Corporate Restructuring

Merger

Merger And Takeover #######

Tender offer

Tender offer involves making a public offer for acquiring the shares of the target company with a view to
acquire management control in that company.

Ex: Flextronics International gave an open market offer at Rs. 548 for 20% paid-up capital in Hughes
Software systems.

Hostile Takeover and Tender Offer

Takeover refers to a change in the controlling interest of a company. Takeover can be friendly or
unfriendly.

In a friendly takeover the target company’s management is receptive to the idea and recommends
approval by shareholders. The acquiring company has to offer a premium to the current market price of
the share to gain control. If the shareholders approve, the transaction is finalized through purchase of
the target company’s shares for cash, exchange of shares, debt or some combination of all three.

In an unfriendly or hostile takeover the target company’s management does not support the solicitation
from a potential acquirer because of the inadequacy of purchase price.

A Tender Offer is a formal offer to purchase a given number of a company’s shares at a specified price.
The acquiring company asks the shareholders of the target company to ‘tender’ their shares in exchange
for a specific price. The price is generally quoted at a premium in order to induce the shareholders to
tender their shares. Tender offer can be used in 2 situations. First, the acquiring company may directly
approach the target company for its takeover. If the target company does not agree, then the acquiring
company may directly approach the shareholders by means of a tender offer. Second, the tender offer
may be used without any negotiations, and it may be equivalent to a hostile takeover. The shareholders
are generally approached through announcement in the financial press or through direct
communication individually. They may or may not react to a tender offer. Their reaction exclusively
depends upon their attitude and sentiment and the difference between the market price and offer price.
The tender offer may or may not be acceptable to the management of the target company.

Asset acquisition

Asset acquisition involves buying the assets of another company. These assets may be tangible assets
like a manufacturing unit or intangible assets like brands. The acquirer purchases only those parts which
benefits or satisfies firm’s needs.  The acquisition of the cement division of TATA Steel by Laffarage of
France. Laffarage acquired only the 1.7 million tons cement plant and its related assets from TATA Steel.
 Coca-Cola paid Rs.170 Crores to Parle to acquire its soft drinks like Thums-Up, Limca and Gold Spot.

Merger And Takeover Mergers and Acquisition activities should take place within the framework of long
range planning by business firms. M&A are the most popular means of corporate restructuring or
business combinations. It is believed that mergers and acquisitions are strategic decisions leading to the
maximization of the company’s growth by enhancing its production and marketing operations. The
reasons why M&A activities are considered to strategic in decision are:

 It includes huge amount of investment and the benefits are long term in nature.

 Maintaining or accelerating a company’s growth, particularly when the internal growth is considered
due to scarcity of resources.

 Enhancing profitability, through cost reduction resulting from economies of scale, operating efficiency
and synergy.

 Diversifying the risk of the company, particularly when it acquires those businesses whose income
streams are not correlated.

 Limiting the severity of competition by increasing the company’s market power.

 Reducing tax liability because of the provision of setting off accumulated losses and unabsorbed
depreciation of one company against the profits of another.
Strategy formulation is a sequential process which consists of strategic situation analysis by which is
meant a company's analysis of the present scenario, its strengths and weaknesses and how they match
with the opportunities and threats that the market analysis throws up. Strategic choice analysis involves
a forward looking scenario building analysis by the company as to where does it see itself in the future,
what kind of capability it must build to reach that position it sees for itself and most importantly how
should it go about building these capabilities.

Tender offer

Tender offer involves making a public offer for acquiring the shares of the target company with a view to
acquire management control in that company.

Ex: Flextronics International gave an open market offer at Rs. 548 for 20% paid-up capital in Hughes
Software systems.

Hostile Takeover and Tender Offer

Takeover refers to a change in the controlling interest of a company. Takeover can be friendly or
unfriendly.

In a friendly takeover the target company’s management is receptive to the idea and recommends
approval by shareholders. The acquiring company has to offer a premium to the current market price of
the share to gain control. If the shareholders approve, the transaction is finalized through purchase of
the target company’s shares for cash, exchange of shares, debt or some combination of all three.

