Mf0002 Mergers And Acquisitions

MBA – III SEMESTER MF0002 – MERGERS AND ACQUISITIONS – 2 CREDITS (BOOK ID –B1036) ASSIGNMENT SET -1 (30 MARKS) Note: Answer all the questions. Each question carries 10 marks. 1. What are the basic steps in Strategic Planning in Merger? Basic steps in Strategic planning in Merger Any merger and acquisition involve the following critical activities in strategic planning processes. Some of the essential elements in strategic planning processes of mergers and acquisitions are as listed here below. 1. Assessment of changes in the organization environment 2. Evaluation of company capacities and limitations 3. Assessment of expectations of stakeholders 4. Analysis of company, competitors, industry, domestic economy and international economies 5. Formulation of the missions, goals and polices 6. Development of sensitivity to critical external environmental changes 7. Formulation of internal organizational performance measurements 8. Formulation of long range strategy programs 9. Formulation of mid-range programmes and short-run plans 10. Organization, funding and other methods to implement all of the proceeding elements 11. Information flow and feedback system for continued repetition of all essential elements and for adjustment and changes at each stage 12. Review and evaluation of all the processes In each of these activities, staff and line personnel have important Responsibilities in the strategic decision making processes. The scope of mergers and acquisition set the tone for the nature of mergers and acquisition

activities and in turn affects the factors which have significant influence over these activities. This can be seen by observing the factors considered during the different stages of mergers and acquisition activities. Proper identification of different phases and related activities smoothen the process of involved in merger.

2. Write short notes: a. Spin Off The creation of an independent company is through the sale or distribution of new shares of an existing business/division of a parent company. It is a kind of de-merger when an existing parent company transforms into two or more separately re-organized different entity. The parent company distributes all the shares it owns in a controlled subsidiary to its own shareholder on a pro-rata basis. In this process, the parent company gains effect to making two of the one company. It may be in the form of subsidiary or a separate company. There is no money transaction in spin off. The transaction is treated as stock dividend and tax free exchange. Both companies exist and carry on business. It does not alter ownership proportion in any company. The newly created entity becomes an independent company taking its own decision and developing its own policies and strategies, which need not necessarily, be the same as those of the parent company. Spin-off is necessary for a company having brand equity or multi-product company enters into collaboration with a foreign company. Businesses wishing to 'streamline' their operations often sell less productive or unrelated subsidiary businesses as spin-offs. The spun-off companies are expected to be worth more as independent entities than as parts of a larger business. Businesses wishing to 'streamline' their operations often sell less productive or unrelated subsidiary businesses as spin-offs. The spun-off companies are expected to be worth more as independent entities than as parts of a larger business.

b. Divestitures Divestiture is a transaction through which a firm sells a portion of its assets or a division to another company. It involves selling some of the assets or division for cash or securities to a third party which is an outsider. These assets may be in the form of plant, division or product line, subsidiary and so on. The divestiture process is a form of contraction for the selling company and means of expansion for the purchasing company. For a business, divestiture is the removal of assets from the books. Businesses divest by the selling of ownership stakes, the closure of subsidiaries, the bankruptcy of divisions, and so on. The buyers benefit due to low acquisition cost of a completely established product line which is easy to combine in his

existing business and increase his profit and market share. The seller can concentrate after divestiture more on profitable segment and consolidate its business activities. The motive for divestiture is to generate cash for the expansion of other product lines, to get rid of poorly performing operation, to streamline the corporate firm or to restructure the company’s business consistent with its strategic goals. Divestiture enables the selling firm to have more lean and focused operation. This in turn, helps the selling company to increase its efficiency and profitability and also help to create more value for its shareholders. 1. Reasons for divestitures The general opinion is that divestiture is the outcome of incapability of the parent company to manage dissimilar assets or assets creating negative synergy. Some of the reasons for divestitures are mentioned here below: o

Corporate attempt to adjust changing economic and political environment of the country

o Strategy to enable others to exploit opportunity effectively to optimize return o To correct the previous investment decision where the company moved into the operational field having no expertise or experience to run on profitable basis o To help finance the acquisition o To realize the capital gain from the assets acquired at the time when they were under performing o To make financial and managerial resources available for developing other more profitable opportunities o Selling not required or unconnected parts in the business due to: Poor fit of Division Reverse Synergy Poor Performance Capital Market Factor Cash flow factors Abandoning the core business

