Mergers and Acquisitions

Abhishek Agarwal
MBA (IB), 3rd Sem.
 Agenda
• Conceptual framework of Mergers
• Types of Mergers
• Characteristics of Mergers
– Advantages
– Disadvantages
• Examples
 Merger
• Any transaction that forms one economic unit
from two or more previous one
• Only one company exists
 Acquisition
• It is aimed at gaining a controlling interest in
share capital of acquired company
 Forms of Merger
• Merger through Consolidation
• Merger through Absorption
 Merger through Consolidation
• Company A and Company B merges to form
Company C
• In the pure sense of the term, a merger happens
when two firms agree to go forward as a single
new company rather than remain separately
owned and operated. This is called "merger of
equals".
• Example, in the 1999 merger of Glaxo Wellcome
and SmithKline Beecham, both firms ceased to
exist when they merged, and a new
company, GlaxoSmithKline, was created
 Merger through Absorption
• Company A and Company B merges to form
Company A
• Company A and Company B merges to form
Company B
• An example of this would be the takeover
of Chrysler by Daimler-Benz in 1999
 Financing M&A
• Mergers are generally differentiated from acquisitions partly by the
way in which they are financed and partly by the relative size of the
companies.
• Cash
• Payment by cash. Such transactions are usually termed acquisitions
rather than mergers because the shareholders of the target
company are removed from the picture and the target comes under
the (indirect) control of the bidder's shareholders.

• Stock
• Payment in the acquiring company's stock, issued to the
shareholders of the acquired company at a given ratio proportional
to the valuation of the latter.

• Both Cash and Stock

 Types of Merger
Vertical Horizontal
Merger Merger

Conglomerat Co-generic
e Merger Merger
 Vertical Merger
• Sometimes two companies that make goods or
services that are different but serve the same
specific finished product merge.
• Say if Tata Motors were to buy up MRF Tyres and
JK Tyres.
• Coffer grower merging with coffee retailer such
as Nescafe
• Time Warner Incorporated, a major cable
operation, and the Turner Corporation, which
produces CNN, TBS, and other programming.
 Advantages of Vertical Merger
• Reduces dependence
• Can increase profits

Disadvantages of Vertical Merger

• Vertical mergers will have less economies of scale
because most of the production is at different stages of
production.
• Also a vertical merger can lead to monoposony power.
e.g. Nescafe have been accused of paying a low price to
farmers in Coorg, Karnataka
 Horizontal Merger
• A horizontal merger occurs when two companies
that offer similar goods or services decide to
combine their operations, usually to take advantage
of economies of scale.
• Reliance Infra merger with GTL to create Rs50,000 crores network
• 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
1) Economies of scope
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. 
 Co-generic Merger
• A cogeneric merger happens between two
companies in the same industry that do not
offer the same products.
• An example would be a bank buying an
insurance company, since both are in the
financial industry, but offer different products.
• Rpower and RNRL
• Prudential Financial merges with Bache and Co.
Advantages of Co-generic Merger
• Market Expansion
• Product Expansion
 Conglomerate Mergers
• 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.
Advantages of Conglomerate Mergers
• It assist the companies to diversify.
• It also bring down the levels of their exposure
to risks.
 Benefits of mergers
• Synergy
• Diversification : access to new markets
• Market share
• Strategic realignment(Technological change)
• Tax considerations
• Q Ratio(buying a co. at lower price)
• Acquisition of suppliers
• Economies of scale
 Disadvantages of merger
• Higher prices leading to allocative inefficiency
• Lower Quantity and reduction in consumer surplus
• Monopolies are more likely to be productively inefficient and
not produce on the lowest point on the average cost curve
• Fewer firms therefore less choice for consumers
• The new firm can pay lower prices to suppliers
• Mergers can lead to job losses.
• The motives for mergers is often poor. E.g. managers may
prefer to work for a big company where they get higher
salaries and more prestige.
 References
• M&A by Timothy J. Galpin, Mark Herndon
• Mergers & Acquisition of companies by P
Mohana Rao
• Examples taken From:
– Economywatch.com
– Livemint.com
Questions
 Recent Mergers and Acquisitions

• Novartis AG merged with Alcon Inc., a leader in

Eye care and vision. This acquisition was worth
73,666 million common shares of the company.
The deal was worth $10.547 billion by paying
$143.18 for every share.
 Answer
• Co-generic Merger
• Kinetic Concepts, a wound care and support
system maker acquired LifeCell Corp, a leader
in blood cell and tissues preservation, for $51
for each share. Their total offer was $1.743
billion.
 Answer
• Co-generic Merger
• Honeywell International Inc, company in engineering
goods, consumer products, aerospace systems has
acquired Norcross Safety Products LLC, a safety
equipment manufacturer from Odyssey Investment
Partners LLC. The deal was worth $1.2 billion
 Answer
• Conglomerate Merger
• Tata Steel acquired Corus Group plc. The
acquisition deal amounted to $12,000
million.
 Answer
• Horizontal Merger
• Suzlon Energy acquired Hansen Group, a wind
turbine gearbox manufacturer through a deal
of $565 million.
 Answer
• Vertical Merger
• Hindalco acquired Canada based Novelis. The
deal involved transaction of $5,982 million.
 Answer
• Horizontal Merger
Thank you !!!!