In an unfriendly or hostile takeover the target company’s management does not support the solicitation
from a potential acquirer because of the inadequacy of purchase price.

A Tender Offer is a formal offer to purchase a given number of a company’s shares at a specified price.
The acquiring company asks the shareholders of the target company to ‘tender’ their shares in exchange
for a specific price. The price is generally quoted at a premium in order to induce the shareholders to
tender their shares. Tender offer can be used in 2 situations. First, the acquiring company may directly
approach the target company for its takeover. If the target company does not agree, then the acquiring
company may directly approach the shareholders by means of a tender offer. Second, the tender offer
may be used without any negotiations, and it may be equivalent to a hostile takeover. The shareholders
are generally approached through announcement in the financial press or through direct
communication individually. They may or may not react to a tender offer. Their reaction exclusively
depends upon their attitude and sentiment and the difference between the market price and offer price.
The tender offer may or may not be acceptable to the management of the target company.

Asset acquisition

Asset acquisition involves buying the assets of another company. These assets may be tangible assets
like a manufacturing unit or intangible assets like brands. The acquirer purchases only those parts which
benefits or satisfies firm’s needs.  The acquisition of the cement division of TATA Steel by Laffarage of
France. Laffarage acquired only the 1.7 million tons cement plant and its related assets from TATA Steel.
 Coca-Cola paid Rs.170 Crores to Parle to acquire its soft drinks like Thums-Up, Limca and Gold Spot.

Joint Venture • A joint venture is a business enterprise under-taken by two or more persons or
organizations to share the expense and profit of a particular business project. Eg. Maruthi Suzuki, ING
Vishya, Bajaj Allianz, Standard & Charted Bank. • A Joint venture is a legal entity formed between two or
more parties to under-take economic activity together. The parties agree to create a new entity by both
contributing equity, and they then share in the revenues, expenses, and control of the enterprise. • The
venture can be for one specific project only, or a continuing business relationship such as the Sony
Ericsson joint venture. This is in contrast to a strategic alliance, which involves no equity stake by the
participants, and is a much less rigid arrangement.

Rational behind JV:  Pooling of complimentary resources  Access to raw-materials  Access to new
markets  Diversification of risks  Economies of scale  Tax shelter  Cost reduction  Purchaser-
supplier relationships  Joint manufacturing

Types of Joint Ventures

• Equity based joint ventures benefit foreign and/or local private interests, groups of interests, or
members of the general public. • Under non-equity joint ventures (also known as cooperative
agreements), meanwhile, the parties seek technical service arrangements, franchise and brand use
agreements, management contracts, rental agreements, or one-time contracts, e.g. for construction
projects. Participants do not always furnish capital as part of their joint venture commitments. They
want to modernize operations or start new production operations. E.g. BIAL- Bangalore International
Airport Ltd. is a joint venture between Central Govt., State Govt. & Switzerland Airport Authority.

Reasons for forming a Joint Venture

1. Internal Reasons • Spreading costs and risks. • Improving access to financial resources • Economies of
scale and advantages of size • Access to new technologies and customers

• Access to innovative managerial practices.

2. Competitive Goals • Influencing structural evolution of the industry • Pre-empting competition •

What Stimulates Joint Venture?  A bigger cash rich company tries to invest in small companies with
inadequate surplus.  Distribution of risk.  Acquisition of technological or managerial resources at a
comparatively lower cost.  As a long-term strategy to establish controlling power in the market and
keep the competitors at a distance.  Tax consideration.  To improve and establish efficient
distribution channel or supply chain.

Benefits of Joint Ventures  Among the most significant benefits derived from joint ventures is that
partners save money and reduce their risks through capital and resource sharing.  Joint ventures also
give smaller companies the chance to work with larger ones to develop, manufacture and market new
products.  They also give companies of all sizes the opportunity to increase sales, gain access to wider
markets, and enhance technological capabilities through research and development underwritten by
more than one party.  E.g. Xerox Corporation & Fuji Corporation in Japan engaged in a joint venture
that allowed Xerox to penetrate Japanese market & Fuji can enter into photo-copy business.  Govt.’s
increased involvement in the private business environment has created more opportunities for
companies to engage in domestic and international joint ventures.

