Mergers & Acquisitions - The Global Perspective
Mergers and acquisitions are used for improving competitiveness of companies and gaining competitive advantage over other firms through gaining greater market share, broadening the portfolio to reduce business risk, entering new markets and geographies, and capitalizing on economies of scale etc. Corporates worldwide have been aggressively building new competencies and capabilities and going in for markets based diversification leading to increase in number of mergers and acquisitions globally. In the USA, since the early 1900s, there have been six distinct waves of mergers and acquisitions, each with its distinct characteristics and outcomes. At the beginning of the twentieth century there was a drive for market share, followed three decades later by a longer and more ambitious wave as companies connected together different elements of the value chain, from raw materials and production through to distribution. The most recent wave, which started in 2004 after the internet bubble at the turn of the century and the subsequent downturn, is driven by consolidation motives. [Source of information - Boston Consulting Group (BCG) Report 2007].
Mergers & Acquisitions – The Indian Perspective
India has emerged as one of the top countries with respect to merger and acquisition deals. Indian companies have been actively involved in mergers and acquisitions in India domestically as well as internationally. The value share of deals where India has been a target or an acquirer has risen sharply over the past decade, from $2.2 billion in 1998 to $62 billion in 2007[For the years 2008 and 2009 the total value of deals is $ 25.billion and $12.50 billion respectively]. As India increases its participation in M&A deals, it is instructive to compare the domestic and cross-border acquisitions due to their distinctiveness. The distinction between them is a function of the change in market integration which changes the costs and benefit structure and also the difference in synergies – social, cultural and organizational.
In India, the concept of mergers and acquisitions was initiated by the government bodies. Some well known financial organizations also took the necessary initiatives to restructure the corporate sector of India by adopting the mergers and acquisitions policies. 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. Among the different Indian sectors that have resorted to mergers and acquisitions in recent times, telecom, finance, FMCG, construction materials, automobile industry and steel industry are worth mentioning. With the increasing number of Indian companies opting for mergers and acquisitions, India is now one of the leading nations in the world in terms of mergers and acquisitions.
Till recent past, the incidence of Indian entrepreneurs acquiring foreign enterprises was not so common. The situation has undergone a sea change in the last four-five years. Acquisition of foreign companies by the Indian businesses has been the latest trend in the Indian corporate sector. There are different factors that played their parts in facilitating the mergers and acquisitions in India. Favorable government policies, buoyancy in economy, additional liquidity in the corporate sector, and dynamic attitudes of the Indian entrepreneurs are the key factors behind the changing trends of mergers and acquisitions in India. A survey among Indian corporate managers Grant Thornton found that Mergers & Acquisitions are a significant form of business strategy today for Indian Corporates. The main objectives behind any M&A transaction, for Corporates today were found to be:
Post Merger Integration – A significant element to a successful deal
- Improving revenues and profitability
- Faster growth in scale and quicker time to market
- Acquisition of new technology or competence
- Eliminate competition and increase market share
- Tax shield and investment savings
As per the survey conducted by mergermarket commissioned by Merrill Corporation to survey 100 corporate from the Asia Pacific, European and North American region in the second quarter of 2009 regarding the foremost post merger integration issues facing deal makers today.
Integration issues are always fundamental; the majority of respondents (53%) expect post-merger integration issues to be examined more closely than other factors in distressed mergers, which are likely to be especially high in volume in the current scenario of economic downturn continues to impact all sectors especially in Europe and USA. Respondents explain that integration must be closely monitored in these transactions, as the companies involved often merge unwillingly and
may not necessarily have a shared vision. Additionally, respondents cite future financial performance, future operational performance and potential cultural conflicts as three factors that are crucial to a merger’s success but particularly hard to predict. These benchmarks are likely to become increasingly difficult to measure in the year ahead as many companies in the current market face a largely uncertain future. Over the course of time, post-merger integration will continue to be a vital component of the M&A process. In uncertain economic conditions, the process will undoubtedly take on greater significance as companies’ health or survival often depends on a successful merger.
Amongst other aspects the certain basic questions shall be addressed immediately for building an approach to the activity of post merger integration. As per the survey the response to the following issues were as follows –
Post merger Integration – Broad areas for integration
At what stage in the M&A process do you typically begin planning for post-merger integration?
In which of the following departments is the integration process most complex?
In the realistic sense there are three broad areas of integration namely -
Post merger Integration – Finance
A business is acquired when it provides the buyer with synergies through –
- Operating leverage
- Financial leverage
- And tax efficiencies if any.
