Unit 4

Mergers and Acquisitions

A merger is an agreement that unites two existing companies into one new company. There are
several types of mergers and also several reasons why companies complete mergers. Mergers
and acquisitions are commonly done to expand a company’s reach, expand into new segments, or
gain market share. All of these are done to please shareholders and create value.
Merging of two companies can be defined as "the legal act of combining two or more companies,
generally by offering the stockholders of one company securities in the acquiring company in exchange
for the surrender of their stock". There are a few types of mergers. Let's look at them one by one.

Horizontal Merger
A horizontal merger refers to a unification or collaboration of two companies that are involved in the
same business activity. This means that two companies manufacturing the same goods or commodity
come together.

The purpose of these companies coming together could be that they can together attain a higher market
share, reduce the price of the manufactured goods to increase its demand, and also to increase the product
efficiency.

Vertical Merger
A vertical merger will indicate that two companies that have a buyer-seller relationship have come
together. They could have shared a buyer-seller relationship before or could also have shared a potential
buyer-seller relationship. Example: If a steel manufacturing company over takes a car manufacturing
company or vice versa.

The purpose of such a merger could be to increase the returns of scale, decrease the cost of production
and to increase product efficiency.

Conglomeration Merger
A conglomeration merger indicates a merger of two companies which are not related. By 'not related' I
mean that both the company's products are not related to each other in terms of consumers, market and
demand. For example: When an automobile manufacturing company enters into a merger with a
pharmaceutical company, it will be termed as a conglomeration merger.

The purpose of such a merger is to reduce risk, transfer skills and technology, and diversification.

Market Extension Merger

A market extension merger indicates a merger of two companies that manufacture the same or identical
products but they sell it in completely different markets. For example: A local or domestic software
developing company is taken over by a multinational software developing company.

Product-Extension Merger
A product-extension merger indicates a merger of companies that do not manufacture the same goods but
they manufacture goods that fall in the same category. For example: If a company manufacturing laptops
overtakes a company that manufactures 'portable hard disks' or 'flash drives', then this would be termed as
a product-extension merger. Here the laptop and the portable hard disk are two different products but they
both come under the category of computers.

Forward Extension
A forward merger is a vertical integration of those firms or vendors which buy raw-material or semi-
finished goods from a supplier. These are the firms that make the final goods or finished goods.

This could be done to increase the market share, and for product and price efficiency.

Backward Extension 
A backward extension merger is a vertical integration of the suppliers of raw-material or semi-finished
goods. This form of a merger can be adapted to increase product and price efficiency.

Purchase Merger
A purchase merger is when a company purchases another company. Though this should then be called an
acquisition, it is still known as a merger as the entire working of the overtaken company does not change
and the purchase is either made in cash or in the form of a debt instrument. This form of a merger is used
to derive tax benefits.

Consolidation Merger
A consolidation merger is one where in both the companies are dissolved and a new entity is formed. This
form of a merger is used when one wants to introduce a new product to attain a higher market share, to
increase product efficiency and to attain tax benefits.

Out of the above nine types of mergers given, the first five types are more commonly used and known
types. The type of merger chosen by the companies to merge is done on the basis of whatever is the most
suitable to them in terms of making higher profit and expansion

What Is the Rationale for Corporate Mergers?

