Valuation Related to Mergers and Acquisitions

The methods of valuation related to mergers and acquisitions can be broadly categorized into three types, namely market based method, income based method, as well as asset based method. All these methods carry a significant degree of importance in the context of mergers and acquisitions. There are numerous elements, which ascertain whether a particular firm should be acquired or not.
The financial steadiness of the firm, which is to be taken over is quite important to find out. In addition, the financial track record over the last few years and trends demonstrated in the macroeconomic ratio and indices require to be analyzed. Among the methods of valuation related to mergers and acquisitions, the market based method might be regarded as more appropriate, nevertheless, all the valuation methods are crucial, taking into account the condition that is prevalent at the time when a merger or acquisition is going to take place.
Methods of Valuation Related to Mergers and Acquisitions

The methods of valuation associated with mergers and acquisitions can be broadly classified into the following types:
1) Market Based Method

In valuation of mergers and acquisitions with the help of market based method, the different attributes of the firm which is going to be acquired are compared with the similar types of attributes of other firms in the market. These firms (not the firm in question) normally have a market value that has been set up earlier. Furthermore, some other factors are to be taken into consideration before the comparison of the different attributes is done. First of all, which elements need comparison are to be distinguished and secondly, which are the firms that are going to act as comparables. Public sector corporations involved in the same type of industry (of the target firm) can be chosen as comparables. Nevertheless, if the target firm is not registered with a stock exchange or is relatively small in its size than the public sector corporations, comparing it with the public sector corporations may not be useful. In these circumstances, public and private databases are there and these are basically commercial databases. The other features that require to be compared are net earnings, gross revenue, and book value of assets. As soon as all the information have been gathered, a broad-based comparison is performed for obtaining the value of the target firm.

The market based method can be further categorized into the following types:

Market multiple (or price-earnings ratio) of comparable firms for firms that are not listed Market capitalization of listed firms
2) Income Based Method

The income based method of valuation associated with mergers and acquisitions takes into account the net present value. The net present value of earnings that is going to be received in the future is taken into consideration through the implementation of a mathematical formula.
The income based method can be further classified into the following types:

Cost to create technique Free cash flow/discounted cash flow method Capitalized earnings technique
3) Asset Based Method

This method of valuation related to mergers and acquisitions is applied while the target firm is running at a loss. In this kind of a situation, the valuation of the assets of the firm at loss is estimated. Besides this procedure, the income based method and market based method can also be applied. Valuation received with the help of these procedures may render small values. Nevertheless, there is a probability that these methods would produce the true condition of the assets of the target firm.
The asset based method can be further categorized into the following forms:

Valuation of Intangible Assets Economic Book Value or Net Adjusted Asset Value Liquidation Value

International Mergers and Acquisitions

About International Mergers and Acquisitions

International mergers and acquisitions are growing day by day. These mergers and acquisitions refer to those mergers and acquisitions that are taking place beyond the boundaries of a particular country. International mergers and acquisitions are also termed as global mergers and acquisitions or cross-border mergers and acquisitions.

Globalization and worldwide financial reforms have collectively contributed towards the development of international mergers and acquisitions to a substantial extent. International mergers and acquisitions are taking place in different forms, for example horizontal mergers, vertical mergers, conglomerate mergers, congeneric mergers, reverse mergers, dilutive mergers, accretive mergers and others. International mergers and acquisitions are performed for the purpose of obtaining some strategic benefits in the markets of a particular country. With the help of international mergers and acquisitions, multinational corporations can enjoy a number of advantages, which include economies of scale and market dominance. International mergers and acquisitions play an important role behind the growth of a company. These deals or transactions help a large number of companies penetrate into new markets fast and attain economies of scale. They also stimulate foreign direct investment or FDI. The reputed international mergers and acquisitions agencies also provide educational programs and training in order to grow the expertise of the merger and acquisition professionals working in the global merger and acquisitions sector. The rules and regulations regarding international mergers and acquisitions keep on changing constantly and it is mandatory that the parties to international mergers and acquisitions get themselves updated with the various amendments. Numerous investment bank professionals, consultants and attorneys are there to offer valuable and knowledgeable recommendations to the merger and acquisition clients.
Methods of Financing International Mergers and Acquisitions

