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Public Private Partnership (PPP)

   

Added on  2019-10-01

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Merger and Acquisition- Who wins and who lose? - Ashareholder perspective Study Introduction This is an era of dynamic environment where changes are taking place at every second. Due tosuch volatility, it is very difficult to sustain same position or status for a people or for anorganization. Business environment is considered as the most dynamic environment as it is notthe organization or industry that brings changes but also other factors like technology, naturalenvironment, politics, socio-cultural aspects etc. are affecting business in many ways. Terms likeindustrialization, globalization, privatization, public-private partnership (PPP) and liberalizationare giving lot of freedom and scope to bring new and new thoughts and ideas into business.This is not only helping the organizations to generate revenue but also developing the standardof living of society, providing employment, raising economic condition and overall progress atglobal stage. [Subramanian, R., et.al1992]As business environment is giving opportunity and scope to all who have new ideas to bringbusiness, we are witnessing a sheer competition in various industrial sectors. One of theimportant objective of every business is to grow day by day and be a leader in market. Noteveryone can be a market leader nor all can have same position in business environment. It isthe organization who finds differentiation identifiable within customers is now leading the race.There are number of strategies which organizations are trying out to find edge over other.Some are trying it at quality, some are trying it at cost, some are creating unique brand image,and some are establishing strategic partnership or joint venture and now some are usingmerger and acquisition as strategy. [Vazirani, N., 2012.]Here in this report we are focusing on merger and acquisition (M&A) strategy. Here we aregoing to see why the organizations prefer such strategy? Our main aim for this study focuses onthe shareholders of both the organization i.e. the shareholders of acquired company and of theholding company.

As the shareholders are the owners of the organizations (referring joint-stock companies only),they are the one who bears all losses and gets the return after payment to all debt andpreference shareholders. They take high risk by investing money in the organization with ananticipation to gain more but not every time the situation goes in favour of the organization.[Ghosh, M.S.et.al2014]A company which is now a market leader may face severe crisis if the product or serviceoffering doesn’t meet expectation of customers. In such case, merger and acquisition come intoaction. Either the company liquidates and goes into another company by losing its identity ormay be controlled and managed by any other company who holds majority of share (51%) ofthat company. The former case is a merger situation and later one is acquisition. In suchsituation, it is the shareholder who faces trouble who comes under settlement process.Our aim from this study is to bring outcomes that are going in favour or against theshareholders. We will also find in such situation which shareholders (the one whoseorganization merged or acquired or the one who is now parent) is gaining or losing more. Thisstudy would take real cases under study to support the statement and will also carry financialanalysis to give strong support to the questions under study. Merger and Acquisition- What and Why?Before we would discuss about the gain and loss to shareholders, it is very important to knowthe two terms. This will help in identifying the benefit or loss to the parti9es concerned withsuch strategic move.Merger and Acquisition (M&A) is basically a process of combining two entities into one or as aone entity. Merger is the extreme case where the organization who is going to be acquired loses itsidentity. It is a form of combination where tow companies become a single entity. WhileAcquisition includes the strategic move of an organization to overtake the management orcontrol position of another entity where the entity identity exists but the control ormanagement is now in other organization’s hand.

Diagrammatic presentation Merger situation where Company-A and Company-B combined to make a new company calledCompany-AB. Identity of Company-A and B lost. It is the case of Acquisition where Company-A is acquiring Company-B’s management andcontrol so that after such action Company-A board will become the decision maker ofCompany-B but it won’t lose any identity. [Miglani, P., 2011] Shareholder GroupShareholder gains forM&A What shouldtake intoaccountWhat should not be takeninto accountCompany B (Target)Acquisition purchasepremium (APP)APPSynergies as it is alreadyreflected in APP. Sharespaid by acquirer is just aninvestment activity, nofuture synergies should betaken into accountCompany A (Acquire)Net Relisable Synergies(NRS)-APP ($7200million)Synergies, APP(it will be paidfor the controlof target so itis related)Payment method isthrough shares as it isdepending on thefinancing activities as it isnot related to M&A.ABBABABA

