depreciation). The target company instead would prefer to sellassets (less depreciation). The target company instead would prefer to sell
the entire business, with employees in place and without the need to windthe entire business, with employees in place and without the need to wind
up the company.up the company.
 Stock PurchaseStock Purchase
Under this method, theUnder this method, the acquirer purchases the entire outstanding equityacquirer purchases the entire outstanding equity
of the target company. It is a method whereby the acquirer purchasesof the target company. It is a method whereby the acquirer purchases
the entire company and all assets and liabilities of the business thatthe entire company and all assets and liabilities of the business that
come with it. Stock purchases does not cause any disruption of thecome with it. Stock purchases does not cause any disruption of the
operations, which can continue as usual.operations, which can continue as usual.

30. Five Stages in M&AFive Stages in M&A
Five Stages
in M&A
1
Corporate
Strategy
2
Organizing
for M&A
3
Deal
Structuring
4
Post M&A
Integration
5
Post M&A
Audit