MERGERS & ACQUISITIONS:

DIFFERENT FORMS
 TYPES OF MERGERS

1. HORIZONTAL MERGER
- Mergers between two firms operating & competing
in the same kind of business activity;
- Main purpose is economies of scale by elimination
of duplication of facilities and operations and broadening
the product line, reduction in investment in working capital,
elimination of competition in a product, reduction in
advertising costs, increase in market share etc.;
- Decrease in no. of firms in an industry;
- Potential to create monopoly.
 TYPES OF MERGERS

2. VERTICAL MERGERS
- Involves merger between firms that are in
different stages of production or value chain;
- Combination of companies that usually have
buyer – seller relationships;
- Backward & Forward integration;
- Motive is to reduce inventories of raw materials
and finished goods, implements its production plans as per
the schedules and better working capital management,
elimination of transaction costs etc.
 TYPES OF MERGERS
3. CONGLOMERATE MERGERS
- Merger between the firms engaged in unrelated types
of business activity;
- Motive is to utilize financial resources, enhance the
stability of acquirer company by creates balance in the compan
y’s total portfolio of diverse products production processes.

Types of Conglomerate mergers:

- Product extension mergers or Concentric mergers
- Geographic market extension merger
- Pure conglomerate merger
- Financial conglomerate
- Managerial conglomerate
 THE MERGER & ACQUISITION PROCESS
The acquisition plan can be divided into a planning stage and
an implementation stage. The planning stage consists of
development of business and the acquisition plans. The
Implementation stage consists of the search, screening,
contacting the target, negotiation, integration and the
evaluation activities.
The process consists of the following:

1. Develop a strategic plan for the business

2. Develop an acquisition plan related to the strategic plan
3. Search candidates for acquisition
4. Screen & prioritize potential candidates
5. Initiate contact with the target
6. Refine valuation, structure the deal, perform due diligence,
and develop financing plan
7. Develop plan for integrating the acquired business
8. Obtain all the necessary approvals,resolve post closing
issues and implement closing
9. Implement post closing integration
10. Conduct the post closing evaluation of acquisition
DEVELOPING THE BUSINESS PLAN

A merger or an acquisition decision is a strategic choice.

The acquisition strategy should fit the company's strategic
goals of increasing the net cash flows and reduce risk.
A business plan communicates a mission or vision for the
firm and a strategy for achieving that mission. A well-
structured business plan consists of the following activities:

i. Determining where to compete i.e., the industry or the

market in which the firm desires to compete.

ii. Determining how to compete. An external industry or the

market analysis can be made to determine how the firm can
most effectively compete in its chosen market(s).
iii. Self-assessment of the firm by conducting an internal
analysis of the firm's strengths and weaknesses relative to the
competition.

iv. Defining the mission statement by summarizing where and

how the firm has chosen to compete and the basic operating
beliefs of the management.

v. Setting objectives by developing quantitative measures of

performance. vi. Selecting the strategy most likely to achieve
the objectives within a reasonable time period subject to
constraints identified in the self-assessment.

The firm's Mergers and Acquisitions strategy should

complement this process, targeting only those industries and
companies that improve the acquirer's strengths or lessen the
weaknesses.
Building the Acquisition Plan

After a proper analysis of the various available options if it is

determined that a merger or an acquisition process is
appropriate to implement the business strategy then an
acquisition plan is prepared. This plan focuses on the tactical
rather than the strategic issues. The acquisition plan defines the
key management objectives for the takeover, resource
constraints, appropriate tactics for implementing the proposed
transactions and the schedule or a time table for completing the
acquisition. It furnishes a proper guidance to those responsible
for successfully completing the transaction by providing
valuable inputs to all the later phases of the acquisition process.
MANAGEMENT OBJECTIVES

Management objectives are both financial and non-financial. The

financial objectives include a minimum rate of return or
operating profit, revenue and cash flow targets to be achieved
within a specified time period. Non-financial objectives address
the motivations for making the acquisition that support the
achievement of the financial returns predetermined in the
business plan.
RESOURCE ASSESSTMENT

