Mergers and Acquisition:

Introduction
The Indian economy has been growing with a rapid pace and has been emerging at the top, be it IT, R&D, pharmaceutical, infrastructure, energy,
consumer retail, telecom, financial services, media, and hospitality etc. It is second fastest growing economy in the world with GDP touching 9.3
% last year. This growth momentum was supported by the double digit growth of the services sector at 10.6% and industry at 9.7% in the first
quarter of 2006-07. Investors, big companies, industrial houses view Indian market in a growing and proliferating phase, whereby returns on
capital and the shareholder returns are high. Both the inbound and outbound mergers and acquisitions have increased dramatically. According to
Investment bankers, Merger & Acquisition (M&A) deals in India will cross $100 billion this year, which is double last year’s level and
quadruple of 2005.

In the first two months of 2007, corporate India witnessed deals worth close to $40 billion. One of the first overseas acquisitions by an Indian
company in 2007 was Mahindra & Mahindra’s takeover of 90 percent stake in Schoneweiss, a family-owned German company with over 140
years of experience in forging business. What hit the headlines early this year was Tata’s takeover of Corus for slightly over $10 billion. On the
heels of that deal, Hutchison Whampoa of Hong Kong sold their controlling stake in Hutchison-Essar to Vodafone for a whopping $11.1 billion.
Bangalore-based MTR’s packaged food division found a buyer in Orkala, a Norwegian company for $100 million. Service companies have also
joined the M&A game.

The taxation practice of Mumbai-based RSM Ambit was acquired by PricewaterhouseCoopers. There are many other bids in the pipeline. On an
average, in the last four years corporate earnings of companies in India have been increasing by 20-25 percent, contributing to enhanced
profitability and healthy balance sheets. For such companies, M&As are an effective strategy to expand their businesses and acquire global
footprint.

Mergers or amalgamation, result in the combination of two or more companies into one, wherein the merging entities lose their identities. No
fresh investment is made through this process. However, an exchange of shares takes place between the entities involved in such a process.
Generally, the company that survives is the buyer which retains its identity and the seller company is extinguished.

Definitions:
Mergers, acquisitions and takeovers have been a part of the business world for centuries. In today's dynamic economic environment, companies
are often faced with decisions concerning these actions - after all, the job of management is to maximize shareholder value. Through mergers
and acquisitions, a company can (at least in theory) develop a competitive advantage and ultimately increase shareholder value. The said terms to
a layman may seem alike but in legal/ corporate terminology, they can be distinguished from each other:

# Merger: A full joining together of two previously separate corporations. A true merger in the legal sense occurs when both businesses dissolve
and fold their assets and liabilities into a newly created third entity. This entails the creation of a new corporation.

# Acquisition: Taking possession of another business. Also called a takeover or buyout. It may be share purchase (the buyer buys the shares of
the target company from the shareholders of the target company. The buyer will take on the company with all its assets and liabilities. ) or asset
purchase (buyer buys the assets of the target company from the target company)
In simple terms, A merger involves the mutual decision of two companies to combine and become one entity; it can be seen as a decision made
by two "equals", whereas an acquisition or takeover on the other hand, is characterized the purchase of a smaller company by a much larger one.
This combination of "unequals" can produce the same benefits as a merger, but it does not necessarily have to be a mutual decision. A typical
merger, in other words, involves two relatively equal companies, which combine to become one legal entity with the goal of producing a
company that is worth more than the sum of its parts. In a merger of two corporations, the shareholders usually have their shares in the old
company exchanged for an equal number of shares in the merged entity. In an acquisition, the acquiring firm usually offers a cash price per share
to the target firm’s shareholders or the acquiring firm's share's to the shareholders of the target firm according to a specified conversion ratio.
Either way, the purchasing company essentially finances the purchase of the target company, buying it outright for its shareholders

# Joint Venture: Two or more businesses joining together under a contractual agreement to conduct a specific business enterprise with both
parties sharing profits and losses. The venture is for one specific project only, rather than for a continuing business relationship as in a strategic
alliance.
# Strategic Alliance: A partnership with another business in which you combine efforts in a business effort involving anything from getting a
better price for goods by buying in bulk together to seeking business together with each of you providing part of the product. The basic idea
behind alliances is to minimize risk while maximizing your leverage.

# Partnership: A business in which two or more individuals who carry on a continuing business for profit as co-owners. Legally, a partnership is
regarded as a group of individuals rather than as a single entity, although each of the partners file their share of the profits on their individual tax
returns.

