MANAGING CHANGE IN THE ERA OF MERGERS AND ACQUISITIONS

Aditi Chauhan Aanchal Sharma Bhawna Mourya Deepika Aggarwal Divya Jangid Garima Dubey

MERGERS
A merger happens when two firms, often of about the same size, agree to go forward as a single new company rather than remain separately owned and operated. This kind of action is more precisely referred to as a "merger of equals." Both companies' stocks are surrendered and new company stock is issued in its place. For example, both Daimler-Benz and Chrysler ceased to exist when the two firms merged, and a new company, DaimlerChrysler, was created.

A purchase deal will also be called a merger when both CEOs agree that joining together is in the best interest of both of their companies. But when the deal is unfriendly - that is, when the target company does not want to be purchased - it is always regarded as an acquisition.

Varieties of Mergers
From the perspective of business structures, there is a whole host of different mergers. Here are a few types, distinguished by the relationship between the two companies that are merging: Horizontal merger - Two companies that are in direct competition and share the same product lines and markets. Vertical merger - A customer and company or a supplier and company. Think of a cone supplier merging with an ice cream maker. Market-extension merger - Two companies that sell the same products in different markets. Product-extension merger - Two companies selling different but related products in the same market. Conglomeration - Two companies that have no common business areas.

There are two types of mergers that are distinguished by how the merger is financed Purchase Mergers - As the name suggests, this kind of merger occurs when one company purchases another. The purchase is made with cash or through the issue of some kind of debt instrument; the sale is taxable. Consolidation Mergers - With this merger, a brand new company is formed and both companies are bought and combined under the new entity. The tax terms are the same as those of a purchase merger.

ACQUISITIONS
An acquisition is the purchase of one business or company by another company or other business entity. It usually refers to a purchase of a smaller firm by a larger one. Sometimes, however, a smaller firm will acquire management control of a larger and/or longer-established company and retain the name of the latter for the post-acquisition combined entity. This is known as a reverse takeover. Another type of acquisition is the reverse merger, a form of transaction that enables a private company to be publicly listed in a relatively short time frame. A reverse merger occurs when a privately held company (often one that has strong prospects and is eager to raise financing) buys a publicly listed shell company, usually one with no business and limited assets.[]

Motives behind M & A

Economies of Scale: This generally refers to a method in which the average cost per unit is decreased through increased production, since fixed costs are shared over an increased number of goods. In a laymans language, more the products, more is the bargaining power. This is possible only when the companies merge/ combine/ acquired, as the same can often obliterate duplicate departments or operation, thereby lowering the cost of the company relative to theoretically the same revenue stream, thus increasing profit. It also provides varied pool of resources of both the combining companies along with a larger share in the market, wherein the resources can be exercised.

 Taxes : A profitable can buy a loss maker to use the

targets tax right off i.e. wherein a sick company is bought by giants.
Geographical or other diversification: this is designed to smooth the earning results of a company, which over the long term smoothens the stock price of the company giving conservative investors more confidence in investing in the company. However, this does not always deliver value to shareholders.

 Corporate Synergy: Better use of complimentary resources. It may take the form of revenue enhancement (to generate more revenue than its two predecessor standalone companies would be able to generate) and cost savings (to reduce or eliminate expenses associated with running a business Cross selling: For example, a bank buying a stock broker could then sell its banking products to the stock brokers customers, while the broker can sign up the bank customers for brokerage account. Or, a manufacturer can acquire and sell complimentary products Increased revenue /Increased Market Share: This motive assumes that the company will be absorbing the major competitor and thus increase its power (by capturing increased market share) to set prices.

 Resource transfer: Resources are unevenly distributed across firms and interaction of target and acquiring firm resources can create value through either overcoming information asymmetry or by combining scarce resources. Eg: Laying of employees, reducing taxes etc. Improved market reach and industry visibility - Companies buy companies to reach new markets and grow revenues and earnings. A merge may expand two companies' marketing and distribution, giving them new sales opportunities. A merger can also improve a company's standing in the investment community: bigger firms often have an easier time raising capital than smaller ones.

