A Diagnosis On Hiccup Of Merger And Acquisition

A DIAGNOSIS ON HICCUP OF MERGER AND				quantity reduction during this period
ACQUISITION				Long-run factors
Introduction:				In the long run, to keep costs low, it was advantageous
The phrase mergers and acquisitions (abbreviated				for firms to merge and reduce their transportation
M&A) refers to the aspect of corporate strategy,				costs thus producing and transporting from one
corporate finance and management dealing with the				location rather than various sites of different
buying, selling and combining of different companies				companies as in the past. This resulted in shipment
that can aid, finance, or help a growing company in a				directly to market from this one location. In addition,
given industry grow rapidly without having to create				technological changes prior to the merger movement
another business entity.				within companies increased the efficient size of plants
Acquisition/Takeover				with capital intensive assembly lines allowing for
Achieving acquisition success has proven to be very				economies of scale. Thus improved technology and
difficult; while various studies have showed that 50%				transportation were forerunners to the Great Merger
of acquisitions were unsuccessful the acquisition				Movement. In part due to competitors as mentioned
process is very complex, with many dimensions				above, and in part due to the government, however,
influencing its outcome.				many of these initially successful mergers were
• The buyer buys the shares, of the target				eventually dismantled. The U.S. government passed the
company ownership control of the company conveys				Sherman Act in 1890, setting rules against price fixing
effective control over the assets of the company, but				and monopolies. Starting in the 1890s with such cases
since the company is acquired intact as a going				as U.S. versus Addyston Pipe and Steel Co., the
business, this form of transaction carries with it all of				courts attacked large companies for strategizing with
the liabilities accrued by that business over its past and				others or within their own companies to maximize
all of the risks that company faces in its commercial				profits. Price fixing with competitors created a greater
environment.				incentive for companies to unite and merge under one
• The buyer buys the assets of the target				name so that they were not competitors anymore and
company and the sell-off is paid back to its				technically not price fixing.
shareholders by dividend or through liquidation. This				Cross-border M&A
type of transaction leaves the target company as an				In a study conducted in 2000 by Lehman Brothers, it
empty shell, if the buyer "cherry-pick" the assets that it				was found that, on average, large M&A deals cause
wants and leaves out the assets and liabilities that it do				the domestic currency of the target corporation to
not.				appreciate by 1% relative to the acquirer's. For every
Mergers				$1-billion deal, the currency of the target corporation
There are two types of mergers that are distinguished				increased s The rise of globalization has exponentially
based on finance. Each has certain implications for the				increased the market for cross border M&A. In 1996
companies involved and for investors:				alone there were over 2000 cross border transactions
Purchase mergers is a kind of merger when one				worth a total of approximately $256 billion. This rapid
company purchases another. The purchase is made				increase has taken many M&A firms by surprise
with cash or through the issue of some kind of debt				because the majority of them never had to consider
instrument; the sale is taxable.				acquiring Due to the complicated nature of cross
Acquiring companies often prefer this type of merger				border M&A, the vast majority of cross border actions
because it can provide them with a tax benefit.				have unsuccessful companies seek to expand their
Acquired assets can be written-up to the actual				global footprint and become more agile at creating
purchase price, and the difference between the book				high-performing businesses and cultures across
value and the purchase price of the assets can				national boundaries.
depreciate annually, reducing taxes payable by the				Table – A - Major M&A World wide
acquiring company.				Top 10 M&A deals worldwide by value (in mil. USD)
Consolidation mergers are merger, where a brand				from 1990 to 1999:
new company is formed and both companies are				Rank
bought and combined under the new entity. The tax				Year
terms are the same as those of a purchase merger.				Purchaser
A unique type of merger called a reverse merger is				Purchased
used as a way of going public without the expense				Transaction value (in mil. USD)
and time required by an IPO. The occurrence of a				1
merger often raises concerns in antitrust circles.				1999
Devices such as the Herfindahl index can analyze the				Vodafone Airtouch PLC
impact of a merger on a market Regulatory bodies
such as the European Commission, the United States				Mannesmann
Department of Justice and the U.S. Federal Trade
Commission investigates anti-trust cases for				183,000
monopolies dangers, and have the power to block
mergers.				2
Accretive mergers are those in which an acquiring				1999
company's earnings per share (EPS) increase. An				Pfizer
alternative way of calculating this is if a company with				Warner-Lambert
a high price to earnings ratio (P/E) acquires one with a				90,000
low P/E.				3
Dilutive mergers are mergers where a company's EPS				1998
decreases. The company will be one with a low P/E				Exxon
acquiring one with a high P/E.				Mobil
The completion of a merger does not ensure the				77,200
success of the resulting organization; indeed, many				4
mergers result in a net loss of value due to problems.				1998
Correcting problems caused by				Citicorp
incompatibility—whether of technology, equipment, or				Travelers Group
corporate culture— diverts resources away from				73,000
new investment, and these problems may be				5
exacerbated by inadequate research or by				1999
concealment of losses or liabilities by one of the				SBC Communications
partners. Overlapping subsidiaries or redundant staff				Ameritech Corporation
may be allowed to continue, creating inefficiency, and				63,000
conversely the new management may cut too many				6
operations or personnel, losing expertise and disrupting				1999
employee culture. These problems are similar to those				Vodafone Group
encountered in takeovers. For the merger not to be				AirTouch Communications
considered a failure, it must increase shareholder value
faster than if the companies were separate, or
prevent the deterioration of shareholder value more
than if the companies were separate.