2. Financial Evaluation of Divestiture

The divestiture decision can be considered similar to reverse capital budgeting decision. In this case, the selling firm receives cash by divesting an asset, say division of the firm, and these cash flows received are then compared with the present value of the cash flows after tax sacrificed on account of parting of a division or asset. The steps involved in assessing whether the divestiture is profitable for the selling firm or not are as follows: i) Computation of decrease in cash flow after tax (for year 1,2,…n) due to sale of division ii) Multiply by appropriate cost of capital factor relevant to division iii) Computation of decrease in present value of the selling firm ( i x ii) iv) Computation of present value of obligations related to the liabilities of the division (assuming liabilities are also transferred with the sale of a division) v) Present value lost due to sale of division (iii – iv) The decision criteria regarding acceptance and rejection of divestiture decision is as follows: Present value lost due to sale of division is less than the sale proceeds obtained from it: Accept, that is, sell the division Present value lost due to sale of division is more than the sale proceeds obtained from it: Reject, that is, keep the division

3. Discuss Master Limited Partnerships Master Limited Partnerships MLPs emerged during the late 1970s and early 1980s as a means of asset securitization financing initially among real-estate-based businesses. Typically, several smaller partnerships were rolled into an MLP, with partners receiving MLP units in exchange for their partnership interests. The format soon gained favor among upstream oil and gas exploration and development companies and MLPs were eventually adopted by a wide range of industries both in the U.S. and in Canada, where the format is known as the Royalty Trust. Today's MLPs are predominantly active in the energy, lumber, and real estate industries in the developed countries. MLPs are a type of limited partnership in which the shares are publicly traded. The limited partnership interests are divided into units which are traded as shares of common

stock. Shares of ownership are referred to as units. MLPs generally operate in the natural resource, financial services, and real estate industries. Unlike a corporation, a master limited partnership is considered to be the aggregate of its partners rather than a separate entity. There are two types of partners in this type of partnership. They are called as general partners and limited partners. The general partner is the party responsible for managing the business and bears unlimited liability. The general partner is typically the sponsor corporation or one of its operating subsidiaries. General partner receives compensation that is linked to the performance of the venture and is responsible for the operations of the company and, in most cases, is liable for partnership debt. The limited partner is the person or group (retail investors) that provides the capital to the MLP and receives periodic income distributions from the MLP's cash flow. The limited partners have no day-to-day management role in the partnership. It has the advantage of limited liability for the limited partners. The transferability provides for continuity of life. MLP is not treated as an entity; it is treated as partnership for which income is allocated pro-rata to the partners. The advantage of MLPs is the combination of the tax benefits of a limited partnership with the liquidity of a publicly traded company. MLPs allow for pass-through income, meaning that they are not subject to corporate income taxes. The partnership does not pay taxes from the profit - the money is only taxed when unit holders receive distributions. The owners of an MLP are personally responsible for paying taxes on their individual portions of the MLP's income, gains, losses, and deductions. This eliminates the "double taxation" generally applied to corporations (whereby the corporation pays taxes on its income and the corporation's shareholders also pay taxes on the corporation's dividends). That is, MLP is taxed as partnership avoids double taxation and the business achieves a lower effective tax rate. The lower cost of capital resulting from the reduced effective tax rate provides the partnership with a competitive advantage when vying against corporations during competitive asset sales or bidding wars and can ultimately provide a higher return to unit holders. Different Types of MLPs o Roll Up MLP Formed by the combination of two or more partnership into one publicly traded partnership Liquidation MLP:

Formed by a complete liquidation of a corporation into an MLP o Acquisition MLPs: Formed by an offering of MLP interest to the public with the proceeds used to purchase assets o Roll Out MLPs: Formed by a corporations contribution of operating assets in exchange for general and limited partnership interest in MLP, followed by a public offerings of limited partnership interest by the corporations of the MLP or both o Start Up MLP: Formed by partnership that is initially privately held but later offers its interests to the public in order to finance internal growth

