Contents

1. Introduction.............................................................................................................................................2
2. Merger and Acquisition...........................................................................................................................3
2.1Types of Mergers and Acquisitions (M&A).........................................................................................3
2.1.1 Mergers:.....................................................................................................................................3
2.1.2 Acquisitions:...............................................................................................................................4
2.1.3 Consolidations:...........................................................................................................................4
2.1.4 Tender Offers:.............................................................................................................................4
2.1.5 Acquisition Assets:......................................................................................................................4
2.1.6 Management Acquisitions:.........................................................................................................4
2.2 Types of Mergers:..............................................................................................................................5
Some of the reason for companies to M&A are:....................................................................................5
 Synergies: Two firms working together can increase performance and cost tends to drop..........5
 Growth: Market share grows without any heavy workload............................................................5
 Increase supply chain: Buying distributor or supplier reduces cos.................................................5
 Eliminate competition: Helps in eliminating future competition and have more market share.. . .5
3. Value, Advantages and Disadvantages OF M&A...............................................................................7
3.1Advantages of M&A:...........................................................................................................................8
3.1.1Growth.........................................................................................................................................8
3.1.2Competition.................................................................................................................................8
3.1.3Synergies.....................................................................................................................................8
3.1.4Domination..................................................................................................................................8
3.1.5Tax Purposes................................................................................................................................8
3.2Disadvantages:......................................................................................................................................9
3.2.1Integration Risk................................................................................................................................9
3.2.2Overpayment...................................................................................................................................9
3.2.3Culture Clash...................................................................................................................................9
3.2.4Diseconomies of Scale.....................................................................................................................9
3.2.5Financial Burden............................................................................................................................10
3.2.5Sunk Costs.....................................................................................................................................10
4. Failed M&A-Citicorp and Travelers Group.....................................................................................11

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 1. Introduction
When two companies come together to be one entity then it is called Merger and Acquisition. All
of its assets, equity, brand image and liabilities are shared to be one entity. Because of this more
often than not the company thrives and works efficiently.

Both Merger and acquisition are referred commonly in the same way, as both reflect one
single company but there is difference between Merger and Acquisition. When the companies
join by mutual consent then it is called merger. Some form of Share allocation is done by the
initiating firm to the other firm, meaning, shares are bought of the smaller firm by the bigger
firm, hence becoming a single company. Whereas, in acquisition, there is aggressive take over
resulting in total control of the other firm. Shareholders of the other firm no longer have stake in
the company as their shares are bought.

Now a days it has become common for companies or firm to merge like Facebook and
Instagram, Amazon and whole foods etc. Due to the growing technology and globalization,
Mergers and Acquisition are increasing rapidly. There are many advantages to Mergers and
acquisition like Synergies, elimination of threat, growth etc. But it is also a long process that
requires its due diligence and can be devastating if it doesn’t work out. Some of the problems are
lack of transparency, culture clash, integration risk, weak financial reporting etc.

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2. Merger and Acquisition

Merger and Acquisition happens when two companies become one and share the liability, assets,
brand image etc. It can either be a hostile takeover meaning Acquisition or done on mutual
understanding meaning Merger (two firms coming together). They are often said together but
have slight difference.

Merger usually happens between two firms of same sizes that become one and
work collectively. This is also called Merger of Equals. For example, when company A and B
merge they will lose their respective name and will be called, let’s say, company C. In this
process, both the companies will give up their individual shares and a new company stock will
be created. A merger can also be called a purchase deal when both CEOs agree to join hands
together for the betterment of the company.

Hostile takeover or unfriendly shakedown, where the merger is forced upon to a target
company is called Acquisition. This is the difference between a Merger and an Acquisition. So
the tone of the message (hostile or friendly) delivered to the other company’s shareholders,
board of directors and employees indicates whether it is a merger or acquisition.

2.1Types of Mergers and Acquisitions (M&A)

2.1.1 Mergers:
When two companies decide to come together sharing their strength and weaknesses, then it is
called Merger. For example, Digital Equipment Corporation and Compaq merged in 1998,
where Compaq engrossed the Digital Equipment Corporation and became CPQ. Compaq again
in 2002 merged with Hewlett-Packard’s and became HPQ.

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2.1.2 Acquisitions:
In simple acquisition, majority of the shares are bought of a company by the acquiring company
and the name of the company or its organizational structure are not altered. For example,
Manulife Financial Corporation acquired John Hancock Financial Services in 2004 and both
company retained their organizational structure and names.

2.1.3 Consolidations:
In this type of M&A, a new company is formed combining core businesses and leaving behind
old corporate structure. The consolidation must be approved by shareholders of both company
and common equity in share is created in new firm. For example, Citicorp in 1998 united with
Travelers Insurance Group announcing consolidation and formed Citigroup.