Mergers Vs acquisitions
Although they are often uttered in the same breath
and used synonymous, the terms merger and
acquisition mean slightly different things.				60,000
In the pure sense of the term, a merger happens				7
when two firms, often of about the same size, agree				1998
to go forward as a single new company rather than				Bell Atlantic
remain separately owned and operated. This kind of				GTE
action is more precisely referred to as a "merger of				53,360
equals".				8
In practice, however, actual mergers of equals don't				1998
happen very often. Usually, one company will buy				BP
another and, as part of the deal's terms, simply allow				Amoco
the acquired firm to proclaim that the action is a				53,000
merger of equals, even if it is technically an acquisition.				9
Being bought out often carries negative connotations,				1999
therefore, by describing the deal euphemistically as a				Qwest Communications
merger, deal makers and top managers try to make				US WEST
the takeover more palatable.				48,000
A purchase deal will also be called a merger when				10
both CEOs agree that joining together is in the best				1997
interest of both of their companies. But when the deal				Worldcom
is unfriendly - that is, when the target company does				MCI Communications
not want to be purchased - it is always regarded as				42,000
an acquisition. Whether a purchase is considered a
merger or an acquisition really depends on whether the				Table – B - Major M&A World wide
purchase is friendly or hostile and how it is announced				Top 9 M&A deals worldwide by value (in mil. USD)
Mergers are generally differentiated from acquisitions				since 2000:
partly by the way in which they are financed and				Rank
partly by the relative size of the companies. Various				Year
methods of financing an M&A deal exist:a) Payment				Purchaser
by cash - Such transactions are usually termed				Purchased
acquisitions rather than mergers because the				Transaction value (in mil. USD)
shareholders of the target company are removed				1
from the picture and the target comes under the				2000
(indirect) control of the bidder's shareholders alone.b)				Fusion: America Online Inc. (AOL)
Financing capital - capital may be borrowed from a				Time Warner
bank, or raised by an issue of bonds. Alternatively, the				164,747
acquirer's stock may be offered as consideration.				2
Acquisitions financed through debt are known as				2000
leveraged buyouts if they take the target private.c)				Glaxo Wellcome Plc.
Hybrids - An acquisition can involve a combination of				SmithKline Beecham Plc.
cash and debt or of cash and stock of the purchasing				75,961
entity.d) Factoring - Factoring can provide the extra to				3
make a merger or sale work. Hybrid can work as ad				2004
e-denit.				Royal Dutch Petroleum Co.
The Great Merger Movement of USA				Shell Transport & Trading Co
The Great Merger Movement was a predominantly				74,559
U.S. business phenomenon that happened from 1895 to				4
1905. During this time, small firms with little market share				2006
consolidated with similar firms to form large, powerful				AT&T Inc.
institutions that dominated their markets. It is estimated				BellSouth Corporation
that more than 1,800 of these firms disappeared into				72,671
consolidations, many of which acquired substantial				5
shares of the markets in which they operated. The				2001
vehicle used was so-called trusts. To truly understand				Comcast Corporation
how large this movement was—in 1900 the value of				AT&T Broadband & Internet Svcs
firms acquired in mergers was 20% of GDP. In 1990				72,041
the value was only 3% and from 1998–2000 it was				6
around 10–11% of GDP. Organizations that				2004
commanded the greatest share of the market in 1905				Sanofi-Synthelabo SA
saw that command disintegrate by 1929 as smaller				Aventis SA
competitors joined forces with each other. However,				60,243
there were companies that merged during this time				7
such as DuPont, Nabisco, US Steel, and General				2000
Electric that have been able to keep their dominance in				Spin-off: Nortel Networks Corporation
their respected sectors today due to growing
technological advances of their products, patents, and				59,974
brand recognition by their customers. The companies				8
that merged were mass producers of homogeneous				2002
goods that could exploit the efficiencies of large				Pfizer Inc.
volume production. The "quick mergers" involved				Pharmacia Corporation
mergers of companies with unrelated technology and				59,515
different management. As a result, the efficiency gains				9
associated with mergers were not present. The new				2004
and bigger company would actually faced higher costs				JP Morgan Chase & Co
than competitors because of these technological and				Bank One Corp
managerial differences. Thus, the mergers were not				58,761
done to see large efficiency gains; they were in fact				10
done because that was the trend at the time.				2008
Changing motives of Merger and Acquisitions				Inbev Inc.
Acquiring firms' financial performance does not				Anheuser-Busch Companies, Inc
positively change as a function of their acquisition				52,000
activity. Motives for merger and acquisition that may				Source:
not add shareholder value include:				Failure and Exiting Assets
• Diversification: This may hedge a company				A merger is not likely to create or enhance market
against a downturn in an individual industry it fails to				power or to facilitate its exercise, if imminent failure, of
deliver value, since it is possible for individual				one of the merging firms would cause the assets of
shareholders to achieve the same hedge by				that firm to exit the relevant market. In such
diversifying their portfolios at a much lower cost than				circumstances, post-merger performance in the
those associated with a merger.				relevant market may be no worse than market
• Manager's hubris: Manager's overconfidence				performance had the merger been blocked and the
about expected synergies from M&A which results in				assets left the market.
overpayment for the target company.				Failing Firm
• Empire-building: Managers have larger companies				A merger is not likely to create or enhance market
to manage and hence more power.				power or facilitate its exercise if the following
• Manager's compensation: Executive management				circumstances are met:
teams had their payout based on the total amount of				1) the allegedly failing firm would be unable to
profit of the company, instead of the profit per share,				meet its financial obligations in the near future;
which would give the team a perverse incentive to				2) it would not be able to reorganize
buy companies to increase the total profit while				successfully under Chapter 11 of the Bankruptcy Act;
decreasing the profit per share.				3) it has made unsuccessful good-faith
A study published in the July/August 2008 issue of the				efforts to elicit reasonable alternative offers of
Journal of Business Strategy suggests that mergers				acquisition of the assets of the failing firm that would
and acquisitions destroy leadership continuity in target				both keep its tangible and intangible assets in the
companies’ top management teams for at least a				relevant market and pose a less severe danger to
decade following a deal. The study found that target				competition than does the proposed merger; and
companies lose 21 percent of their executives each				4) absent the acquisition, the assets of the
year for at least 10 years following an acquisition –				failing firm would exit the relevant market.
more than double the turnover experienced in				Failing Division
non-merged firms.				A similar argument can be made for "failing" divisions
Marketplace difficulties				as for failing firms.