Many mergers are in truth acquisitions. One business actually buys another and incorporates it into its own business model. Because of this
misuse of the term merger, many statistics on mergers are presented for the combined mergers and acquisitions (M&A) that are occurring. This
gives a broader and more accurate view of the merger market .
Types of Mergers:

From the perception of business organizations, there is a whole host of different mergers. However, from an economist point of view i.e. based
on the relationship between the two merging companies, mergers are classified into following:

# Horizontal merger- Two companies that are in direct competition and share the same product lines and markets i.e. it results in the
consolidation of firms that are direct rivals. E.g. Exxon and Mobil, Ford and Volvo, Volkswagen and Rolls Royce and Lamborghini

# Vertical merger- A customer and company or a supplier and company i.e. merger of firms that have actual or potential buyer-seller relationship
eg. Ford- Bendix, Time Warner-TBS.

# Conglomerate merger- generally a merger between companies which do not have any common business areas or no common relationship of
any kind. Consolidated firma may sell related products or share marketing and distribution channels or production processes. Such kind of
merger may be broadly classified into following:

# Product-extension merger - Conglomerate mergers which involves companies selling different but related products in the same market or sell
non-competing products and use same marketing channels of production process. E.g. Phillip Morris-Kraft, Pepsico- Pizza Hut, Proctor and
Gamble and Clorox

# Market-extension merger - Conglomerate mergers wherein companies that sell the same products in different markets/ geographic markets.
E.g. Morrison supermarkets and Safeway, Time Warner-TCI.

# Pure Conglomerate merger- two companies which merge have no obvious relationship of any kind. E.g. BankCorp of America- Hughes
Electronics.

On a general analysis, it can be concluded that Horizontal mergers eliminate sellers and hence reshape the market structure i.e. they have direct
impact on seller concentration whereas vertical and conglomerate mergers do not affect market structures e.g. the seller concentration directly.
They do not have anticompetitive consequences.

The circumstances and reasons for every merger are different and these circumstances impact the way the deal is dealt, approached, managed
and executed. .However, the success of mergers depends on how well the deal makers can integrate two companies while maintaining day-to-day
operations. Each deal has its own flips which are influenced by various extraneous factors such as human capital component and the leadership.
Much of it depends on the company’s leadership and the ability to retain people who are key to company’s on going success. It is important, that
both the parties should be clear in their mind as to the motive of such acquisition i.e. there should be census- ad- idiom. Profits, intellectual
property, costumer base are peripheral or central to the acquiring company, the motive will determine the risk profile of such M&A. Generally
before the onset of any deal, due diligence is conducted so as to gauze the risks involved, the quantum of assets and liabilities that are acquired
etc.

Legal Procedures for Merger, Amalgamations and Take-overs

The basis law related to mergers is codified in the Indian Companies Act, 1956 which works in tandem with various regulatory policies. The
general law relating to mergers, amalgamations and reconstruction is embodied in sections 391 to 396 of the Companies Act, 1956 which jointly
deal with the compromise and arrangement with creditors and members of a company needed for a merger. Section 391 gives the Tribunal the
power to sanction a compromise or arrangement between a company and its creditors/ members subject to certain conditions. Section 392 gives
the power to the Tribunal to enforce and/ or supervise such compromises or arrangements with creditors and members. Section 393 provides for
the availability of the information required by the creditors and members of the concerned company when acceding to such an arrangement.
Section 394 makes provisions for facilitating reconstruction and amalgamation of companies, by making an appropriate application to the
Tribunal. Section 395 gives power and duty to acquire the shares of shareholders dissenting from the scheme or contract approved by the
majority.

And Section 396 deals with the power of the central government to provide for an amalgamation of companies in the national interest. In any
scheme of amalgamation, both the amalgamating company or companies and the amalgamated company should comply with the requirements
specified in sections 391 to 394 and submit details of all the formalities for consideration of the Tribunal. It is not enough if one of the
companies alone fulfils the necessary formalities. Sections 394, 394A of the Companies Act deal with the procedures and the requirements to be
followed in order to effect amalgamations of companies coupled with the provisions relating to the powers of the Tribunal and the central
government in the matter of bringing about amalgamations of companies.