2.1.4 Tender Offers:

A company in tender offer purchases the outstanding stock of another company in a specific
rate which is different to the market price. The offers is directly laid out by the acquiring
company to the other company’s shareholder, ignoring the board of directors and management
of the company. For example, Johnson and Johnson in 2008 made a tender offer of $438million
to acquire Omrix Biopharmaceuticals. The tender offer was accepted and a deal was signed.

2.1.5 Acquisition Assets:

The assets of one company is directly bought by another company in acquisition of assets. The
shareholders must approve the acquiring of the assets. This usually happens due to bankruptcy.

2.1.6 Management Acquisitions:

It is also known as management-led buyout (MBO). In this type of acquisition, controlling stake
in another firm are purchased by a company’s executive taking it private. The former executive
usually partner with former corporate officer or with a financier for the purpose of funding a
transaction. For this to happen shareholders in majority need to approve and transactions are
usually done in debt, disproportionately. For example, Dell Corporation was acquired by its
founder Michael Dell in 2013.

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2.2 Types of Mergers:

Mergers can also be done in variety of different ways, depending on the companies involved in
the deal:

 Horizontal merger: companies in direct competition that share same markets and share.

 Vertical merger: A company and customer or a company and supplier. For example a
cone maker merging with ice cream maker.

 Congeneric mergers: Different two companies that sell to the same consumer in different
way. For example, a cable company and TV manufacturer.

 Market-extension merger: Same product selling two companies in different market.

 Product-extension merger: Related but different product selling two companies.

 Conglomeration: Companies that have no common area of business

Some of the reason for companies to M&A are:

 Synergies: Two firms working together can increase performance and cost tends to drop.

 Growth: Market share grows without any heavy workload.

 Increase supply chain: Buying distributor or supplier reduces cos.

 Eliminate competition: Helps in eliminating future competition and have more market
share.

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There is also a process that must be done to complete M&A. This process can take from
6months to a Year. Also it’s a risky and complicated process where due diligence is required.

Process required to do before doing M&A are as follows:

 Developing Acquisition Strategy

 Setting search M&A criteria

 Looking for prospective Targets

 Creating a Plan for M&A

 Doing valuation analysis

 Negotiations

 Due diligence on M&A

 Buying and Selling of Contract

 Financing strategy for Acquisition

 Closing and integrating acquisition

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3. Value, Advantages and Disadvantages OF M&A

A good merger and acquisition can help a company create value for organization. It has a great
effect on company’s growth and long term plans. It also comes with its own sets of risk that’s
why analyzing and valuing acquisition is an important step of M&A. M&A which falls right will
be a great boon to the companies. When two companies that are involved in similar type of
business merge then they help tap each other’s client or customers. This increases company’s
brand image, lowers financial burden without much weightlifting and propels company forward
into greater heights. It also helps in removing market threats. M&A can affect the company in
many ways like its capital structure, growth prospects and stock price. Some of the companies
have benefited highly from M&A. For example, Gilead Sciences (GILD) - largest maker of HIV
medication decided to merge with Pharmasset, with an 11billion dollar offer. Pharmasset was an
experimental developer for hepatitis C treatment. $137 in cash was offered by Gilead for every
share of Pharmasset, For Gilead it was considered a risky deal, and its share lowered by 9% on
the day of announcement. But everything worked out and the deal was closed with Pharmasset.
After the merger, Gilead market share rose to $159billion dollars from its initial market share of
$39billion before the merger. Therefore, from here we can see targeting the right company,
doing your research and bringing the plan to action with due diligence brings value to the
company.

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 Similarly, yes, it has its risk factors that’s why it’s important to do due diligence before
doing M&A. Companies have been destroyed because of mergers and acquisition didn’t go as
planned. There are lot of things that need to be considered. For example, the world’s biggest
online service, America Online in January 2000 made a bold offer to buy Time Warner, a media
giant in an all-stock deal. At the time America Online made the offer its shares had risen
immensely, but things didn’t go as they had planned. In March 2000, they had Two year slide of
almost 80% and therefore became a unit of Time Warner. The reason for this was the corporate
clash between the two companies. Later Time Warner sold America Online for a 3.2billion
valuation, nowhere near its valuation in its prime days. The original deal between America
Online and Time Warner of $165billion is still one of the largest M&A transactions.

Therefore, Yes M&A can add value to your organization but it is also a big risk if done
without proper planning and due diligence.

3.1Advantages of M&A:

3.1.1Growth
Various companies have used M&A to grow and beat their rivals. Together using the resources
knowledge and manpower, a company can achieve what alone it can take decades to achieve
organically.

3.1.2Competition
One of the primary reason for M&A to occur regularly. It’s important to grab a promising rising
company with good portfolio of assets before the opponent does. This usually creates frantic
feeding in markets. Examples of frantic M&A activity are telecoms in 1990s, energy and
commodity in 2006-07 and in 2012-14 biotech companies.