Usually, the following methods are implemented for funding international mergers and acquisitions:

Financing (or taking loans) Cash Factoring Hybrid Financing Significant International Mergers and Acquisitions Following are the instances of the major international mergers and acquisitions:

The merger of British Petroleum (BP) with Amoco (erstwhile Standard Oil of Indiana) The acquisition of Mannesmann AG by Vodafone Airtouch PLC The merger of Exxon with Mobil (The name of the company formed as a result of the merger is ExxonMobil) The acquisition of AirTouch Communications by the Vodafone Group The acquisition of Compaq by Hewlett-Packard

The acquisition of Shell Transport & Trading Company by Royal Dutch Petroleum Company The merger of Bank One Corporation with JPMorgan Chase & Company Factors Affecting International Mergers and Acquisitions The following elements influence the international mergers and acquisitions from many aspects:

Corporate governance Company acts The capacity of average workers Expectation of the consumers Political features of a country Tradition and culture of a country

Merger Types - Various Type of Merger

A merger refers to the process whereby at least two companies combine to form one single company. Business firms make use of mergers and acquisitions for consolidation of markets as well as for gaining a competitive edge in the industry.
Merger types can be broadly classified into the following five subheads as described below. They are Horizontal Merger, Conglomeration, Vertical Merger, Product-Extension Merger and Market-Extension Merger. Horizontal Merger refers to the merger of two companies who are direct competitors of one another. They serve the same market and sell the same product. Conglomeration refers to the merger of companies, which do not either sell any related products or cater to any related markets. Here, the two companies entering the merger process do not possess any common business ties. Vertical Merger is effected either between a company and a customer or between a company and a supplier.

Product-Extension Merger is executed among companies, which sell different products of a related category. They also seek to serve a common market. This type of merger enables the new company to go in for a pooling in of their products so as to serve a common market, which was earlier fragmented among them. Market-Extension Merger occurs between two companies that sell identical products in different markets. It basically expands the market base of the product.

Vertical Mergers - Guidelines on Vertical Mergers

Vertical mergers refer to a situation where a product manufacturer merges with the supplier of inputs or raw materials. In can also be a merger between a product manufacturer and the product's distributor.
Vertical mergers may violate the competitive spirit of markets. It can be used to block competitors from accessing the raw material source or the distribution channel. Hence, it is also known as "vertical foreclosure". It may create a sort of bottleneck problem. As per research, vertical integration can affect the pricing incentive of a downstream producer. It may also affect a competitors incentive for selecting input suppliers. Research studies single out several factors, which point to the fact that vertical integration facilitates collusion. Vertical mergers may promote collusion through an outlets effect. A corollary of vertical integration is that integrated business structures are able to perform better in crisis phases. There are multiple reasons, which promote the vertical integration by firms. Some of them are discussed below.

The prime reason being the reduction of uncertainty regarding the availability of quality inputs as also the uncertainty regarding the demand for its products. Firms may also enter vertical mergers to avail the plus points of economies of integration. Vertical merger may make the firms cost-efficient by streamlining its distribution and production costs. It is also meant for the reduction of transactions costs like marketing expenses and sales taxes. It ensures that a firm's resources are used optimally.
Bird's Eye View of US Laws Pertaining to Vertical Mergers

In USA the vertical mergers abide by the 'Clayton Act (15 U.S.C.A. 12 et seq.)'. The transactions conducted here fall under the purview of antitrust acts.