Reasons for Failure of JV

Lower than expected turnover. Expiry of Technical tie up. Economic Recession. Reluctance of
Management to accept additional responsibility. Distance and language barrier. Unfavorable
profitability ratio – Post JV arrangement. Lack of openers between JV constituents.

Strategic Alliance:

 Is a flexible arrangement between firms whereby they agree to work together to achieve a specific
goal. Such arrangements are looser in nature than the JV and can be disbanded easily.  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 the
leverage.  Normally, a strategic alliance does not result in the creation of new entity unlike a JV. The
major advantage of a strategic alliance is that it can be created easily as and when there is a need.

Types of Strategic Alliances:  Franchising: An agreement whereby someone with a good idea for
business (the franchiser) sells the rights to use the business’s name and sell a product/service to
someone else (the franchisee).  Licensing: A form of strategic alliance which involves the sale of a right
to use certain proprietary knowledge, i.e., intellectual property.  Management Contracts  Turnkey
Projects  Partnering with suppliers  Pooled purchasing  Partnering with distributors

JV Vs Strategic Alliance: JV Strategic Alliance Formed to capitalize on knowledge in parent firms and to
generate knowledge Formed in order to learn from the partners knowledge

Two or more organizations set up a separate, independent organization for a specific purpose
B2B collaboration where two or more corporate shares resources and capabilities to achieve some
business purpose.

A formal contract is written

Less formal than JV’s. A new entity need not be created.

It has clear and legal boundaries

Boundaries are defined by partnering firms

Holding companies Holding company controls the subsidiary company by acquiring substantial voting
powers by acquiring equity shares carrying voting rights. When it hold 100% shares of subsidiary
company, then it is called as wholly owned subsidiary Holding company is also called as parent company.
More than 50% of the shares of the subsidiary are held by parent company either directly or indirectly.

Takeover by Reverse Bid Normally a large company takeover a small company. But when a small
company acquires a big company in a takeover manner, such a situation is called as takeover by reverse
bid. It happens when substantial shares of big company are in the hands of a small company. It is
possible when small company is a cash rich company and big company is a sick company.

DIVESTITURE / DEMERGER

 Divestiture: Sale of segment of a company (assets, a product line, a subsidiary) to a third party for
cash and/or securities.

 Although divestitures causes contraction from the perspective of selling firm, it doesn’t however,
entail decrease in its profits.  It is believed that, the value will be enhanced by parting / divesting /
demerging some of its assets as they are either causing losses or yielding very low returns.
Motives of Divestitures • Raising Capital It is a common motive. Cash strapped firms seem to resort to
divestiture to shore up their liquidity. E.g. CEAT sold its nylon tyre cord plant at Gwalior to SRF for Rs.
3250 million so that it could settle its out standings and raise funds to concentrate on tyre
manufacturing. • Curtailment of losses Prominent reason is to cut losses. It may imply that the unit that
is proposed to be divested is earning a sub normal rate of return. • Strategic Realignment The sellers
may divest a unit which no longer fits with its strategic plan. Often such a unit tends to be in an
unrelated line and may demand a lot of managerial time & attention. • Efficiency Gain A divestiture
results in an efficiency gain when the unit divested is worth more as part of some other firm or as a
standalone business. • Inability to adopt new technology. • Underperformance of Labor including
managers. • Subsidiaries not able to exploit advantages of new policies.

Financial Evaluation of Divestiture Procedures: Step 1: Estimate the divisional post tax cash flow Step 2:
Establish the discount rate for the division Step 3: Calculate the division’s present value Step 4: Find the
market value of the division-specific liabilities- The MV is the PV of the obligations arising from the
liabilities of the division. Step 5: Assume the value of the parent firm’s ownership position in the
division– the value of the ownership position enjoyed by the parent firm is PV of the division’s cash flow
(Step 3)-MV of the division’s specific liabilities. (Step 4) Step 6: Compare the value of the ownership firm
with the divestiture proceeds-When a parent firm transfers the assets of a division along with its
liabilities, it receives divestiture proceeds as compensation for giving up its ownership position in the
division.