In many countries, no marketplace exists for the				First, upon applying appropriate cost allocation rules, the
mergers and acquisitions of privately owned small to				division must have a negative cash flow on an
mid-sized companies. Market participants often wish to				operating basis.
maintain a level of secrecy about their efforts to buy				Second, absent the acquisition, it must be that the
or sell such companies. Their concern for secrecy				assets of the division would exit the relevant market in
usually arises from the possible negative reactions a				the near future if not sold. Due to the ability of the
company's employees, bankers, suppliers, customers				parent firm to allocate costs, revenues, and
and others seek a transaction to become known. This				intracompany transactions among itself and its
need for secrecy has thus far thwarted the				subsidiaries and divisions, the Agency will require
emergence of a public forum or marketplace to serve				evidence, not based solely on management plans that
as a clearinghouse for this large volume of business. In				could be prepared solely for the purpose of
USA, a Multiple Listing Service (MLS) of small				demonstrating negative cash flow or the prospect of
businesses for sale is maintained by organizations such				exit from the relevant market.
as Business Brokers of Florida (BBF). Another MLS is				Third, the owner of the failing division also must have
maintained by International Business Brokers				complied with the competitively preferable purchaser
Association (IBBA).				requirement
The process by which a company is bought or sold				Although at present the majority of M&A advice is
can prove difficult, slow and expensive. A transaction				provided by full-service investment banks, recent
typically requires six to nine months and involves many				years have seen a rise in the prominence of specialist
steps. Locating parties with whom to conduct a				M&A advisers, who only provide M&A advice. These
transaction forms one step in the overall process and				companies are sometimes referred to as Transition
perhaps the most difficult one. Qualified and interested				Companies, assisting businesses often referred to as
buyers of multimillion corporations are hard to find.				"companies in transition." To perform these services in
Even more difficulties attend bringing a number of				the US, an advisor must be a licensed broker dealer,
potential buyers forward simultaneously during				and subject to SEC (FINRA) regulation.
negotiations. Potential acquirers in an industry simply
cannot effectively "monitor" the economy at large for				Poison bill
acquisition opportunities even though some may fit well				The poison pill was invented by noted M&A lawyer
within their company's operations or plans.				Martin Lipton of Wachtell, Lipton, Rosen & Katz, in 1982,
An industry of professional "middlemen" known as				as a response to tender-based hostile takeovers.
intermediaries, business brokers, and investment				Poison pills became popular during the early 1980s, in
bankers exists to facilitate M&A transactions. These				response to the increasing trend of corporate raids.
professionals do not provide their services cheaply and				Poison pill is a term referring to any strategy, generally
generally resort to previously-established personal				in business or politics, to increase the likelihood of
contacts, direct-calling campaigns, and placing				negative results over positive ones for a party that
advertisements in various media. In servicing their				attempts any kind of takeover. It derives from its
clients they attempt to create a one-time market for a				original meaning of a literal poison pill carried by various
one-time transaction. Stock purchase or merger				spies throughout history, taken when discovered to
transactions involve securities and require that these				eliminate the possibility of being interrogated for the
"middlemen" be licensed broker dealers under FINRA				enemy's gain.
(SEC) (USA) in order to be compensated as a				It was reported in 2001 that since 1997, for every
percentage of the deal. Marketing problems typify any				company with a poison pill that successfully resisted a
private negotiated markets. Due to this problem and				hostile takeover, there were 20 companies with poison
other problems like much more strenuous conditions				pills that accepted takeover offers. The trend since the
for mid-sized companies. Mid-sized business brokers				early 2000s has been for shareholders to vote against
have an average life-span of only 12–18 months				poison pill authorization, since, despite the above
and usually never grow beyond 1 or 2 employees.				statistic, poison pills are designed to resist takeovers,
The market inefficiencies can prove detrimental for a				whereas from the point of view of a shareholder,
sector of the economy. An important and large sector				takeovers can be financially rewarding.
of the entire economy is held back by the difficulty in				Common types of poison pills
conducting corporate M&A. Furthermore, it is likely that				- Preferred stock plan
since privately held companies are so difficult to sell				- Flipover rights plan
they are not sold as often.				- Ownership flip-in plan
Previous attempts to streamline the M&A process				- Back-end rights plan
through computers have failed to succeed on a large				- Voting plan
scale because they have provided mere "bulletin				Constraints and legal status
boards" - static information that advertises one firm's				Following the development of poison pills in the 1980s,
opportunities. Users seek other sources for				the legality of their use was unclear in the United
opportunities just as if the bulletin board were not				States for some time. However, poison pills were
electronic. A multiple listings service concept was not				upheld as a valid instrument of Delaware corporate
used due to the need for confidentiality but there are				law by the Delaware Supreme Court in its 1985
currently several in operations. The most significant of				decision Moran v. Household International, Inc.
these are run by the California Association of Business				Many jurisdictions other than the U.S. view the poison
Brokers (CABB) and the International Business Brokers				pill strategy as illegal, or place restraints on their use.
Association (IBBA) These organizations have				Canada
effectivily created a type of virtual market without				In Canada, almost all shareholders rights plans are
compromising the confidentiality of parties involved and				"chewable", meaning they contain a permitted bid
without the unauthorized release of information.				concept such that a bidder who is willing to conform to
One part of the M&A process using networked				the requirements of a permitted bid can acquire the
computers is the improved access to "data rooms"				company by take-over bid without triggering a flip-in
during the due diligence process for larger transactions.				event. Shareholder rights plans in Canada are also
For the purposes of small-medium sized business,				weakened by the ability of a hostile acquirer to petition
these data rooms serve no purpose and are generally				the provincial securities regulators to have the
not used.				company's pill overturned. A notable Canadian case
M&A failure				before the securities regulators in 2006 involved the
Reasons for failure of M&A were analyzed by				poison pill of Falconbridge Ltd. which at the time was
Thomas Straub in "Reasons for frequent failure in				the subject of a friendly bid from Inco and a hostile bid
mergers and acquisitions - a comprehensive analysis",				from Xstrata plc, which was a 20% shareholder of
DUV Gabler Edition, 2007. Despite the goal of				Falconbridge. Xstrata applied to have Falconbridge's pill
performance improvement, results from mergers and				invalidated, citing among other things that the
acquisitions (M&A) are disappointing. Numerous				Falconbridge had had its pill in place without
empirical studies show high failure rates of M&A deals.				shareholder approval for more than nine months and
Studies are mostly focused on individual determinants.				that the pill stood in the way of Falconbridge
Using four statistical methods, Thomas Straub shows				shareholders accepting Xstrata's all cash offer for
that M&A performance is a multi-dimensional function.				Falconbridge shares. Despite similar facts with previous
For a successful deal, the following key success				cases in which securities regulators had promptly
factors should be taken into account:				taken down pills, the Ontario Securities Commission
Strategic logic which is reflected by six determinants:				ruled that Falconbridge's pill could remain in place for a
• market similarities,				further limited period as it had the effect of sustaining
• market complementarities,				the auction for Falconbridge by preventing Xstrata
• operational similarities,				increasing its ownership and potentially obtaining a
• operational complementarities,				blocking position that would prevent other bidders from
• market power, and				obtaining 100% of the shares.
