M & A

Date: September 2005 Price: $2.6B When eBay’s leaders acquired VoIP business Skype for $2.6 billion in 2005, the thinking was that enhanced communications technology would help buyers and sellers better connect. The outcome was less than spectacular, though, with few eBay users (buyers, sellers, or shippers) having any real reason to communicate in any way besides email. eBay also changed the management team in charge of Skype a reported four times during its four years with the e-commerce site, before selling off 65% of the company to Silver Lake, Andreessen Horowitz, and the Canada Pension Plan Investment Board in 2009 for $1.9 billion.

Daimler-Benz and Chrysler Date: November 12, 1998 Price: $36B Combining two of the biggest names in the car world in 1998 seemed like a sure thing. Daimler bet heavily on the union, paying $36 billion to merge with Chrysler. But leadership changes quickly created issues for the merged company. The retirement of Chrysler CEO Bob Eaton led to Daimler taking majority control, and soon after, other high-ranking Chrysler executives, including the president and vice-chair, were forced out. With Daimler in full control, it immediately began pouring resources into Chrysler, but language and cultural differences and misjudged product launches saw Chrysler losing market share quickly. A recession and continued poor sales spelled the end of this once-promising union. In 2007, Daimler sold off 80% of Chrysler to Cerberus Capital Management for $7 billion.

Reasons for failures of Mergers & acquisitions  Unrealistic Price Paid for Target  Difficulties in cultural Integration  Overstated Synergies  Integration Difficulties  Inconsistent Strategy  Poor Business Fit  Inadequate Due Diligence  High Leverage  Board room Split Regulatory Issues  HR Issues

Unrealistic Price Paid for Target The process of M&A involves valuation of the target company and paying a price for taking over the assets of the company. Quite often, one finds that the price paid to the target company is much more that what should have been paid. While the shareholders of the target company stand benefited the shareholders of the acquirer end up on the loosing side.

Difficulties in cultural Integration Every merger involves combining of two or more different entities. These entities reflect corporate cultures, styles of leadership, differing employee expectations and functional differences. If the merger is implemented in a way that does not deal sensitively with the companies’ people and their different corporate cultures, the process may turn out to be disaster.

Overstated Synergies Mergers and acquisitions are looked upon as an important instrument of creating synergies through increased revenue, reduced costs, reduction in net working capital and improvement in the investment intensity. Overestimation of these can lead to failure of mergers

Integration Difficulties Companies very often face integration difficulties, i.e. the combined entity has to adapt to a new set of challengers given the changed circumstances. To do this, the company prepares plans to integrate the operations of the combining entities. If the information available on related issues is inadequate or inaccurate integration becomes difficult.

Inconsistent Strategy Mergers and acquisitions that are driven by sound business strategies are the ones that succeed. Entities that fail to assess the strategic benefits of mergers face failure. It is therefore important to understand the strategic intent.

Poor Business Fit Inconsistent Strategy services of the merging entities do not naturally fit into the acquirer’s overall business plan. This delays efficient and effective integration and causes failure.

High Leverage One of the most crucial elements of an effective acquisition strategy is planning how one intents to finance the deal through an ideal capital structure. The acquirer may decide to acquire the target through cash. To pay the price of acquisition, the acquirer may borrow heavily from the market.

Boardroom Split When a merger is planned, it is crucial to evaluate the composition of the boardroom and compatibility of the directors. Specific personality clashes between executive in the two companies are also very common. This may prove to be a major problem, slowing down or preventing integration of the entries.

Regulatory Issues The entire process of merger requires legal approvals. If any of the stakeholders are not in favour of the merger, they might create legal obstacles and slow down the entire process. This results in regulatory delays and increase the risk of deterioration of the business. While evaluating a merger proposal, care should be taken to ensure that regulatory hassles do not crop up.

HR Issues A merger or acquisition is identified with job losses, restructuring and the imposition of a new corporate culture and identity. This can create uncertainty, anxiety and resentment among the company’s employees. These HR issue are crucial to the success of M&As

Question 01 Firm “A “going to take over firm “B” Firm “A” estimated that combined entity will have synergy benefit of Rs. 3000 forever. i) If Firm “B” is will to acquire for Rs 27 per share cash what is the NPV of the merger. ii) What will the price per share of the merged firm after above (i) (iii) What is the Merger premium (iv) Suppose Firm “B” is agreeable to merger by an exchange of stock, if “A” offers three of its shares for every one of “B” Shares. What will be MPS of merge firm (v) What is the NPV of the merger assuming the conditions in (iv) Firm A Firm B Shares outstanding 1,500 900 MPS Rs.34 Rs. 24