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Monday, October 6, 2008

A bit about Mergers and Acquisitions...

Q 1. What are mergers and acquisitions?

Ans. Simply put, any activity involving the buying, selling, or combining of different companies (generally for growth or consolidation) is called a merger and acquisition (M&A) activity.

Normally, a merger occurs when two companies mutually agree to join hands to improve profitability, and form a completely new entity. For example, Daimler-Benz and Chrysler combined to create 'DaimlerChrysler', which was a new company.

An acquisition, is also called a takeover, and involves the buyout of one company by another. For example, Vodafone bought over Mannesmann in Germany.

Q2. Why do companies indulge in M&A?

Ans. Obviously, the underlying motive of any capitalist venture is to earn profit. This can be accomplished through the following effects of a merger/acquisition:

a) Increased synergy - The combined company can reduce redundant departments, retrench extra workers, and lower associated costs.

b) Increased market share - Clearly, if you merge with someone who was competing for your market share earlier, you now have a bigger chunk of the market. Hence, you not only earn more, but also save costs on advertising and marketing.

c) Cross-selling - If I manufacture cellphones like say Nokia, and I merge with a company that provides cellular services like Airtel, the new company can provide customised deals to consumers, and tap both the phone market, and the sim market.

d) Taxes - If you acquire a loss-making company, you can reduce your tax liabilities. This used to be a common practice earlier, but now laws prevent this from happening.

e) Economies of scale - Since you can buy larger volumes of goods, you can get bulk deals. (Yeah, yeah... we students are not the only cheapsters around.. :P )

Q3. What are some of the major M&A activities on the Indian horizon, in the recent past?

Ans. Some of the biggest M&A deals by Indian companies are given in the table below:

Q4. What is the future of the M&A activity across the globe?

Ans. Even if one had a crystal ball, one would be a tad wary of making predictions. However, one shall risk making one here. :P Since these are tough financial times, companies would feel the urge to consolidate, and combine synergies. It is wasteful to expend one's energy in fighting someone who is engaging in similar business practices. Hence, the larger players will probably wipe the smaller ones out, or keep them as subsidiaries, and maybe, we'll see more large deals coming through too. In addition, there would be plenty of takers to pick at the remains of dying organizations like Lehmann.


ramaa said...

Awesome! Sumit to the rescue once again. :) One question- what is an amalgamation? How is it different from a merger?

Sauron said...

Good question Ramaa! Actually, an amalgamation (or consolidation) is what results when a merger takes place. So, if a new company is formed by the merging of two companies, it is called the 'amalgamated company'