Mergers & Acquisitions can take place

• by purchasing assets
• by purchasing common shares
• by exchange of shares for assets
• by exchanging shares for shares

Types of Mergers and Acquisitions:

Merger or amalgamation may take two forms: merger through absorption or merger through consolidation. Mergers can also be classified into three types from an economic perspective depending on the business combinations, whether in the same industry or not, into horizontal ( two firms are in the same industry), vertical (at different production stages or value chain) and conglomerate (unrelated industries). From a legal perspective, there are different types of mergers like short form merger, statutory merger, subsidiary merger and merger of equals.

Reasons for Mergers and Acquisitions:

• Financial synergy for lower cost of capital
• Improving company’s performance and accelerate growth
• Economies of scale
• Diversification for higher growth products or markets
• To increase market share and positioning giving broader market access
• Strategic realignment and technological change
• Tax considerations
• Under valued target
• Diversification of risk

Principle behind any M&A is 2+2=5

There is always synergy value created by the joining or merger of two companies. The synergy value can be seen either through the Revenues (higher revenues), Expenses (lowering of expenses) or the cost of capital (lowering of overall cost of capital).

Three important considerations should be taken into account

• The company must be willing to take the risk and vigilantly make investments to benefit fully from the merger as the competitors and the industry take heed quickly
• To reduce and diversify risk, multiple bets must be made, in order to narrow down to the one that will prove fruitful
• The management of the acquiring firm must learn to be resilient, patient and be able to adopt to the change owing to ever-changing business dynamics in the industry

Stages involved in any M&A:

• Phase 1: Pre-acquisition review: this would include self assessment of the acquiring company with regards to the need for M&A, ascertain the valuation (undervalued is the key) and chalk out the growth plan through the target.
• Phase 2: Search and screen targets: This would include searching for the possible apt takeover candidates. This process is mainly to scan for a good strategic fit for the acquiring company.
• Phase 3: Investigate and valuation of the target: Once the appropriate company is shortlisted through primary screening, detailed analysis of the target company has to be done. This is also referred to as due diligence
• Phase 4: Acquire the target through negotiations: Once the target company is selected, the next step is to start negotiations to come to consensus for a negotiated merger or a bear hug. This brings both the companies to agree mutually to the deal for the long term working of the M&A.
• Phase 5: Post merger integration: If all the above steps fall in place, there is a formal announcement of the agreement of merger by both the participating companies.

Reasons for the failure of M&A – Analyzed during the stages of M&A:

• Poor strategic fit: Wide difference in objectives and strategies of the company
• Poorly managed Integration: Integration is often poorly managed without planning and design. This leads to failure of implementation
• Incomplete due diligence: Inadequate due diligence can lead to failure of M&A as it is the crux of the entire strategy
• Overly optimistic: Too optimistic projections about the target company leads to bad decisions and failure of the M&A

Benefits of Combining Forces

Some of the benefits of M&A deals have to do with efficiencies and others have to do with capabilities, such as:

• Improved economies of scale. By being able to purchase raw materials in greater quantities, for example, costs can be reduced.
• Increased market share. Assuming the two companies are in the same industry, bringing their resources together may result in larger market share.
• Increased distribution capabilities. By expanding geographically, companies may be able to add to their distribution network or expand its geographic service area.
• Reduced labor costs. Eliminating staffing redundancies can help reduce costs.
• Improved labor talent. Expanding the labor pool from which the new, larger company can draw can aid in growth and development.
• Enhanced financial resources. The financial wherewithal of two companies is generally greater than one alone, making new investments possible.

Potential Drawbacks

Although mergers and acquisitions are expensive undertakings, there are potential rewards. And there are disadvantages, or reasons not to purchase an acquisition, including:

• Large expenses associated with buying a company, especially if it does not want to be acquired. (If an investor has a controlling interest in another company, however, it may not have a choice regarding whether it is acquired.)
• Higher legal costs, which can be exorbitant if a company does not want to be acquired.
• The opportunity cost of having to forego other deals in order to focus on bringing two companies together.
• The possibility of a negative reaction to a merger or acquisition, which drives the company’s stock price lower.
• M&A is a growth strategy corporations often use to quickly increase its size, service area, talent pool, customer base, and resources in one fell swoop. The process is costly, however, so the businesses need to be sure the advantage to be gained is substantial.

Mergers and Acquisitions Case Study:

Case Study 1: Sun Pharmaceuticals acquires Ranbaxy:
The deal has been completed: The companies have got the approval of merger from different authorities. This is a classic example of a share swap deal. As per the deal, Ranbaxy shareholders will get four shares of Sun Pharma for every five shares held by them, leading to 16.4% dilution in the equity capital of Sun Pharma (total equity value is USD3.2bn and the deal size is USD4bn (valuing Ranbaxy at 2.2 times last 12 months sales).

Reason for the acquisition: This is a good acquisition for Sun Pharma as it will help the company to fill in its therapeutic gaps in the US, get better access to emerging markets and also strengthen its presence in the domestic market. Sun Pharma will also become the number one generic company in the dermatology space. (currently in the third position in US) through this merger.

Objectives of the M&A:

• Sun Pharma enters into newer markets by filling in the gaps in the offerings of the company, through the acquired company
• Boosting of products offering of Sun Pharma creating more visibility and market share in the industry
• Turnaround of a distressed business from the perspective of Ranbaxy

This acquisition although will take time to consolidate, it should in due course start showing results through overall growth depicted in Sun Pharma’s top-line and bottom-line reporting.