It is interesting to note that vertical mergers do not lead to a fall in the number of operating economic agents at a particular market level. However, it may result in a change of industry behavior pattern. At its worst suppliers might be faced with a loss of product market. The retail chains may run out of stock. Competitors may also face blockages for supplies as well as outlets. Vertical mergers by virtue of their market power may effectively block new firms from entering the market thereby violating the competitive flavor of the market. The Supreme Court of USA has given a ruling on just 3 cases pertaining to vertical merger under the Clayton Act ( section 7 ) as per the latest available information. In the first case the Court contradicted the general assumption that section 7 was not applicable for vertical mergers. In the following vertical merger case the US Supreme Court observed that the primary disadvantage of vertical merger lies in the throttling of the spirit and essence of competition. Business rivals may be denied a fair chance at competition. The Court observed that regarding vertical mergers two areas need close scrutiny and regulation. One concerns the purpose and nature of the vertical merger arrangement. The other parameter concerns the industry concentration trend in that specific sector. In the third judgment passed on vertical merger US Supreme Court quashed Ford's claim that its acquisition of Autolite had made the latter a better competitor. Thus a vertical merger is a situation where a firm acquires a product supplier or a customer. Vertical mergers may at times violate the US federal antitrust laws.
Gist of European Commission Guidelines on Vertical Mergers

In 2007 the European Commission released a new set of guidelines for non-horizontal mergers. It can be noted that vertical merger is a type of non-horizontal merger. The Commission is the regulatory body overseeing the compliance aspect of firms going for vertical mergers. The guidelines cited instances where conglomerate and vertical mergers significantly affected the competitive nature of the market. The European Commission normally is not bothered about 'competition concerns' in what is commonly known as 'safe harbors'. The guidelines sets benchmarks for market share levels and concentration levels below which comes the 'safe harbors'. Market analysts consider this 'safe harbor' aspect of the new guidelines to be an innovative one.

Seen in overall terms the new guidelines from the European Commission aims at providing a transparent regulatory guideline framework for the business community as well as the legal fraternity.

Conglomerate Mergers - Types of Conglomerate Mergers, Benefits of Conglomerate Mergers

As per definition, a conglomerate merger is a type of merger whereby the two companies that merge with each other are involved in different sorts of businesses. The importance of the conglomerate mergers lies in the fact that they help the merging companies to be better than before.
Types of Conglomerate Mergers

There are two main types of conglomerate mergers the pure conglomerate merger and the mixed conglomerate merger. The pure conglomerate merger is one where the merging companies are doing businesses that are totally unrelated to each other. The mixed conglomerate mergers are ones where the companies that are merging with each other are doing so with the main purpose of gaining access to a wider market and client base or for expanding the range of products and services that are being provided by them There are also some other subdivisions of conglomerate mergers like the financial conglomerates, the concentric companies, and the managerial conglomerates.
Reasons of Conglomerate Mergers

There are several reasons as to why a company may go for a conglomerate merger. Among the more common reasons are adding to the share of the market that is owned by the company and indulging in cross selling. The companies also look to add to their overall synergy and productivity by adopting the method of conglomerate mergers.
Benefits of Conglomerate Mergers

There are several advantages of the conglomerate mergers. One of the major benefits is that conglomerate mergers assist the companies to diversify. As a result of conglomerate mergers the merging companies can also bring down the levels of their exposure to risks.
Implications of Conglomerate Mergers

There are several implications of conglomerate mergers. It has often been seen that companies are going for conglomerate mergers in order to increase their sizes. However, this also, at times, has adverse effects on the functioning of the new company. It has normally been observed that these companies are not able to perform like they used to before the merger took place. This was evident in the 1960s when the conglomerate mergers were the general trend. The term conglomerate mergers also implies that the two companies that are merging do not even have the same customer base as they are in totally different businesses. It has normally been seen that a lot of companies that go for conglomerate mergers are able to manage a wide variety of activities in a particular market. For example, these companies can carry out research activities and applied engineering processes. They are also able to add to their production as well as strengthen the marketing area that ensures better profitability. It has been seen from case studies that conglomerate mergers do not affect the structures of the industries. However, there might be significant impact if the acquiring company happens to be a leading company of its market that is not concentrated and has a large number of entry barriers.