The assessment of the resources involves the determination of the

maximum amount of resources available to assign to the merger
or acquisition. This information is useful in the selection of the
right candidate for the merger or the acquisition. The resources
available generally include the financial resources like the internal
cash flows in excess of the normal operating requirements plus
funds from equity and the debt markets. If the target is identified,
resources should also include funds which the combined firm can
raise by issuing equity or by increasing leverage. It is the
management's perception about the likely risks that it would be
exposed to by virtue of acquisition that determines the financial
implications. These risks may be :
i. Operating risk
ii. Financial risk
iii. Overpayment risk
TIME TABLE

A time table or a schedule that recognizes all the key events

that should take place in the acquisition process is the final
component of a properly structured acquisition plan. It
should be both realistic and aggressive to motivate all the
participants in the process to work as fast as possible to
achieve the management objectives established in the
acquisition plan. The schedule should also include the names
of the individuals who will be responsible for ensuring that
the set objectives are achieved.
THE SEARCH PROCESS

After the firm has developed a viable business plan that

requires an acquisition to realize the firm's strategic direction
and an acquisition plan the search for the right candidate for
acquisition begins. The search for a potential acquisition
candidate generally takes place in two stages.
The first stage of the search process involves establishing a
primary screening process. The primary criteria based on which
the search process is based include factors like the industry,
size of the transaction and the geographic location. The size of
the transaction is best defined in terms of the maximum
purchase price a firm is willing to pay. It can be expressed as
the maximum purchase price to earnings, book, cash flow or
revenue ratio or a maximum purchase price stated in terms of
rupees.
THE SEARCH PROCESS cont..

The second stage involves developing the search strategy.

Such strategies generally involve using computerized
database and directory services to identify the prospective
candidates. Law, banking and accounting firms also form
valuable sources from which information can be obtained.
Investment banks, brokers, and leveraged buyout firms are
also useful sources although they are likely to require an
advisory fee.
THE FIRST CONTACT

The contact phase of the process involves meeting the acquisition

candidate and putting forward the proposal of acquisition. It could
run through several distinctively identifiable phases that need a
little more elaboration.
A face to face meeting is then arranged when the target is willing
to entertain the idea of an acquisition. Contact is made through an
intermediary for a medium sized company. The intermediaries
might include members of the acquirer's board of directors,
accounting firm, lender or an investment banker. For a large sized
company contact is made through an intermediary but it is
important that the contact is made with the highest level of the
management of the target firm
DISCUSSING VALUES

Valuation of the target company is the most critical part of a

deal. A conservative valuation can result in collapse of the deal
while an aggressive valuation may create perpetual problems for
the acquiring company. The commonly used valuation methods
are:
i. Discounted Cash Flow Method
ii. Comparable Companies Method
iii. Book Value Method
iv. Market Value Method
PRELIMINARY LEGAL DOCUMENTS

The common first step in a merger or an acquisition transaction

is to negotiate a bilateral confidentiality agreement and a letter of
intent

NEGOTIATIONS & DEFININING THE PURCHASE

PRICE

The negotiation phase of the acquisition process consists of many

activities conducted simultaneously by the various members of
the acquisition team. The actual purchase consideration is
determined during this phase. This is different from the
preliminary valuation of the target company made when the first
contact is made.
STRUCTURING THE DEAL

Deal structuring involves meeting the needs of both the parties by

dealing with issues of risk and reward by constructing an appropriate
set of compensation, legal, tax and accounting structures.
The decisions made throughout the deal structuring process influence
various attributes of the deal. These attributes include how the
ownership is determined, how assets are transferred, how the
interests of the ownership are protected, and how the risk is shared
among the parties to the transaction. Other aspects like the type,
number, and complexity of the documents required for closing, the
type of approval required, and the time needed to complete the
transaction are also dictated by this document. The process starts
with the determination by each party of their initial negotiating
positions, potential risks, alternatives for managing risk, and levels of
tolerance for risk, and the conditions under which either of the
parties would withdraw from the deal.
DUE DILIGENCE

