PROJECT REPORT

ON
ANALYSIS OF MERGERS AND ACQUISITIONS

Submitted By:- Submitted To:-

Shantnu Sood Mrs. Malvika Sharma

Class Roll No.:- 151912 Asstt. Professor
Univ. Roll No.:- 3115BMBM170053
B.Com 6th Semester

Centre of Excellence, Govt. College,

Sanjauli, Shimla

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 DECLARATION

I hereby declare that the following documented project report titled “ANALYSIS
OF MERGERS AND ACQUISITIONS” is an authentic work done by me.
The study was undertaken as a part of the course curriculum of BCOM full time
program of SANJAULI COLLEGE, SHIMLA.

SHANTNU SOOD
Date-2nd April,2018
Place:-Shimla

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 CERTIFICATE

It is certified that SHANTNU SOOD, student of B.COM 6 th semester has

prepared the Project titled “ANALYSIS OF MERGERS AND ACQUISITIONS”. The
project is the result of his efforts and endeavours. The project work is found
worth of acceptance as Final Project Report. He has prepared this Project
Report under my guidance.

Malvika Sharma
Asstt. Professor
Department of Commerce
Centre of Excellence, Govt College,
Sanjauli, Shimla-6, H.P.

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 ACKNOWLEDGEMENT
 
The success and final outcome of this project required a lot of guidance and
assistance from many people and I am extremely privileged to have got this all
along the completion of my project. All that I have done is only due to such
supervision and assistance and I would not forget to thank them.
 
I respect and thank Mrs Malvika Sharma for providing me an opportunity to do
this project work on ‘ANALYSIS OF MERGERS AND ACQUISITIONS’ and giving
me support and guidance which made me complete the project duly.
I owe my deep gratitude to her as she took keen interest on my project work
and guided me all along, till the completion of my project work by providing all
the necessary information.

At last I would like to thank my parents and all those persons who helped me
in completion of my project directly or indirectly.

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INTRODUCTION
TO THE
PROJECT

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 MERGERS AND ACQUISITIONS

What is 'Mergers and Acquisitions - M&A'?

Mergers and acquisitions (M&A) is a general term that refers to

the consolidation of companies or assets. M&A can include a number of
different transactions, such as mergers, acquisitions, consolidations, tender
offers, purchase of assets and management acquisitions. In all cases, two
companies are involved. The term M&A also refers to the department
at financial institutions that deals with mergers and acquisitions.

Breaking Down Mergers & Acquisitions

M&A can include a number of different transactions, detailed below.

Merger
 In a merger, the boards of directors for two companies approve the
combination and seek shareholders' approval. After the merger, the acquired
company ceases to exist and becomes part of the acquiring company. For
example, in 2007 a merger deal occurred between Digital Computers and
Compaq whereby Compaq absorbed Digital Computers.

Acquisition
 In a simple acquisition, the acquiring company obtains the majority stake in
the acquired firm, which does not change its name or legal structure. An
example of this transaction is Manulife Financial Corporation's 2004 acquisition
of John Hancock Financial Services, where both companies preserved their
names and organizational structures.

Consolidation
 A consolidation creates a new company. Stockholders of both companies must
approve the consolidation, and subsequent to the approval, they receive
common equity shares in the new firm. For example, in 1998 Citicorp and
Traveler's Insurance Group announced a consolidation, which resulted in
Citigroup.

Tender Offer
In a tender offer, one company offers to purchase the outstanding stock of the
other firm at a specific price. The acquiring company communicates the offer
directly to the other company's shareholders, bypassing the management and
board of directors. Example: when Johnson & Johnson made a tender offer in
2008 to acquire Omrix Biopharmaceuticals for $438 million. While the acquiring
company may continue to exist — especially if there are certain dissenting
shareholders — most tender offers result in mergers.

Acquisition of Assets
 In a purchase of assets, one company acquires the assets of another
company. The company whose assets are being acquired must obtain approval
from its shareholders. The purchase of assets is typical
during bankruptcy proceedings, where other companies bid for various assets
of the bankrupt company, which is liquidated upon the final transfer of assets
to the acquiring firm(s).

Management Acquisition
 In a management acquisition, also known as a management-led
buyout (MBO), the executives of a company purchase a controlling stake in a
company, making it private. Often, these former executives partner with a
financier or former corporate officers in order to help fund a transaction.
What's the Difference Between a Merger and an
Acquisition?

Although they are often uttered in the same breath and used as though they
were synonymous, the terms merger and acquisition mean slightly different
things.
A merger occurs when two separate entities (usually of comparable size)
combine forces to create a new, joint organization in which – theoretically –
both are equal partners. For example, both Daimler-Benz and Chrysler ceased
to exist when the two firms merged, and a new company, DaimlerChrysler,
was created.
An acquisition refers to the purchase of one entity by another (usually, a
smaller firm by a larger one). A new company does not emerge from an
acquisition; rather, the acquired company, or target firm, is often consumed
and ceases to exist, and its assets become part of the acquiring company.
Acquisitions – sometimes called takeovers – generally carry a more negative
connotation than mergers, especially if the target firm shows resistance to
being bought. For this reason, many acquiring companies refer to an
acquisition as a merger even when technically it is not.
Legally speaking, a merger requires two companies to consolidate into a new
entity with a new ownership and management structure (ostensibly with
members of each firm). An acquisition takes place when one company takes
over all of the operational management decisions of another. The more
common interpretive distinction rests on whether the transaction is friendly
(merger) or hostile(acquisition).

Since mergers are so uncommon and takeovers are viewed in a derogatory

light, the two terms have become increasingly conflated and used in
conjunction with one another. Contemporary corporate restructurings are
usually referred to as merger and acquisition (M&A) transactions rather than
simply a merger or acquisition. The practical differences between the two
terms are slowly being eroded by the new definition of M&A deals. In other
words, the real difference lies in how the purchase is communicated to and
received by the target company's board of directors, employees and
shareholders. The public relations backlash for hostile takeovers can be
damaging to the acquiring company. The victims of hostile acquisitions are
often forced to announce a merger to preserve the reputation of the acquiring
entity.
 TYPES OF MERGER

HORIZONTAL

VERTICAL CONGLOMERATE

HORIZONTAL MERGER
Horizontal mergers raise three basic competitive problems. The first is the
elimination of competition between the merging firms, which, depending on
their size, could be significant. The second is that the unification of the
merging firms' operations might create substantial market power and might
enable the merged entity to raise prices by reducing output unilaterally. The
third problem is that, by increasing concentration in the relevant market, the
transaction might strengthen the ability of the market's remaining participants
to coordinate their pricing and output decisions. The fear is not that the entities
will engage in secret collaboration but that the reduction in the number of
industry members will enhance tacit coordination of behavior.

VERTICAL MERGER
Vertical mergers take two basic forms: forward Integration, by which a firm
buys a customer, and backward integration, by which a firm acquires a
supplier. Replacing market exchanges with internal transfers can offer at least
two major benefits. First, the vertical merger internalizes all transactions
between a manufacturer and its supplier or dealer, thus converting a
potentially adversarial relationship into something more like a partnership.
Second, internalization can give management more effective ways to monitor
and improve performance.
Vertical integration by merger does not reduce the total number of economic
entities operating at one level of the market, but it might change patterns of
industry behavior. Whether a forward or backward integration, the newly
acquired firm may decide to deal only with the acquiring firm, thereby altering
competition among the acquiring firm's suppliers, customers, or competitors.
Suppliers may lose a market for their goods; retail outlets may be deprived of
supplies; or competitors may find that both supplies and outlets are blocked.
These possibilities raise the concern that vertical integration will foreclose
competitors by limiting their access to sources of supply or to customers.
Vertical mergers also may be anticompetitive because their entrenched market
power may impede new businesses from entering the market.

