Motives and Effects of Mergers in Financial Decision Making

This presentation discusses the motives and effects of mergers in financial decision making. It covers topics such as funding sources used in mergers, movement of share prices pre and post merger, comparing share prices within the sector, commenting on the financial performance of newly formed corporations, and identifying winners and losers in mergers.

BUSM4308 Financial Decision Making for
Managers 2019-20

Table of contents
• Motives or purpose for mergers
• Funding sources used by firm in merger and its effect on capital structure
• Details regarding movement of share pre and post merger and the factors that might have caused company's share price to move
• Comparing share price of company within its sector and to FTSE in graphical and discussion manner
• Commenting on newly formed corporations financial performance
• Identifying winners and the losers in merger and explaining the ways to reach conclusions

Motives or purpose for mergers
The Royal Dutch and the shell group was been formed in the year 1907 and the merger took place in November
2004 at the time when merging of an interest of Royal Dutch and the Shell transport has taken place within which
each of the company retained its own identity.
Motives
Attaining leading position as an oil and gas company
Getting high economies of scale
Enhancement of customer base
Maximization of productivity and profitability

Funding sources used by firm in merger and its effect on capital structure
Funding sources that used in merger of Royal Dutch and the Shell transport enumerated below:

Funding sources used by firm in
merger and its effect on capital
structure
• Exchanging stocks- Royal Dutch has decided to
exchange stocks for the sellers company. It is found as the
most common and the suitable financing alternative as
parties share risk on an equal basis
• Debt financing- Royal Dutch has also take on the sellers
debt as the viable alternative in order to pay in cash or the
stock

Details regarding movement of share pre and post merger and the factors that might
have caused company's share price to move
 Prior to the merger the share price of Royal Dutch seen as stable and declining but after the merger
the increased movement of the share price has been resulted which helps the firm in enhancing the
wealth of the firm.
 Before the merger the profits and the resources of the company were lower which causes a fall or
reduce in the share price.
 However, after the merger happened it has been seen that because of greater resources, higher
profitability, greater production etc. share price of the company get increased.

Comparing share price of company
within its sector and to FTSE in
graphical and discussion manner
Interpretation- from the above analysis it
has been stated that the share price of the
company within an industry is seen as
declining and at FTSE also it is reflected as
decreasing with a greater movement.
This means that after the merger share
price of newly formed company has
declined and this showed a greater impact
on the performance of the company in a
negative or adverse manner.

Commenting on newly formed corporations financial performance

Commenting on newly formed corporations financial performance
Interpretation- The above table shows that the financial performance of the company after
the merger been taken place has become better. This is because the resources, assets and
reserves resulted as increasing with that of the decrease in cost and expense.
As the return on capital employed of the company is increasing which means that higher
amount of earnings is generated over the year through the use of its capital. Similarly
its profit margins are also increasing which means that an organisation is having
sufficient profits after paying off its expenses, cost and tax obligations.
The current ratio of the firm is showing an increasing trend which that it is making an
effective use of the current assets and has adequate funds for meeting its short term
obligations. Overall, the financial performance of newly formed firm after merger is
indicated as better as its liquidity and profitability ratios are rising from one period to
another.

Identifying winners and the losers in merger and explaining the ways to reach
conclusions
FTSE 100- winners
• BP got up 1.8%, Royal Dutch shell A and B increased up as
1.3% & 1.1%. Te major players in the oil sector were been
tracking as higher prices of spot oil quoted as $69.55 an up
from $68.11. The benchmark of North Sea touched the
overnight high of value $ 70.72 which is the highest level as
might arose tension between Iran and US. Oil prices ha s
became a good barometer for state of playing in Middle
East, providing that black stuff is been produced above $70
per barrel amid an escalating tensions within the region.
• Poly-metal international get by 1.2% and Russian gold
miner was been tracking a price of spot gold higher quoting
as $575.77 higher from $1549.40. BAE systems get up by
1.2% shares in respect of Defence Company higher than
amid intensifying US-Iran tensions.
FTSE 100-Losers
• Hikma Pharmaceutical got gown by 4.5% and JP
Morgan downgraded a drug maker to an underweight
from the neutral. WM Morrison Supermarket gets
down by 3.5% where Bank of America cut grocer in
underperforming from a Neutral.
• Easy Jet came down by 2.5% and International
Consolidated Airlines down by 4%. Travel stock
remains lower as a threat of the war reduces an appetite
for the travel whereas higher prices of oil feed through
higher cost of jet fuel for an Airline.

Commenting on factors that results to success of merger
Pre transaction success factors
• Due diligence and good valuation- Prior to merger it is
very important for the company to ensure quality of the
valuation after a due diligence.
• Communication before an execution of merger or the
acquisition- Trustworthy and a high quality management
plays greater role as they guides processes and ensure an
open communication within company.

Post transaction success factors
• Realization of synergies- Potential synergies seems to be motivated
behind a merger as the operational cost of company get lowered
because both company complements each other resulting to
significant level of gains.
• Organizational fit- As both the companies was having a parallel
structure unified efficiently. It would develop an ease at the time
when the different sectors are been involved.

REFERENCES
• Benchekroun, H., Breton, M. and Chaudhuri, A.R., 2019.
Mergers in nonrenewable resource oligopolies and
environmental policies. European Economic Review. 111.
pp.35-52.
• Kumar, B.R., 2019. Acquisitions by Royal Dutch Shell.
In Wealth Creation in the World’s Largest Mergers and
Acquisitions. (pp. 147-153). Springer, Cham.

Thank You