Mergers And Acquisition Process

Process is probably the most important thing in mergers or acquisition deal as it influences the benefit and profitability of merger and acquisitions . The process can be divided into some steps which are as follows.

STEP 1-PRELIMINARY ASSESSMENT OR BUSINESS VALUATION In this first step the market value of the target company is assessed. In this assessment not only the current financial position of the company is examined but also the estimated future market value is considered.

STEP 2 PHASE OF PROPOSAL After complete analysis of target firms market performance the proposal for merger or acquisition is given. Generally this proposal is given through issuing an non-binding offer document STEP 3- EXIT PLAN When a company decides to buy out the target firm and the target firm agrees than latter involves in exit planning. The target firm plans the right time for exit , which considers all the alternatives like full sale partial sale n others.

STEP 4 STRUCTURED MARKETING

After finalizing the exit plan,target firm involves in the marketing process and tries to achieve highest selling price. In this step business firm concentrates on structuring the business deal STEP 5 ORIGINATION OF PURCHASE AGREEMENT OR MERGER AGREEMENT In this step, the purchase agreement is made in case of an acquisition deal. In case of merger also the final agreement paper is generated in this stage.

STEP 6 STAGE OF INTEGRATION In this final stage, the two firms are integrated through mergers and acquisiton. It is ensured that the new joint company carries same rules and regulations through out the organization.

Mergers and Acquisitions Need for changing strategies

The organization need the strategies to mange the some of the difficulties at the time of mergers and acquisitions: Loss of skilled employees other than employees in leadership positions. This type of loss inevitably involves loss of business know-how that may be difficult to replace or can only be replaced at great cost. Retrenchment of employees causing panic and a loss in motivation, which could in turn also lead to a loss of productivity and a reduction in revenues. Improper or incomplete alignment of employment terms, conditions and benefits leading to anger, resentment and a drop in motivation.

 Rushed or improper population of new organisational structures. Increase in costs could result if the proper management of change and the implementation of the M&A transaction are delayed. Unhappy customers and the eventual loss of customers. Build up of resistance to any future change initiatives. Managing change in the highly complex world of M&As is not easy and research has found that so much as 70% of change initiatives are unsuccessful. The fact that the M&A process can sometimes takes as long as 3 to 5 years to be fully effected, adds to the levels of uncertainty, ambiguity or confusion that accompanies such transactions

CHANGE MANAGEMENT
Change management plays an important role in An organization since the task of managing change is not an easy one. When we say managing change we mean to say that making changes in a planned and systemic fashion. With reference to the IT projects we can say the change in the versions of a project and managing these versions properly. Changes in the organization or a project can be initiated from within the organization or externally. For example a product that is popular among the customers may undergo a change in design based on the triggering factor like a competitive product from some other manufacturer

 Empirical-Rational People are rational and will follow their self-interest once it is revealed to them. Change is based on the communication of information and the proffering of incentives. Normative-Reeducative People are social beings and will adhere to cultural norms and values. Change is based on redefining and reinterpreting existing norms and values, and developing commitments to new ones. Power-Coercive People are basically compliant and will generally do what they are told or can be made to do. Change is based on the exercise of authority and the imposition of sanctions.

Four Basic Change Management Strategies

Environmental-Adaptive People oppose loss and disruption but they adapt readily to new circumstances. Change is based on building a new organization and gradually transferring people from the old one to the new one.

 The first thing to do is jump in. You can't do anything about it from the outside. A clear sense of mission or purpose is essential. The simpler the mission statement the better. "Kick ass in the marketplace" is a whole lot more meaningful than "Respond to market needs with a range of products and services that have been carefully designed and developed to compare so favorably in our customers' eyes with the products and services offered by our competitors that the majority of buying decisions will be made in our favor. "Build a team. "Lone wolves" have their uses, but managing change isn't one of them. On the other hand, the right kind of lone wolf makes an excellent temporary team leader.