CONGLOMERATE MERGER
Conglomerate transactions take many forms, ranging from short-term joint
ventures to complete mergers. Whether a conglomerate merger is pure,
geographical, or a product-line extension, it involves firms that operate in
separate markets. Therefore, a conglomerate transaction ordinarily has no
direct effect on competition. There is no reduction or other change in the
number of firms in either the acquiring or acquired firm's market.
Conglomerate mergers can supply a market or "demand" for firms, thus giving
entrepreneurs liquidity at an open market price and with a key inducement to
form new enterprises. The threat of takeover might force existing managers to
increase efficiency in competitive markets. Conglomerate mergers also provide
opportunities for firms to reduce capital costs and overhead and to achieve
other efficiencies.
Conglomerate mergers, however, may lessen future competition by eliminating
the possibility that the acquiring firm would have entered the acquired firm's
market independently. A conglomerate merger also may convert a large firm
into a dominant one with a decisive competitive advantage, or otherwise make
it difficult for other companies to enter the market. This type of merger also
may reduce the number of smaller firms and may increase the merged firm's
political power, thereby impairing the social and political goals of retaining
independent decision-making centers, guaranteeing small business
opportunities, and preserving democratic processes.

TAKEOVER
An acquisition may be defined as an act of acquiring effective control by one
company over assets or management of another company without any
combination of companies. Thus, in an acquisition two or more companies may
remain independent, separate legal entities, but there may be a change in
control of the companies. When an acquisition is ‘forced’ or ‘unwilling’, it is
called a takeover.

TYPES OF TAKEOVER

FRIENDLY HOSTILE
TAKEOVER TAKEOVER

REVERSE BACKFLIP
TAKEOVER TAKEOVER

FRIENDLY TAKEOVER
A "friendly takeover" is an acquisition which is approved by the management.
Before a bidder makes an offer for another company, it usually first informs the
company's board of directors. In an ideal world, if the board feels that
accepting the offer serves the shareholders better than rejecting it, it
recommends the offer be accepted by the shareholders.
In a private company, because the shareholders and the board are usually the
same people or closely connected with one another, private acquisitions are
usually friendly. If the shareholders agree to sell the company, then the board
is usually of the same mind or sufficiently under the orders of the equity
shareholders to cooperate with the bidder. This point is not relevant to the UK
concept of takeovers, which always involve the acquisition of a public
company.

HOSTILE TAKEOVER
A "hostile takeover" allows a suitor to take over a target company whose
management is unwilling to agree to a merger or takeover. A takeover is
considered "hostile" if the target company's board rejects the offer, but the
bidder continues to pursue it, or the bidder makes the offer directly after
having announced its firm intention to make an offer. Development of the
hostile tender is attributed to Louis Wolf son.
A hostile takeover can be conducted in several ways. A tender offer can be
made where the acquiring company makes a public offer at a fixed price above
the current market price. Tender offers in the United States are regulated by
the Williams Act. An acquiring company can also engage in a proxy fight,
whereby it tries to persuade enough shareholders, usually a simple majority, to
replace the management with a new one which will approve the takeover.
Another method involves quietly purchasing enough stock on the open market,
known as a "creeping tender offer", to effect a change in management. In all of
these ways, management resists the acquisition, but it is carried out anyway.
The main consequence of a bid being considered hostile is practical rather than
legal. If the board of the target cooperates, the bidder can conduct extensive
due diligence into the affairs of the target company, providing the bidder with a
comprehensive analysis of the target company's finances. In contrast, a hostile
bidder will only have more limited, publicly available information about the
target company available, rendering the bidder vulnerable to hidden risks
regarding the target company's finances. An additional problem is that
takeovers often require loans provided by banks in order to service the offer,
but banks are often less willing to back a hostile bidder because of the relative
lack of target information which is available to them.
A well known example of an extremely hostile takeover was Oracle's hostile bid
to acquire PeopleSoft.

REVERSE TAKEOVER
A "reverse takeover" is a type of takeover where a private company acquires a
public company. This is usually done at the instigation of the larger, private
company, the purpose being for the private company to effectively float itself
while avoiding some of the expense and time involved in a conventional IPO.
However, in the UK under AIM rules, a reverse take-over is an acquisition or
acquisitions in a twelve-month period which for an AIM company would:
Exceed 100% in any of the class tests; or
Result in a fundamental change in its business, board or voting control; or In
the case of an investing company, depart substantially from the investing
strategy stated in its admission document or, where no admission document
was produced on admission, depart substantially from the investing strategy
stated in its pre-admission announcement or, depart substantially from the
investing strategy.

BACKFLIP TAKEOVER
A "back flip takeover" is any sort of takeover in which the acquiring company
turns itself into a subsidiary of the purchased company. This type of takeover
can occur when a larger but less well-known company purchases a struggling
company with a very well-known brand such as Texas Air Corporation takeover
of Continental Airlines but taking the Continental name as it was better known.
The SBC acquisition of the ailing AT&T and subsequent rename to AT&T is
another example.
 SCOPE OF MERGERS AND ACQUISITIONS

Mergers & Acquisition have gained popularity throughout the world in the
recent times. They have become popular due to globalization, liberalization,
technological developments & intensely competitive business environment.
Mergers and acquisition are a big part of the corporate finance world. This
process is extensively used for restructuring the business organization. In
India, the concept of mergers and acquisition was initiated by the government
bodies. The Indian economic reform since 1991 has opened up a whole lot of
challenges both in the domestic and international spheres. The increased
competition in the global market has prompted the Indian companies to go for
mergers and acquisitions as an important strategic choice.

The trends of mergers and acquisitions in India have changed over the years.
The immediate effects of the mergers and acquisitions have also been diverse
across the various sectors of the Indian economy. Mergers and Acquisitions
(M&A) have been around for a long time and has experienced waves of
popularity during these times and they are very much an important part of
today’s business world. They have also become increasingly international which
can be due to the rising global competition. The popularity of cross-border
M&A’s makes it important to look at them from an international perspective.
Basically M&A emerged as a strategic issue but now a days, valuation aspect
has gained more popularity. There are thousands of investment bankers who
are daily engaged in valuations and in the coming years this trend is expected
more in Banking sector as well as other sectors too.
 RECENT MERGERS AND ACQUISITIONS TRENDS IN
INDIA

If money could talk, it would have whooped last year. In 2017, India saw more
than 1,000 mergers and acquisitions (M&A s), the highest in the current
decade. The deal making happened on the back of a record year in terms of
raising equity. A total of Rs1,81,605 crore was raised in 2017. 

Private equity players, too, had their best year in India in 2017. An EY report
says private equity players invested a record $25 billion in India in 2017 and
also had a record number of exits. The year 2018 has started on a positive
note, with a flurry of initial public offerings (IPOs) in March and M&As
surpassing the corresponding 2017 January-February numbers.
The really big deals, though, have not yet happened. The number of billion-
dollar deals, at eight, had declined in 2017, against 12 in 2016. 