After the application is filed, the Tribunal would pass orders with regard to the fixation of the dates of the hearing, and the provision of a copy of
the application to the Registrar of Companies and the Regional Director of the Company Law Board in accordance with section 394A and to the
Official Liquidator for the report confirming that the affairs of the company have not been conducted in a manner prejudicial to the interest of
the shareholders or the public. Before sanctioning the scheme of amalgamation, the Tribunal has also to give notice of every application made to
it under section 391 to 394 to the central government and the Tribunal should take into consideration the representations, if any, made to it by the
government before passing any order granting or rejecting the scheme of amalgamation. Thus the central government is provided with an
opportunity to have a say in the matter of amalgamations of companies before the scheme of amalgamation is approved or rejected by the
Tribunal.

The powers and functions of the central government in this regard are exercised by the Company Law Board through its Regional Directors.
While hearing the petitions of the companies in connection with the scheme of amalgamation, the Tribunal would give the petitioner company an
opportunity to meet all the objections which may be raised by shareholders, creditors, the government and others. It is, therefore, necessary for
the company to keep itself ready to face the various arguments and challenges. Thus by the order of the Tribunal, the properties or liabilities of
the amalgamating company get transferred to the amalgamated company. Under section 394, the Tribunal has been specifically empowered to
make specific provisions in its order sanctioning an amalgamation for the transfer to the amalgamated company of the whole or any parts of the
properties, liabilities, etc. of the amalgamated company. The rights and liabilities of the employees of the amalgamating company would stand
transferred to the amalgamated company only in those cases where the Tribunal specifically directs so in its order.

The assets and liabilities of the amalgamating company automatically gets vested in the amalgamated company by virtue of the order of the
Tribunal granting a scheme of amalgamation. The Tribunal also make provisions for the means of payment to the shareholders of the transferor
companies, continuation by or against the transferee company of any legal proceedings pending by or against any transferor company, the
dissolution (without winding up) of any transferor company, the provision to be made for any person who dissents from the compromise or
arrangement, and any other incidental consequential and supplementary matters to secure the amalgamation process if it is necessary. The order
of the Tribunal granting sanction to the scheme of amalgamation must be submitted by every company to which the order applies (i.e., the
amalgamating company and the amalgamated company) to the Registrar of Companies for registration within thirty days.

Motives behind M & A

These motives are considered to add shareholder value:
# 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 layman’s 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.

# 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.

# 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.

# 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).

# Taxes : A profitable can buy a loss maker to use the target’s 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.

# 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.

Advantages of M&A’s:
The general advantage behind mergers and acquisition is that it provides a productive platform for the companies to grow, though much of it
depends on the way the deal is implemented. It is a way to increase market penetration in a particular area with the help of an established base.
As per Mr D.S Brar (former C.E.O of Ranbaxy pharmaceuticals), few reasons for M&A’s are:
# Accessing new markets
# maintaining growth momentum
# acquiring visibility and international brands
# buying cutting edge technology rather than importing it
# taking on global competition
# improving operating margins and efficiencies
# developing new product mixes

Conclusion
In real terms, the rationale behind mergers and acquisitions is that the two companies are more valuable, profitable than individual companies
and that the shareholder value is also over and above that of the sum of the two companies. Despite negative studies and resistance from the
economists, M&A’s continue to be an important tool behind growth of a company. Reason being, the expansion is not limited by internal
resources, no drain on working capital - can use exchange of stocks, is attractive as tax benefit and above all can consolidate industry - increase
firm's market power.

With the FDI policies becoming more liberalized, Mergers, Acquisitions and alliance talks are heating up in India and are growing with an ever
increasing cadence. They are no more limited to one particular type of business. The list of past and anticipated mergers covers every size and
variety of business -- mergers are on the increase over the whole marketplace, providing platforms for the small companies being acquired by
bigger ones.

The basic reason behind mergers and acquisitions is that organizations merge and form a single entity to achieve economies of scale, widen their
reach, acquire strategic skills, and gain competitive advantage. In simple terminology, mergers are considered as an important tool by companies
for purpose of expanding their operation and increasing their profits, which in façade depends on the kind of companies being merged. Indian
markets have witnessed burgeoning trend in mergers which may be due to business consolidation by large industrial houses, consolidation of
business by multinationals operating in India, increasing competition against imports and acquisition activities. Therefore, it is ripe time for
business houses and corporates to watch the Indian market, and grab the opportunity.
The process of mergers and acquisitions has gained substantial importance in today's corporate
world. This process is extensively used for restructuring the business organizations. In India, the
concept of mergers and acquisitions was initiated by the government bodies. Some well known
financial organizations also took the necessary initiatives to restructure the corporate sector of
India by adopting the mergers and acquisitions policies. The Indian economic reform since 1991
has opened up a whole lot of challenges both in the domestic and international spheres. The
increased competition in the global market has prompted the Indian companies to go for mergers
and acquisitions as an important strategic choice. The trends of mergers and acquisitions in India
have changed over the years. The immediate effects of the mergers and acquisitions have also
been diverse across the various sectors of the Indian economy.