3.1.3Synergies
Synergies and economic of scale is another factor that makes companies merge. When two
company with similar businesses band together then synergies occur. Working in the same
market helps them to use each other’s customers, facilities, market knowledge etc. which in turn
saves money, boosts share earnings and make M&A an attractive transaction

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3.1.4Domination
To dominate the sector they are in, companies use M&A. When two power house merge they
will dominate the market and eliminate any future threats. This will improve the company’s
market standing and help them grow exponentially.

3.1.5Tax Purposes
For tax reasons also M&A are used. Rather than an explicit move this can be an implicit move.
Buying a foreign company and moving base to that country can help in reducing tax bill.

3.2Disadvantages:

3.2.1Integration Risk

When two companies come together, it’s difficult to merge the operations of the companies. It
can be very difficult to find balance, which can result to failure to achieve the desired target. This
can cause a attractive looking merger to fall flat and disappoint.

3.2.2Overpayment

While buying a very lucrative company sometimes the buying company pays more than needed
to thrash its rival. Once the acquisition has happened, the company can find it hard to find its
anticipated goal. Such overpayment will be a headache to the company for a long time if things
don’t go as planned.

3.2.3Culture Clash

M&A can fail because of the corporate culture clash with the partner. This will result in toxic
work environment leading to issues, clash etc. The goal of the company will not be fulfilled and
the company will collapse. America Online and Time warner is an example of failed M&A due
to culture clash.

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3.2.4Diseconomies of Scale

The aim of any merger is to benefit from the synergies and economies of scale. However this
does not always happen. What can happen sometime is that the firm becomes too large and
burdensome to handle and become useless with time. For example, merger of K-mart and Sears
was valued at $11billion in United States in 2005. But, Sears made huge losses of billions after
merger and went bankrupt. The synergies of combined administrative costs, supply chain and
product line never delivered.

3.2.5Financial Burden

Merger and Acquisition has one major disadvantage and that is it can cause huge debt.
Acquiring a firm can take huge amount of money and time. Also the firm that your company is
merging with can have huge debts. After merger, together the company will have huge sum of
debt and that can drag a business to the ground. For example, Mannesmann was purchased by
Vodafone in 1999 for a record $183billion. This came at a huge price, and Vodafone write off
over excess of 23billion in losses in 2013.

3.2.5Sunk Costs

Merger and acquisition happen with a lot of accounting and legal work which can costs
millions. If the merger does not happen then the company loses huge amount of money. If the
merger happens still it is a lot of money added to the actual price.

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4. Failed M&A-Citicorp and Travelers Group

Citicorp and Travelers Group

On April 7, 1998 Citicorp and Travelers Group announced plans of merger involving $83billion.
They wanted to create world’s largest financial service firm, including investment, banking and
insurance activities. The new corporation would take the name Citigroup, and was estimated to
have over 100 million customers in 100+ countries and employ more than 160,000 people selling
wide range of products and services.
As part of the merger deal Travelers would get the chance to promote insurance and
mutual funds to Citicorp’s clientele. In return Citigroup gained access to traveler’s client of
insurance buyers and investors. Through this deal it was expected that other companies would
merge through pressure created and see if financial supermarket was what customers wanted.
The purpose of the merger was to create value but problems arose. There were cultural
integration issues because of the merger. Citi’s faced significant problems like outdated
technology, inflated cost and employee retention because of the merger. In 279days of merger
Citi’s cumulative return was 35.5% and Travelers cumulative return was 41.50%. As the
expected synergies didn’t prove fruitful and Citi spun Travelers into a subsidiary and was sold to
MetLife in 2005.

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This looked like a good merger but sometimes in haste to accomplish something we forget to
evaluate and analyze or use the tools in hand to better understand the merger. Similar thing
happened to this merger. They didn’t account cultural integration which proved fatal for them.
Also, the company was too big to handle, the costs were too high.

Therefore it is important before doing a Merger and Acquisition to do due diligence.

There are tools that they could have used before merger to understand better what they are
diving into like:

 Developing Acquisition Strategy:

Having a clear idea of what you want from the merger is important. It helps in
developing further strategy.

 Setting search M&A criteria

Selecting key criteria to target particular companies.

 Creating a Plan for M&A

After finding suitable prospects, talking to them and knowing about the value of
company you are about to merge with. This helps in forming concrete plans.

 Doing valuation analysis

Not paying more than necessary amount as it will be a huge financial burden after
merger.

 Negotiations

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 Try to get the best value for the company and less financial burdens.

 Due diligence on M&A

Understanding what the other firms bring to the table and planning accordingly.

 Financing strategy for Acquisition

Planning for the money to acquire the business.

 Closing and integrating acquisition

After the above process the transition should be with less hiccups and more synergized.

If above mentioned precautions or tools were used by Citi and Traveler, then they would have
better understood what they were getting into and be prepared to solve the problems arising.
They could have made a better decision regarding if merger was the correct path to take.
Therefore, it’s important to do due diligence before jumping on the boat.

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