Forms of Corporate Divestitures • Inter-corporate sell-off: that is sale to another company • Spin-off or
de-merger • Equity Carve out, in which a subsidiary is floated on a stock exchange, but parent, retains a
majority control. • Issue of tracking stock • Management buyout

1. Corporate sell-offs • A sell-off is a transaction between two independent companies. The divestor may
benefit from the cash proceeds, which could be put to more profitable use in the businesses within the
group, or used to mitigate financial distress. • Sell-off may also add to the divestor by eliminating
negative synergy, or by realizing managerial resource preempted by the divested business. • It may also
sharpen the strategic focus of the remaining businesses & enhance the divestor’s competitive strength.
 Selling a part or all of the firm by any one of means: sale, liquidation, spin-off & so on . Or

 General term for divestiture of part/all of a firm by any one of a no. of means: sale, liquidation, spin-off
and so on.

PARTIAL SELL-OFF/ SLUMP SALE  A partial sell-off/slump sale, involves the sale of a business unit or
plant of one firm to another.
 It is the mirror image of a purchase of a business unit or plant.

 From the seller’s perspective, it is a form of contraction;

 From the buyer’s point of view it is a form of expansion.

 For example:

 When Coromandal Fertilizers Limited sold its cement division to India Cement Limited, the size of
Coromandal Fertilizers contracted whereas the size of India Cements Limited expanded.

2. Corporate spin-offs • In a corporate spin-off, a company floats off a subsidiary which may be small
part of the parent company. The newly floated company now has an independent existence and is
separately valued at the stock market. • Shares in the spin-off company are distributed to the
shareholders of the parent company; they own shares in two companies rather than just one. The
parent company does not receive any proceeds from the demerger, as the demerged company’s shares
are directly distributed to the parent company shareholders. • A corporate spin-off divides a company
into two or more independent firms, and offers a firm an opportunity to improve managerial incentives
with fresh compensation packages.

• This is the reversal of mergers or acquisitions. • Denotes a transaction in which a company distributes
on a pro-rata basis, all the shares of its own in a subsidiary to its own shareholders. • EX: United
Breweries (Flagship CO.) UB Holdings Ltd. For every 600 Shares held 400 Shares are given. • In the year
1997, PepsiCo spun-off KFC, Pizza Hut and Taco Bell into a separate corporation Tricon Global
Restaurants Inc. The company spun-off 100% of its restaurant unit to stock holders who received shares
in the new company. The spin-off was aimed at better focus on its Pepsi beverage operations and Frito
Lay snack business.

Benefits for a spin-off • A spin off like other form of divestitures, lead to enhanced focus, reduced
organizational complexity & control loss, & avoid of negative synergy. • Eliminate the conglomerate
discount the parent may have suffered as a diversified company. • Increase the transparency of both the
parent & the spin-off business to the stock market through separate financial reports of the two firms to
current share holders.

• Increase analyst & institutional investor following, create new shareholders & allow to access to new
capital. • Allow shareholders increased flexibility in their portfolio decisions, since they now have the
freedom to alter the proportion of their portfolios invested in each company.

Split off A transaction in which some, but not all, parent company shareholders receive shares in a
subsidiary in return for relinquishing(surrendering) their parent company shares. A split-off is a type of
corporate reorganization whereby the stock of a subsidiary is exchanged for shares in the parent
company. Split-off is basically of two types. In the first type, a corporation transfers part of its assets to a
new corporation in exchange for stock of the new corporation. The original corporation then distributes
the same stock to its shareholders, who, in turn, surrender part of their stock in the original corporation.
In the second type, a parent company transfers stock of a controlled corporation to its stock holders in
redemption of a similar portion of their stock. “Control” refers to the ownership of 80% or more of the
corporation whose shares are being distributed.