Mergers and Acquisitions Across Indian Sectors

Among the different Indian sectors that have resorted to mergers and acquisitions

in recent times, telecom, finance, FMCG, construction materials, automobile industry and steel
industry are worth mentioning. With the increasing number of Indian companies opting for
mergers and acquisitions, India is now one of the leading nations in the world in terms of
mergers and acquisitions.
The merger and acquisition business deals in India amounted to $40 billion during the initial 2
months in the year 2007. The total estimated value of mergers and acquisitions in India for 2007
was greater than $100 billion. It is twice the amount of mergers and acquisitions in 2006.

Mergers and Acquisitions in India: the Latest Trends

Till recent past, the incidence of Indian entrepreneurs acquiring foreign enterprises was not so
common. The situation has undergone a sea change in the last couple of years. Acquisition of
foreign companies by the Indian businesses has been the latest trend in the Indian corporate
sector.

There are different factors that played their parts in facilitating the mergers and acquisitions in
India. Favorable government policies, buoyancy in economy, additional liquidity in the corporate
sector, and dynamic attitudes of the Indian entrepreneurs are the key factors behind the changing
trends of mergers and acquisitions in India.

The Indian IT and ITES sectors have already proved their potential in the global market. The
other Indian sectors are also following the same trend. The increased participation of the Indian
companies in the global corporate sector has further facilitated the merger and acquisition
activities in India.

Major Mergers and Acquisitions in India

Recently the Indian companies have undertaken some important acquisitions. Some of those are
as follows:

Hindalco acquired Canada based Novelis. The deal involved transaction of $5,982 million. Tata
Steel acquired Corus Group plc. The acquisition deal amounted to $12,000 million. Dr. Reddy's
Labs acquired Betapharm through a deal worth of $597 million.Ranbaxy Labs acquired Terapia
SA. The deal amounted to $324 million. Suzlon Energy acquired Hansen Group through a deal
of $565 million. The acquisition of Daewoo Electronics Corp. by Videocon involved transaction
of $729 million. HPCL acquired Kenya Petroleum Refinery Ltd.. The deal amounted to $500
million. VSNL acquired Teleglobe through a deal of $239 million.

When it comes to mergers and acquisitions deals in India , the total number was 287 from the
 month of January to May in 2007. It has involved monetary transaction of US $47.37 billion. Out
of these 287 merger and acquisition deals, there have been 102 cross country deals with a total
valuation of US $28.19 billion.

Mergers and acquisitions in India

are on the rise. Volume of mergers and acquisitions in India in 2007 are expected to grow two fold from 2006 and four
times compared to 2005.

India has emerged as one of the top countries with respect to merger and acquisition deals. In 2007, the first two
months alone accounted for merger and acquisition deals worth $40 billion in India. The estimated figures for the
entire year projected a total of more than $ 100 billions worth of mergers and acquisitions in India. This is two fold
growth from 2006 and a growth of almost four times from 2005.

Mergers and Acquisitions in different sectors in India

Sector wise, large volumes of mergers and mergers and acquisitions in India have occurred in finance, telecom,
FMCG, construction materials, automotives and metals. In 2005 finance topped the list with 20% of total value of
mergers and acquisitions in India taking place in this sector. Telecom accounted for 16%, while FMCG and
construction materials accounted for 13% and 10% respectively.

In the banking sector, important mergers and acquisitions in India in recent years include the merger between IDBI
(Industrial Development bank of India) and its own subsidiary IDBI Bank. The deal was worth $ 174.6 million (Rs. 7.6
billion in Indian currency). Another important merger was that between Centurion Bank and Bank of Punjab. Worth
$82.1 million (Rs. 3.6 billion in Indian currency), this merger led to the creation of the Centurion Bank of Punjab with
235 branches in different regions of India.