• purchasing power.				United Kingdom
Organizational integration which is reflected by three				In Great Britain, poison pills are not allowed under
determinants:				Takeover Panel rules. The rights of public shareholders
• acquisition experience,				are protected by the Panel on a case-by-case,
• relative size,				principles-based regulatory regime. One disadvantage
• cultural compatibility.				of the Panel's prohibition of poison pills is that it allows
Financial / price perspective which is reflected by three				bidding wars to be won by hostile bidders who buy
determinants:				shares of their target in the marketplace during "raids".
• acquisition premium,				Raids have helped bidders win targets such as BAA
• bidding process, and				plc and AWG plc when other bidders were
• due diligence.				considering emerging at higher prices. If these
All 12 variables are presumed to affect performance				companies had poison pills, they could have prevented
either positively or negatively. Post-M&A performance				the raids by threatening to dilute the positions of their
is measured by synergy realization, relative				hostile suitors if they exceeded the statutory levels
performance and absolute performance.				(often 10% of the outstanding shares) in the rights plan.
Short-run factors				The London Stock Exchange itself is another example
One of the major short run factors that sparked in				of a company that has seen significant stakebuilding
The Great Merger Movement was the desire to keep				by a hostile suitor, in this case the NASDAQ. The
prices high. During the panic of 1893, the demand				LSE's ultimate fate is currently up in the air, but
declined. When demand for the good falls, as illustrated				NASDAQ's stake is sufficiently large that it is
by the classic supply and demand model, prices are				essentially impossible for a third party bidder to make a
driven down. To avoid this decline in prices, firms found				successful offer to acquire the LSE.
it profitable to collude and manipulate supply to counter				Takeover law is still evolving in continental Europe, as
any changes in demand for the good. This type of				individual countries slowly fall in line with requirements
cooperation led to widespread horizontal integration				mandated by the European Commission. Stakebuilding
amongst firms of the era. Focusing on mass				is commonplace in many continental takeover battles
production allowed firms to reduce unit costs to a				such as Scania AB. Formal poison pills are quite rare in
much lower rate. These firms usually were				continental Europe, but national governments hold
capital-intensive and had high fixed costs. Because				golden shares in many "strategic" companies such as
new machines were mostly financed through bonds,				telecom monopolies and energy companies.
interest payments on bonds were high followed by the				Governments have also served as "poison pills" by
panic of 1893, yet no firm was willing to accept				threatening potential suitors with negative regulatory
quantity reduction during this period				developments if they pursue the takeover. Examples
Long-run factors				of this include Spain's adoption of new rules for the
In the long run, to keep costs low, it was advantageous				ownership of energy companies after E.ON of
for firms to merge and reduce their transportation				Germany made a hostile bid for Endesa and France's
costs thus producing and transporting from one				threats to punish any potential acquiror of Groupe
location rather than various sites of different				Danone.
companies as in the past. This resulted in shipment				Takeover Defenses
directly to market from this one location. In addition,				Poison pill is sometimes used more broadly to describe
technological changes prior to the merger movement				other types of takeover defenses that involve the
within companies increased the efficient size of plants				target taking some action. Although the broad
with capital intensive assembly lines allowing for				category of takeover defenses (more commonly
economies of scale. Thus improved technology and				known as "shark repellents") includes the traditional
transportation were forerunners to the Great Merger				shareholder rights plan poison pill. Other anti-takeover
Movement. In part due to competitors as mentioned				protections include:
above, and in part due to the government, however,				- Classified boards with staggered terms.
many of these initially successful mergers were				- Limitations on the ability to call special meetings or
eventually dismantled. The U.S. government passed the				take action by written consent.
Sherman Act in 1890, setting rules against price fixing				- Supermajority vote requirements to approve
and monopolies. Starting in the 1890s with such cases				mergers.
as U.S. versus Addyston Pipe and Steel Co., the				- Supermajority vote requirements to remove
courts attacked large companies for strategizing with				directors.
others or within their own companies to maximize				- The target adds to its charter a provision which gives
profits. Price fixing with competitors created a greater				the current shareholders the right to sell their shares to
incentive for companies to unite and merge under one				the acquirer at an increased price (usually 100% above
name so that they were not competitors anymore and				recent average share price), if the acquirer's share of
technically not price fixing.				the company reaches a critical limit (usually one third).
Cross-border M&A				This kind of poison pill cannot stop a determined
In a study conducted in 2000 by Lehman Brothers, it				acquirer, but ensures a high price for the company.
was found that, on average, large M&A deals cause				- The target takes on large debts in an effort to make
the domestic currency of the target corporation to				the debt load too high to be attractive—the acquirer
appreciate by 1% relative to the acquirer's. For every				would eventually have to pay the debts.
$1-billion deal, the currency of the target corporation				- The company buys a number of smaller companies
increased s The rise of globalization has exponentially				using a stock swap, diluting the value of the target's
increased the market for cross border M&A. In 1996				stock.
alone there were over 2000 cross border transactions				- The target grants its employees stock options that
worth a total of approximately $256 billion. This rapid				immediately vest if the company is taken over. This is
increase has taken many M&A firms by surprise				intended to give employees an incentive to continue
because the majority of them never had to consider				working for the target company at least until a merger
acquiring Due to the complicated nature of cross				is completed instead of looking for a new job as soon
border M&A, the vast majority of cross border actions				as takeover discussions begin. However, with the
have unsuccessful companies seek to expand their				release of the "golden handcuffs", many discontented
global footprint and become more agile at creating				employees may quit immediately after they've cashed
high-performing businesses and cultures across				in their stock options. This poison pill may create an
national boundaries.				exodus of talented employees. In many high-tech
1998 Citicorp				businesses, attrition of talented human resources often
Travelers Group				means an empty shell is left behind for the new owner.