Difference between Spin-off and Split-off

A split-off differs from spin-off in that the shareholders in a split-off must relinquish (surrender) their
shares of stock in the parent corporation in order to receive shares of the subsidiary corporation,
whereas the shareholders in a spin-off need not do so.

Split up

A transaction under which a company spins off all of its subsidiaries to its shareholders and ceases to
exist. In a split-up, the existing corporation transfers all its assets to two or more new controlled
subsidiaries, in exchange for subsidiary stock. The parent distributes all stock of each subsidiary to
existing shareholders in exchange for all outstanding parent stock, and liquidates. In other words, a
single company splits into 2 or more separately run companies.

One of the classical examples for split-up is the split-up of AT & T into four separate units- AT & T
Wireless, AT&T Broadband, AT & T Consumer, AT & T Business. It could be termed as one of the biggest
shake-ups in the US Telecommunication industry since 1984.

3. Equity Carve Out • An equity carve out is the initial public offering (IPO) of the some portion of the
common stock of a wholly owned subsidiary. These are also referred to as “split off IPO”. • An IPO of the
equity of a subsidiary resembles a seasoned equity offering of the parent in that cash is received from a
public sale of equity securities. • An equity carve out is the sale of a minority or a majority voting control
in a subsidiary by its parent to outside investors. • Equity carve out is similar to a spin-off in many ways.

They are often motivated by the need to:  Increases the focus of the firm  Improves the autonomy of
the component businesses  Improve the managerial incentive structure by relating management
performance directly to the share holder value.  Enhance the visibility of the component businesses
being divested.  Minimize the conglomerate discount through this enhanced visibility & increased
information.

Leveraged Buyout • Acquisition of one company by another, typically with borrowed funds. Usually, the
acquired company’s assets are used as collateral for the loans of the acquiring company. • The loans are
paid back from the acquired company’s cash flow. Another possible form of leveraged buyout occurs
when investors borrow from banks, using their own assets as collateral to acquire the other company.
Typically, public stockholders receive an amount in excess of the current market value for their shares.

Types of LBO • Investment buyouts (IBO) • Management buyouts (MBO) • Management buy-in (MBI) •
Going private buyouts
1. Management Buyout A management buyout (MBO) is a form of acquisition where a company’s
existing managers buy or acquire a large part of the company. • Purchase of all of a company’s publicly
held shares by the existing mgt., which takes the company private. Usually, mgt. Will have to pay a
premium over the current market price to entire public shareholders to go along with the deal. If mgt.
has to borrow heavily to finance the transaction, it is called a Leveraged Buyout (LBO) • Managers may
want to buy their company for several reasons: They want to avoid being taken over by a raider who
would bring in new mgt., they no longer want the scrutiny that comes with running a public company; or
they believe they can make more money for themselves in the long run by owning a larger share of the
company, and eventually reap substantial profits by going public again with a Reverse Leveraged Buyout

2. Management Buy-in • A management buy-in (MBI) occurs when a manager or a management team
from outside the company raises the necessary finance, buys it and becomes the company’s new
management. • A management buy-in team often competes with other purchasers in the search for a
suitable business. Usually, the team will be led by a manager with significant experience at managing
director level.

Difference between MBO and MBI • The difference to a management buy-out is in the position of the
purchaser: In the case of a buy-out, they are already working for the company. In the case of a buy-in,
however, the manager or management team is from another source.

Merger Process:

Steps in Merger or Merger Process 1. Screening and investigation of merger proposal 2. Negotiation
stage

3. Approval of proposal by Board of Directors

4. Approval of shareholders

5. Approval of creditors/financial institutions/banks 6. Tribunal’s approval

7. Approval of central government

8. Integration stage

1. Screening and investigation of merger proposal

When there is an intention of acquisition or merger, the primary step is that of screening. The motives
and the needs are to be adjudged against three strategic criteria i.e. business fit, management and
financial strength. If the proposal is viable after thorough analysis from all angles, then the matter will be
carried further.
2. Negotiation stage

In this stage the bargain is made in order to secure the highest price by the seller and the acquirer keen
to limit the price of the bid. The seller needs to decide the minimum price acceptable and the buyer
needs to decide the maximum he is prepared to pay. After the consideration is decided then the
payment terms and exchange ratio of shares between the companies will be decided. The exchange
ratio is an important factor in the process of amalgamation.