In the telecom sector, an increase of stakes by SingTel from 26.96 % to 32.8 % in Bharti Telecom was worth $252
million (Rs. 10.9 billion in Indian currency). In the Foods and FMCG sector a controlling stake of Shaw Wallace and
Company was acquired by United Breweries Group owned by Vijay Mallya. This deal was worth $371.6 million (Rs.
16.2 billion in Indian currency). Another important one in this sector, worth $48.2 million (Rs 2.1 billion in Indian
currency) was the acquisition of 90% stake in Williamson Tea Assam by McLeod Russell India In construction
materials 67 % stake in Ambuja Cement India Ltd was acquired by Holcim, a Swiss company for $634.9 million (Rs
27.3 billion in Indian currency).

Mergers and Acquisitions in India in 2007

Some of the important mergers and takeovers in India in 2007 were -

 Mahindra and Mahindra acquired 90% stake in the German company Schoneweiss.
 Corus was taken over by Tata
 RSM Ambit based at Mumbai was acquired by PricewaterhouseCoopers.
 Vodafone took over Hutchison-Essar in India.
Mergers and Acquisitions: Valuation Matters
Investors in a company that are aiming to take over another one must determine whether the purchase will be
beneficial to them. In order to do so, they must ask themselves how much the company being acquired is really worth
Naturally, both sides of an M&A deal will have different ideas about the worth of a target company: its seller will tend
to value the company at as high of a price as possible, while the buyer will try to get the lowest price that he can.
There are, however, many legitimate ways to value companies. The most common method is to look at comparable
companies in an industry, but deal makers employ a variety of other methods and tools when assessing a target
company. Here are just a few of them:

1. Comparative Ratios - The following are two examples of the many comparative metrics on which acquiring
companies may base their offers:

o Price-Earnings Ratio (P/E Ratio) - With the use of this ratio, an acquiring company makes an

offer that is a multiple of the earnings of the target company. Looking at the P/E for all the stocks
within the same industry group will give the acquiring company good guidance for what the target's
P/E multiple should be.
o Enterprise-Value-to-Sales Ratio (EV/Sales) - With this ratio, the acquiring company makes an offer
as a multiple of the revenues, again, while being aware of the price-to-sales ratio of other
companies in the industry.
 Replacement Cost - In a few cases, acquisitions are based on the cost of replacing the target
company. For simplicity's sake, suppose the value of a company is simply the sum of all its
equipment and staffing costs. The acquiring company can literally order the target to sell at that
price, or it will create a competitor for the same cost. Naturally, it takes a long time to assemble
good management, acquire property and get the right equipment. This method of establishing a
price certainly wouldn't make much sense in a service industry where the key assets - people and
ideas - are hard to value and develop.
 Discounted Cash Flow (DCF) - A key valuation tool in M&A, discounted cash flow analysis
determines a company's current value according to its estimated future cash flows. Forecasted free
cash flows (net income + depreciation/amortization - capital expenditures - change in working
capital) are discounted to a present value using the company's weighted average costs of
capital (WACC). Admittedly, DCF is tricky to get right, but few tools can rival this valuation method.

Synergy: The Premium for Potential Success

For the most part, acquiring companies nearly always pay a substantial premium on the stock market value of the
companies they buy. The justification for doing so nearly always boils down to the notion of synergy; a merger
benefits shareholders when a company's post-merger share price increases by the value of potential synergy.

Let's face it, it would be highly unlikely for rational owners to sell if they would benefit more by not selling. That means
buyers will need to pay a premium if they hope to acquire the company, regardless of what pre-merger valuation tells
them. For sellers, that premium represents their company's future prospects. For buyers, the premium represents
part of the post-merger synergy they expect can be achieved. The following equation offers a good way to think about
synergy and how to determine whether a deal makes sense. The equation solves for the minimum required synergy:

In other words, the success of a merger is measured by whether the value of the buyer is enhanced by the action.
However, the practical constraints of mergers, which we discuss in part five, often prevent the expected benefits from
being fully achieved. Alas, the synergy promised by deal makers might just fall short.
What to Look For
It's hard for investors to know when a deal is worthwhile. The burden of proof should fall on the acquiring company.
To find mergers that have a chance of success, investors should start by looking for some of these simple criteria:

 A reasonable purchase price - A premium of, say, 10% above the market price seems within the bounds of
level-headedness. A premium of 50%, on the other hand, requires synergy of stellar proportions for the deal
to make sense. Stay away from companies that participate in such contests.
 Cash transactions - Companies that pay in cash tend to be more careful when calculating bids and
valuations come closer to target. When stock is used as the currency for acquisition, discipline can go by the
wayside.
 Sensible appetite – An acquiring company should be targeting a company that is smaller and in businesses
that the acquiring company knows intimately. Synergy is hard to create from companies in disparate
business areas. Sadly, companies have a bad habit of biting off more than they can chew in mergers.