Managing change at Mergers and Acquisitions

 Maintain a flat organizational team structure and rely on minimal and informal reporting requirements. Pick people with relevant skills and high energy levels. You'll need both. Toss out the rulebook. Change, by definition, calls for a configured response, not adherence to prefigured routines.Shift to an actionfeedback model. Plan and act in short intervals. Do your analysis on the fly. No lengthy up-front studies, please. Remember the hare and the tortoise. Set flexible priorities. You must have the ability to drop what you're doing and tend to something more important.

Set flexible priorities. You must have the ability to drop what you're doing and tend to something more important. Treat everything as a temporary measure. Don't "lock in" until the last minute, and then insist on the right to change your mind

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Ask for volunteers. You'll be surprised at who shows up. You'll be pleasantly surprised by what they can do. Find a good "straw boss" or team leader and stay out of his or her way. Give the team members whatever they ask for except authority. They'll generally ask only for what they really need in the way of resources. If they start asking for authority, that's a signal they're headed toward some kind of powerbased confrontation and that spells trouble. Nip it in the bud! Concentrate dispersed knowledge. Start and maintain an issues logbook. Let anyone go anywhere and talk to anyone about anything. Keep the communications barriers low, widely spaced, and easily hurdled. Initially, if things look chaotic, relax they are.

IMPACT OF MERGERS AND ACQUISITION:

Impact Of Mergers And Acquisitions on workers or employees:
The mergers and acquisitions impact the employees or the workers the most. It is a well known fact that whenever there is a merger or an acquisition, there are bound to be lay offs. In the event when a new resulting company is efficient business wise, it would require less number of people to perform the same task. Under such circumstances, the company would attempt to downsize the labor force. If the employees who have been laid off possess sufficient skills, they may in fact benefit from the lay off. But it is usually seen that the employees those who are laid off would not have played a significant role under the new organizational set up. This accounts for their removal from the new organization set up. These workers in turn would look for re employment and may have to be satisfied with a much lesser pay package than the previous one.

Impact of mergers and acquisitions on top level management:

Impact of mergers and acquisitions on top level management may actually involve a "clash of the egos". There might be variations in the cultures of the two organizations. Under the new set up the manager may be asked to implement such policies or strategies, which may not be quite approved by him. When such a situation arises, the main focus of the organization gets diverted and executives become busy either settling matters among themselves or moving on. If however, the manager is well equipped with a degree or has sufficient qualification, the migration to another company may not be troublesome at all.

IMPACTS OF MERGERS AND ACQUISITION ON SHAREHOLDERS: Shareholders of the acquired firm:

The shareholders of the acquired company benefit the most. The reason being, it is seen in majority of the cases that the acquiring company usually pays a little excess than it what should. Unless a man lives in a house he has recently bought, he will not be able to know its drawbacks. So that the shareholders forgo their shares, the company has to offer an amount more then the actual price, which is prevailing in the market. Buying a company at a higher price can actually prove to be beneficial for the local economy.

Shareholders of the acquiring firm:

They are most affected. If we measure the benefits enjoyed by the shareholders of the acquired company in degrees, the degree to which they were benefited, by the same degree, these shareholders are harmed. This can be attributed to debt load, which accompanies an acquisition.

Advantages And Disadvantages of Mergers & Acquisition

ADVANTAGES
1.Economies of scale, which reduces unit costs. 2.Greater market share for horizontal integration, which means the business can often charge higher prices 3.Spreads risks if products different. 4.Reduces competition if a rival is taken over

5.Other businesses can bring new skills and specialist departments to the business.
6.It is easier to raise money if a larger business.

7.A merger may be accomplished tax-free for both parties 8.A merger of a privately held company into a publicly held company allows the target company shareholders to receive a public company's stock, despite the liquidity. 9.Merger allows the acquirer to avoid many of the costly and time-consuming aspects of asset purchases, such as the assignment of leases and bulk-sales notifications. 10. Shareholders in acquired firm benefits substantially.