3. Approval of proposal by Board of Directors

Deciding upon the consideration of the deal and terms of payments, then the proposal will be put for
the Board of Director’s approval.

4. Approval of shareholders

As per the provisions of the Companies Act 1956, the shareholders of both seller and acquirer
companies hold meeting under the directions of the National Company Law Tribunal and they consider
the scheme of amalgamation. A separate meeting for both preference and equity shareholders is
convened for this purpose.

5. Approval of creditors/financial institutions/banks

Approvals from the constituents for the scheme of merger and acquisition are required to be sought
for as per the respective agreement with each of them and their interest is considered in drawing up the
scheme of merger.

6. Tribunal’s approval

The tribunal shall issue orders for winding up of the amalgamating company without dissolution on
receipt of the reports from the Official Liquidator and the Regional Director that the affairs of the
amalgamating company have not been conducted in a manner prejudicial to the interest of its members
or to public interest.

7. Approval of central government

It is required to obtain declaration of the Central Government on the recommendation made by the
Specified Authority under section 72 A of the Income Tax Act, if applicable.

8. Integration stage

The structural and cultural aspects of the two organization, will lead to successful merger and ensure
that expected benefits of the merger are realized.

Due Diligence
 Due diligence is nothing but a detailed evaluation. Once a proposal has passed through initial
screening, it is subjected to a detailed evaluation or due diligence process.

Types

The are three components of Due Diligence:-

 Financial Due Diligence

 Legal Due Diligence

 Strategic Due Diligence

Financial Due Diligence

Financial evaluation is the most important part of the due diligence. It is needed to determine the
earnings and cash flows, areas of risk, the maximum price payable to the target company and the best
way to finance the merger. A merger is said to be at a premium when the offer price is higher than the
target firm’s pre-merger market value. The acquiring firm may pay the premium if it thinks that it can
increase the target firm’s profits after merger by improving its operations and due to synergy.

Legal Due Diligence

Any M&A activity needs a lot of structuring such that they are within the tax and legal frame work. Any
merger to happen successfully, has to be structured in such a way that they are tax efficient, compliant
with SEBI, FDI, Capital Market and Government rules and regulations.

Strategic Due Diligence

It tests the strategic rationale behind a proposed transaction with two broad questions:

1. Is the deal commercially attractive?

2. Are we capable of realizing the targeted value?

The first question testing the commercial attractiveness of the deal involves validating both the target
company’s financial projections and identified synergies using an external lens.

Regarding the second question, a company must make a hard internal examination of whether the
targeted value of the deal can be realized by the management team of the combined enterprise and, if
so, whether the projected time frame is realistic.

DUE DILIGENCE

INTRODUCTION

Due diligence is a systematic process of acquiring and analyzing information, which helps a buyer or a
seller determine whether to proceed with the transaction or not.

The information obtained relates to all aspects of the business to be purchased.

DUE DILIGENCE PROCESS

DUE DILIGENCE

• It involves analysis of public and proprietary information related to the assets and liabilities of the
company being purchased.

• The information encompasses legal, tax and financial matters. • It provides the buyer an opportunity
to verify the accuracy of the information furnished by the seller. • The process helps to determine
whether there are potential concerns like questionable asset quality, title of assets, govt. approvals and
so on.

DUE DILIGENCE - EXAMPLE

• One of the fiercest takeover battles in Europe was fought between Nestle and the Agnellis over the
control of Perrier, a French mineral water company. • Nestle ultimately won the battle but, to its
dismay, discovered that at least one of the springs, which it thought was part of its purchase, was not
owned by Perrier, to begin with (it was leased from the town). • When queried, Perrier officials noted
that they did not hide the fact, it was just that Nestle had not asked for it.