MBA – III SEMESTER MF0002 – MERGERS AND ACQUISITIONS – 2 CREDITS (BOOK ID –B1036) ASSIGNMENT SET -2 (30 MARKS) Note: Answer all the questions. Each question carries 10 marks. 1. Describe the political, cultural and change management perspective on integration. Political and cultural aspects of integration The value chains of the acquirer and the acquired, need to be integrated in order to achieve the value creation objectives of the acquirer. This integration process has three dimensions: the technical, political and cultural. The technical integration is similar to the capability transfer discussed above. The integration of social interaction and political relationships represents the informal processes and systems which influence people’s ability and motivation to perform. At the time of integration, the acquirer should have regard to these political relationships if acquired employees are not to feel unfairly treated. An important aspect of integration is the cultural integration of the acquiring and acquired firms. The culture of an organization is embodied in its collective value systems, beliefs, nor ms, ideologies myths and rituals. They can motivate people and can become valuable sources of efficiency and effectiveness. The following are the illustrative organizational diverse cultures which may have to be integrated during post-merger period: Strong top leadership versus Team approach Management by formal paper work versus management by wandering around Individual decision versus group consensus decision Rapid evaluation based on performance versus Long term relationship based on loyalty Rapid feedback for changes versus formal bureaucratic rules and procedures Narrow career path versus movement through many areas Risk taking encouraged versus ‘one mistake you are out’ Risky activities versus low risk activities Narrow responsibility arrangement versus ‘Everyone in this company is salesman (or cost controller, or product quality improver etc.)’ Learn from customer versus ‘We know what is best for the customer’ The above illustrative culture may provide basis for the classification of organizational culture. There are four different types of organizational culture as mentioned below: Power

The main characteristics are: essentially autocratic and suppressive of challenge; emphasis on individual rather than group decision making Role The important features are: bureaucratic and hierarchical; emphasis on formal rules and procedures; values fast, efficient and standardized culture service Task/achievement The main characteristics are: emphasis on team commitment; task determines organization of work; flexibility and worker autonomy; needs creative environment Perso n/support The important features are: emphasis on equality; seeks to nurture personal development of individual members Poor cultural fit or incompatibility is likely to result in considerable fragmentation, uncertainty and cultural ambiguity, which may be experienced as stressful by organizational members. Such stressful experience may lead to their loss of morale, loss of commitment, confusion and hopelessness and may have a dysfunctional impact on organizational performance. Merger s between certain types can be disastrous. Differences in culture may lead to polarization, negative evaluation of counterparts, anxiety and ethnocentrism between top management teams of the acquired and acquiring firms. In assessing the advisability of an acquisition, the acquirer must consider cultural risk in addition to strategic issues. The differences between the national and the organizational culture influence the cross-border acquisition integration. Thus, merging firms must consciously and proactively seek to transform the cultures of their organizations.

2. What are the accounting treatment of share premium, goodwill and other profits Share Premium account

Share premium is difference between the sale price of the share and its par value. Section 78 of the Companies Act, 1956 empowers a company to issue shares at a premium. A sum equal to the aggregate amount or value of the premium on those shares shall be transferred to an account to be called ‘the share premium account’. Share premium account cannot be distributed to shareholders except by the way of bonus issue, writing of preliminary expenses other expenses incurred or discount allowed on any issue of shares or debentures or to provide premium payable on the redemption of redeemable preference shares or debentures. The board of the acquiring company shall fix up price of shares issued in three possible manners: at nominal value of shares, at price equal to market price, at price equal to book price or the current valuation reflecting the value of the consideration. In merger, the shares acquired by the company’s shareholders are issued at nominal value whereas in takeovers it is the market value at which such shares are issued by the acquiring company. Goodwill Goodwill represents the difference between the value of the assets of the acquired company at the date of acquisition by acquiring company and the cost in investments for acquired company. It is an intangible asset and is available for a takeover of going concern. Other Profits The retained earnings and capital reserves of acquired company in the year before acquisition may be passed on to the acquiring company on merger which requires treatment in accounts of the acquiring company as pre-acquisition profit. The question arises whether these profits could be taken as current income of the acquiring company or be treated as capital profit. These accounting problems solicit appropriate solutions in the light of the existing accounting practices and the tax laws. Similarly, the problems of accounting remain to be settled in respect of: profit in the year of acquisition of the company being acquired, profit of the company on consolidation after merger and post acquisition accounts etc.

3. Write short notes on: a. White Square The white square is a modified form of a white knight. The difference being that the white squire does not acquire control of the target. In a white square transaction, the target sells a block of its stock to a third party it considers to be friendly. The white squire sometimes is required to vote its shares with the target

management. These transactions often are accompanied by a stand-still agreement that limits the amount of additional target stock the white square can purchase for a specified period of time and restricts the sale of its target stock, usually giving the right of first refusal to the target. In return, the white square often receives a seat on the target board, generous dividends, and/or a discount on the target shares. Preferred stock enables the board to tailor the characteristics of that stock to fit the transaction and so usually is used in white square transaction.

b. Poison Put. A covenant allowing the bondholder to demand repayment in the event of a hostile takeover. This poison put feature seeks to protect against risk of takeover-related deterioration of target bonds, at the same time placing a potentially large cash demand on the new owner, thus raising the cost of an acquisition. Merger and acquisition activity in general has had negative impacts on bondholders’ wealth. This was particularly true when leverage increases where substantial.