Some companies pursue a merger as a one-time opportunity that arises, whereas others make it
an ongoing strategy they utilize to grow their business. Corporate mergers are also referred to as
mergers and acquisitions because many times one of the companies involved purchases a
majority control of the other and assumes a dominant role from a managerial standpoint after the
deal is closed.
1. Combined Strength
Creating a larger company gives the combined entity more strength in the marketplace. Volume
purchasing is one advantage. The larger entity purchases more of a given item than each
company did by itself, so manufacturers give the combined company volume discounts.
2. Customer Acquisition
Merging allows a company to acquire customers quickly rather than taking the time and
spending the money to get established in a new market. The strategic decision to expand across a
region or even into another country is one reason mergers and acquisitions take place. Bank
mergers are often motivated by a strategy of geographic expansion.
3. Retirement of Owner
Many acquisitions take place because the owner wants to retire and reap the rewards of all of his
years of hard work building the company by selling it to another, larger company. He may also
elect to sell only a portion of his shares and keep the rest if he believes the company making the
acquisition will further build the value of the business in the ensuing years.
4. Vertical Integration
From the stage of purchasing raw materials all the way to the finished product appearing on retail
store shelves, a chain of transactions happens in which several companies play a role in creating
the finished product and moving it through the distribution system. Along the way, each
company earns a profit. A company may decide it will be more efficient and profitable to control
the steps in the process itself. An oil refining company may decide to develop the capacity to
drill for oil rather than purchasing the oil from a supplier. One way to quickly develop this
capacity is to acquire a company that already has drilling rights, production equipment and a
transportation infrastructure to deliver the oil to refineries.
5. Synergies
Just like individuals, companies have different relative strengths. When they join together, each
can take advantage of the other's core competency. One company may have achieved excellent
brand recognition in the marketplace but have products near the end of their life cycles with
limited opportunity for sales growth. The other might be a newer company with an exciting and
innovative product line ready to introduce, but limited marketing or distribution channels in
place. Combined, they can quickly build the second company's sales by taking advantage of the
first company's marketing strengths.
 Increasing capabilities: Increased capabilities may come from expanded research and
development opportunities or more robust manufacturing operations (or any range of core
competencies a company wants to increase). Similarly, companies may want to combine
to leverage costly manufacturing operations (as was the hoped for case in the acquisition
of Volvo by Ford).
Capability may not just be a particular department; the capability may come from
acquiring a unique technology platform rather than trying to build it.
Biopharmaceutical companies are a hotbed for M&A activities due to the extreme
investment necessary for successful R&D in the market. In 2011 alone, the four biggest
mergers or acquisitions in the biopharmaceutical industry were valued at over US$75
billion.
 Gaining a competitive advantage or larger market share: Companies may decide to
merge into order to gain a better distribution or marketing network. A company may want
to expand into different markets where a similar company is already operating rather than
start from ground zero, and so the company may just merge with the other company.
This distribution or marketing network gives both companies a wider customer base
practically overnight.
One such acquisition was Japan-based Takeda Pharmaceutical Company’s purchase of
Nycomed, a Switzerland-based pharmaceutical company, in order to speed market
growth in Europe. (That deal was valued at about US$13.6 billion, if you’re counting.)
 Diversifying products or services: Another reason for merging companies is to
complement a current product or service. Two firms may be able to combine their
products or services to gain a competitive edge over others in the marketplace. For
example, in 2008, HP bought EDS to strengthen the services side of their technology
offerings.
 Replacing leadership: In a private company, the company may need to merge or be
acquired if the current owners can’t identify someone within the company to succeed
them. The owners may also wish to cash out to invest their money in something else,
such as retirement!
 Cutting costs: When two companies have similar products or services, combining can
create a large opportunity to reduce costs. When companies merge, frequently they have
 an opportunity to combine locations or reduce operating costs by integrating and
streamlining support functions.
This economic strategy has to do with economies of scale: When the total cost of
production of services or products is lowered as the volume increases, the company
therefore maximizes total profits.
 Surviving: It’s never easy for a company to willingly give up its identity to another
company, but sometimes it is the only option in order for the company to survive. A
number of companies used mergers and acquisitions to grow and survive during the
global financial crisis from 2008 to 2012.
During the financial crisis, many banks merged in order to deleverage failing balance
sheets that otherwise may have put them out of business.
Mergers and acquisitions occur for other reasons, too, but these are some of the most
common. Frequently, companies have multiple reasons for combining.

Specific Motives for Mergers and Acquisitions

Mergers are undertaken if it is believed two or more companies which are merging will be
greater together than sum of its parts. The math of a merger is “1+1=3” or “2+2=5”. Specific
motives for mergers for strategic and financial reasons include the following:

Tax advantages – Tax advantages in mergers will differ from one location to another. In US it
can be utilized if the acquiring firm or target company has a tax loss carry-forward. Tax loss
carry-forward refers to the ability to deduct past losses from the taxable income. This
advantage is available in mergers but not for holding companies. To decrease the attractiveness
of this motive, the US and many other countries limit the amount of tax loss carry-forward that
can be deducted annually from the taxable income of merged companies.

For example, assume the acquiring company is a profitable company and the target company is a
loss maker which incurred losses in the past two years. When the merger is completed, the
operating results of a merged company, which probably will have the identity of the acquiring
company, will be reported on a consolidated basis.
This means the acquiring company will be able to deduct past losses of the target company from
the consolidated taxable income, within limits. Merged firms will continue deducting the tax loss
carry-forward (within limits) until it is recovered completely over a duration of up to 20 years.
Increases liquidity for owners – If the acquiring firm is a large company and target company is
a small organization then the target company’s shareholders may find it very appealing that after
merger their shares’ liquidity and marketability will likely be considerably better.
Gaining access to funds – The acquiring company may have high financial leverage (a lot of
debt) thereby making access to additional external debt financing very limited. Therefore, one of
the motives of the acquiring company to undertake the merger is to merge with a company which
has a healthy liquidity position with low or non-existent financial leverage (very little or no
debt).
Growth – This is one of the most common motives for mergers. It may be cheaper and less risky
for the acquiring company to merge with another provider in a similar line of business than to
expand operations internally. It is also much faster to grow by acquisition.
Sometimes an organization may have a window of opportunity that will be closing fast and the
only way the organization can take advantage of this opportunity is by acquiring a company with
competencies and resources necessary to take advantage of the opportunity. Additional benefits
of growth motivated mergers are that a competitor or potential future competitor is eliminated.