To conduct due diligence, companies typically form a team comprising of personnel from finance, sales
and marketing, human resources and tax/legal departments. The personnel review and revise the due
diligence checklist before sending it to the seller.The seller’s team conducts an in-house review of all
available information and lets the buyer know when, what and how any information will be provided.

A typical M&A transaction involves the preparation of a number of agreements and documents
between/by the buyers and the seller. The most prominent being:

1. Non-disclosure agreement

2. Letter of intent

3. Due diligence

• Non-disclosure agreement spells out the definition of ‘evaluation material’ (any material or
information furnished to the recipient) and the use of such material. • The agreement prevents the
buyer from using that information in an appropriate manner like public disclosure of the information
(even the fact that an agreement has been signed), and it provides for the return of all the materials to
the seller upon request. • The process ends with the disclosure of the deal.

Challenges of Mergers & Acquisitions

Acquisitions are a mean to achieving the corporate strategy aims of improving the firm’s competitive
positioning in its chosen markets on a sustainable basis. An important consideration in

developing competitive strategies and business models is the expected reaction of the firm’s
competitors. The firms may adopt given strategies as either first movers or “me-too” followers. Both
approaches have associated risks as well as opportunities. In some situations the first mover gathers the
“winner-takes-all” booty but the risk of failure may be high. The second mover can reap the benefit of
vicariously learning from the mistakes and failures of the first mover.

2. Challenges in Organizing for Acquisitions

A number of factors impart a momentum to acquisition decision and deal making the individual players
may find difficult to control. Companies and key decision makers need to be conscious of these
pressures and pulls and not allow them to over whelm the logic of the deal. Otherwise the deal will turn
out to be a sub optional one and will lead to value destruction. This emphasizes the importance of
establishing an acquisition function or the A Team.

The A team has a role in developing acquisition programme to deliver the strategies goals, in
proactively looking for acquisition opportunities, providing internal consulting expertise to divisions,
coordinating the acquisition-relative activities and developing the necessary capabilities and resources
for an acquisition function that confers a competitive advantage.

In developing acquisition ideas and programmes the A team needs to consult with and coordinate all
the relative functions, business units and the top mgt. Involved.

The A team has to play the devil’s advocate from time to time so that over-optimistic acquisition
proposals are not accepted or the acquisition process is not driven by the grandiose vision or
overweening ambitions of the CEO, reducing acquisitions to a one man show.

Once the decision has been made, the bidder has to carry out deal structuring and negotiation in a way
that minimizes risks not only to deal making but also to the achievement of the strategic and value
creation objectives.

3. Challenges in Deal Structuring and Negotiation

There are a number of potential risks concerned with the deal-structuring and negotiation stage.
Selection of an acquisition team lacking in balance of expertise from operations, laws, human resources
management and other relevant functions to carry out negations or hostile bids if necessary and
engaging advisers with little relevant experience or standing may lead to a costly and aborted acquisition
attempt.

The A team set realistic negotiation parameters and benchmarks for negotiation but ensure that the
deal-making momentum does not breach these parameters. Information is the key to successful deal
making.

Inadequate due diligence and delays may lead to risk of failure of the bid as well as cost escalation in
terms of the bidder managers time and organizational resources and also in terms of the costs of
advisors.
 The choice of experienced advisors helps to identify the deal breakers. Due diligence traditionally was
restricted to accounting and legal issues. It must be extended to cover a wider range of issues including
commercial and human resources due diligence.

4. Challenges in Post-acquisition Integration

The post-acquisition integration stage is intended to implement the acquisition’s strategic and financial
goals. In practice, there may be a ‘disconnect’ between the previous stages and this stage because there
is a lack of continuity between the A team that developed the acquisitions strategy and guided the
negotiation on the one hand and the integration teams mainly involving operations managers on the
other. The disconnect may also arise from poor articulation of the strategic goals and how organizational
transformation would achieve them.

There may also be lack of clarity about the new organizational structure and how the merging
organization would fit into that new structure. These may give rise to fragmented perspectives and
expectational ambiguity.