But appetite for domestic assets is strong. While the number of cross-border
deals fell to 340 in 2017 from 368 in 2016, the number of domestic deals
increased to 682 in 2017, from 528 in 2016. By deal count, the domestic
number is double that of the cross-border one. By sheer value, domestic deals
make up more than 75% of the total. 
A period of high capital-raising can be a double-edged sword for mergers and
acquisitions. It can indicate that a season of M&A is around the corner, like in
2006-07, or it can point to a listless period for deal-making. After all, only 20%
of the IPOs that happened in the last year raised fresh equity; the rest were
promoters or private equity funds offering their shares for sale. 

Ajay Arora, partner and head of M&A transaction advisory at EY, says: “There
is a strong undercurrent for M&A right now. Many conversations are
happening, even if the deal news has not been announced.” 

Every phase of strong capital-raising is followed by a period of M&As and that

phase is just starting in India, says Ajay Garg, managing director *of Equirus
Capital. 
 Ganeshan Murugaiyan, managing director and head of investment banking for
India at BNP Paribas, says: “The M&A situation is very active and there are
several deals under discussion in the strategic and private equity domains.”

REASONS FOR MERGERS AND ACQUISITIONS

1. Economies of scale
The operating cost advantage in terms of economies of scale is considered to
be the primary motive of mergers, in particular, for horizontal and vertical
mergers. They result in lower average cost of production and sales due to
higher level of Operations.

2. Economies to scope
A company may use a specific set of skills or assets that it possesses to
use a Specific set of skills or assets that it possesses to widen the scope of its
activities. For example, Proctor and Gamble can enjoy economies of scope of
its activities a Consumer product company that benefits from it’s highly
consumer marketing Skills.

3. Synergy
Synergy is the magic force that allows for enhanced cost efficiencies of the new
business. Synergy takes the form of revenue enhancement and cost savings.
Most of the mergers seek synergistic gains to both the acquiring as well as the
Target firms.
Synergy would be expressed as follows:

In effect, synergy is created and is positive only when the following equation
holds

True:
V (A+B)>V (A) +V (B)
 Where: V (A+B) : Value of the combined firm
V (A) : Value of firm A
V (B) : Value of firm B

4. Staff Reduction
As every employee knows, merger tends to mean job losses. Consider all the
money saved firm reducing the number of staff members from accounting,
Marketing and other departments, job cuts will also include the former CEO,
who typically leaves with a compensation package.

5. Improved Market Reach and Industry Visibility

Companies buy companies to reach new markets and grow revenues and
Earnings. A merger may expand two companies marketing and distribution,
giving them new sales opportunities. A merger can also improve a company’s
standing in The investment community; bigger firm often have an easier time
raising capital than smaller ones.
 Process of Mergers and Acquisitions

Merger and Acquisition Process is a great concern for all the companies who
intend to go for a merger or an acquisition. This is so because, the process of
merger and acquisition can heavily affect the benefits derived out of the
merger or acquisition. So, the Merger and Acquisition Process should be such
that it would maximize the benefits of a merger or acquisition deal.
The Merger and Acquisition Process can be divided into following steps.

BUSINESS PHASE OF
EXIT PLAN
VALUATION PROPOSAL

STRUCTURED MERGER STAGE OF

MARKETING AGREEMENT INTEGRATION

1. PRELIMINARY ASSESSMENT OR BUSINESS VALUATION

In this first step of Merger and Acquisition Process, the market value of the
target company is assessed. In this process of assessment not only the current
financial performance of the company is examined but also the estimated
future market value is considered. The company which intends to acquire the
target firm engages itself in a thorough analysis of the target firm’s business
 history. The product of the firm, its’ capital requirement, organizational
structure, brand value are reviewed strictly.

2. PHASE OF PROPOSAL
After complete analysis and review of the target firm’s market performance, in
the second step, the proposal for merger or acquisition is given. Generally, this
proposal is given through issuing a non-binding offer document.

3. EXIT PLAN
When a company decides to buy out the target firm and the target firm agrees,
then the latter involves in Exit Planning. The target firm plans the right time for
exit. It considers all the alternatives like Full Sale, Partial Sale and others. The
firm also does the tax planning and evaluates the options of reinvestment.

4. STRUCTURED MARKETING
After finalizing the Exit Plan, the target firm involves in the marketing
process and tries to achieve highest selling price. In this step, the target
firm concentrates on structuring the business deal.

5. ORIGINATION OF PURCHASE AGREEMENT OR MERGER

AGREEMENT
In this step, the purchase agreement is made in case of an acquisition
deal. In case of Merger also, the final agreement papers are generated in this
stage.

6. STAGE OF INTEGRATION
In this final stage, the two firms are integrated through Merger or Acquisition.
In this stage, it is ensured that the new joint company carries the same rules
and regulation throughout the organization.
 Stakeholders to consider to Improve mergers and
acquisitions

1. Employees
The first group to consider relates to the impacted employees, as even the
best strategy will fail if it does not consider the people needed to execute it.
Employees will look to see that a plan for creating a better organization exists
and for signals that people matter, as well as answers to what the acquisition
means for them. In smaller firms, a face to face meeting would be a better
option to share news and implications of an acquisition. Without these steps, a
lack of information to employees will only lead to speculation and resulting
anxiety that will complicate integration efforts. Employee commitment to a
merged firm is lowest following an acquisition announcement and increased
employee turnover is a primary suspect in poor acquisition performance. An
obvious reason for this is that the first employees to leave are generally the
best and brightest. In other words, if an acquirer does not take steps to
address the concerns of their employees they will likely find what they bought
walked out the door when they were not looking. For example, many
employees will get job offers from competitors within five days of an
acquisition announcement.

2. Competitors
While obvious in hindsight, it is easy to overlook this group. Failing to consider
the actions of groups that want to see you fail can hurt your success, and
competitive pressures driving the use of an acquisition to meet firm goals do
not end once an acquisition is announced. Acquisition announcements are
public and clarify what competitors can expect. Often competitors treat the
inevitable distraction of combining firms as an opportunity. Meanwhile,
employees will also have lower commitment to a new organization. As a result,
competitors also actively recruit from the employees and customers of firms
involved in a merger when those firms are most vulnerable.
3. Customers
Merging firms often focus on internal issues during integration at the expense
of external market issues, and customers of both acquirer and target firms are
sometimes overlooked. Failing to address customer impacts in a
communication plan will provide competitors an opportunity to frame customer
perceptions on the impact of a merger. A strong emphasis on communicating
with customers can reduce uncertainty and lower customer defection, as
retaining customers may be more important to acquisition performance than
reducing costs. In one example, while a combination of two high technology
companies was meant to better serve IBM, uncertainty about implications of
the merger led IBM to cut its orders for the firms in half because no one
communicated what the acquisition meant to this important customer.8 Firms
that communicate a continued commitment to their customers by considering
their perspective during a merger can expect improved success.

4. Advisors
Completing an acquisition depends on advisors and incorporating an external
perspective can enable better acquisition decisions. Additionally, more
prestigious advisors can provide important reputation advantages. However,
increasing the number of advisors increases the amount of time and money to
complete a deal. This becomes an important consideration as the primary
advantage of acquisitions involves speed or faster access to needed resources
than internal development. Another consideration for public firms and sellers is
that advisors may be required to help ensure managers fulfill their fiduciary
obligations to shareholders.