73,000				- The practice of having staggered elections for the
5 1999 SBC Communications				board of directors. In some companies, certain
Ameritech Corporation				percentages of the board (33%) may be enough to
63,000				block key decisions (such as a full merger agreement
6 1999 Vodafone Group				or major asset sale), so an acquirer may not be able
AirTouch Communications				to close an acquisition for years after having
60,000				purchased a majority of the target's stock. As of
7 1998 Bell Atlantic				December 31, 2008, 47.05% of the companies in the
GTE				S&P Super 1500 had a classified board.
53,360				Peoplesoft guaranteed its customers in June 2003 that
8 1998 BP				if it were acquired within two years, presumably by its
Amoco				rival Oracle Corporation, and product support were
53,000				reduced within four years, its customers would receive
9 1999 Qwest Communications				a refund of between two and five times the fees they
US WEST				had paid for their Peoplesoft software licenses. The
A DIAGNOSIS ON HICCUP OF MERGER AND				hypothetical cost to Oracle was valued at as much as
ACQUISITION				US$1.5 billion. Peoplesoft allowed the guarantee to
S.Senthil Srinivasan[1]				expire in April 2004. If PeopleSoft had not prepared
Introduction:				itself by adopting effective takeover defenses, it is
The phrase mergers and acquisitions (abbreviated				unclear if Oracle would have significantly raised its
M&A) refers to the aspect of corporate strategy,				original bid of $16 per share. The increased bid
corporate finance and management dealing with the				provided an additional $4.1 billion for PeopleSoft's
buying, selling and combining of different companies				shareholders.
that can aid, finance, or help a growing company in a				Conclusion
given industry grow rapidly without having to create				The Merger Guidelines issued by the U.S. Department
another business entity.				of Justice in 1984 and the Statement of the Federal
Acquisition/Takeover				Trade Commission Concerning Horizontal Mergers
				issue in 1982. The Merger Guidelines may be revised
Achieving acquisition success has proven to be very				from time to time as necessary to reflect any
difficult; while various studies have showed that 50%				significant changes in enforcement policy or to clarify
of acquisitions were unsuccessful the acquisition				aspects of existing policy. Burden with respect to
process is very complex, with many dimensions				efficiency and failure continues to reside with the
influencing its outcome.				proponents of the merger. Sellers with market power
- The buyer buys the shares, of the target company				also lessen competition on dimensions other than price,
ownership control of the company conveys effective				such as product quality, service, or innovation. The
control over the assets of the company, but since the				Clayton Act prohibits mergers that may substantially
company is acquired intact as a going business, this				lessen competition "in any line of commerce . . . in any
form of transaction carries with it all of the liabilities				section of the country." Accordingly, the Agency
accrued by that business over its past and all of the				normally assesses competition in each relevant market
risks that company faces in its commercial				affected by a merger independently and normally will
environment.				challenge the merger if it is likely to be anticompetitive
- The buyer buys the assets of the target company				in any relevant market. In some cases, however, the
and the sell-off is paid back to its shareholders by				Agency in its prosecutorial discretion should consider
dividend or through liquidation. This type of transaction				efficiencies not strictly in the relevant market, but
leaves the target company as an empty shell, if the				inextricably linked with a partial divestiture or other
buyer "cherry-pick" the assets that it wants and leaves				remedy feasible to eliminate the anticompetitive effect
out the assets and liabilities that it do not.				in the relevant market without sacrificing the
Mergers				efficiencies in the other market(s).
				The Agency should consider the effects of cognizable
There are two types of mergers that are distinguished				efficiencies with no short-term, direct effect on prices
based on finance. Each has certain implications for the				in the relevant market. Delayed benefits from
companies involved and for investors:				efficiencies should be given less weight because they
Purchase mergers is a kind of merger when one				are less proximate and more difficult to predict.
company purchases another. The purchase is made				Reference:
with cash or through the issue of some kind of debt				1. \| accessdate = 2007-06-17.
instrument; the sale is taxable.				2. & acquistions note 6 to note 19.
Acquiring companies often prefer this type of merger				3. N.38 and N.39
because it can provide them with a tax benefit.				1. Television Sets Corporate - Mergers & Acquisitions
Acquired assets can be written-up to the actual
purchase price, and the difference between the book				******
value and the purchase price of the assets can
depreciate annually, reducing taxes payable by the
acquiring company.
Consolidation mergers are merger, where a brand
new company is formed and both companies are
bought and combined under the new entity. The tax
terms are the same as those of a purchase merger.
A unique type of merger called a reverse merger is
used as a way of going public without the expense				[1] Assistant Professor, P.G. and Research Department
and time required by an IPO. The occurrence of a				of Corporate Secretaryship, Bharathidasan
merger often raises concerns in antitrust circles.				Government College for Women, Puducherry – 605
Devices such as the Herfindahl index can analyze the				003. Email:
impact of a merger on a market Regulatory bodies				A DIAGNOSIS ON HICCUP OF MERGER AND
such as the European Commission, the United States				ACQUISITION
Department of Justice and the U.S. Federal Trade				Introduction:
Commission investigates anti-trust cases for				The phrase mergers and acquisitions (abbreviated
monopolies dangers, and have the power to block				M&A) refers to the aspect of corporate strategy,
mergers.				corporate finance and management dealing with the
Accretive mergers are those in which an acquiring				buying, selling and combining of different companies
company's earnings per share (EPS) increase. An				that can aid, finance, or help a growing company in a
alternative way of calculating this is if a company with				given industry grow rapidly without having to create
a high price to earnings ratio (P/E) acquires one with a				another business entity.
low P/E.				Acquisition/Takeover
Dilutive mergers are mergers where a company's EPS
decreases. The company will be one with a low P/E				Achieving acquisition success has proven to be very
acquiring one with a high P/E.				difficult; while various studies have showed that 50%
The completion of a merger does not ensure the				of acquisitions were unsuccessful the acquisition
success of the resulting organization; indeed, many				process is very complex, with many dimensions
mergers result in a net loss of value due to problems.				influencing its outcome.