Hence integration of finance and accounting is mainly to attain the planned synergies i.e. put the plan into action. This would require compromise, adjustments, reshuffle, retuning, compliance, etc from both transacting and outside entities.
The finance integration is approached into following stages –
Finance - Acquisition
The Acquisition stage also termed as the “pre – integration” addresses matters relating to mode of consideration and acquisition. Mode of consideration is purchase of business in cash, shares or any other financial instrument. Further the mode of acquisition refers to purchase of business through a special purpose vehicle, group holding or the subsidiary.
Acquisition is influence by primarily two factors –
- Commercial – the break even post which the planned synergies would be crystallized. The trade off therefore is between the cash flows generated and the impact on the bottom line due to the synergy. Consider an example of a loss making business but a potential for growth in the foreseeable future.
As is evident from the example though post integration the cash flows has increased by 4% roughly bottom line i.e. PAT has declined considerably by 70%. This impact would be felt on the EPS and the market capital in case of the listed entity.
Therefore an immediate integration of the acquired business cannot be considered as a viable option and until the trade on the bottom line is equal to or higher than the cash flow gain.
- Financial – the optimum way for utilization of funds of the group. Consider an example where the group holding company can borrow at 6% where as its subsidiary contemplating acquisition can borrow at 12%. Now either the group can raise the equity in the subsidiary through borrowed funds and enable to latter to acquire the target entity or where the group does not want to further increase its holding in subsidiary then it may evaluate the opportunity for leverage buy out such that its effective cost of borrowing is 6% from 12%.
Finance – Operational Integration
This stage also termed as “In process Integration” refers to identifying functional areas for integration without affecting the ongoing operations of the buyer and the seller. In other words it addresses taking active steps that are reversible without any permanent impact on the business of the transacting parities. The approach to this stage is better understood by considering the functional areas that may differ across sectors. For instance in a manufacturing concern functional areas are treasury, procurement, production and sales & marketing which is inclusive and not exhaustive. In process integration in these areas would have to be approached as follows –
- Treasury -
- Transfer of existing external loan funds to attain optimum cost of borrowing
- Renegotiation with the lenders for the terms and conditions of borrowing e.g. repayment schedule
- Searching for entirely new avenues with the objective of optimum cost, repayment, security and other terms and conditions.
- Explore the possibility of eliminating cost of forward cover where either the buyer or the acquired entity is exposed to import payment and the other to export receipts
- Procurement –
- Common supplier be negotiated for higher bulk discount
- Different suppliers be evaluated for higher bulk discounts
- Negotiation for terms of payment with the single supplier
- Reshuffle of existing suppliers to attain higher savings in logistic costs. E.g. the buyer is sourcing supplies to its units at different location from the single unit of its supplier may now evaluate sourcing from the supplier of the acquired entity situated in proximity to the buyer’s units.
- Sales & Marketing –
- Reshuffle of customers to achieve product cost, timeliness and logistics efficiencies. E.g. Customer of the buyer would be supplied by the target entity production unit situated in proximity to such customer leading to change in the bottom line of the acquired and the acquired entity
- Production –
- Change in product mix in pursuant to reshuffle of suppliers, customers, logistics and production efficiency. E.g. the target entity may commence producing the type of product for the customer of the buyer situated in proximity to the target entity that may result in larger impact favorable or adverse on the bottom line of the acquiring and the acquired entity.
Finance – Complete Integration
This stage also termed as “Post Integration” refers to an irreversible long term permanent decision that aims at achieving in creating a new identity for both the buyer and the target entity. It is the end action undertaken to achieve total integration as a single identity with regard to –
- Finance - Internal
- The “in process integration” dealt with financial integration of external sources but this stage deals with financial integration of internal sources e.g. establishing the transfer pricing of goods and services between the acquiring and the acquired entity or amongst division.
- Accounting –
- Integration from the accounting angle requires merging of financials within the existing regulatory framework and with the view to prevent the direct impact to the shareholders value. For instance in case of merging of the subsidiary into the holding the brought forward losses be knocked off against the
Free reserves or business reconstruction reserve of the merged entity without impacting the current year’s profits and thereby the shareholders value of the transacting entities. Hence the choice of method of accounting for amalgamation plays important factors to amongst other aspects decide the impact on the shareholders value.
Apart from the above integration would also require the following secondary steps from the
- accounting angle –
- Integration of accounts with different year endings and accounting policies
- Redefining Management Information Systems
- Retuning internal controls undergone change due to changes in size, hierarchical structure of organization and technology
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