Diversification – Diversification is an external growth strategy and sometimes serves as a

motive for a merger. For example, if an organization operates in a volatile industry, it may
decide to undertake a merger to hedge itself against fluctuations in its own market. Another
example can be when an acquiring company pursues a target company which is located in
different state or country. This is called a geographical diversification.

Related diversification seems to have a better track record. It refers to expanding in the current
market or entering new markets and adding related new products and services to the product or
service line of the acquiring company.
Diversification usually does not deliver value to the shareholders because they can diversify their
portfolio on their own at much lower cost. Therefore, diversification on its own is unlikely to be
sufficient motive for a merger.

Synergistic benefits – Synergy occurs when the whole is greater than sum of its parts. For
example, in terms of math it could be represented as “1+1=3” or as “2+2=5”. Within the context
of mergers, synergy means the performance of firms after a merger (in certain areas and overall)
will be better than the sum of their performances before the merger. For example, a larger
merged company may be able to order larger quantities from suppliers and obtain greater
discounts due to the size of the order.
In the context of mergers, there can be two types of synergy. The first type of synergy results
in economies of scale, which refers to decreased costs. Another type of synergy results in
increased revenues such as cross-selling.
As per the above, economies of scale are derived from synergy. For example, merging
businesses in the same business line will allow elimination of some of the duplicated overhead
costs. A new business will not need two human resources and public relations departments.
Instead, the best employees will be kept and the rest of personnel and unused office space will be
reallocated or no longer used.
Cross-selling is another benefit derived from synergy. If some of the products and services of
merged companies differ then cross-selling those products and services to the other firm’s
customer base can be a cost effective way to increase sales. Being able to effectively meet more
of the customers’ needs may also increase customer loyalty due to higher customer satisfaction
which can occur by effectively providing customers with a broader spectrum of products and
services which meet customers’ needs.
Synergy benefits with regard to an increase in revenue are usually more difficult to achieve than
synergy benefits with regard to decreasing costs. Management also needs to be careful to ensure
that potential synergy benefits are not overestimated as this may result in overpayment for the
target company.

Protection against a hostile takeover – Defensive acquisition is one of the hostile takeover

defense strategies that may be undertaken by target of the hostile takeover to make itself less
attractive to the acquiring company. In such a situation, the target company will acquire another
company as a defensive acquisition and finance such an acquisition through adding substantial
debt. Due to the increased debt of the target company, the acquiring company, which planned the
hostile takeover, will likely lose interest in acquiring the now highly leveraged target company.
Before a defensive acquisition is undertaken, it is important to make sure that such action is
better for shareholders’ wealth than a merger with the acquiring company which started off the
whole process by proposing a hostile takeover.

Acquisition of required managerial skills, assets or technology – The target company may
have managerial skills, assets and/or technology that the acquiring company needs to improve its
performance, profits, revenue, cut costs, reduce productivity etc. This can become a motive for
merger.

Theories of merger

Efficiency Theories Differential Efficiency Operating Synergy Finance Essay

Merger is corporate combination of two or more independent business corporations into a single
enterprise, usually the absorption of one or more firms by a dominant one. A merger may be
accomplished by one firm purchasing the other’s assets with cash or its securities or by
purchasing the other’s shares or stock or by issuing its stock to the other firm’s stockholders in
exchange for their shares in the acquired firm (thus acquiring the other company’s assets and
liabilities).
Mergers are of several different types: horizontal, if both firms produce the same commodity or
service for the same market; market-extensional, if the merged firms produce the same
commodity or service for different markets; or vertical, if a firm acquires either a supplier or a
customer. If the merged business is not related to that of the acquiring firm, the new corporation
is called a conglomerate.
The efficiency theories of merger states that mergers will only occur when they are expected to
generate enough realizable synergies to make the deal beneficial to both parties it is the
symmetric expectations of gains which results in a 'friendly' merger being proposed and
accepted. If the gain in value to the target was not positive, it is suggested, the target firm's
owners would not sell or submit to the acquisition, and if the gains were negative to the bidders'
owners, the bidder would not complete the deal. Hence, if we observe a merger deal, efficiency
theory predicts value creation with positive returns to both the acquirer and the target.