The basic function of due diligence is to assess the benefits

and the costs of a proposed acquisition by inquiring into all
relevant aspects of the past, present and the predictable
future of a business to be purchased. Due diligence is of vital
importance to prevent "unpleasant surprises" after
completing the acquisition. The due diligence should be
thorough and extensive. Both the parties to the transaction
should conduct their own due diligence to get the accurate
assessment of potential risks and rewards.
DEVELOPING THE FINANCING PLAN
One of the very important activities in the negotiation phase is to
develop a financing plan. This activity is a key input in
determining the purchasing price, as it helps in identifying a
practical limit of the amount of the purchase price the buyer can
offer the seller. According to the capital budgeting theory, an
investment should be funded as long as its net present value is
greater than or equal to zero. Applying the concept of capital
budgeting to acquisition financing, we can determine the purchase
price as the present value of the target company plus the synergy
created by combining the acquiring and target companies
discounted at the acquirer's cost of capital.
Based on the purchase price determined, a financing plan is
attached to the acquirer's business and the acquisition plan and is
used to obtain the financing for the transaction. A financing plan is
usually used as a marketing or sales document to negotiate the best
possible terms for financing the proposed transaction.
DEVELOPING THE INTEGRATION PLAN

Making the combined firm perform in line with the

expectations is a difficult task. For the result to be in line
with expectations proper planning is needed before the
agreement of purchase and sale is signed. Without adequate
planning, integration is unlikely to provide the synergies
anticipated by, at the cost included in, and within the time
provided in the acquisition plan.
The benefit packages, contracts for employees, retention
bonuses, etc. all should be negotiated before closing.
Covenants and conditions in the contract also impact
integration. Successful integration of the firms requires
getting the employees in both the firms to work towards the
achievement of the common goals. This is achieved through
trust and mutual cooperation.
CLOSING

It consists of all necessary shareholder, regulatory and third party

consents. All the necessary legal approvals are attained at this
stage. Considerable planning before closing is essential to
minimize the obstructions that a target company may place before
the buyer. Non-compliance with the law may delay or prevent the
merger or acquisition. Many transactions also require approval of
the shareholders of both the acquiring and the target companies
before the ownership is legally transferred.
At the end of the closing phase a closing document is prepared
which is a definitive agreement of purchase and sale that indicates
all the rights and obligations of both the parties before and after
closing. The complexity of the transaction determines the length
of this document.
CONTENTS OF CLOSING DOCUMENT

•Purpose of acquisition
•Price
•Allocation of price
•Payment mechanism
•Assumption of liabilities
•Representations and warranties
•Covenants
•Conditions for closing
•Indemnification
Of
PARTICIPANTS IN RESTRUCTURING ACTIVITIES

1. Investment Bankers – to assist companies in achieving

their strategic financial objectives like growth,
shareholder wealth maximization etc. The services
includes:
- Identification of areas for restructuring
- Buyer/Seller identification
- Structuring and Valuation
- Negotiations
- Legal compliance

2. Lawyers – in the area of tax implication, employee

benefit, real estate, securities and intellectual property &
compliance of all other requirements.
PARTICIPANTS IN RESTRUCTURING ACTIVITIES

3. Accountants - provides services in the area of financial due

diligence, financial structure, optimal tax planning, audit
etc.

4. Valuation Experts – for valuation of the firm by building

model that incorporates various assumptions such as cost &
revenue growth.

5. Institutional investors - for seeking their support for

managements action for mergers & acquisition.

6. Arbitrageurs – They buy the stock and make profit on the

difference between the bid price & current stock price.
They placed themselves in a position to influence the out
come of takeover attempt.
ELEMENTS FOR SUCCESSFUL INTEGRATION

Issues involved in post merger integration ranged from managing

cultural differences to integrating employee compensation and
benefit systems to standardizing operations. The key elements for
a successful post merger integration are as follows:

- Vision
- Strategic Leadership
- Action Plan
THE MERGER INTEGRATION WORK STREAMS MODEL
There are different but strongly interdependent and
continuing sets of responsibilities that are critical for the
success of any merger integration. They are

i. Integration leadership roles and responsibilities,

ii. Integration planning and implementation,
iii. Communication,
iv. Structure and Staffing,
v. Re-recruiting,
vi. Cultural Integration,
vii. Human capital related integration,
viii. Measurement and feedback,
ix. Project Management.
Integration Leadership Roles and Responsibilities