5. Lenders
 Most acquirers include debt as part of their payment for a target, making
lenders an important advisor. While lenders are interested in available
collateral and the use of provided funds, they will also be interested in the
projections of the merged firm and its ability to pay off the increased debt
load. Selection of lenders is an important consideration, as more prestigious
underwriters are associated with positive outcomes, such as completing deals
faster.11 Banks may also be interested in marketing other services—a
circumstance that can complicate their interests. For example, Barclays Capital
recently agreed to pay Del Monte shareholders almost $90 million following
conflict of interest surrounding allegations it steered the sale of Del Monte to
bidders using it for financing. 12 The desire for advisory fees may bias bank
lending decisions, so prudence may drive keeping deal advisors and lenders
separate.

6. Vendors
Acquisitions can also be disruptive to businesses a merged firm depends on.
Suppliers of goods and services of merging companies will have a vested
interest in their ability to continue to supply a business and in being paid on a
timely basis. It is not uncommon for vendors to require updated credit data for
merging firms. Still, an acquisition offers the opportunity to consolidate
vendors and increase bargaining power. As a result, vendors will want
information about continued business. Communication with vendors, especially
the key ones, is another critical piece of the overall acquisition communication
plan. The last thing an acquiring company wants to learn is that a key vendor
is skittish about the transaction and that they may not deliver scheduled
product or service! In other words, without vendor support a merged firm can
find it difficult to maintain normal operations.

7. Government Regulators
Firms planning an acquisition generally make filings with government agencies
for regulatory approval that is followed by a waiting period that allows
 regulators to review information to consider labor or anticompetitive
implications, and any conditions for completing a deal.

METHODS OF FINANCING MERGERS AND

ACQUISITIONS

There are a number of different methods for financing mergers and

acquisitions, and the chosen method will depend not only on the state of the
company, but also on overall activity in M&A and finance at the time of the
transaction.

1. Exchanging stock
This is probably the most common option when it comes to financing an M&A
deal. If one company is seeking to merge with or acquire another, it is safe to
assume that they are in possession of a healthy balance sheet with a robust
stock offering. In fact, it is this stock pricing that probably led to the M&A
activity in the first place.
In a typical stock-exchange transaction, the buyer will exchange shares in their
own company for shares in the selling company. Financing M&A with stock is a
relatively safe option as both parties share risks between the two of them after
the transaction, meaning that careful management is guaranteed. Paying with
stock is also advantageous to a buyer if their shares are overvalued on the
market, as they will receive more stocks in the seller company per shares
exchanged than if they were paying for their transaction in cash.
However, there is one major drawback to using stock as currency to pay for
M&A – stock volatility. No matter how well a company is doing, there is always
a risk of a drop in stock, particularly if word gets out about a possible M&A
before any deal has been finalized. Stock markets thrive on liquidity, so
shareholders can move quickly to sell their stock if they have any reason to
 feel nervous about the future of a particular company. An unannounced or
unexplained M&A deal would certainly raise a few questions in the financial
press.
While it is hard to predict what shares will be worth in the future, it is easy to
understand why some companies might be reluctant to sell their shares in
exchange for stock rather than cash. Often a compromise is reached whereby
the sale price includes a mix of shares and cash, reducing risk on both sides
and allowing both parties to maintain a stake in the new company.

2. Taking on debt
Agreeing to take on the debt owed by a seller is a great alternative to paying in
stock or cash. For many companies, debt is the reason behind any sale, as
high interest rates and poor market conditions make repayment impossible. In
these circumstances, the priority for the indebted company is to reduce the
risk of further losses and redundancies by as much as possible by entering into
an M&A transaction with a company which can guarantee its debts.
Unfortunately, the debt of a company can reduce its sale value significantly,
and can even eliminate its price. However, from the creditor’s point of view, it
offers a cheap means of acquiring assets.
Furthermore, being in control of a large quantity of a company’s debt means
increased control over management in the event of liquidation, as in this
instance owners of debt have priority over shareholders. This can be another
huge incentive for would-be creditors who may wish to restructure the new
company or simply take control of assets such as property or contacts.
Of course, it is possible to trade debt in M&A deals without the threat of
bankruptcy. Under the terms of the deal, one company may offer to buy up a
certain amount of corporate bonds for a favorable interest rate, or bonds may
be traded between companies as a means of spreading risk and cementing a
merger. Where a company’s debts are relatively small, the creditor may simply
offer to cover their costs as an extra incentive during the latter stages of the
transaction. As with exchanging stock, taking on debt can merely be one part
of a complex transaction agreement.
3. Paying with cash
Paying with cash is the most obvious alternative to paying for a transaction
with stock. Cash transactions are instant and mess-free, and cash does not
require the same kind of complicated management as stock would.
Furthermore, the value of cash is far less volatile and does not depend on the
performance of a company. One exception when dealing in multiple currencies
is exchange rates can vary wildly, as evidenced by the market response to the
yen following the Ban of Japan’s deflation program; and the British pound
following the Brexit. Currency exchange fees can also add extra expense to
multi-national acquisitions.
While cash payment is the preferred method, the price of M&A transactions can
run into the millions or even billions, and not many companies can access this
much cash from their own funds.

4. IPO
Initial public offerings (IPOs) are a good way for a company to raise money in
any context, but an upcoming M&A transaction is one of the better times to
carry one out. The prospect of an upcoming M&A transaction can make
investors more excited about the company’s future, as it signals an ambition to
expand and a long-term strategy. IPOs always attract market buzz, so by
timing the IPO with an M&A transaction, companies can maximize investor
interest and drive up early share prices.
Moreover, increasing the value of an IPO with an upcoming M&A transaction
also increases the value of existing shares – in fact, existing shareholders could
see their stock value rocket overnight. However, due to the same volatility that
has driven down activity in stock-financed M&A, IPOs can be a risky way of
financing ventures. The market can fall just as easily as it can rise, and newly-
minted companies are more vulnerable to volatility as they do not have a long
track record to reassure investors.

5. Bond issuance
 Corporate bonds are a quick and easy way of getting cash, either from existing
shareholders or from members of the public. Companies will typically release a
number of bonds covering a defined period of time (anything from one year to
twenty years), with a set interest rate (usually less than five percent). In
purchasing these bonds, investors are essentially loaning money to the
company in the expectation that they will receive a return on their capital over
time, but once the investment has been made, their money is locked in and
can’t be touched until the maturation date. This makes them popular with risk-
averse, long-term investors, who tend to snap them up.

6. Loans
Borrowing money can be an expensive affair when undertaking an M&A
transaction. Lenders, or owners who have agreed to accept payments over an
extended period of time, will demand a reasonable interest rate for the loans
they have made. Even when the interest is relatively small, when you are
dealing with a multi-million-dollar M&A transaction, the costs can really add up.
Interest rates, therefore, are an important consideration in funding M&A
transactions with debt, and low interest rates will spike the number of
transactions funded with loans.

Other loan options include re-mortgaging (which is only a viable option if the
company has a large property portfolio), and bridge financing. A bridge loan is
a very short-term loan which is intended to ‘bridge’ the gap between expected
payments. For instance, a company may be expecting a slew of invoices
dividends just after the M&A deadline. In a way, this is the payday loan
equivalent of the business world, and should be approached as a last resort.
Interest rates are higher than average, and late payment penalties can be
severe. Furthermore, use of a bridge loan in an M&A transaction may raise
concerns with the other party, undermining the deal.