Mergers are awfully hard to get right, so investors should look for acquiring companies with a healthy grasp of reality.

Mergers and Acquisitions: Doing The Deal

Start with an Offer
When the CEO and top managers of a company decide that they want to do a merger or acquisition, they start with a
tender offer. The process typically begins with the acquiring company carefully and discreetly buying up shares in the
target company, or building a position. Once the acquiring company starts to purchase shares in the open market, it
is restricted to buying 5% of the total outstanding shares before it must file with the SEC. In the filing, the company
must formally declare how many shares it owns and whether it intends to buy the company or keep the shares purely
as an investment.
Working with financial advisors and investment bankers, the acquiring company will arrive at an overall price that it's
willing to pay for its target in cash, shares or both. The tender offer is then frequently advertised in the business
press, stating the offer price and the deadline by which the shareholders in the target company must accept (or
reject) it.

The Target's Response

Once the tender offer has been made, the target company can do one of several things:

 Accept the Terms of the Offer - If the target firm's top managers and shareholders are happy with the
terms of the transaction, they will go ahead with the deal.
 Attempt to Negotiate - The tender offer price may not be high enough for the target company's
shareholders to accept, or the specific terms of the deal may not be attractive. In a merger, there may be
much at stake for the management of the target - their jobs, in particular. If they're not satisfied with the
terms laid out in the tender offer, the target's management may try to work out more agreeable terms that let
them keep their jobs or, even better, send them off with a nice, big compensation package.

Not surprisingly, highly sought-after target companies that are the object of several bidders will have greater
latitude for negotiation. Furthermore, managers have more negotiating power if they can show that they are
crucial to the merger's future success.
 Execute a Poison Pill or Some Other Hostile Takeover Defense – A poison pill scheme can be triggered
by a target company when a hostile suitor acquires a predetermined percentage of company stock. To
execute its defense, the target company grants all shareholders - except the acquiring company - options to
buy additional stock at a dramatic discount. This dilutes the acquiring company's share and intercepts its
control of the company.
  Find a White Knight - As an alternative, the target company's management may seek out a friendlier
potential acquiring company, or white knight. If a white knight is found, it will offer an equal or higher price for
the shares than the hostile bidder.

Mergers and acquisitions can face scrutiny from regulatory bodies. For example, if the two biggest long-distance
companies in the U.S., AT&T and Sprint, wanted to merge, the deal would require approval from the Federal
Communications Commission (FCC). The FCC would probably regard a merger of the two giants as the creation of a
monopoly or, at the very least, a threat to competition in the industry.

Closing the Deal

Finally, once the target company agrees to the tender offer and regulatory requirements are met, the merger deal will
be executed by means of some transaction. In a merger in which one company buys another, the acquiring
company will pay for the target company's shares with cash, stock or both.

A cash-for-stock transaction is fairly straightforward: target company shareholders receive a cash payment for each
share purchased. This transaction is treated as a taxable sale of the shares of the target company.

If the transaction is made with stock instead of cash, then it's not taxable. There is simply an exchange of share
certificates. The desire to steer clear of the tax man explains why so many M&A deals are carried out as stock-for-
stock transactions.

When a company is purchased with stock, new shares from the acquiring company's stock are issued directly to the
target company's shareholders, or the new shares are sent to a broker who manages them for target company
shareholders. The shareholders of the target company are only taxed when they sell their new shares.

When the deal is closed, investors usually receive a new stock in their portfolios - the acquiring company's expanded
stock. Sometimes investors will get new stock identifying a new corporate entity that is created by the M&A deal.

Mergers and Acquisitions: Break Ups

As mergers capture the imagination of many investors and companies, the idea of getting smaller might seem
counterintuitive. But corporate break-ups, or de-mergers, can be very attractive options for companies and their
shareholders

Advantages
The rationale behind a spinoff, tracking stock or carve-out is that "the parts are greater than the whole." These
corporate restructuring techniques, which involve the separation of a business unit or subsidiary from the parent, can
help a company raise additional equity funds. A break-up can also boost a company's valuation by providing powerful
incentives to the people who work in the separating unit, and help the parent's management to focus on core
operations.