There are different efficiency theories of mergers

a. Differential Efficiency Theory

b. Inefficient Management Theory
c. Operating Synergy
d. Pure Diversification
e. Strategic Realignment to changing environment
f. Undervaluation

Differential Efficiency Theory

A merger in simple words refers to combining of two companies into one. According to
differential theory of merger, one reason for a merger is that if the management of a company X
is more efficient than the management of the company Y than it is better if company X acquires
the company Y and increase the level of the efficiency of the company Y.
According to this theory if some companies are operating at level which is below the optimum
potential of the company than it is better if it is taken over by another company. This theory also
implies that management of a company is also not efficient in running the company and therefore
there are always chances that it will be taken over by other companies.
Differential theory can be particularly helpful when a company decides to take over other
company in the same industry because than it would mean that company which is taking over
other company can expand without much cost because of the efficient utilization of all the
resources. However there is one risk to this, which is if the acquiring company pays too much for
acquiring the company, but in reality the resources do not get utilized in a manner which is
forecasted than it can lead to problems for acquiring company.

Operating Synergy
The operating synergy theory of mergers states that economies of scale exist in industry and that
before a merger take place, the levels of activity that the firms operate at are insufficient to
exploit the economies of scale. Operating economies of scale are achieved through horizontal,
vertical and conglomerate mergers. Operating economies occur due to indivisibilities of
resources like people, equipment and overhead. The productivity of such resources increases
when they are spread over a large number of units of output. For instance, expensive equipment
in manufacturing firms should be utilized at optimum levels so that cost per unit of output
decreases.

Pure Diversification
Diversification provides several benefits to managers, other employees and owners of the firm as
well as to the firm itself. Moreover, diversification through mergers is commonly preferred to
diversification through internal growth, since the firm may lack internal resources or capabilities
required. The timing of diversification is an important factor since there may be several firms
seeking to diversify through mergers at the same time in a particular industry.
Employees: - The employees of a firm develop firm-specific skills over time, which make them
more efficient in their current jobs. These skills are valuable to that firm and job only and not to
any other jobs. Employees thus have fewer opportunities to diversify their sources of earning
income, unlike shareholders who can diversify their portfolio. Consequently, they seek job
security and stability, better opportunities within the firm and higher compensation (promotions).
These needs can be fulfilled through diversification, since the employees can be assigned greater
responsibilities.

Owner-managers: - The owner-manager of a firm is able to retain corporate control over his firm
through diversification and simultaneously reduce the risk involved.
Firm: - A firm builds up information on its employees over time, which helps it to match
employees with jobs within the firm. Managerial teams are thus formed within the firm. This
information is not transferred outside and is specific to the firm. When the firm is shut down,
these teams are destroyed and value is lost. If the firm diversifies, these teams can be shifted
from unproductive activities to productive ones, leading to improved profitability, continuity and
growth of the firm.
Goodwill: - A firm builds up a reputation over time in its relationships with suppliers, creditors,
customers and others, resulting in goodwill. It does this through investments in advertising,
employee training, R&D, organizational development and other strategies. Diversification helps
in preserving its reputation and goodwill.
Financial and tax benefits: - Diversification through mergers also results in financial synergy and
tax benefits. Since diversification reduces risk, it increases the corporate debt capacity and
reduces the present value of future tax liability of the firm.

Strategic Realignment to changing environment

It suggests that the firms use the strategy of Mergers and Acquisitions as ways to rapidly adjust
to changes in their external environments. When a company has an opportunity of growth
available only for a limited period of time slow internal growth may not be sufficient
Change in environment which may necessitate Mergers and Acquisitions may include regulatory,
tax, technology / Globalization impact etc. E.g. Banking/Insurance/Telecom/ Pharmaceuticals
Sometimes the firm may have limited period of growth. Adjustment through internal adjustment
may take time. So, external acquisition will help to reduce time involved.
Otherwise, competitors may exploit the situation