Correcting problems caused by				- The buyer buys the shares, of the target company
incompatibility—whether of technology, equipment, or				ownership control of the company conveys effective
corporate culture— diverts resources away from				control over the assets of the company, but since the
new investment, and these problems may be				company is acquired intact as a going business, this
exacerbated by inadequate research or by				form of transaction carries with it all of the liabilities
concealment of losses or liabilities by one of the				accrued by that business over its past and all of the
partners. Overlapping subsidiaries or redundant staff				risks that company faces in its commercial
may be allowed to continue, creating inefficiency, and				environment.
conversely the new management may cut too many				- The buyer buys the assets of the target company
operations or personnel, losing expertise and disrupting				and the sell-off is paid back to its shareholders by
employee culture. These problems are similar to those				dividend or through liquidation. This type of transaction
encountered in takeovers. For the merger not to be				leaves the target company as an empty shell, if the
considered a failure, it must increase shareholder value				buyer "cherry-pick" the assets that it wants and leaves
faster than if the companies were separate, or				out the assets and liabilities that it do not.
prevent the deterioration of shareholder value more				Mergers
than if the companies were separate.
Mergers Vs acquisitions				There are two types of mergers that are distinguished
Although they are often uttered in the same breath				based on finance. Each has certain implications for the
and used synonymous, the terms merger and				companies involved and for investors:
acquisition mean slightly different things.				Purchase mergers is a kind of merger when one
In the pure sense of the term, a merger happens				company purchases another. The purchase is made
when two firms, often of about the same size, agree				with cash or through the issue of some kind of debt
to go forward as a single new company rather than				instrument; the sale is taxable.
remain separately owned and operated. This kind of				Acquiring companies often prefer this type of merger
action is more precisely referred to as a "merger of				because it can provide them with a tax benefit.
equals".				Acquired assets can be written-up to the actual
In practice, however, actual mergers of equals don't				purchase price, and the difference between the book
happen very often. Usually, one company will buy				value and the purchase price of the assets can
another and, as part of the deal's terms, simply allow				depreciate annually, reducing taxes payable by the
the acquired firm to proclaim that the action is a				acquiring company.
merger of equals, even if it is technically an acquisition.				Consolidation mergers are merger, where a brand
Being bought out often carries negative connotations,				new company is formed and both companies are
therefore, by describing the deal euphemistically as a				bought and combined under the new entity. The tax
merger, deal makers and top managers try to make				terms are the same as those of a purchase merger.
the takeover more palatable.				A unique type of merger called a reverse merger is
A purchase deal will also be called a merger when				used as a way of going public without the expense
both CEOs agree that joining together is in the best				and time required by an IPO. The occurrence of a
interest of both of their companies. But when the deal				merger often raises concerns in antitrust circles.
is unfriendly - that is, when the target company does				Devices such as the Herfindahl index can analyze the
not want to be purchased - it is always regarded as				impact of a merger on a market Regulatory bodies
an acquisition. Whether a purchase is considered a				such as the European Commission, the United States
merger or an acquisition really depends on whether the				Department of Justice and the U.S. Federal Trade
purchase is friendly or hostile and how it is announced				Commission investigates anti-trust cases for
Mergers are generally differentiated from acquisitions				monopolies dangers, and have the power to block
partly by the way in which they are financed and				mergers.
partly by the relative size of the companies. Various				Accretive mergers are those in which an acquiring
methods of financing an M&A deal exist:a)				company's earnings per share (EPS) increase. An
Payment by cash - Such transactions are usually				alternative way of calculating this is if a company with
termed acquisitions rather than mergers because the				a high price to earnings ratio (P/E) acquires one with a
shareholders of the target company are removed				low P/E.
from the picture and the target comes under the				Dilutive mergers are mergers where a company's EPS
(indirect) control of the bidder's shareholders				decreases. The company will be one with a low P/E
alone.b) Financing capital - capital may be				acquiring one with a high P/E.
borrowed from a bank, or raised by an issue of bonds.				The completion of a merger does not ensure the
Alternatively, the acquirer's stock may be offered as				success of the resulting organization; indeed, many
consideration. Acquisitions financed through debt are				mergers result in a net loss of value due to problems.
known as leveraged buyouts if they take the target				Correcting problems caused by
private.c) Hybrids - An acquisition can involve				incompatibility—whether of technology, equipment, or
a combination of cash and debt or of cash and stock				corporate culture— diverts resources away from
of the purchasing entity.d) Factoring - Factoring				new investment, and these problems may be
can provide the extra to make a merger or sale work.				exacerbated by inadequate research or by
Hybrid can work as ad e-denit.				concealment of losses or liabilities by one of the
The Great Merger Movement of USA				partners. Overlapping subsidiaries or redundant staff
The Great Merger Movement was a predominantly				may be allowed to continue, creating inefficiency, and
U.S. business phenomenon that happened from 1895 to				conversely the new management may cut too many
1905. During this time, small firms with little market share				operations or personnel, losing expertise and disrupting
consolidated with similar firms to form large, powerful				employee culture. These problems are similar to those
institutions that dominated their markets. It is estimated				encountered in takeovers. For the merger not to be
that more than 1,800 of these firms disappeared into				considered a failure, it must increase shareholder value
consolidations, many of which acquired substantial				faster than if the companies were separate, or
shares of the markets in which they operated. The				prevent the deterioration of shareholder value more
vehicle used was so-called trusts. To truly understand				than if the companies were separate.
how large this movement was—in 1900 the value of				Mergers Vs acquisitions
firms acquired in mergers was 20% of GDP. In 1990				Although they are often uttered in the same breath
the value was only 3% and from 1998–2000 it was				and used synonymous, the terms merger and
around 10–11% of GDP. Organizations that				acquisition mean slightly different things.
commanded the greatest share of the market in 1905				In the pure sense of the term, a merger happens
saw that command disintegrate by 1929 as smaller				when two firms, often of about the same size, agree
competitors joined forces with each other. However,				to go forward as a single new company rather than
there were companies that merged during this time				remain separately owned and operated. This kind of
such as DuPont, Nabisco, US Steel, and General				action is more precisely referred to as a "merger of
Electric that have been able to keep their dominance in				equals".
their respected sectors today due to growing				In practice, however, actual mergers of equals don't
technological advances of their products, patents, and				happen very often. Usually, one company will buy
brand recognition by their customers. The companies				another and, as part of the deal's terms, simply allow
that merged were mass producers of homogeneous				the acquired firm to proclaim that the action is a
goods that could exploit the efficiencies of large				merger of equals, even if it is technically an acquisition.