Most importantly, shareholders get better information about the business unit because it issues separate financial
statements. This is particularly useful when a company's traditional line of business differs from the separated
business unit. With separate financial disclosure, investors are better equipped to gauge the value of the parent
corporation. The parent company might attract more investors and, ultimately, more capital.

Also, separating a subsidiary from its parent can reduce internal competition for corporate funds. For investors, that's
great news: it curbs the kind of negative internal wrangling that can compromise the unity and productivity of a
company.

For employees of the new separate entity, there is a publicly traded stock to motivate and reward them. Stock options
in the parent often provide little incentive to subsidiary managers, especially because their efforts are buried in the
firm's overall performance.

Disadvantages
That said, de-merged firms are likely to be substantially smaller than their parents, possibly making it harder to tap
credit markets and costlier finance that may be affordable only for larger companies. And the smaller size of the firm
may mean it has less representation on major indexes, making it more difficult to attract interest from institutional
investors.

Meanwhile, there are the extra costs that the parts of the business face if separated. When a firm divides itself into
smaller units, it may be losing the synergy that it had as a larger entity. For instance, the division of expenses such as
marketing, administration and research and development (R&D) into different business units may cause redundant
costs without increasing overall revenues.

Restructuring Methods
There are several restructuring methods: doing an outright sell-off, doing an equity carve-out, spinning off a unit to
existing shareholders or issuing tracking stock. Each has advantages and disadvantages for companies and
investors. All of these deals are quite complex.

Sell-Offs
A sell-off, also known as a divestiture, is the outright sale of a company subsidiary. Normally, sell-offs are done
because the subsidiary doesn't fit into the parent company's core strategy. The market may be undervaluing the
combined businesses due to a lack of synergy between the parent and subsidiary. As a result, management and the
board decide that the subsidiary is better off under different ownership.

Besides getting rid of an unwanted subsidiary, sell-offs also raise cash, which can be used to pay off debt. In the late
1980s and early 1990s, corporate raiders would use debt to finance acquisitions. Then, after making a purchase they
would sell-off its subsidiaries to raise cash to service the debt. The raiders' method certainly makes sense if the sum
of the parts is greater than the whole. When it isn't, deals are unsuccessful.

Equity Carve-Outs
More and more companies are using equity carve-outs to boost shareholder value. A parent firm makes a subsidiary
public through an initial public offering (IPO) of shares, amounting to a partial sell-off. A new publicly-listed company
is created, but the parent keeps a controlling stake in the newly traded subsidiary.

A carve-out is a strategic avenue a parent firm may take when one of its subsidiaries is growing faster and carrying
higher valuations than other businesses owned by the parent. A carve-out generates cash because shares in the
subsidiary are sold to the public, but the issue also unlocks the value of the subsidiary unit and enhances the parent's
shareholder value.

The new legal entity of a carve-out has a separate board, but in most carve-outs, the parent retains some control. In
these cases, some portion of the parent firm's board of directors may be shared. Since the parent has a controlling
stake, meaning both firms have common shareholders, the connection between the two will likely be strong.

That said, sometimes companies carve-out a subsidiary not because it's doing well, but because it is a burden. Such
an intention won't lead to a successful result, especially if a carved-out subsidiary is too loaded with debt, or had
trouble even when it was a part of the parent and is lacking an established track record for growing revenues and
profits.

Carve-outs can also create unexpected friction between the parent and subsidiary. Problems can arise as managers
of the carved-out company must be accountable to their public shareholders as well as the owners of the parent
company. This can create divided loyalties.

Spinoffs
A spinoff occurs when a subsidiary becomes an independent entity. The parent firm distributes shares of the
subsidiary to its shareholders through a stock dividend. Since this transaction is a dividend distribution, no cash is
generated. Thus, spinoffs are unlikely to be used when a firm needs to finance growth or deals. Like the carve-out,
the subsidiary becomes a separate legal entity with a distinct management and board.

Like carve-outs, spinoffs are usually about separating a healthy operation. In most cases, spinoffs unlock hidden
shareholder value. For the parent company, it sharpens management focus. For the spinoff company, management
doesn't have to compete for the parent's attention and capital. Once they are set free, managers can explore new
opportunities.

