Kanika sharma�assistant prof. in commerce

MERGER

AND

ACQUISITION

INTRODUCTION

• Merger and acquistion is another strategy of entering into international business. under this strategy a parent company in a particular country joins hands with some existing company of a foreign country. Merger and acquisitions are basically done to expand company’s reach , expansion into new segments or gain market share .

MERGER

• Two companies join hands, go into liquidation to form a new company .
• Country 1 + Country 2 = In host country

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• X Co. Y Co. ABC Ltd
• (old) (old) new company takes (new)
• (liquidated) (liquidated) over their business

EXAMPLES OF MERGES

TYPES OF MERGER

• Conglomerate Merger
• Horizontal Merger
• Vertical Merger
• Market Extension Merger
• Product Extension Merger

TYPES OF MERGER

• 1. Conglomerate Merger
• A merger between firms that are involved in totally unrelated business activities.
• Ex: Car with telecom

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Although the deals were strictly acquisitions because more cash than shares was exchanged in the deals, Pepsico’s acquisitions of companies like Wendy’s, Burger King, and Pizza Hut in the 1970s and 1980s represent good examples of conglomerate ‘mergers’ with the selling of soft drinks having little relevance to the selling of pizzas (although, it should be noted that all of these restaurants still only have Pepsi on top, decades after the original transactions).

Example

2. Horizontal Merger

A merger of business units performing similar activities in order to create a larger organisation with more market share.

Ex: Facebook with Whatsapp

TYPES OF MERGER

For example, if KFC and McDonalds were subject to a merger or acquisition, it would be known as horizontal. Both firms operate in the fast-food market, selling similar goods.

Through this form of integration, it is likely to result in synergies. As the two firms are in the same industry, they are likely to have areas of the business that overlap.

Example

TYPES OF MERGER

• 3. Vertical Merger
• Two companies combining together to have a buyer - seller relationship . A vertical merger joins two companies that may not complete with each other but exist in the same supply chain. Ex: 1.Zomato with hotel’s

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In the strictest sense of the term ‘merger’, vertical mergers are extremely rare: The reality is that vertical transactions are usually acquisitions, as a much larger company buys one of its partners or suppliers, enabling it to ensure better control of its value chain. An example of this occurred when UK frozen food retailer Iceland acquired Loxton Foods in 2012, allowing it to gain control of one of the many producers it worked with to bring food production in-house.

Example

4.Market Extension Merger

A merger between two companies that deal in same products separate markets. Its main purpose is to get access to a bigger market.

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TYPES OF MERGER

In early 2022, two innovative shipbuilders, Wight Shipyard from the UK, and OCEA, from France combined in an all-share merger that gave both increased access to both markets, as well as enhanced resources to take on larger players. The market extension merger enabled both companies to double their size.

Example

5.Product Extension Merger

• A merger that takes place between two firms that deal in products that are related to each other and operate in same market. This is done to have an access to bigger set of consumers and high profitability. This kind of merger is also known as Congeneric Merger.
• Ex: PepsiCo with Pizza Hut

The $90 billion all-share merger between mining firm Xstrata and commodities trader Glencore in 2012 provides an interesting example of a product extension merger. Under the deal, the players said that they would create a ‘natural resources group’ that would be able to trade the commodities as soon as they were mined. In this respect, it could also be seen as a vertical merger, in that one was upstream of the value chain of the other.

Example

Advantages of Merger

• 1. Increases market share
• When companies merge, the new company gains a larger market share and gets ahead in the competition.
• 2. Reduces the cost of operations
• Companies can achieve economies of scale, such as bulk buying of raw materials, which can result in cost reductions. The investments on assets are now spread out over a larger output, which leads to technical economies.
• 3. Avoids replication
• Some companies producing similar products may merge to avoid duplication and eliminate competition. It also results in reduced prices for the customers.
• 4. Expands business into new geographic areas
• A company seeking to expand its business in a certain geographical area may merge with another similar company operating in the same area to get the business started.
• 5. Prevents closure of an unprofitable business
• Mergers can save a company from going bankrupt and also save many jobs.

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Disadvantages of Merger

• 1. Raises prices of products or services
• A merger results in reduced competition and a larger market share. Thus, the new company can gain a monopoly and increase the prices of its products or services.
• 2. Creates gaps in communication
• The companies that have agreed to merge may have different cultures. It may result in a gap in communication and affect the performance of the employees.
• 3. Creates unemployment
• In an aggressive merger, a company may opt to eliminate the underperforming assets of the other company. It may result in employees losing their jobs.
• 4. Prevents economies of scale
• In cases where there is little in common between the companies, it may be difficult to gain synergies. Also, a bigger company may be unable to motivate employees and achieve the same degree of control. Thus, the new company may not be able to achieve economies of scale.

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WHY DO WE NEED MERGER?

• After the merger, companies will secure more resources and the scale of operations will increase.
• Companies may undergo a merger to benefit their shareholders. The existing shareholders of the original organizations receive shares in the new company after the merger.
• Companies may agree for a merger to enter new markets or diversify their offering of products and services, consequently increasing profits.
• Mergers also take place when companies want to acquire assets that would take time to develop internally.
• To lower the tax liability, a company generating substantial taxable income may look to merge with a company with significant tax loss carry forward.
• A merger between companies will eliminate competition among them, thus reducing the advertising price of the products. In addition, the reduction in prices will benefit customers and eventually increase sales.
• Mergers may result in better planning and utilization of financial resources.

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ACQUISITION

• One existing company takes over another existing company after its liquidation.

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• Country 1 Country 2

X Co. Takes over Y Co.

(Liquidated)

EXAMPLES

Acquire flipkart

TATA Company acquire

Advantages

• Improves a struggling business.
• Obtain funds for development.
• Gain access to quality staff with adequate skills.
• Diversify the business.
• Enhance market power.
• Ensure access to more capital.
• Reduction of training costs.
• Increase your company's competitiveness.

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DISADVANTAGES

• Culture conflicts between two companies.
• Job cuts/ increase in unemployment.
• Clash between objectives between companies.
• Low productivity.
• Employee morale may decrease.
• Choosing the right company to acquire, otherwise it may damage the productive company.
• Brand value can be damaged.
• Production problems.

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Difference between merger and acquisition

CONCLUSION

In real terms, the reason behind mergers and amalgamations is that the two companies are more valuable, profitable than individual companies and that the shareholder value is also over and above that of the sum of the two companies. Reason being, the expansion is not limited by internal resources, no drain on working capital - can use exchange of stocks, is attractive as tax benefit and above all can consolidate industry - increase firm's market power.