heories merger
1. 1. Presented by: Roja M.V Nanaiah T.G Nandish H.M Madhu S.A
2. 2.  Efficiency theories 1. Differential managerial efficiency 2. Inefficient management 3.
Synergy 4. Pure diversification 5. stratergic Realignment to changing environment 6. Hubris
(winner curse) 7. Q-ratio
3. 3. Cont.… 8. Information and signaling 9. Agency problem 10. Market share/power 11.
Managerialism 12. Tax consideration
4. 4.  DIFFERENTIAL EFFICIENCY It is also called managerial synergy or managerial
efficiency . According to this theory • if the management of firm A is more efficient than the
management of firm B and after firm A acquires firm B the efficiency of firm B is brought upto
the level of efficiency of firm A .Efficiency is increased by merger. • Basis for horizontal
merger • It may be social gain as well as private gain. Lastly level of efficiency in the
economy will be increased
5. 5.  INEFFICIENT MANAGEMENT THEORY • This is similar to the concept of managerial
efficiency but it is different in that inefficient management . • Basis for mergers between firms
when unrelated business i.e., conglomerate merger. • The management in control is not able
to manage asset efficiently ,mergers with another firm can provide the necessary supply of
managerial capabilities . • In this replacement of incompetent managers were the sole motive
for mergers and also manager of the target company will be replaced
6. 6.  SYNERGY Synergy refers to the type of reactions that occur when two substances or
factors combine to produce a greater effect together than that which the sum of the two
operating independently could account for. The ability of a combination of two firms to be
more profitable than the two firms individually. In this companies can create great
shareholders value than if they are operated separately. There are two types of synergy: •
Operating synergy • Financial synergy
7. 7.  In vertical mergers com expands forward towards the customer or backward towards the
source of raw material (suppliers). By acquiring com control over the distribution and
 purchasing bring in economies of scale . In that merging of company in same line of
business such as horizontal Merger it eliminates duplication and concentrate a great volume
of activity in a available facility .  it means reduction of average cost with increase In volume
or production. Because of fixed overhead expenses such as steel ,pharmaceutical, chemical
and aircraft manufacturing . Economies of scale :  Operating synergy Operating synergy
is improved by Economies of scale and Economies of scope . 
8. 8. Economies of scope: Using a specific set of skill or an asset currently employed in
producing a specific product or service . Operating synergy arise from improving operating
efficiency through E/C’s of scale and scope by acquiring a customers ,suppliers ,and
compititors.Cont.…..
9. 9.  Financial synergy occurs as a result of the lower costs of internal financing versus
external financing. A combination of firms with different cash flow positions and investment
opportunities may produce a financia Impact of merger on cost of capital of acquiring firms
or the newly formed firm . Cost of capital can be reduced with financial synergy.  Financial
synergy  The financial synergy theory also states that when the cash flow rate of the
acquirer is greater than that of the acquired firm, capital is relocated to the acquired firm and
its investment opportunities improve. Tax saving is another considerations. When the two
firms merge, their combined debt capacity may be greater than the sum of their individual
capacities before the merger. l synergy effect and achieve lower cost of capital.
10. 10.  It is undertaken to shift from the acquiring com core product line or market into those
that have higher growth prospect . Research reveals that investors do not benefited from
diversification . Investors perceive com diversified in unrelated areas as riskier because they
are difficult for mgt to understand. It may be done including demand for diversification by
managers and other employees ,preservation of organizational and reputational capital,
financial and tax advantage.  Diversification through mergers is commonly preferred to
diversification through internal growth, given that the firm may lack internal resources or
capabilities requires.  PURE DIVERSIFICATION 
11. 11.  STRATEGIC REALIGNMENT To CHANGING ENVIRONMENT. • It suggests that the
firms use the strategy of M&As as ways to rapidly adjust to changes in their external
environments in regulatory framework and technological innovation . When a company has
an opportunity of growth available only for a limited period of time slow internal growth may
not be sufficient. • Technical changes contributes to new products ,industries , market . • The
use of IT technology is likely to encourage mergers which are less expensive and faster way
to acquire new technology and owner knows that how to fill a gap in current offering or to
entering new business .
12. 12.  HUBRIS HYPOTHESIS Hubris hypothesis implies that managers look for acquisition of
firms for their own potential motives and that the economic gains are not the only motivation
for the acquisitions. This theory is particularly evident in case of competitive tender offer to
acquire a target. The urge to win the game often results in the winners curse refers to the
ironic hypothesis that states that the firm which over estimates the value of the target mostly
wins the contest.
13. 13.  Mergers are undertaken when market value of com is less than replacement cost of its
asset Inflation and high interest rate can depress share prices will below the book value of
the firm , high inflation may also raise replacement cost above the book value of asset . 
The ratio relates the market value of shares to replacement value of asset.  Q-ratio 
14. 14. The announcement of mergers negotiation or a tender offer may convey information or
signals to market participants that future cash flows are likely to increase and that future will
increase in future valuesInformation and signaling 
15. 15.  When it takes place where there is a divergence between the goals of management
and owners  Takeover and mergers would be a threat because of inefficiency or agency
problem .  Agency problem 
 16. 16. Increase in the size of the firm is expected to result in market share . The decrease in the
number of firm will increase recognized interdependenceMainly mergers are undertaken to
improve ability to set and maintain prices above competitive level .  Market power /share 
17. 17. Managers may increase the size of the firm through mergers in the beliefs that their
compensation is determined by size but in practice management compensation is
determined by profitability Managerialism 
18. 18.  Unused net operating loss of the target com and the revaluation or writing up of acquired
asset and the tax free status of the deal influence M Tax consideration & Loss
carryforward can be setoff against the combined firm taxable income.A .