Conclusion
 Where cash isn’t an option, there are plenty of alternative methods of financing
mergers and acquisitions, many of which will result in a speedy and lucrative
transaction. The best method will depend on the companies in question, their
share situation, debt liabilities, and the total value of their assets. Each method
comes with its own risks, hidden fees, and commitments.

VALUATION MATTERS

Investors in a company that is aiming to takeover another one must determine

whether the purchase will be beneficial to them. In order to do so, they must
ask themselves how much the company being acquired is really worth.
Naturally, both sides of an M & A deal will have different ideas about the worth
of a target company, its seller will tend to value the company as high as
possible, while the buyer will try to get the lowest price possible.
There are however, many legitimate ways to value companies. The most
common Method is to look at comparable companies in an industry, but deal
makers employ a variety of other methods and tools when assessing a target
company. Here are just few of them:

1. Comparative Ratios:
The following are two examples of the many comparative metrics on which
acquirers may base their offers:

 P/E (Price-to-Earnings) Ratio

With the use of this ratio, an acquirer makes an offer as a multiple of the
Earnings the target company is producing. Looking at the P/E for all the stocks
within the same industry group will give the acquirer good guidance for what
the target’s P/E multiple should be.

 E/V Sales (Enterprise – value – to – Sales Ratio or Price – to

– Sales) Ratio:
With this ratio, the acquiring company makes an offer as a multiple of the
revenues again. While being aware of the P/S ratio of other companies in the
industry.

2. Replacement Cost:
In a few cases, acquisitions are based on the cost of Replacing the target
company. For simplicity’s sake, suppose the value of a create is simply the
sum of all its equipment and staffing costs. The Acquiring Company can
literally order the target to sell at that price, or it will create a competitor for
the same cost. Naturally, it takes a long time to assemble good
management, acquire property and get the right Equipment. This method
of establishing a price certainly wouldn’t make much sense in a service
industry where the key assets – people – are Hard to value and develop.

Discounted Cash Flow (DCF):

A key valuation tool in M & A discounted Cash flow analysis determines a
company’s current values according to its estimated future cash flows.
Forecasted free cash flows (operating profit + Depreciation + amortization of
goodwill – capital expenditures – cash taxes - Change in working capital) are
discounted to a present value using the Company’s weighted average costs of
capital (WACC).

Synergy: The Premium for Potential Success

For the most part, acquiring nearly always pay a substantial premium on the
stock market value of the companies they buy. The justification for doing so
nearly always boils to the notion of synergy. A merger benefits shareholders
when a company’s post-merger share price increases by the value of potential
synergy.

It would be highly unlikely for rational owners to sell if they would benefit more
by not selling. That means buyers will need to pay a premium if they hope to
acquire the company, regardless of what pre-merger valuation tells them. For
sellers, that premium represents their company’s future prospects. For buyers,
the premium represents part of the merger synergy they expect can be
achieved. The following equation offers a good way to think about synergy and
how to determine if a deal makes sense. The equation solves for the minimum
required synergy.

Pre-Merger Value of Both Firms + synergy = Pre – Merger Stock Price Post –
Merger Number of Shares
In other words, the success of a merger is measured by whether the value of
the buyer is enhanced by the action. However, the practical constraints of
merger often prevent the expected benefits from being fully achieved
 LIMITATIONS OF MERGER AND ACUISITIONS

 Merger involves the following limitations.

 Elimination of healthy competition.
 Striving for bigness.
 Concentration of economic power.
 Monopoly affecting the customer and suppliers.
 Adverse effects on national economy.

WHY A MERGER FAILS

The main reasons for a merger’s failure are ”autonomy, self-interest, culture
clash” all included or lies in leadership. At both implementation and negotiation
and negotiation stages, mergers fail due to failure of leadership. Lack of
leadership qualities of managers may cause mergers and acquisitions failure.
Leadership is thus a crucial management task in strategic restructuring. The
following are the reasons for failure of mergers:
 Un-utilization or minimum utilization of staff and working hours.
 The inability to control and commanding/directing the sub-ordinates.
 Personal desires
 Desire towards authority but not responsibility.
 Desire towards to control and commanding/directing the subordinates.
 The negative believes of the partners and the people in the society.
 Inefficient and inactive leader or director in merged firms.
 The inability of the leader in bridging the cultures within the merged
organization.
 In addition to the above, many mergers fail, due to following reasons :
 Paying too much.
 Assuming a boom market won’t crash.
 Leaping before looking.
 Straying too far ahead.
 Swallowing something too big.
 Marrying disparate corporate culture.
RESEARCH WORK
 OBJECTIVES OF STUDY

i. To study the factors that affects mergers and acquisitions.

ii. To study the positive & negative effects of mergers and acquisitions.

iii. To identify the procedure of mergers and acquisitions.

iv. To study how mergers and acquisitions improves corporate performances

to bring it at par with competitors.

v. To understand reasons for mergers and acquisition.

 RESEARCH METHODOLOGY

Research in common parlance refers to a search for knowledge. One can also
define research as a scientific and systematic search for pertinent information
on a specific topic. The word research has been derived from French word
Researcher means to search.
FRANCIES RUMMER defined Research: “It is a careful inquiry or examination to
discover new information or relationship and to expand or verify existing
knowledge.”
Research is the solution of the problem, whether created or already generated.

RESEARCH DESIGN

Descriptive research design has been followed in this study.

METHODS OF DATA COLLECTION

This study is purely based on secondary data.
SECONDARY DATA
Secondary data is data that is taken from other sources. It is also known as
second hand data as it is already used by someone. In this books, websites
and magazines were used as secondary data i.e. Books, Websites, Magazine,
Brochure.

TOOLS OF ANALYSIS:

 Tables
 Pie Chart
 Percentage
 Trend Line
 LIMITATIONS OF THE STUDY

I. The study is purely based on secondary data.

II. Absence of primary data.
III. The study was limited to books, internet and Magazines.
IV. Already available facts were used.
V. The study is not vast enough to ascertain long term success or failure of
the companies.
VI. The study does not show the impact of various stakeholders on the
merger and acquisitions.
 CASE STUDY 1:

REEBOK ACQUISITION BY ADIDAS

ABSTRACT
The case discusses the proposed merger of Reebok International Limited with
Adidas-SalomonAG. 
It describes the recent trends and studies the ongoing merger in the sporting
goods industry. 
The case presents the rationale behind the decision to merge. 
Finally, the case ends with a debate on whether the merger was be successful.

INTRODUCTION
On August 03, 2005, Adidas-Salomon AG (Adidas), Germany's largest sporting
goods maker announced acquisition of the US-based Reebok International
Limited (Reebok) for $3.8 billion. The share prices of both the companies
recorded an increase on the day of the announcement of the deal.
The share price of Adidas increased by 7.4% from $181.49 on August 02,
2005 to $194.90 on August 03, 2005 on the Frankfurt stock exchange, while
Reebok's share price at the New York Stock Exchange rose to $57.14 on
August 03, 2005, an increase of 30% over the August 02, 2005 share price of
$43.95. The deal would result in the union of two cutthroat competitors
through a "friendly takeover.
 CHANGE IN SHARE PRICE($)
Adidas Reebok

194.9
181.49

57.14
43.95

August 2,2005 August 3,2005

Adidas and Reebok claimed that the merger was decided upon because of the
realization that their individual (company) goals would be best accomplished
by joining instead of competing. Nike International Inc. (Nike) was the
common competitor for both Reebok and Adidas.