volume production. The "quick mergers" involved				Being bought out often carries negative connotations,
mergers of companies with unrelated technology and				therefore, by describing the deal euphemistically as a
different management. As a result, the efficiency gains				merger, deal makers and top managers try to make
associated with mergers were not present. The new				the takeover more palatable.
and bigger company would actually faced higher costs				A purchase deal will also be called a merger when
than competitors because of these technological and				both CEOs agree that joining together is in the best
managerial differences. Thus, the mergers were not				interest of both of their companies. But when the deal
done to see large efficiency gains; they were in fact				is unfriendly - that is, when the target company does
done because that was the trend at the time.				not want to be purchased - it is always regarded as
Changing motives of Merger and Acquisitions				an acquisition. Whether a purchase is considered a
Acquiring firms' financial performance does not				merger or an acquisition really depends on whether the
positively change as a function of their acquisition				purchase is friendly or hostile and how it is announced
activity. Motives for merger and acquisition that may				Mergers are generally differentiated from acquisitions
not add shareholder value include:				partly by the way in which they are financed and
- Diversification: This may hedge a company against a				partly by the relative size of the companies. Various
downturn in an individual industry it fails to deliver value,				methods of financing an M&A deal exist:a)
since it is possible for individual shareholders to achieve				Payment by cash - Such transactions are usually
the same hedge by diversifying their portfolios at a				termed acquisitions rather than mergers because the
much lower cost than those associated with a merger.				shareholders of the target company are removed
- Manager's hubris: Manager's overconfidence about				from the picture and the target comes under the
expected synergies from M&A which results in				(indirect) control of the bidder's shareholders
overpayment for the target company.				alone.b) Financing capital - capital may be
- Empire-building: Managers have larger companies to				borrowed from a bank, or raised by an issue of bonds.
manage and hence more power.				Alternatively, the acquirer's stock may be offered as
- Manager's compensation: Executive management				consideration. Acquisitions financed through debt are
teams had their payout based on the total amount of				known as leveraged buyouts if they take the target
profit of the company, instead of the profit per share,				private.c) Hybrids - An acquisition can involve
which would give the team a perverse incentive to				a combination of cash and debt or of cash and stock
buy companies to increase the total profit while				of the purchasing entity.d) Factoring - Factoring
decreasing the profit per share.				can provide the extra to make a merger or sale work.
A study published in the July/August 2008 issue of the				Hybrid can work as ad e-denit.
Journal of Business Strategy suggests that mergers				The Great Merger Movement of USA
and acquisitions destroy leadership continuity in target				The Great Merger Movement was a predominantly
companies’ top management teams for at least a				U.S. business phenomenon that happened from 1895 to
decade following a deal. The study found that target				1905. During this time, small firms with little market share
companies lose 21 percent of their executives each				consolidated with similar firms to form large, powerful
year for at least 10 years following an acquisition –				institutions that dominated their markets. It is estimated
more than double the turnover experienced in				that more than 1,800 of these firms disappeared into
non-merged firms.				consolidations, many of which acquired substantial
				shares of the markets in which they operated. The
				vehicle used was so-called trusts. To truly understand
Marketplace difficulties				how large this movement was—in 1900 the value of
In many countries, no marketplace exists for the				firms acquired in mergers was 20% of GDP. In 1990
mergers and acquisitions of privately owned small to				the value was only 3% and from 1998–2000 it was
mid-sized companies. Market participants often wish to				around 10–11% of GDP. Organizations that
maintain a level of secrecy about their efforts to buy				commanded the greatest share of the market in 1905
or sell such companies. Their concern for secrecy				saw that command disintegrate by 1929 as smaller
usually arises from the possible negative reactions a				competitors joined forces with each other. However,
company's employees, bankers, suppliers, customers				there were companies that merged during this time
and others seek a transaction to become known. This				such as DuPont, Nabisco, US Steel, and General
need for secrecy has thus far thwarted the				Electric that have been able to keep their dominance in
emergence of a public forum or marketplace to serve				their respected sectors today due to growing
as a clearinghouse for this large volume of business. In				technological advances of their products, patents, and
USA, a Multiple Listing Service (MLS) of small				brand recognition by their customers. The companies
businesses for sale is maintained by organizations such				that merged were mass producers of homogeneous
as Business Brokers of Florida (BBF). Another MLS is				goods that could exploit the efficiencies of large
maintained by International Business Brokers				volume production. The "quick mergers" involved
Association (IBBA).				mergers of companies with unrelated technology and
The process by which a company is bought or sold				different management. As a result, the efficiency gains
can prove difficult, slow and expensive. A transaction				associated with mergers were not present. The new
typically requires six to nine months and involves many				and bigger company would actually faced higher costs
steps. Locating parties with whom to conduct a				than competitors because of these technological and
transaction forms one step in the overall process and				managerial differences. Thus, the mergers were not
perhaps the most difficult one. Qualified and interested				done to see large efficiency gains; they were in fact
buyers of multimillion corporations are hard to find.				done because that was the trend at the time.
Even more difficulties attend bringing a number of				Changing motives of Merger and Acquisitions
potential buyers forward simultaneously during				Acquiring firms' financial performance does not
negotiations. Potential acquirers in an industry simply				positively change as a function of their acquisition
cannot effectively "monitor" the economy at large for				activity. Motives for merger and acquisition that may
acquisition opportunities even though some may fit well				not add shareholder value include:
within their company's operations or plans.				- Diversification: This may hedge a company against a
An industry of professional "middlemen" known as				downturn in an individual industry it fails to deliver value,
intermediaries, business brokers, and investment				since it is possible for individual shareholders to achieve
bankers exists to facilitate M&A transactions. These				the same hedge by diversifying their portfolios at a
professionals do not provide their services cheaply and				much lower cost than those associated with a merger.
generally resort to previously-established personal				- Manager's hubris: Manager's overconfidence about
contacts, direct-calling campaigns, and placing				expected synergies from M&A which results in
advertisements in various media. In servicing their				overpayment for the target company.
clients they attempt to create a one-time market for a				- Empire-building: Managers have larger companies to
one-time transaction. Stock purchase or merger				manage and hence more power.