Undervaluation
Undervaluation theory states that mergers occur when the market value of the target firm stock
for some reason does not reflect its true or potential value or its value in the hands of alternative
management.
Firms may be able to acquire assets for expansion more cheaply by buying the stocks of existing
firms than by buying or building assets when the target’s stock price is below the replacement
cost of its assets
Overvaluation
 Overvaluation might drive the firm to use its overpriced stocks to acquire other firms. It is
however controversial if deals of this type benefit acquiring firms' existing shareholders. 

Joint Venture

An association of two or more individuals or companies engaged in a solitary business enterprise 
for profit without actualpartnership or incorporation; also called a joint adventure.
A joint venture is a contractual business undertaking between two or more parties. It is similar to a 
business partnership, withone key difference: a partnership generally involves an ongoing, long-
term business relationship, whereas a joint venture isbased on a single business transaction. Indivi
duals or companies choose to enter joint ventures in order to share strengths,minimize risks, and in
crease competitive advantages in the marketplace. Joint ventures can be distinct business units (a 
newbusiness entity may be created for the joint venture) or collaborations between businessesIn a 
collaboration, for example, a high
technology firm may contract with a manufacturer to bring its idea for a product to market; the for
mer provides the know-how, the latter the means.

All joint ventures are initiated by the parties' entering a contract or an agreement that specifies thei
r mutual responsibilitiesand goals. The contract is crucial for avoiding trouble later; the parties m
ust be specific about the intent of their joint ventureas well as aware of its limitations. All joint ven
tures also involve certain rights and duties. The parties have a mutual right to
control the enterprise, a right to share in the profits, and a duty to share in any losses incurred. Eac
h joint venturer has afiduciary responsibility, owes a standard of care to the other members, and ha
s the duty to act in good faith
in matters thatconcern the common interest or the enterprise. A fiduciary  responsibility is a duty to 
act for someone else's benefit whilesubordinating one's personal interests to those of the other pers
on. A joint venture can terminate at a time specified in thecontract, upon the accomplishment of its 
purpose, upon the death of an active member, or if a court decides that seriousdisagreements betw
een the members make its continuation impractical.
Benefits of a Joint Venture
Creating a JV provides an opportunity for the parties to benefit from one another’s expertise.
Other benefits include:
 Enables the parties to offer their customers new products and services
 Helps the parties to save money in operating, marketing, and advertising costs
 Helps the parties save time
 Helps the parties acquire new business associates and referrals
 Enables the parties to gain new technological know-how or new geographical market
territories
 Does not require a long-term commitment
Joint Venture Examples
Since two of the nation’s burgeoning railroads entered into a joint venture to expand rail service
to a rapidly growing West Coast population in themed 1800s, the concept has experienced
phenomenal growth. The idea of being able to join forces with another individual or company
solely for the purpose of taking on a single business enterprise offers solutions to companies
large and small.  Below are two famous joint venture examples.
Kellogg Company Joins with Wilmar International Limited
Anticipating China’s rise to the top of the food and beverage global market, Kellogg Company
entered into a joint venture agreement with Wilmar International Limited for the purpose of
selling and distributing cereal and snack foods to consumers in China. While Kellogg brings to
the table an extensive collection of globally renowned products as well as their expertise in the
industry, Wilmar offers marketing and sales infrastructure in China, including an extensive
distribution network and supply chain. Joining together allows both companies to profit from a
synergistic relationship.
The Joint Venture of Hulu
The 2008 joint venture launched by NBC Universal Television Group (Comcast), Fox
Broadcasting Company (21st Century Fox), and Disney-ABC Television Group (The Walt
Disney Company) to create the enormously popular video streaming website “Hulu” is one
example of a large scale partnering of companies that has been very profitable.
Though individually the companies are competitors over the U.S. airwaves, combining their
efforts to provide streaming content to billions of homes, computers, and mobile devices proved
a powerful way to increase revenues. The success of Hulu has potential buyers lining up with
offers topping $1 billion.