Thus, the merger would help spreading the global appeal of the brands in
places where they had not made a mark as individual brands. However, some
analysts had doubts about the success of the merger of the companies. 

They cited that the merger would not generate much synergy because the
individual brand identities would be maintained even after the merger. 

Analysts also doubted the effectiveness of the merger, as a strategy to beat

Nike. They felt that the combined entity would have to work really hard to
further expand its market share in the US market and globally.

Analysts said that the merging companies were alike in many ways. Both the
companies had a reputation of using cutting-edge technologies to produce
innovative products and both had eminent brand ambassadors from the sports
and entertainment worlds.
ADIDAS

Adidas AG is a multinational corporation, founded and headquartered

in Herzogenaurach ,Germany, that designs and manufactures shoes, clothing
and accessories. It is the largest sportswear manufacturer in Europe, and the
second largest in the world, after Nike. Adidas' revenue for 2016 was listed
at €19.29 billion.

REEBOK

INTRODUCTION
Reebok is a global athletic footwear and apparel company, operating as a
subsidiary of Adidas since 2005. The global headquarters are located in Canton,
Massachusetts, U.S.

In 1895, Joseph William Foster at the age of 14 started work in his bedroom

above his father's sweet shop in Bolton, England, and designed some of the
earliest spiked running shoes. After his ideas progressed, he founded his
business 'J.W. Foster' in 1900, later he joined with his sons and changed the
company name to J.W. Foster and Sons. Foster opened a small factory called
Olympic Works, and gradually became famous among athletes for his "running
pumps".[10] For pioneering the use of spikes, the company's revolutionary
running pumps appear in the book, Golden Kicks: The Shoes that changed
Sport. The company began distributing shoes across the United Kingdom which
were worn by British athletes.
 REASONS AND AIM FOR ACQUISITION

FINANCIAL AIMS OF THE ACQUISITION

 Group expected to earn higher return than cost of capital in three year time.
 Strong operating cash flow. Group expected to reduce its debt and improve its
cash flow from operational synergies.
 Group aimed to reduce its annual cost and wanted to save around approx.-125
million euros annually with substantial operational synergies. And expected to
increase revenue and profit from complete coverage of all consumer segments.

STRATEGIC AIMS FOR ACQUISITION

 Adidas and Reebok were facing tough competition from their rival firm Nike.
Nike had about 36 percent, Adidas 8.9 percent and Reebok 12.2 percent
market share in the athletic footwear market in North America. Although,
Adidas holds the second position globally in sporting goods .The US ranks the
world's biggest athletic shoe market, account for 50 percent of $ 33 billion
spend globally. In order to compete with Nike, which has very strong market
share in North America and globally, Adidas announces the plan to acquire
Reebok.

Market Share in US
Adidas Reebok
9% 12%

Others
43%

Nike
36%
 Adidas was facing a tough competition from Puma which was the number 4 in
sporting- goods brand. And recently Puma had disclosed its expansion plan
through acquisition and entry into new sportswear categories . This seemed to
have a definite effect on Adidas and Reebok market share. Therefore, in order
to compete with Nike and to achieve stronger position in the market, Adidas
and Reebok went for a friendly merger. This would help company in achieving
more competitive position worldwide.

 Adidas wanted to extend their global reach. In Europe and Asia, Adidas hold a
better marketing position and brand recognition and this could be used to
expand Reebok market in Europe and Asia. On the other hand merger will help
Adidas to capture Asian fashion oriented market where Reebok already had its
presence through marketing tie ups in China with Yao Ming.

 Broader portfolio of world - renowned brands. Adidas and Reebok together will
have a more complete portfolio of brands that fulfil the need of a global
customer base. Well defined and complementary brand, i.e. Adidas which is
European based company is a leader in sports performance and Reebok which
is American leader in sports and lifestyle products.

THE DEAL

According to the merger deal, Adidas would buy all the outstanding shares of
Reebok at $59 per share in cash. This price represented a premium of 34.2%,
as per the closing share price of $43.95 on August 02, 2005. Adidas proposed
to fund the purchase through an arrangement of debt and equity. The deal
price was equal to the latest twelve month sales of Reebok and 11.7 times its
EBITDA. Some analysts felt that the deal was priced too high. As Uwe
Weinrich, an analyst at HVB Group remarked, "The price Adidas will pay for
Reebok is ambitious." He added that acquisitions in the sporting goods industry
rarely brought in good returns.
 Deal Price(USD)
Deal Price(USD)

59

43.95

Closing Price Deal Price

ANALYSIS OF ACQUISITION SUCCESS/ FAILURE

According to me this merger is a success because all the financial, strategic

and operational objectives were achieved in due time. This statement can be
supported through following facts:

 Adidas sales revenue increased by 17percent as per 2006 half year result.

 Sales revenue increases by 52percent i.e. from approx- 6.636 billion in 2005 to
approx.- 10.084 billion in 2006 in euro terms.

 In year 2007 and 2008 the gross profit margin and operating profit margin also
increased. As a result gross profit margin increased by 2.8percent in 2007
reaching 47.4percent as compared to 44.6percent in 2006, and in 2008 it
increased by 1.3percent i.e. from 47.4percent in 2007 to 48.7percent in 2008,
this is the highest annual gross margin from the group since the IPO in 1995.
Group gross profit also increased by 9percent in 2007 and 8percent in 2008
reaching a level of approx. - 4.882 billion in 2007 and approx. - 5.256 billion in
2008. The groups operating profit margin increased by 0.5percent in 2007
reaching 9.2percent as compare to 8.7percent in 2006 and in 2008 by
0.7percent i.e. from 9.2percent in 2007 to 9.9percent in 2008.

Chart Title
Gross Profit Margin Operational Profit Margin

47.4 48.7
44.6

8.7 9.2 9.9

2006 2007 2008

Though this acquisition has been a success there are certain

shortcomings of it too which are as follows:

Although this merger was successful but in North America it didn’t work out.
Though in 2006 group revenue from North America increased significantly
from approx. 1561 million in 2005 to approx.3234 million in 2006 i.e.
107percent growth, but this was mainly due to 2006 FIFA world cup and group
revenue from North America declined thereafter. . In 2007 it decreased by
9percent reaching approx. 2929 million and by 14% in 2008 touching approx.
2520 million.

Revenue Trend In US
250

200

150
Revenue Trend In US

100

50

0
2005 2006 2007 2008
 INTERPRETATION

The above data shows that Adidas financed the acquisition with the
mix of debt and equity. This shows that the capital structure of the
new company was a balanced one.
Also some of the objectives of reebok’s acquisition by Adidas have
been fulfilled but there are still certain areas or aspects where the
acquisition didn’t worked out so well. Though the combined market
share of Adidas and reebok had increased but still it was not enough to
upset Nike as brand leader in the industry.
Nike’s income is triple Adidas’s and Nike’s revenue is 1.5 times
Adidas’s. This is mainly due to the reason that Adidas wasn’t able to
upset Nike in North America. But still Adidas has become one of the
most influential players in Sports goods industry and the reason for it
is synergies generated by the acquisition.
 CASE STUDY 2:
WHATSAPP ACQUISITION BY FACEBOOK

ABSTRACT
The case is about the US-based social networking giant Facebook’s acquisition
of WhatsApp, the world’s most popular mobile instant-messaging platform. It
discusses the landmark deal to buy Whatsapp.