DISADVANTAGES
1.Diseconomies of scale if business becomes too large, which leads to higher unit costs. 2.Clashes of culture between different types of businesses can occur, reducing the effectiveness of the integration. 3.May need to make some workers redundant, especially at management levels this may have an effect on motivation. 4.May be a conflict of objectives between different businesses, meaning decisions are more difficult to make and causing disruption in the running of the business

LIVE EXAMPLE

Merger: A merger refers to a process in which two companies become

one by coming together. In such a case, no one company rules over the other. companies. Examples of mergers, GlaxoSmithKline ,Hero Honda Sony Ericsson.

Acquisition: Acquisitions on the other hand refer to processes in which

one company buys the other company. Example- On the other hand Vodafone Group , the world's largest mobile communications network company recently acquired a 67% stake in Essar Hutchison (one of India's leading mobile phone network) The purpose of this acquisition was to enter the highly lucrative Indian mobile phone market.

Joint Venture: Joint Venture is an approach in which two or more

companies agree to pool their resources together to form a combined force in the marketplace. Example-the world's largest retailer Wal-Mart entered into a joint venture with India's Bharti Enterprises to get a toe hold in the booming Indian retail market

Deciding Factors
1.Level of competition in the market- One of the fundamental reasons that companies engage in either M&A or an joint venture is to tackle competition in any market. Samsung works with Sony, a Sony works with Ericsson, Intel works with IBM and so on. Barriers to entry M&A are usually resorted to either for increasing scale or cutting costs and joint ventures are preferred to enter new markets or segments. Barrier to entry is low-Merger &acquisition .Barrier to entry is high joint venture. Mergers and joint ventures between companies have been proven to work efficiently if there is a high level of synergy between companies that come together. Synergies can be in the corporate culture, product portfolio, strategic goals, and supply chain or logistic systems.

Example
In October 2001, Sony Corporation and Ericsson began a joint venture to create a new company that incorporates their respective mobile phone businesses worldwide. The new company, Sony Ericsson Mobile Communications, is equally owned by Ericsson and Sony, utilizing Ericssons leading expertise in telecommunications and Sonys leading expertise in consumers electronics products.

By combining the complementary strengths of Ericsson and Sony, the new company is uniquely positioned to become a world leader in telecommunications, as the industry moves rapidly toward Mobile Internet.
CHALLENGES FACED BY SONY ERICSSIONDesign Technology Transfer The initial stage of the alliance was also faced with challenges in the transfer of technology know-how. Cultural Gaps

Management of Change
Both Sony and Ericsson have different and at times conflicting organizational culture. The goal for venture was to create synergies between the two companies, and become market leaders within their field of action . The difference in managerial styles and accounting practices between Sony and Ericsson contributed to tension in the integration process. Adoption of Global Thinking Rather than focusing on the cultural backgrounds of its parent companies, Sony being Japanese and Ericsson being Swedish, the management adopted a global thinking.

BENEFITS

Merger between BoR and icici bank

Bank of Rajasthan (BoR) is set to merge with ICICI Bank, the countrys largest private sector lender. Under the deal, ICICI Bank would give 25 shares for 118 shares (1:4.72) of BoR. BoR has a market capitalisation of Rs 1,600 crore compared with ICICI Banks Rs 99,000 crore.

MERGER MATRIX
Factor
Edge Business Operations Management

BOR
Stronghold in north India All India

ICICI

Business strategy Branches Financial Results Share price (24.5.2010) Share exchange ratio Merger benefit

stronghold in western parts 18 countries Conservative, traditional Visionary, hunger for banking growth Struggling to survive Aggressive, innovative and expanding 463 2209 Loss in December 2009 Rs 166.70 118 (4.72) Bank survives, growth potential. Continuous profits Rs 832 25 (1) future Business expansion north India. in

Why mergers are breaked- Under the joint venture Hero Group could not export to international markets (except Sri Lanka) and the termination would mean that Hero Group can now export.