Date: 9th February 2021

VIRTUAL COACHING CLASSES

FINAL LEVEL
PAPER 2: STRATEGIC FINANCIAL MANAGEMENT

Faculty: CA SUUSHANT ARORA

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 MERGERS &
ACQUISITIONS
Chapter 13

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 Mergers and acquisitions

TYPES OF TAKEOVER
FINANCIAL
MERGERS DEFENSIVE
FRAMEWORK
TACTICS

REVERSE FINANCIAL OWNERSHIP

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RATIONALE FOR MERGERS AND
ACQUISITIONS
Synergistic operating economics: Synergy May be defined as follows:
V (AB) >V(A) + V (B).
Benefits:
A. Diversification
B. Taxation
C. Growth
D. Consolidation of Production Capacities and increasing market power

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FORMS (TYPES) OF MERGERS
(i) Horizontal Merger: The two companies which have merged are in the same industry, normally the
market share of the new consolidated company would be larger and it is possible that it may move
closer to being a monopoly or a near monopoly to avoid competition.
(ii) Vertical Merger: This merger happens when two companies that have ‘buyer-seller’ relationship
(or potential buyer-seller relationship) come together.
(iii) Conglomerate Mergers: Such mergers involve firms engaged in unrelated type of business
operations.
(iv) Congeneric Merger: In these mergers, the acquirer and the target companies are related through
basic technologies, production processes or markets.
(v) Reverse Merger: Such mergers involve acquisition of a public (Shell Company) by a private
company, as it helps private company to by-pass lengthy and complex process required to be followed
in case it is interested in going public.
(vi) Acquisition: This refers to the purchase of controlling interest by one company in the share
capital of an existing company via open market, private agreement or majority holding.

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FINANCIAL FRAMEWORK
Gains from Mergers or Synergy
The first step in merger analysis is to identify the economic gains from the merger. There are
gains, if the combined entity is more than the sum of its parts.
That is, Combined value > (Value of acquirer + Stand alone value of target)

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TAKEOVER DEFENSIVE TACTICS
Take Over Strategies
Other than Tender Offer the acquiring company can also use the following techniques:
Street Sweep: This refers to the technique where the acquiring company accumulates larger
number of shares in a target before making an open offer. The advantage is that the target
company is left with no choice but to agree to the proposal of acquirer for takeover.
Bear Hug: When the acquirer threatens the target company to make an open offer, the board of
target company agrees to a settlement with the acquirer for change of control.
Strategic Alliance: This involves disarming the acquirer by offering a partnership rather than a
buyout. The acquirer should assert control from within and takeover the target company.
Brand Power: This refers to entering into an alliance with powerful brands to displace the
target’s brands and as a result, buyout the weakened company.

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Defensive Tactics
A target company can adopt a number of tactics to defend itself from hostile takeover
through a tender offer.
Divestiture - In a divestiture the target company divests or spins off some of its businesses
in the form of an independent, subsidiary company. Thus, reducing the attractiveness of the
existing business to the acquirer.
Crown jewels - When a target company uses the tactic of divestiture it is said to sell the
crown jewels. In some countries such as the UK, such tactic is not allowed once the deal
becomes known and is unavoidable.
Poison pill - Sometimes an acquiring company itself becomes a target when it is bidding for
another company. The tactics used by the acquiring company to make itself unattractive to
a potential bidder is called poison pills. For instance, the acquiring company may issue
substantial amount of convertible debentures to its existing shareholders to be converted at
a future date when it faces a takeover threat. The task of the bidder would become difficult
since the number of shares to having voting control of the company increases substantially.
(target co to buy shares of acquiring at reduced rate or ask for ESOP of Acq co or special
rights exercisable upon trigger of event)
Poison Put - In this case the target company issue bonds that encourage holder to cash in at
higher prices. The resultant cash drainage would make the target unattractive.

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Greenmail - Greenmail refers to an incentive offered by management of the target company to the
potential bidder for not pursuing the takeover. The management of the target company may offer the
acquirer for its shares a price higher than the market price. (Promoters of the T co make an offer at an
attractive price to the acquirer to surrender his holding in T Co back to the promoters of the T co so
co needs to be cash rich)
White knight - In this a target company offers to be acquired by a friendly company to escape from a
hostile takeover. The possible motive for the management of the target company to do so is not to
lose the management of the company. The hostile acquirer may change the management. (WK is the
person who helps promoters of the T Co in making counter bid against the A co and so T co can able
to get rid of the A co) ITC was the acquirer and wanted to target Indian hotels (Oberios) so RIL came as
WK
White squire - This strategy is essentially the same as white knight and involves sell out of shares to a
company that is not interested in the takeover. As a consequence, the management of the target
company retains its control over the company.
Golden parachutes - When a company offers hefty compensations to its managers if they get ousted
due to takeover, the company is said to offer golden parachutes. This reduces their resistance to
takeover. (it consists of substatial benefits given to top executives if the co is taken over by another
firm, it is in their empl agreement and amount is 5 times roughly.)
Pac-man defence - This strategy aims at the target company making a counter bid for the acquirer
company. This would force the acquirer to defend itself and consequently may call off its proposal for
takeover. (target co tries to acquire the co that has made the hostile bid but its an
expensive strategy and T should be cash rich to acquire shares of A co)

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REVERSE MERGER
The concept of takeover by reverse bid, or of reverse merger, is thus not the usual case of
amalgamation of a sick unit which is non-viable with a healthy or prosperous unit but is a case
whereby the entire undertaking of the healthy and prosperous company is to be merged and
vested in the sick company which is non-viable.
The three tests should be fulfilled before an arrangement can be termed as a reverse takeover is
specified as follows:
(i) the assets of the transferor company are greater than the transferee company,
(ii) equity capital to be issued by the transferee company pursuant to the acquisition exceeds its
original issued capital, and
(iii) the change of control in the transferee company through the introduction of a minority
holder or group of holders.

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FINANCIAL RESTRUCTURING
Financial restructuring refers to a kind of internal changes made by the management in Assets
and Liabilities of a company with the consent of its various stakeholders.
Financial restructuring is one of the technique to bring into health such firms which are having
potential and promise for better financial performance in the years to come.
It is also known as internal re-construction& is aimed at reducing the debt/payment burden of
the corporate firm.

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OWNERSHIP RESTRUCTURING
Going Private
This refers to the situation wherein a listed company is converted into a private company by
buying back all the outstanding shares from the markets.
Management Buy Outs
Buyouts initiated by the management team of a company are known as a management buyout.
In this type of acquisition, the company is bought by its own management team.
MBOs are considered as a useful strategy for exiting those divisions that does not form part of
the core business of the entity.

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OWNERSHIP RESTRUCTURING
Contd.
Leveraged Buyout (LBO)
An acquisition of a company or a division of another company which is financed entirely or
partially (50% or more) using borrowed funds is termed as a leveraged buyout. The target
company no longer remains public after the leveraged buyout; hence the transaction is also
known as going private.
Equity buyback
This refers to the situation wherein a company buys back its own shares back from the market.
This results in reduction in the equity capital of the company. This strengthen the promoter’s
position by increasing his stake in the equity of the company.

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THANK YOU

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