INTRODUCTION
In February 2014 Facebook announced the firm’s biggest acquisition ever.
Facebook CEO Mark Zuckerberg managed to agree on the deal with WhatsApp
founders Jan Koum and Brian Acton for astonishing $22 billion.
Reuters stated that acquisition was the sixth biggest in technologies and
biggest ever in history of acquisitions of software companies.
 Facebook share prices soared to $77.56 from $68 by the time the regulatory
approval process concluded in October 2014.

SHARE PRICE CHANGE($)

FACEBOOK

77.56

68
Facebook
Facebook is an American online social media and social networking service
company based in Menlo Park, California.
The history of Facebook can be traced back to the early 2000s.On October 28,
2003, Mark Zuckerberg launched www.facemash.com, which used private
dormitory ID photographs of students of Harvard. Users were asked to rate
two people at a time as “Hot or Not”. However, a few days later, the site was
closed by the Harvard administration. On February 4, 2004 Zuckerberg
founded Facebook Inc. and launched a social networking website
‘thefacebook.com’ from his Harvard dormitory room. The name of the site was
taken from the Photo Address Book of Phillips Exeter Academy, which the
students referred to as ‘The Facebook’.

Whatsapp
WhatsApp Messenger is a freeware and cross-platform messaging and Voice
over IP service. The application allows the sending of text messages and voice
calls, as well as video calls, images and other media, documents, and user
location.
WhatsApp was founded by Jan Koum and Brian Acton , both former employees
of Yahoo Inc!
At the age of 18, Jan Koum enrolled at San Jose State University to study math
and computer science and simultaneously worked at Ernst & Young as a
security tester. While working at Ernst & Young, Koum met Acton. In 1998,
Koum got a job at Yahoo as an infrastructure engineer. Soon he dropped out of
college.

CHALLENGES
While analysts were mostly positive about Facebook’s acquisition of WhatsApp,
some of them were worried about the valuation of the deal, which was
Facebook’s largest acquisition ever. The deal was not only one of the biggest
since Time Warner’s US$ 124 billion merger with AOL in 2001, it was also one
of the biggest deals in the tech industry and larger than any deal done by
Microsoft , Google, or Apple. While Apple had never done a deal of over US$ 1
billion, Microsoft’s biggest deal was acquiring Skype at US$ 8.5 billion, and
Google’s biggest deal was acquiring Motorola Mobilty at US$ 12.5 billion.
 THE DEAL

DEAL PRICE $21.8 BN

CASH AMOUNT $4 BN

SHARE VALUE $17.8 BN(183,865,778 shares

issued)

ENTERPRISE VALUE $21.8 BN

Firstly, Facebook offered unimaginable amount of $19 billion to buy

WhatsApp. Koum holding bigger share in WhatsApp was to get about $6.8
billion and Acton $3.5 billion after taxes.
Facebook gave $17.8 billion of its Class A common stock shares and $4
billion in cash to WhatsApp’s shareholders.
Fortunately for WhatsApp owners, Facebook’s share value had risen from
February 2014 to October 2014 when deal was realized by another $2.8
billion. In the end, acquisition was worth $21.8 billion.
The acquisition of that size had to go through regulatory approvals. Companies
were worried and it was said that WhatsApp may hurt players such as
Deutsche Telekom, Orange and Telecom Italia with its plan to offer free voice
calls to customers. However, The European Commission said the deal would
not hurt competition.
 REASONS FOR ACQUISTION

 WhatsApp already has a powerful revenue model, and other successful

messaging apps are showing the potential for it to add many more
 WhatsApp ostensibly charges its users $1 per year after the first year.
Assuming most current users end up paying the $1/year, that's a potential
revenue stream of several hundred million dollars a year from WhatsApp's
current revenue model alone. Meanwhile, other messaging apps like Line and
WeChat have demonstrated the power of "stickers," user-to-user payments,
ecommerce, and other revenue streams. When you have as many users as
WhatsApp, generating even only a few dollars per year per user creates a
massive business.

 WhatsApp has very low costs, so it should eventually be wildly

profitable
WhatsApp at the time of merger had only 55 employees. Assuming an all-in
cost of $200,000 per employee, that's a total cost base of $11 million.
Meanwhile, if the company's growth trajectory continues, it could easily be
pulling in more than $1 billion a year of revenue in a few years. Almost all of
that would be profit.
 ANALYSIS OF MERGER SUCCESS/FAILURE

 WhatsApp’s six-month revenue for the first half of 2014 totalled $15.9

million and the company incurred a staggering net loss of $232.5
million, though the majority of that loss was for share-based
compensation.

 At the moment WhatsApp is making $400M from $1B+ in revenue, the

$19B acquisition price is only 47.5x the company’s yearly earnings.
Twitter, by contrast, is worth $29B despite the fact that the company
had operating losses of $500M last quarter and has never made a profit.
Pandora, worth $7.5B, made a quarterly profit of only $760k. Netflix,
worth $26B, has a price to earnings multiple of 235x. LinkedIn has an
893x multiple and is worth $23.6B.

  Silver Lake Partners, a private equity group, acquired Skype from eBay
for $1.9B in 2009 before reselling the business to Microsoft for $8.5B in
2011. Three years later, Skype has around 300M total users. Last year,
Silver Lake helped take Dell private for $24.4 B dollars – in the range
of the WhatsApp deal. While Dell had $60B in revenue and earnings of
$3B, the company is extremely mature and shrinking. WhatsApp by
contrast is growing quickly and had tremendous strategic value for
Facebook beyond simply the financial growth of the company.

INTERPRETATION
Whatsapp is a fast growing company. It only needs to earn $20 to $80
million to justify its $19 billion valuation.
Facebook made use of debt, equity and cash to finance the deal. This
would have influenced the risk tolerance level and returns expected by
the shareholders. The greater the use of fixed interest bearing debt
greater is the financial risk to be assumed by the shareholders which
can result in increase in the cost of raising the overall capital.

CASE STUDY 3:
AMERICA ONLINE’S ACQUISITION OF TIME WARNER:
A FAILED MERGER?

ABSTRACT
The case discusses the acquisition of Time Warner with America Online. 
The case presents the rationale behind the decision to merge. 
Finally, the case ends with a debate on whether the merger was a success or
not.

INTRODUCTION

The consolidation of AOL Time Warner is perhaps the most prominent merger
failure ever. In 2001, America Online acquired Time Warner in
a megamerger for $165 billion – the largest business combination up until that
time. Respected executives at both companies sought to capitalize on the
convergence of mass media and the internet. At the time of merger
talks shares of AOL closed at $50, up $1.55. Time Warner stock rose by
$1.90 to $74.50. Shortly after the megamerger, however, the dot-com
bubble burst, which caused a significant reduction in the value of the
company's AOL division.
 SHARE PRICES AT THE TIME OF MERGER($)
AOL TIME WARNER

72.6 74.5

48.45 50

AMERICA ONLINE

In the early 1980s, Case felt there was a latent market for user friendly online
services. The online services provided at that time were very complex and
costly and provided poor quality content. Believing that the online service
market would evolve into a big industry in future, Case, Jim Kimsey and Marc
Seriff founded AOL in 1985. The company was initially incorporated as
Quantum Computer Services (Quantum). Quantum provided online services to
consumers via PC modems. Quantum's first product was 'Q-Link,' a proprietary
online service that routed emails and chat through its communication network
(via telephone cables). Q-Link became popular in the market, and within a
year its user base crossed the 10,000 mark.
In 1991, Quantum was renamed America Online and Case was appointed CEO.
The total customer base of the company during that period was 150,000, with
total revenues amounting to $ 20 million.