Horizontal Mergers - Horizontal Integration, Horizontal Monopoly, Horizontal Expansion

About Horizontal Mergers

Horizontal mergers are those mergers where the companies manufacturing similar kinds of commodities or running similar type of businesses merge with each other. The principal objective behind this type of mergers is to achieve economies of scale in the production procedure through carrying off duplication of installations, services and functions, widening the line of products, decrease in working capital and fixed assets investment, getting rid of competition, minimizing the advertising expenses, enhancing the market capability and to get more dominance on the market. Nevertheless, the horizontal mergers do not have the capacity to ensure the market about the product and steady or uninterrupted raw material supply. Horizontal mergers can sometimes result in monopoly and absorption of economic power in the hands of a small number of commercial entities.

According to strategic management and microeconomics, the expression horizontal merger delineates a form of proprietorship and control. It is a plan, which is utilized by a corporation or commercial enterprise for marketing a form of commodity or service in a large number of markets. In the context of marketing, horizontal merger is more prevalent in comparison to horizontal merger in the context of production or manufacturing.
Horizontal Integration

Sometimes, horizontal merger is also called as horizontal integration. It is totally opposite in nature to vertical merger or vertical integration.
Horizontal Monopoly

A monopoly formed by horizontal merger is known as a horizontal monopoly. Normally, a monopoly is formed by both vertical and horizontal mergers. Horizontal merger is that condition where a company is involved in taking over or acquiring another company in similar form of trade. In this way, a competitor is done away with and a wider market and higher economies of scale are accomplished. In the process of horizontal merger, the downstream purchasers and upstream suppliers are also controlled and as a result of this, production expenses can be decreased.
Horizontal Expansion

An expression which is intimately connected to horizontal merger is horizontal expansion. This refers to the expansion or growth of a company in a sector that is presently functioning. The aim behind a horizontal expansion is to grow its market share for a specific commodity or service.
Examples of Horizontal Mergers

Following are the important examples of horizontal mergers:

The formation of Brook Bond Lipton India Ltd. through the merger of Lipton India and Brook Bond The merger of Bank of Mathura with ICICI (Industrial Credit and Investment Corporation of India) Bank The merger of BSES (Bombay Suburban Electric Supply) Ltd. with Orissa Power Supply Company The merger of ACC (erstwhile Associated Cement Companies Ltd.) with Damodar Cement

Advantages of Horizontal Merger:

Horizontal merger provides the following advantages to the companies which are merged:

1) Economies of scope

The notion of economies of scope resembles that of economies of scale. Economies of scale principally denote effectiveness related to alterations in the supply side, for example, growing or reducing production scale of an individual form of commodity. On the other hand, economies of scope denote effectiveness principally related to alterations in the demand side, for example growing or reducing the range of marketing and supply of various forms of products. Economies of scope are one of the principal causes for marketing plans like product lining, product bundling, as well as family branding.
2) Economies of scale

Economies of scale refer to the cost benefits received by a company as the result of a horizontal merger. The merged company is able to have bigger production volume in comparison to the companies operating separately. Therefore, the merged company can derive the benefits of economies of scale. The maximum use of plant facilities can be done by the merged company, which will lead to a decrease in the average expenses of the production. The important benefits of economies of scale are the following:

Synergy Growth or expansion Risk diversification Diminution in tax liability Greater market capability and lesser competition Financial synergy (Improved creditworthiness, enhancement of borrowing power, decrease in the cost of capital, growth of value per share and price earning ratio, capital raising, smaller flotation expenses) Motivation for the managers For attaining economies of scale, there are two methods and they are the following:

Increased fixed cost and static marginal cost No or small fixed cost and decreasing marginal cost One example of economies of scale is that if a company increases its production twofold, then the entire expense of inputs goes up less than twofold.
3) Dominant existence in a particular market

Market Extension Merger, Product Extension Merger

Market extension merger and product extension merger are the two basic types of mergers. These two mergers have become very common in the modern day financial market. These have also become very important as more companies are looking at extending the base of their operations as well as the range of products and services they deal in.
Market Extension Merger

As per definition, market extension merger takes place between two companies that deal in the same products but in separate markets. The main purpose of the market extension merger is to make sure that the merging companies can get access to a bigger market and that ensures a bigger client base.
Example of Market Extension Merger

