M & A: REDEFINING THE DYNAMICS OF THE MARKET PLACE

Marriages are said to be made in heaven. Mergers & acquisitions are no exception. Both involve the people who are sensitive to even the minutest of the issues of their life. However when it comes to spending their future with a new partner, it always creates skepticism in the human mind.

Talking about the marriages, there were some which created the history. Recent examples are Arun Nair & Liz Hurley and Abhishek & Aishwarya. Whole movie industry was dependent on just a small issue of a marriage. Why? Millions of rupees were riding on these recently wed couples.

• Coming back to the scenario of Mergers & acquisitions, there are many which created history. Recent examples are Mittal Arcelor, Tata Corus, Hutch Vodafone, etc. and the market is not of a few millions but trillion of dollars.
• According to Dealogic, - the value of announced M&A topped $4 trillion. Cross-border deals were worth $1.3 trillion, another record, of which $219 billion went on American companies—$45 billion of this from Canada—and $210 billion on British firms.

Considering the kind of money that has been put at stake we can gauge the criticality of these business events. The waves created can leave the bosses bullish or bearish.

M & A is not a new phenomena. Since Imperial age companies have been doing this. In 1890s the reasons were the ability to eliminate competition and to control production and supply in short to create monopoly conditions in order to set prices independent of competition. Post imperial era in 1920s the principal drivers for the mergers were “vertical integration” combined with the benefits of mass production. Even a 100 years after, the motives and rules of the game haven’t change much. But this time the push is towards strategic extension – building up in the lines that the owners and managers know produce profits.

In present day market scenario the reasons for M & A are as follows:

• 
  Dominant partner’s desire to hold unique market position.
• 
  An organisation’s geographic expansion move through M & A.
• 
  An aggressive company’s target to eliminate competition & stop opportunities for key competitors.
• 
  An ambitious company’s venture to improve IPO possibility.
• 
  An organisation’s strategy to access new customer base & to increase depth and breadth of Product line.
  
  Usually mergers occur in a consensual (occurring by mutual consent) setting where executives from the target company help those from the purchaser in a due diligence process to ensure that the deal is beneficial to both parties. Acquisitions can also happen through a hostile takeover by purchasing the majority of outstanding shares of a company in the open market against the wishes of the target's board. The M & A can be broadly classified into four categories which are as follows:
  
  • Align
  – Horizontal Mergers (Same domain)
  
  
  • Associate
  – Vertical Mergers
  • (Same domain but forward or backward integration)
  
  • Affiliated
  – Related mergers (Broad domain is same – convergence)
  
  
  • Alien
  – Diagonal Mergers (Non domain)
  
  
  Delving a bit deeper into the dynamics of M & A, a deal needs to be closed for this event to get completed. The CEO and top managers of acquiring company decide that they want to do a merger or acquisition, they start with a tender offer. Then the target company plans its move: It can go for different responses like:
  It can attempt to negotiate if it is not satisfied with the terms laid out in the tender offer, the target's management may try to work out more agreeable terms.
  It can execute a poison pill or some other hostile takeover defense when a hostile suitor acquires a predetermined percentage of company stock.
  As an alternative, the target company’s management may seek out a friendlier potential acquiring company, or white knight.
  If the target firm's top managers and shareholders are happy with the terms of the transaction, they will go ahead with the deal. And so the deal is closed.
  
  For investors in a company that are aiming to take over another, valuation of M & A matters a lot. Various ways to go about this could be to implement comparative metrics like P/E ratio or EV/ sales. Replacement cost and discounted cash flow are other viable options.
  Ultimately everything boils down to synergy – the premium for potential success. An equation to calculate the minimum required synergy:
  
  Ways in which Mergers and Acquisitions can be made more successful:
  1. By improving negotiation and price through estimating the company's exact market position
  2. By providing credibility and insurance to investors and bankers
  3. By selecting the optimal acquisition candidate for your company.
  4. By identifying market opportunities that an acquisition strategy can exploit
  5. By measuring customer attitudes on company's products to indicate their image in market
  6. By providing customer demographic data that gives insight into future market potential and growth for targeted company
  7. By identifying opportunities for growth in market segmentation analysis
  8. By providing competitive benchmarking measurements to identify areas for fast improvement in company
  9. By measuring market and technical trends to forecast future growth potential of company's technology
  10. By identifying key trends in the market, the company's customers and relative position with competitors to pinpoint future problems and opportunities.
  
  In the End,
  
  “Those who fear thorns will never pick the roses”.
  
  Mergers and acquisition is all about guts and glory.
  
  

  Contemplated & Written by: Vivek Kaushal, MHROD (Batch of 2008), Delhi School of Economics, Delhi University