Mergers & Amalgamations

Merger is a fusion between two or more enterprises, whereby the identity of one or more is lost and the result is a single enterprise

A Ltd.

Merged B Ltd A Ltd

In Amalgamation, Two or more existing companies amalgamates and a new company is formed.As such all existing companies amalgamating disappears and a new company comes into the existence.

A Ltd

B Ltd

Amalgamated New company AB Ltd.

• Acquire operating facilities & resources for internal development that were earlier a constrain • Technical skills, Marketing, Manufaturing & research facilities for entering new products / markets. • Diversifying the risks of the company, by acquiring unrelated businesses whose income streams are not correlated.

• Combination of companies may result in more than average profitability due to cost reduction and efficient utilization of resources • Economies of scale:- arise when increase in the volume of production leads to a reduction in the cost of production per unit , since Fixed costs are distributed over a large volume of production • A given function, facility or resource (like production facilities, management functions and management resources and systems) are utilized for a large scale of operations by the combined firm.

• Operating economies:- Operating costs reduce due to avoidance of over-lapping functions and consolidation of management functions such as manufacturing, marketing, R&D and thus. • For example, a combined firm may eliminate duplicate channels of distribution, or crate a centralized training center, or introduce an integrated planning and control system.

• Synergy:- implies a situation where the combined firm is more valuable than the sum of the individual combining firms. • Synergy may arise from enhanced managerial capabilities, creativity, innovativeness, R&D and market coverage capacity due to the complementarities of resources and skills and a widened horizon of opportunities.

• A merger may result in financial synergy and benefits for the firm in many ways:• By eliminating financial constraints • By enhancing debt capacity. This is because a merger of two companies can bring stability of cash flows which in turn reduces the risk of insolvency and enhances the capacity of the new entity to service a larger amount of debt • By lowering the financial costs. This is because due to financial stability, the merged firm is able to borrow at a lower rate of interest.

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Severity of competition is limited  by increasing the company's market power. A merger can increase the market share of the merged firm.  Increased profitability of the firm due to economies of scale.  Better bargaining power vis-à-vis labour, suppliers and buyers.  Technological breakthroughs against obsolescence and price wars.

Why do Mergers Fail? Coping with a merger makes top managers spread their time too thinly and neglect their core business, spelling doom. Assumptions that personnel issues are easily overcome. For example, employees at a target company might be accustomed to easy access to top management, flexible work schedules or even a relaxed dress code. These aspects of a working environment may not seem significant, but if new management removes them, the result can be resentment and shrinking productivity.

• Companies often focus too intently on cutting costs following mergers, so much that they neglect day-to-day business,ultimately, revenues & profits suffer. • If a merger or acquisition is planned depending on the (bullish) conditions prevailing in the stock market, it may be risky. • At times acquisitions may be effected for “seeking glory,” as a corporate strategy to fulfill the needs of the company. Executives are more interested in satisfying their “executive ego.”

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Failure may also occur if a merger takes place as a defensive measure to neutralize the adverse effects of globalization and a dynamic corporate environment. Lack of Communication Lack of Direct Involvement by Human Resources Lack of Training Loss of Key People and Talented Employees Loss of Customers Corporate Cultural Clash Power Politics Inadequate Planning

HP Compaq Amalgamation Compaq Pre merger status  Compaq Founded in 1982  Primary Strength – Innovation  Primary Business Divisions  

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Access, commercial & Consumer PCs Servers & storage products Global Services

#2 in PC business, but continuously weakening performance made directors impatient

ComPaq Pre-merger Status • To Bring Compacq to online market, Capellas ( CEO) , bought Alta Vista • New management was incohesive resulted in Layoffs and Loss. • Bad investments • Firm was too small and badly run to maintain its array of products and services

Hewlett Packard Pre-merger Status  Incorporated

in 1947, promoted by William Hewlett & David Packard  Laserjet printers were its most successful products  By 2001, the industry stumbled, HP could not cope with the technological innovations  Stock prices stumbled; there was a need for more than just a strategy from within

Oppositions for merger 

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Market reaction for merger was negative HP’s strategy was to move into higher margin less commodity like business,hence merging with compaq was a strategic misfit Revenue risks might offset synergies HP and Compaq have different cultures

Efficiencies achieved        

Achieved merger related cost saving of more than $1.3B annually Restructured direct material procurement to save $450M annually Redesigned products and requalifying components to save $300M Consolidated multiple manufacturing sites saved $120 M Manufacturing savings of $200M &logistics savings of $100M Total Shareholders returns were up by 46% Business steadily improved and brought competition to DELL Now HP holds 19.1% of world’s PC market and maintaining its strengths in Printers and servers.

A Failed Merger The merger, was considered the largest deal in history, combining the nation’s top internet service provider with the world’s top media conglomerate. The company profiles before Merger was: AOL

Time Warner

Sales

$4.8B

$14.8B

Earnings

$762M

$168M

Employees 12100

67500

Key assets AOL Compuserve

CNN, HBO, Warner Bros

Rationale For the Merger • AOL feared that its business needed continual adaptation to a changing internet and broadband access. continue its growth by acquisition strategy in order to justify its high market capitalization. • Time Warner feared that its network of traditional media outlets were outdated(television broadcasting, publishing, movies, magazines, and newspapers) needed a facelift.

Rationale For the Merger 

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For Warner it was Effective to merge with existing company to distribute contents via online channels than to build own capacity Warner’s broadband systems, media contents , subscriber base strategic advantages together with AOL’s online brand, Internet infrastructure and own subscriber base of 30 million customers was expected to create synergy The high-quality media contents of Warner in combination with interactive services available on the internet would result in increased benefits for consumers and translate into revenue growth. Synergies were expected by way of crosspromotion, more efficiency in marketing, cost reductions in launching and operating new technologies

Failure Announced • In May 2009 Time Warner announced that it will spin off the entire AOL Internet unit by the end of the year 2009 , reversing a failed $124 billion merger that triggered record losses.

Why did the Merger Fail? Falling Ad sales  Series of Shareholders lawsuits  Perfect example of cltural clash  Falling stock prices  Overvaluation of AOL Shared during Merger 

CULTURAL CLASH AOL Time Warner presented a perfect example of culture clash. Time Warner presented a decentralized organization. Divisions would compete furiously with one another. Yearly performance determined the powers of a division in TW TW Employees were used to stable jobs and count on their retirement savings.

Cultural Clash •AOL was completely different. The biggest incentive for AOL people are options, which are often vested in 3-4 years. So AOL employees tend to focus on the near future. • There was inherent disrespect between staff of two companies .Time Warner employees thought AOL people were young upstarts that happened to be lucky. They thought the company was sold to AOL at too low a price, and were frustrated to see their retirement savings shrink as the stock price kept falling after the merger. All these differences made it hard for the two sides to collaborate.

Chart showing Falling Stock Performance Closing rates

Closing rates

100 90 80 70 60 50 40 30

Closing rates

20 10 0 2001 2002 2003 2004 2005 2006 2007 2008 2009

Overvaluation of AOL stocks At the time of merger AOL offered a premium of almost $50 for Time Warner's stock, then trading at $65. But within two years after the merger, shares of the now combined firms trade for 90% less than the pre-merger peak. Suits were filed claiming that what allowed AOL to support so lavish a price was fraud “Materially false and misleading” financial statements resulted in AOL's share price being overvalued. After an internal investigation into AOL's accounts AOL Timewarner decided to restate its revenues for the two years.