Investors, however, should beware of throw-away subsidiaries the parent created to separate legal liability or to off-
load debt. Once spinoff shares are issued to parent company shareholders, some shareholders may be tempted to
quickly dump these shares on the market, depressing the share valuation.
Tracking Stock
A tracking stock is a special type of stock issued by a publicly held company to track the value of one segment of that
company. The stock allows the different segments of the company to be valued differently by investors.

Let's say a slow-growth company trading at a low price-earnings ratio (P/E ratio) happens to have a fast growing
business unit. The company might issue a tracking stock so the market can value the new business separately from
the old one and at a significantly higher P/E rating.

Why would a firm issue a tracking stock rather than spinning-off or carving-out its fast growth business for
shareholders? The company retains control over the subsidiary; the two businesses can continue to enjoy synergies
and share marketing, administrative support functions, a headquarters and so on. Finally, and most importantly, if the
tracking stock climbs in value, the parent company can use the tracking stock it owns to make acquisitions.

Still, shareholders need to remember that tracking stocks are class B, meaning they don't grant shareholders the
same voting rights as those of the main stock. Each share of tracking stock may have only a half or a quarter of a
vote. In rare cases, holders of tracking stock have no vote at all

Mergers and Acquisitions: Why They Can Fail

It's no secret that plenty of mergers don't work. Those who advocate mergers will argue that the merger will cut costs
or boost revenues by more than enough to justify the price premium. It can sound so simple: just combine computer
systems, merge a few departments, use sheer size to force down the price of supplies and the merged giant should
be more profitable than its parts. In theory, 1+1 = 3 sounds great, but in practice, things can go awry.

Historical trends show that roughly two thirds of big mergers will disappoint on their own terms, which means they will
lose value on the stock market. The motivations that drive mergers can be flawed and efficiencies from economies of
scale may prove elusive. In many cases, the problems associated with trying to make merged companies work are all
too concrete.

Flawed Intentions
For starters, a booming stock market encourages mergers, which can spell trouble. Deals done with highly rated
stock as currency are easy and cheap, but the strategic thinking behind them may be easy and cheap too. Also,
mergers are often attempt to imitate: somebody else has done a big merger, which prompts other top executives to
follow suit.

A merger may often have more to do with glory-seeking than business strategy. The executive ego, which is boosted
by buying the competition, is a major force in M&A, especially when combined with the influences from the bankers,
lawyers and other assorted advisers who can earn big fees from clients engaged in mergers. Most CEOs get to
where they are because they want to be the biggest and the best, and many top executives get a big bonus for
merger deals, no matter what happens to the share price later.

On the other side of the coin, mergers can be driven by generalized fear. Globalization, the arrival of new
technological developments or a fast-changing economic landscape that makes the outlook uncertain are all factors
that can create a strong incentive for defensive mergers. Sometimes the management team feels they have no
choice and must acquire a rival before being acquired. The idea is that only big players will survive a more
competitive world.

The Obstacles to Making it Work

Coping with a merger can make top managers spread their time too thinly and neglect their core business, spelling
doom. Too often, potential difficulties seem trivial to managers caught up in the thrill of the big deal.

The chances for success are further hampered if the corporate cultures of the companies are very different. When a
company is acquired, the decision is typically based on product or market synergies, but cultural differences are often
ignored. It's a mistake to assume that personnel issues are easily overcome. For example, employees at a target
company might be accustomed to easy access to top management, flexible work schedules or even a relaxed dress
code. These aspects of a working environment may not seem significant, but if new management removes them, the
result can be resentment and shrinking productivity.

More insight into the failure of mergers is found in the highly acclaimed study from McKinsey, a global consultancy.
The study concludes that companies often focus too intently on cutting costs following mergers, while revenues, and
ultimately, profits, suffer. Merging companies can focus on integration and cost-cutting so much that they neglect day-
to-day business, thereby prompting nervous customers to flee. This loss of revenue momentum is one reason so
many mergers fail to create value for shareholders.

But remember, not all mergers fail. Size and global reach can be advantageous, and strong managers can often
squeeze greater efficiency out of badly run rivals. Nevertheless, the promises made by deal makers demand the
careful scrutiny of investors. The success of mergers depends on how realistic the deal makers are and how well they
can integrate two companies while maintaining day-to-day operations