Joint Venture Accounting

Setting up accurate Joint Venture accounting is crucial, and best assigned to a professional. For
accounting purposes, there are three main types of JV, each of which recognizes assets and
liabilities a bit differently:
1. Jointly Controlled Operations – while the JV with jointly controlled operations utilizes
the resources and assets of each of the parties, each party incurs its own expenses, raises its
own financing, and contributes its own assets to the venture.
2. Jointly Controlled Assets – the parties jointly own and control the assets contributed to
the JV, as well as the assets acquired by the venture, each receiving a share of the income
and expenses of the venture.
 3. Jointly Controlled Entities – this type of JV requires the formation of a separate legal
entity in which each party owns an interest. The newly created entity then controls the
assets, liabilities, revenues, and expenses, of the venture. This jointly controlled entity
maintains its own records for accounting purposes, preparing financial statements on a
regular basis. If a party to the venture contributes money or other assets to the jointly
controlled entity, the contribution is regarded as an investment.
The Qualified Joint Venture
IRS law permits certain joint venture businesses owned by a married couple to file business taxes
as a Qualified Joint Venture (QJV), rather than a standard partnership. When filing as a
partnership on IRS Schedule C, only one spouse is credited for social security and Medicare
coverage. Filing as a Qualified Joint Venture, with each spouse reporting a share of the business
profits and losses, enables both spouses to receive social security and Medicare coverage credit.
In order to qualify as a Qualified Joint Venture, the business must meet the following three
conditions:
1. The only members of the JV are a married couple who file a joint IRS tax return
2. Both spouses actively participate in the business
3. Both spouses choose not to treat the business as a partnership
Working With a Joint Venture Broker
An individual experienced in creating, participating in, and dissolving joint ventures may
become a joint venture broker (JV broker), using his expertise to pair up the right projects with
the right people. The JV broker has been specially trained to assist businesses in the creation and
management of Joint Ventures, increasing the chance the venture will be profitable. In addition
to offering suitable partners for a JV, a broker often offers supportive services in marketing and
other strategies for success.
A JV broker generally has a large database of companies in a variety of industries, each looking
for joint venture opportunities. By gathering all of the relevant information and doing the
necessary research, a JV broker saves the individual or company time and money.
Related Legal Terms and Issues
 Asset – Any valuable thing or property owned by a person or entity, regarded as being of
value.
 Intellectual Property – Anything created by the human intellect, such as artistic and
literary works, designs, images, symbols, and names.
 Liabilities – A company’s legal obligations or debts that come up during the course of
business.
 Legal Entity – An individual, company, association, trust, or other organization that is
legally recognized in the eyes of the law. A legal entity is able to enter into contracts, take
on obligations, pay debts, be sued, and be held responsible for its actions.

Sell-off'

A sell-off is the rapid and sustained selling of securities at high volumes that causes a sharp drop
in the value of the traded securities. Sell-offs most commonly occurs with liquid assets such as
stocks, bonds, currencies and commodities. Unexpected adverse news can spark a sell-off, as can
a market rumor, and the sell-off will continue until the selling action becomes exhausted or when
the market believes that the value of the asset has readjusted to fair value. In the case of a market
rumor, if proven false, the sell-off typically reverses course, sometimes in a matter of minutes.

Spinoff

A spinoff is the creation of an independent company through the sale or distribution of new
shares of an existing business or division of a parent company. A spinoff is a type of divestiture.
The spun-off companies are expected to be worth more as independent entities than as parts of a
larger business.
When a corporation spins off a business unit that has its own management structure, it sets it up
as an independent company under a renamed business entity. The company that initiates the
spinoff is referred to as the parent company. A spinoff retains its assets, employees, and
intellectual property from the parent company which gives it support in a number of ways, such
as investing equity in the newly formed firm, and providing legal, technology, or financial
services.
There are a number of reasons why a spinoff may occur. A spinoff may be conducted by a
company so it can focus its resources and better manage the division that has better long-term
potential. Businesses wishing to streamline their operations often sell less productive or
unrelated subsidiary businesses as spinoffs. For example, a company might spin off one of its
mature business units that is experiencing little or no growth so it can focus on a product or
service with higher growth prospects. On the other hand, if a portion of the business is headed in
a different direction and has different strategic priorities from the parent company, it may be
spun off so it can unlock value as an independent operation. A company may also separate a
business unit into its own entity if it has been looking for a buyer to acquire it for a while but was
unsuccessful. For example, the offers to purchase the unit may be unattractive and the parent
company might realize that it can provide more value to its shareholders by spinning off the
business sector.
A corporation creates a spinoff by distributing 100% of its ownership interest in that business
unit as a stock dividend to existing shareholders. It can also offer its existing shareholders a
discount to exchange their shares in the parent company for shares of the spinoff. For example,
an investor could exchange $100 of the parent’s stock for $110 of the spinoff’s stock. Spinoffs
tend to increase returns for shareholders because the newly independent companies can better
focus on their specific products or services. Both the parent and the spinoff tend to perform
better as a result of the spinoff transaction, with the spinoff being the greater performer.
The downside of spinoffs is that their share prices can be more volatile and can tend
to underperform in weak markets and outperform in strong markets. They can also experience
high selling activity; shareholders of the parent may not want the shares of the spinoff they
received because it may not fit their investment criteria. Share price may dip in the short term
because of this selling activity, even if the spinoff’s long-term prospects are positive.