TIME WARNER
Time Warner, Inc. is an American multinational mass media and
entertainment conglomerate headquartered in New York City.[7] It is currently
the world's third largest entertainment company in terms of revenue,
after Comcast and The Walt Disney Company. It was also once the world's
largest media conglomerate. [8] Time Warner was first founded in 1990, with the
merger of Time Inc. and Warner Communications. The current company
consists largely of the assets of the former Warner Communications (as well
as HBO, a Time Inc. subsidiary prior to the merger), and the assets of Turner
Broadcasting (which was acquired by the company in 1996).

THE MERGER
In January 2000, AOL announced that it would be acquiring Time Warner for
$165 billion through a complete stock deal to create the largest media
company in the world. Not only was the merger the biggest ever in the media
industry, it was also one of the biggest in the history of the corporate world. As
per the merger agreement, AOL and TW stock was converted to AOL TW stock.

AOL shareholders received one share of AOL TW for each AOL share owned and
TW shareholders received 1.5 shares of AOL TW for each TW share they
owned. While AOL shareholders owned 55% of the new company, the
remaining was held by TW. The merger was soon being talked of as the
beginning of a new trend: the coming together of traditional and new media
companies. The total market value of both companies combined was estimated
to be $350 billion. The merger was expected to result in a 30% increase in
profits, amounting to over US $ 40 billion in revenues in the first year itself.
The new company had 100 million paid subscribers, which included the
customers of AOL's dial-up service and subscribers of TW's cable and magazine
divisions.

ANALYSIS OF MERGER SUCCESS/FAILURE

According to many people this acquisition was a complete disaster. This
acquisition was earlier termed as the deal of a century but it was over in a
decade.
 The combined company, which had a speculated market capitalization valued
at $350 billion just a year ago, would now be valued at $205 billion.
 The deal value also fell from $160 billion to $113 billion in just a year i.e.
nearly 30%.
 The combined company reported astonishing net loss of $99 billion for the year
2002.
 After merger stock price:

MONTH SHARE PRICE($)

JANUARY 97

SEPTEMBER 35

OCTOBER 30

This clearly shows that after the acquisition the stock price started declining
drastically.
 INTERPRETATION OF MERGER

As we can see from the above information the acquisition was a

complete failure. This was mainly because the cultural integration was
not successfully done by the 2 companies.

Another reason for failure of the merger was that the stock of AOL was
inflated and was overvalued at the time of merger. As it was a
complete stock deal the share price came down which resulted in less
market valuation of the merged company.
 DISCUSSION AND COMPARISON OF THE THREE CASE
STUDIES:

 METHODS OF FINANCING USED

Name of Adidas- Facebook- AOL-Time Warner

companies Reebok WhatsApp
Debt  

STOCK   

ADIDAS acquired REEBOK and FACEBOOK acquired WHATSAPP using a mix of

debt and equity. This resulted in increase in the financial risk of shareholders
and would have influenced the cost of equity. AOL acquisition with TIME
WARNER on the other hand was completed with exchange of stock only.
Although the fixed interest bearing debt was less but still it resulted in dilution
of voting rights and a large group of shareholders which resulted in less control
which was one of the main reasons for its failure.

 SYNERGIES
Synergy means combined value of 2 or more companies. While ADIDAS-
REEBOK and FACEBOOK-WHATSAPP were able to take advantage of synergy
generated, AOL-TIME WARNER wasn’t able to take proper advantage of it. This
was mainly because AOL stock price was overvalued. It had experienced a
 stock price increase of 1,468% between the years 1996-2001, providing it with an
inflated market capitalization of $226 billion at the time of the merger. This proved
to be a problem since the deal was a ‘stock-for-stock’ merger, meaning that Time
Warner, despite having a higher annual turnover than AOL, was still the smaller
company by market capitalization and was only provided with AOL’s shares,
effectively making the ‘merger’ in practice, an acquisition.

 SIMILARITY OF COMPANIES MERGED

More similar the structure of the companies, more likely the merger will be a
success.
ADIDAS-REEBOK, FACEBOOK-WHATSAPP were pretty similar companies
therefore, it was easy for them to integrate. Also as we know that customers
are one of the important stakeholders for any merger & acquisition deal, both
of these companies have similar customer base.
AOL-TIME WARNER may seem similar but they are different. AOL was more
into online media whereas TIME-WARNER covered all the areas related to mass
media.

 CULTURAL CLASHES
AOL-Time Warner were not able to successfully integrate their respective
cultures with each other meaning the top executives of the merged company
left whereas Adidas-Reebok and Facebook-Whatsapp were able to retain their
key executives.
 FINDINGS

I. Mergers and acquisitions helps in orderly redirection of the firm’s

activities.

II. It also aims at improving the competitive position of an individual

business.

III. It is mainly concerned with reorganizing or restructuring or rearranging

the organizational or business activities of the company as a whole.

IV. Mergers and acquisitions has become common to the corporate sector in
order to grow and survive in the present ongoing corporate environment
for increased efficiency and profitable growth.

V. Mergers and acquisitions is a form of corporate restructuring.

 SUGGESTIONS

I. The share price of firms to be merged should be analyzed carefully

because sometimes the share price can be inflated and this can result
in overvaluation of the firm to be merged or acquired.

II. Mergers and Acquisitions is a complex process so it should be done

with a lot of caution.

III. Proper financial and operational analysis should be done of the firms
to be merged.

IV. Mergers and Acquisitions should be done with the motive of enhancing
efficiency and effectiveness of the company.

V. It has become an important aspect in today’s world to survive in the

competitive environment so restructuring has become a must to grow
and expand. As a result it must be undertaken by all the sick
industries in order to improve.

VI. It has become an important aspect in today’s world to survive in the

competitive environment so mergers and acquisitions has become a
must to grow and expand. As a result it must be undertaken by all the
sick industries in order to improve.
 CONCLUSION

In this perspective, ‘Mergers and Acquisitions’ is a process of rearranging the

organizational or business structure of the company for increased efficiency
and profitable growth. It is a form of corporate restructuring.

Simply stated, Mergers and Acquisitions is a comprehensive process by which

a company can consolidate or rearrange its organizational set up or business
operations and strengthen its position so as to achieve its short-term or /and
long term objectives and establish itself as a synergetic , dynamic , continuing
as well as successful independent corporate entity in the competitive
environment.

It has become an important aspect in today’s competitive world.

Every company is going through restructuring in way or the other.

 BIBLIOGRAPHY

WEBSITES:

www.Investopedia.com
www.chron.com
www.icmrindia.org
www.scribd.com
www.forbes.com
www.wikipedia.com
www.economictimes.com
www.phdify.com

BOOKS:

Mergers and Acquisitions from A to Z

Mergers and Acquisitions for Dummies