Integration begins with a clear strategic direction, objectives

and a determination of the primary value drivers of the
combined entity. Both the firms come to an agreement
regarding the integration process and the time to be taken to
complete the process. Important governance issues and the
desired level of integration for the the company are discussed
as early as possible since they have a significant impact on the
strategic planning of the business.
Key Management Integration Team Responsibilities
I. Building a master schedule of what should be done, by whom and
by what date.
II. Determining the required economic performance for the
combined entity.
III. Establishing work teams to determine how each function and
business unit will be combined (e.g., structure, job design, and
staffing level.)
IV. Focus the organization on meeting ongoing business
commitments and operational performance targets throughout the
integration process.
V. Create an early warning system consisting of performance
indicators to ensure that both the integration effort and the
business stay as planned.
VI. Monitor and expedite key decisions.
VII. Establish a communication campaign to aggressively and
repeatedly support the integration plan, addressing both internal
(employees) and external (customers, suppliers, etc.)
constituencies.
Planning and Implementation

During the negotiation stages of the merger deal only, the parties to
the deal should begin planning the integration of the two
businesses. Guidance should be obtained to set the appropriate time
to begin integration planning and to establish deal specific
protocols that will govern the sharing of information and the
coordination of activities.
An initial meeting is organized to provide a coordinated start to the
planning process. The objectives of such a meeting include gaining
clear understanding of the task force's purpose, roles,
responsibilities, deadlines and other issues. The leaders of the task
force are given an overview of the deal, the expected synergies and
the strategic parameters that have already been decided as a result
of the negotiations. The meeting gives an early opportunity to
identify and discuss potential functional and cultural differences.
PREPARATION OF THE CHARTER
Given the complexity of merger integration the task force's
initial step in the planning process should be to provide a
detailed, customized charter to help their sub-teams start on the
job quickly. The charter serves several important purposes
which include planning, role clarification, resourcing ,
scheduling, establishment of accountability and responsibility,
etc. The charter typically includes:

Objective Statement: The objective statement describes the goal of the

new organization.
Specific Synergy Targets: This lists all the present known synergy
possibilities that fall under each task force's responsibilities. The description
of the project along with the estimated value of the target, the time for
accomplishment and the list of any other task forces that are linked with this
synergy are given.
Sub-team Resourcing Requirements: It contains the list of key
individuals who should be involved in the various issues and
responsibilities of the task forces.
Data and Documentation Requirements: This gives specific
requests for information that will be needed for sufficient understanding
of the partner organization and its relevant business processes.
Initial Identification of Issues: This component identifies issues,
tasks, responsibilities, policies, decisions, synergy explanations and other
points that require thorough planning for the transition.
INTEGRATION PLAN DOCUMENT
The integration plan document outlines the specific expectations for
the integration plan and gives examples of the types of data and the
level of data required which depends on the level of transaction's
scope, timing, complexity, objectives and the synergy targets that
have been identified.

Steps in the Planning Process

The task force planning and implementation process typically
takes place as follows:
1. Current situation is analyzed to get a basic understanding.
2. Data is collected and documented in information, process
maps and measures.
3. The integration solution is identified and the integration
process designed.
4. Integration plans are developed and the road map for
installation is made.
5. Approval is obtained from the top authorities to go ahead
with the integration project.
6. Detailed preparation of the procedure to implement the
proposed design is made through announcements, scheduling,
etc.
7. Training sessions are conducted to aid in the installation
activities.
8. Every step in the implementation activity is measured and
monitored and any deviation from the standard is adjusted.
9. The integration firm is handed over to the management or
the owners.
10 Finally , the integration project is completed
COMMUNICATION

At the time of a merger or an acquisition transaction

communication has to be used effectively so that rumors do not
become the main source of information to the stakeholders.
Before the public announcement of an acquisition or a merger is
made the integration team should prepare a communication
plan. The plan should contain the key messages as well as the
specifications of target stakeholders and appropriate media for
conveying the messages to each group.
PRINCIPLES OF AN EFFECTIVE COMMUNICATION IN
A MERGER AND ACQUISITION TRANSACTION

Communication should be a priority and linked to the strategic

objectives of integration effort

Communication should be honest

Communication should be proactive
Communication should be consistent
Communication should be repeated through various channels
Communication should be two way
REASONS FOR FAILURE OF MERGERS AND ACQUISITIONS

1. Payment of high price

2. Cultural Clash
3. Overstated Synergies
4. Failure to Integrate Operations
5. Inconsistent Strategy
6. Poor Business Fit
7. Inadequate Due Diligence
8. Over Leverage
9. Boardroom Split
10. Regulatory Delay