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Merger Strategies and Motives

Strategies play an integral role in mergers and acquisitions. Key strategies for a successful merger include determining business drivers, understanding the target market, assessing integration processes, and gaining approval from management. Proper strategic planning is essential to fulfill the desired objectives of a merger.

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Gaurav Rathaur
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128 views

Merger Strategies and Motives

Strategies play an integral role in mergers and acquisitions. Key strategies for a successful merger include determining business drivers, understanding the target market, assessing integration processes, and gaining approval from management. Proper strategic planning is essential to fulfill the desired objectives of a merger.

Uploaded by

Gaurav Rathaur
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Strategies play an integral role when it comes to merger and acquisition.

A
sound strategic decision and procedure is very important to ensure success
and fulfilling of expected desires. Every company has different cultures and
follows different strategies to define their merger. Some take experience from
the past associations, some take lessons from the associations of their known
businesses, and some hear their own voice and move ahead without wise
evaluation and examination.

Following are some of the most essential strategies of merger and


acquisition that can work wonders in the process:
The first and foremost thing is to determine business plan drivers. It is very
important to convert business strategies to set of drivers or a source of
motivation to help the merger succeed in all possible ways.
There should be a strong understanding of the intended business market,
market share, and the technological requirements and geographic location of
the business. The company should also understand and evaluate all the risks
involved and the relative impact on the business.

Then there is an important need to assess the market by deciding


the growth factors through future market opportunities, recent
trends, and customer's feedback.
The integration process should be taken in line with consent of the
management from both the companies venturing into the merger.
Restructuring plans and future parameters should be decided with
exchange of information and knowledge from both ends. This
involves considering the work culture, employee selection, and the
working environment as well.
At the end, ensure that all those involved in the merger including
management of the merger companies, stakeholders, board
members, and investors agree on the defined strategies. Once
approved, the merger can be taken forward to finalizing a deal.

Friedrich Trautwein, Merger Motives and


Merger Prescriptions, Strategic
Management Journal, 1990, has
summarized seven major theories or
motives of M&A.
Monoploy Theory
Efficiency Theory

Raider Theory
Valuation Theory
Empire Building Theory
Process Theory
Disturbance Theory

Market leaders trying to consolidate their


position further
Profitable and cash-rich companies trying
to gain market leadership
Market entry startegy

1-7

Revenue generating synergies ICICI with ICICI


Bank
Cost reduction synergies
Manufacturing synergy Daiichi Sankyo with
Ranbaxy
Operations synergy Oriental Bank of
Commerce takeover of Global Trust Bank
Marketing synergy HLL acquired Lakme
Financial synergy
Tax Synergy

Valuation Theory;

when acquirer has better information about


valuation of the target company than the
stock market as a whole,
In this case the acquirer company estimates
the real intrinsic value to be much higher than
the present market capitalization of the
company,
Therefore, an acquirer is always ready to pay
premium over the present market price to
acquire the control over the target company

Is in context specially with PE Funds,


Where the acquirer acquires controlling stake in
cash needy company at much lower valuation,
Just to transfer wealth from existing shareholders
to themselves,
In India so far as it is possible with unlisted
companies
As SEBI has fixed the minimum prices of shares,
below which shares can not be allotted to PE
funds,
The minimum price is based on past 26 weeks
prices of shares,

Is planed and executed to expanding


own empire rather than creating wealth
for shareholders,
This theory is based on believe of
corporate world that size matters,
This kind of acquisition are more or less
driven by ego.

Motives behind Mergers: The following are the


motivations behind any merger that occurs between the
companies:
Synergies: This is the most common reason for a merger. It
is expected that when two companies merge to form a new
bigger company, the value of the new entity will be more
than the combined value of two separate companies.
Generally, there are two types of synergies that are aimed
for:
Cost Synergies: Synergies that reduce costs through the
economies of scale in various divisions of the company, viz.
research and development, procurement, sales and
marketing, manufacturing, distribution and general
administration. Revenue Synergies: Synergies that increase
the overall revenue through expanded markets, products

Rapid Growth: Generally, any company has two options


to grow, viz. organic growth and external growth.
Organic growth is achieved by an increase in sales by
making internal investments. External growth is achieved
by an increase in sales by buying external resources
through mergers and acquisitions. Often, companies
prefer to grow externally, especially the ones in a mature
industry as the industry offers limited opportunities for
growth. It is less risky to have external growth.
Market Power: A horizontal merger in a small industry
will definitely help in increasing the market share. An
increased market share will, in turn, give the power to
influence prices. In fact, monopoly is an extreme example
of a horizontal merger. A vertical merger can also
increase the market power by reducing the dependence
on external suppliers.

Unique Capabilities: Not every company can have all


the resources or strengths required for a successful
growth. There will come a time when the company wants
to acquire the competencies and resources that it lacks.
This can easily be done through mergers and
acquisitions in a very cost effective way as compared to
developing the capabilities internally.
Diversification: Diversification of the companys total
cash flows is a reason argued by managers for the
mergers. However, shareholders are not convinced by
this reason as they can easily diversify their investments
themselves at the portfolio level. This is cheaper and less
painful than the company going through the process of
merging with another company to achieve synergies
created by diversification.

Bootstrapping EPS: A merger deal might have a


bootstrapping effect on the companys EPS. This occurs
when the acquiring companys shares are trading at a
higher P/E ratio than the P/E of the target company and
the P/E does not decrease even after the merger. Such
an effect increases the current EPS of the company at the
expense of decreased future EPS and decreased growth
prospects.
Personal Incentives for Managers: The executives of a
company might want the merger to satisfy their personal
goals rather than maximize the shareholder value. A
post-merger bigger company translates into more
prestige and greater power for them. Even the
compensation increases in a bigger company. Thus, the
managers will prefer the merger to increase the size of
their company.

Tax Issues: A company with a large taxable income will


look at merging with a company with large carry
forwards tax losses. By doing so, the acquiring company
can lower the tax liability. A merger purely for reducing
tax liabilities will not be approved by regulators,
however, companies can hide this reason under other
strong motivations to merge.
Unlocking Hidden Value: A struggling company may be
bought by an acquirer to unlock its hidden value. The
acquiring company may believe that by making some
improvements in management and organizational
structure and adding more resources, it can make the
company perform better. Of course, the acquirer will pay
a lower price than the market price.

International Goals: International mergers and


acquisitions have become more common and important
in todays business world. Like with mergers in ones own
country, these international deals are also motivated by
the above-mentioned reasons. However, there are
several reasons specifically for international mergers as
follows:
Unique products can be marketed in new markets.
Transfer of technology to new markets.
Exploiting market inefficiencies.
Overcoming disadvantageous policies of the
government.
Continued support to international clients.

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