transactions involve securities and require that these				- Manager's compensation: Executive management
"middlemen" be licensed broker dealers under FINRA				teams had their payout based on the total amount of
(SEC) (USA) in order to be compensated as				profit of the company, instead of the profit per share,
a percentage of the deal. Marketing problems typify				which would give the team a perverse incentive to
any private negotiated markets. Due to this problem				buy companies to increase the total profit while
and other problems like much more strenuous				decreasing the profit per share.
conditions for mid-sized companies. Mid-sized business				A study published in the July/August 2008 issue of the
brokers have an average life-span of only 12–18				Journal of Business Strategy suggests that mergers
months and usually never grow beyond 1 or 2				and acquisitions destroy leadership continuity in target
employees.				companies’ top management teams for at least a
The market inefficiencies can prove detrimental for a				decade following a deal. The study found that target
sector of the economy. An important and large sector				companies lose 21 percent of their executives each
of the entire economy is held back by the difficulty in				year for at least 10 years following an acquisition –
conducting corporate M&A. Furthermore, it is likely that				more than double the turnover experienced in
since privately held companies are so difficult to sell				non-merged firms.
they are not sold as often.
Previous attempts to streamline the M&A process
through computers have failed to succeed on a large				Marketplace difficulties
scale because they have provided mere "bulletin				In many countries, no marketplace exists for the
boards" - static information that advertises one firm's				mergers and acquisitions of privately owned small to
opportunities. Users seek other sources for				mid-sized companies. Market participants often wish to
opportunities just as if the bulletin board were not				maintain a level of secrecy about their efforts to buy
electronic. A multiple listings service concept was not				or sell such companies. Their concern for secrecy
used due to the need for confidentiality but there are				usually arises from the possible negative reactions a
currently several in operations. The most significant of				company's employees, bankers, suppliers, customers
these are run by the California Association of Business				and others seek a transaction to become known. This
Brokers (CABB) and the International Business Brokers				need for secrecy has thus far thwarted the
Association (IBBA) These organizations have				emergence of a public forum or marketplace to serve
effectivily created a type of virtual market without				as a clearinghouse for this large volume of business. In
compromising the confidentiality of parties involved and				USA, a Multiple Listing Service (MLS) of small
without the unauthorized release of information.				businesses for sale is maintained by organizations such
One part of the M&A process using networked				as Business Brokers of Florida (BBF). Another MLS is
computers is the improved access to "data rooms"				maintained by International Business Brokers
during the due diligence process for larger transactions.				Association (IBBA).
For the purposes of small-medium sized business,				The process by which a company is bought or sold
these data rooms serve no purpose and are generally				can prove difficult, slow and expensive. A transaction
not used.				typically requires six to nine months and involves many
M&A failure				steps. Locating parties with whom to conduct a
Reasons for failure of M&A were analyzed by				transaction forms one step in the overall process and
Thomas Straub in "Reasons for frequent failure in				perhaps the most difficult one. Qualified and interested
mergers and acquisitions - a comprehensive analysis",				buyers of multimillion corporations are hard to find.
DUV Gabler Edition, 2007. Despite the goal of				Even more difficulties attend bringing a number of
performance improvement, results from mergers and				potential buyers forward simultaneously during
acquisitions (M&A) are disappointing. Numerous				negotiations. Potential acquirers in an industry simply
empirical studies show high failure rates of M&A deals.				cannot effectively "monitor" the economy at large for
Studies are mostly focused on individual determinants.				acquisition opportunities even though some may fit well
Using four statistical methods, Thomas Straub shows				within their company's operations or plans.
that M&A performance is a multi-dimensional function.				An industry of professional "middlemen" known as
For a successful deal, the following key success				intermediaries, business brokers, and investment
factors should be taken into account:				bankers exists to facilitate M&A transactions. These
Strategic logic which is reflected by six determinants:				professionals do not provide their services cheaply and
- market similarities,				generally resort to previously-established personal
- market complementarities,				contacts, direct-calling campaigns, and placing
- operational similarities,				advertisements in various media. In servicing their
- operational complementarities,				clients they attempt to create a one-time market for a
- market power, and				one-time transaction. Stock purchase or merger
- purchasing power.				transactions involve securities and require that these
Organizational integration which is reflected by three				"middlemen" be licensed broker dealers under FINRA
determinants:				(SEC) (USA) in order to be compensated as
- acquisition experience,				a percentage of the deal. Marketing problems typify
- relative size,				any private negotiated markets. Due to this problem
- cultural compatibility.				and other problems like much more strenuous
Financial / price perspective which is reflected by three				conditions for mid-sized companies. Mid-sized business
determinants:				brokers have an average life-span of only 12–18
- acquisition premium,				months and usually never grow beyond 1 or 2
- bidding process, and				employees.
- due diligence.				The market inefficiencies can prove detrimental for a
All 12 variables are presumed to affect performance				sector of the economy. An important and large sector
either positively or negatively. Post-M&A performance				of the entire economy is held back by the difficulty in
is measured by synergy realization, relative				conducting corporate M&A. Furthermore, it is likely that
performance and absolute performance.				since privately held companies are so difficult to sell
Short-run factors				they are not sold as often.
One of the major short run factors that sparked in				Previous attempts to streamline the M&A process
The Great Merger Movement was the desire to keep				through computers have failed to succeed on a large
prices high. During the panic of 1893, the demand				scale because they have provided mere "bulletin
declined. When demand for the good falls, as illustrated				boards" - static information that advertises one firm's
by the classic supply and demand model, prices are				opportunities. Users seek other sources for
driven down. To avoid this decline in prices, firms found				opportunities just as if the bulletin board were not
it profitable to collude and manipulate supply to counter				electronic. A multiple listings service concept was not
any changes in demand for the good. This type of				used due to the need for confidentiality but there are
cooperation led to widespread horizontal integration				currently several in operations. The most significant of
amongst firms of the era. Focusing on mass				these are run by the California Association of Business
production allowed firms to reduce unit costs to a				Brokers (CABB) and the International Business Brokers
much lower rate. These firms usually were				Association (IBBA) These organizations have
capital-intensive and had high fixed costs. Because				effectivily created a type of virtual market without
new machines were mostly financed through bonds,				compromising the confidentiality of parties involved and
interest payments on bonds were high followed by the				without the unauthorized release of information.
panic of 1893, yet no firm was willing to accept

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A Diagnosis On Hiccup Of Merger And Acquisition