What is a 'Divestiture'?

A divestiture is the partial or full disposal of a business unit through sale, exchange, closure
or bankruptcy. A divestiture most commonly results from a management decision to cease
operating a business unit because it is not part of a core competency. However, it may also occur
if a business unit is deemed to be redundant after a merger or acquisition, if the disposal of a unit
increases the resale value of the firm, or if a court requires the sale of a business unit to improve
market competition.

A divestiture or divestment is the reduction of an asset or business through sale, liquidation,

exchange, closure, or any other means for financial or ethical reasons. It is the opposite
of investment.
HOW IT WORKS (EXAMPLE):
Let's assume Company XYZ is the parent of a food company, a car company, and a clothing
company. If for some reason Company XYZ wants out of the car business, it might divest the
business by selling it to another company, exchanging it for another asset, or closing down the
car company.
WHY IT MATTERS:
Optimists often look at divestitures as ways to streamline (i.e., "get back to basics"), reduce debt,
and enhance shareholder value. Pessimists may view them as concessions that the divested assets
were not performing well.
Acts for Merger and Acquisition in Nepal
2.2.1 Companies Act, 2063: According to this act the provision about Merger of a
company is mentioned in section 177. It also includes 8 subsections which are the
essential criteria for any kind of merger. Those essential criteria included are as
follow:
a. For all public companies they have to pass special resolution in its general
meeting about merger however for the private companies it should be according to
the Memorandum of articles or consensus agreement.
b. A public company merging into a private company or a private company
merging into a public company shall stand as a public company.
c. After passing the resolution they shall make application to Company Registrar
Office within 30 days.

Additional document required are : for public companies they must include a copy
of the decision of general meeting whereas for private companies, copies of the
related provisions contained in the memorandum of articles or consensus
agreement authorizing the merger, last balance sheet and auditor’s report of the
company, copy of the letter of consent in writing of the creditors of the merging
company and of the merged company, valuation of the movable and immovable
properties of , and actual details of the assets and liabilities of , the merging
company.
In addition to these if the merging company and merged company have made a
decision as to the creditors and employees and workers of the merging company, a
copy of such decision; the scheme of arrangement concluded between the
companies for merger with each other.
Once the documents are provided the company registrar office shall give its
decision within three months and after an approval from the company registrar
office for merger all the assets and liabilities of the merging company shall be
deemed to have been transferred to the merged company. All the records are
maintained by the company registrar office in the company registration book.
However if such merger appears to create a monopoly or unfair trade restriction or
to be contrary to public interest the company shall not give an approval.

2.2.2 Bank and Financial Institution Act 2063 (BAFIA): This act has made
‘Provision Relating to Merger of Licensed Institutions’ on Chapter-10 (Sections 68
& 69). According to this act if any licensed institution wants to merge with each
other, they must follow the procedure mentioned in this act.

1. If any licensed institution wishes to be merged with or merging another licensed

institution, both the merging and merged licensed institutions shall adopt a special
resolution to that effect in their respective general meetings and make a joint
application, setting out the following matters, to the Rastra Bank for approval.
2. Audit report of the last fiscal year of the merging licensed institution, along with
its audited balance sheet, Profit and loss account, cash flow statement and other
financial institutions.
3. A copy of the written consent of the creditors of both the merging and merged
licensed institutions to merge or to be merged.
4. Valuation of the movable and immovable properties of and actual details of the
assets and liabilities of the merging licensed institution.
5. A copy of the decision as to the employees of the merging licensed institution.
6. Such other necessary matter as prescribed by the Rastra Bank in relation to the
merger of the licensed institutions.

After receiving application for approval, the central bank shall examine the
documents and returns attached with the application and decide whether or not to
grant approval for the merger of the licensed institutions with each other and give
information thereof to the concerned licensed institutions within forty five days,
and within a period of additional fifteen days if the central bank has demanded any
returns or documents in the course of making decision. However there shall not be
any decision for merger and acquisition of a licensed institution if it is likely to
create an environment of unhealthy competition or to give rise to the monopoly or
controlled practices of any licensed institution in the financial sector. Once the
merger is approved by the central bank all the assets and liabilities of the merging
licensed institution shall maintain records of the merged licensed institutions.
However the central bank may issue necessary directives in relation to the other
procedure relating to the merger of the licensed institutions. Furthermore there
shall be published news in a national newspaper at least once within thirty days
after the date of decision, a notice containing the particulars of the decision made
by it in relation to the merger of any licensed institutions for the information of the
general public.