A very good example of market extension merger is the acquisition of Eagle Bancshares Inc by the RBC Centura. Eagle Bancshares is headquartered at Atlanta, Georgia and has 283 workers. It has almost 90,000 accounts and looks after assets worth US $1.1 billion. Eagle Bancshares also holds the Tucker Federal Bank, which is one of the ten biggest banks in the metropolitan Atlanta region as far as deposit market share is concerned. One of the major benefits of this acquisition is that this acquisition enables the RBC to go ahead with its growth operations in the North American market. With the help of this acquisition RBC has got a chance to deal in the financial market of Atlanta , which is among the leading upcoming financial markets in the USA. This move would allow RBC to diversify its base of operations.
Product Extension Merger

According to definition, product extension merger takes place between two business organizations that deal in products that are related to each other and operate in the same market. The product extension merger allows the merging companies to group together their products and get access to a bigger set of consumers. This ensures that they earn higher profits.
Example of Product Extension Merger

The acquisition of Mobilink Telecom Inc. by Broadcom is a proper example of product extension merger. Broadcom deals in the manufacturing Bluetooth personal area network hardware systems and chips for IEEE 802.11b wireless LAN. Mobilink Telecom Inc. deals in the manufacturing of product designs meant for handsets that are equipped with the Global System for Mobile Communications technology. It is also in the process of being certified to produce wireless networking chips that have high speed and General Packet Radio Service technology. It is expected that the products of Mobilink Telecom Inc. would be complementing the wireless products of Broadcom.
Difference between Market Extension Merger and Product Extension Merger

The difference between market extension merger and product extension merger lies in the fact that the later is meant to add to the existing variety of products and services offered by the respective merging companies; while, in case of the former the two merging companies are dealing in similar products. In case of the market extension merger the two merging companies are operating in the same market and as far as product extension merger is concerned the two merging companies are operating in different markets.

Benefits of Mergers and Acquisitions

Merger refers to the process of combination of two companies, whereby a new company is formed. An acquisition refers to the process whereby a company simply purchases another company. In this case there is no new company being formed. Benefits of mergers and acquisitions are quite a handful. Mergers and acquisitions generally succeed in generating cost efficiency through the implementation of economies of

scale. It may also lead to tax gains and can even lead to a revenue enhancement through market share gain. Birds Eye View of the Benefits Accruing from Mergers and Acquisitions The principal benefits from mergers and acquisitions can be listed as increased value generation, increase in cost efficiency and increase in market share. Mergers and acquisitions often lead to an increased value generation for the company. It is expected that the shareholder value of a firm after mergers or acquisitions would be greater than the sum of the shareholder values of the parent companies. An increase in cost efficiency is effected through the procedure of mergers and acquisitions. This is because mergers and acquisitions lead to economies of scale. This in turn promotes cost efficiency. As the parent firms amalgamate to form a bigger new firm the scale of operations of the new firm increases. As output production rises there are chances that the cost per unit of production will come down.

An increase in market share is one of the plausible benefits of mergers and acquisitions. In case a financially strong company acquires a relatively distressed one, the resultant organization can experience a substantial increase in market

share. The new firm is usually more cost-efficient and competitive as compared to its financially weak parent organization. It can be noted that mergers and acquisitions prove to be useful in the following situations: Firstly, when a business firm wishes to make its presence felt in a new market. Secondly, when a business organization wants to avail some administrative benefits. Thirdly, when a business firm is in the process of introduction of new products. New products are developed by the R&D wing of a company.
Employee Benefits under Mergers and Acquisitions in US

The 'Employee Retirement Income Security Act' was enacted in 1974. It is also known as ERISA. Since then programs for employee benefit have been a major component of the balance and income statements of US business organizations. Current law promulgations have attached supreme importance to the presence of post retirement pension schemes and welfare benefit schemes as a part of corporate obligation. As a result employee benefit programs are affecting the viability of mergers and acquisitions in the USA. Expenses accruing due to employee benefit programs may not be fully reflected in a company's balance sheet. Some employee benefit obligations may arise out of a change in the corporate structure of a firm. Retirement income schemes and benefit plans may vary from company to company. Companies going for mergers and acquisitions strive to iron out the internal differences to maintain a specified level of employee satisfaction.