1. 1 Mergers & Acquisitions Strategic Tool for Growth By: Ms. Chandni Sahgal

2. 2 M&A: Objectives, Effect and the Transaction itself

3. 3 CEOs’ Motives for Mergers  The Quest for “Bigness”  Face Saving – To achieve pre-committed topline goals  Boredom and Monotonicity – Need a big deal to allay Been there done that feeling  Fear of Being left alone on the shelf  Tit for tat – Matching rival’s moves > Mobil merged with Exxon shortly after BP announced merger with Amoco

4. 4 Real Objectives of M&A  Higher Market Share leading to more Power in the Market > More or Complementary Customers > Geographical Expansion > Better or Complementary Technologies > Other industry specific factors like patents > Undervalued Talent  Economies of Scale  Economies of Scope > Synergy in the Vertical Chain (e.g. Content and Distribution in Media) > Horizontal synergy (Complementary Work Profiles)

5. 5 Real Objectives of M&A  Globalization > Entry into foreign markets – Helps in lesser Time to Market > Availability of Critical Resources Starbucks acquired London based Seattle Coffee Company that gave access to 61 Retail Stores across the city > Defending Home Turf (Parle drinks with Coke)  Growth in the era of Change > Technological Changes in the Value Chain (e.g. Forced redundancy of elements in the chain) > Changing Demography (e.g. Ageing of Customers in a particular category)  Essentially a “Make vs. Buy” decision !!

6. 6 M&A Effect on Shareholders’ Value – Slightly Positive  Series of studies on American firms since 1950 > Modest Value Created by merged firms Various studies put down the figure in 5-7% range > Most of the Value Accrues to Target > Multiple Bidding Creates twice as much value as single bidding High Value Creation Opportunities attract more bidders > Mergers within same industry creates more value than Diversified Mergers.

7. 7 Foul!… Cry the Opponents  A Study* of 4136 American Mergers (1998- 2001) > Combined value of Merged Firms falls by $134 Bn > Acquiring Firms lose 12 Cents on every Dollar spent on acquisition Aggregate loss of $240 Bn to Acquirers > Next Worse 4-Year period of loss for acquirers 1980-83, When Acquirers lost 2 Cents on every Dollar spent *Source: Wealth Destruction on Massive scale, Journal of Finance

8. 8 The Silver Lining  Out of 4136 firms, 87 acquirers lost $1 Bn or more each > Combined loss to 87 firms was $397 Bn  All Other acquirers gain $157 Bn  Many of the big loss deals were paid by Equity in the times of a Stock-market boom > Suggests that over valued equity might have been used to buy real assets > Boom time gave acquiring firms’ managers freedom to make such deals

9. 9 Why some Mergers fail?  Overestimation of Synergies  Neglect of dis-synergies like loss of customers.  Under-estimation of one time costs needed to produce synergies  Competitive bidding and CEO’s Ego  Cost cutting may not be effective or needed at all in a high growth industry. The facilities shut might be required to re-open after a short while  Involvement of line managers may help in making better estimates

10. 10 While Making the Deal  Closely Examine your objectives. Are they worth a Merger?  Try to get other side’s objectives. It helps in realizing better terms of contract.  Typically, in a merger of unequals > Seller estimates Valuation on a going concern basis > Acquirer estimates on its Utility of Target. This is usually higher than the going concern valuation. > It pays for the Seller to understand the true Utility to Acquirer and negotiate the transaction value

11. 11 While Making the Deal  Due Diligence, done for > Verification of Claims > Assessment of feasibility of fulfilling objectives. > Exploring differences and possible hindrances  Deals Hinge on > Price > Acquisition of Assets, SBUs, debt and employee liabilities > Tax arrangements and indemnities, SLAs etc. > The bridging arrangements for various functions and staff in the intervening period > Regulatory Approvals and FDI Policies

12. 12 Making Mergers Successful  Merger Communication should be Candid and Consistent. Medium becomes the message itself.  It’s a Human issue. Deal it in a humane way  Make the integration process a new nucleus for evolution of Merged entity  Identify conflicting values in pre-merger entities and make Merger an opportunity to shed some of old baggage

13. 13 Alternative to M&A  Alliance, when > Companies are unwilling to sell > High Acquisition premium > Companies want to stay in business and gain scale (Sony and Ericsson for mobiles) > Entering High risk markets or Next Generation Technologies (High risk, probability of high return) > Scope of providing integrated solution (Insurance and Retail Banking)  Issues with Alliances > Integration problems similar to those in large scale mergers > Joint Ownership and thus clear division of responsibility is needed