Market value of Target asit is an investment.Why M&A take place?There is no particular case for M&A strategic move. This can take place for various reasons.Some of the reasons can be-Synergy- This is the most common reason for a merger. It is expected that when two entitiescome together to form a new bigger company, the value of new organization will be muchmore than their individual entity value. Such synergies can take place in two forms such as-Cost synergy- The synergy that reduces overall cost through economies of scale in variousdivision of companies such as R&D, procurement, sales and marketing, manufacturing,distribution and general administration. Revenue synergies- The synergy that increases overall revenue generation through expandedmarket, product cross selling and market share. Example- Alaska air and Virgin America merger took place to increase the west coast airtravelling market to compete with Southwest. Growth- Any organization has two options to grow i.e. organic growth and external growth.Organic growth is achieved by increase in sales and making internal investments. Merger oracquisition is an external growth strategy where an organization either tries to join with asuccessful organization or acquires the organization. [Piloff, S.J.et.al1998]Example- Facebook’s acquisition of WhatsApp was intended to grow the Facebook marketcapitalization. Market Power- This is another popular purpose of M&A. This can take place on two forms thatis either horizontal or vertical. Horizontal M&A takes place when an organization feelsincreasing competition is affecting revenue and growth of the organization thus it acquiressome of the competitive firms. Example- HP and Compaq [Shleifer, A.et.al2003]

Vertical M&A takes place when the organization tries to control its entire supply chainmanagement. This way it reduces the dependencies on supplier and other supply chainmember who can influence the business. Example- E-bay tried up with PayPal to ensure allonline payment option. Unique capability- It is true that not all company have all resources for successful growth. Thusmany at time, they face difficulties to be competitive thus they go for M&A strategy where theyacquire or get into another organization where it can find those resources to develop capabilityinternally. Example- Apple Inc. bought Siri (the automated personal assistant) in 2010 toenhance IPhone capability. Diversification- Sometimes when the existing business doesn’t give expected return,organizations move into another business area which is called as diversification. Suchdiversification can take place through M&A. Example- Amazon’s acquisition of Washington PostNewspaper for enhancing Amazon Kindle market. Tax issues- When a company is having large taxable income, it goes with M&A with a companywith large carry forward tax losses. By this way the acquiring company can reduce the taxeffect. Though this is not approved by regulator to give as reasons however behind other abovementioned motives, this is also having strong presence. How can it take place?There can be several way M&A can take place. They are-Purchasing of assets- This is the mode of M&A where the organization buys the assets ofanother organization instead of stocks. Such type of acquisition takes place when anorganization is having unique set of assets such as copyright which the other organizationcan utilize for own benefit. Such type of acquisition doesn’t normally take place as it createsa lot of trouble to settle issues like purchase consideration and tax. Even such acquisitionleads to tax paid on capital gain.

Example- VCA Antech, a nationwide chain of veterinary clinics and diagnostic laboratories whichMars Inc. used asset acquisition strategy by buying Antech. The agreement took place at $93per share which resulted a total purchase consideration of $9.1 billion. [Loughran, T.et.al1997] Purchasing of common shares or stocks- - It is form of acquisition where the acquirer buysall the equity of targeted company. This doesn’t make any change in employees or ongoingprocess. Just ownership gets shifted to another company. Example- Exxon Mobile Corporation acquired Mobil Corporation under stock acquisitionplan which valued $8.3 billion. Such type of acquisition can take place in 3 forms such as- Take over (100% stakes in othercompany), low touch ownership (majority of shareholding to influence decision making) andconglomeration (strategic expansion plan) Exchange of shares for assets- This is a popular mode of M&A where a company buys theassets of another company in exchange of its share giving to the stockholders of theacquired company. Example- AT and T acquisition of Time Warner in stock-cash transaction$107.50 per share. [Nandy, D.et.al 2009]Exchange of shares for share- This time of M&A takes place when one company offers itsown share in exchange of the shares of the acquired company. This takes place at an agreedratio. Shareholders of the Target: This value paid for the shares of the target in excess for the pre-merger market price isconsidered as takeover premium. Thus the amount for the takeover premium is the gain ofthe shareholder of target.Shareholders of the Acquirer: The shareholders of the acquiring the company as assuming the greater risk within themerger as the gain will be able for management in order to create synergy value whichexceeds the takeover the premium.In this case,

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