Why Corporates Prefer Mergers And Acqusition

Posted in Finance Articles, Total Reads: 2548 , Published on 22 January 2014
Advertisements

Merger means the merging of two companies where one new company will continue to exist. It is a friendly takeover. Acquisition refers to the acquisition of assets by one company from another company. Mergers & Acquisition and corporate restructuring are big parts of the corporate finance world. India will further liberalize norms to facilitate mergers and acquisitions that have been one of the biggest contributors to the country's industrial expansion. "Corporate will not have multiplicity of reporting formats and that is one commitment to the Indian industry.


The main idea behind the Mergers and Acquisition for the companies who want to go for this process is for the synergy effect (1+1=3) in terms of creating share holders value, the companies which were under in tuff situation or to create a more competitive cost efficient company. Some companies will come together hoping to gain a greater Market share or to achieve greater efficiency.


Image Courtesy: freedigitalphotos.net, bplanet


Example: Google merger with Motorola

Google is great at software; Motorola Mobility is great at devices. The combination of the two makes sense and will enable faster innovation.

Motorola Mobility’s patent portfolio will help protect the Android ecosystem.

The company confirmed this sentiment in a statement issued yesterday, declaring that a full 99 percent of shareholders gave a thumbs up to Big G's acquisition at a recent meeting that comprised 74 percent of all outstanding shares.


By merging MOTROLA gets cost benefit On 13 August 2012, Google announced that it would cut 4,000 employees and close one third of the company's locations, mostly outside the United States.

After the merger also the CEO of MOTOROLA is same for Motorola Mobility.

The acquisition viewed as Google being a white knight, since Motorola just had its fifth straight quarter of losses.


Objectives behind the Mergers and Acquisition are to dominant the financial performance of the company. The objectives include 1.Economies of scale means to that fact that combined company can offer reduce its fixed cost by removing the duplicate departments or operations. 2. Economy of Scope means increasing or decreasing the scope of marketing or distributions of different types of products.3. Increasing revenue or market share this means that the buyer will be absorbing a major competitors & thus increased its market power to set prices.4. For tax benefits means that a profitable company can buy a loss maker for reducing the tax liability.5. For Geographical Diversification. 6. Resources transfer.


Types of Mergers are of different types which are Horizontal (same type of companies), Vertical (different companies), Strategic, Reverse merger (Private with public company).

The example given above Google and Motorola is White knight. Where one company is not in good position and is unable to survive in the market that company prefers to join with the other company which offers the merging.


The process of mergers and acquisition starts with an offer when the CEO & top managers of a company decide that they want to do a mergers and acquisition. They start with a tender offer. The process typically begins with the acquiring company carefully & discretely buying up shares in the target company or building a position. Most acquired stocks to purchase in the open market. It is restricted to buying only 5% of the total outstanding shares, it must file offer with SEBI. It must take how many shares it owns and whether it is intended to buy the company or keep the shares purely as an investment. Working with financial advisors and investment bankers the acquiring company which arrive at an overall price which it is willing to pay for its target in cash , shares or both. The tender offer is frequently advised in the business press, stepping the auto crisis and deadlines by which the share holders the target company must accept or reject it.

With example: Google & Motorola


The acquisition viewed as Google being a white knight, since Motorola just had its fifth straight quarter of losses. On July 21 and 23. Jha met with Arora and Rubin to discuss strategic options between the two companies, agreeing to continue to discuss a potential sale.

Motorola Mobility for $12.5 billion subject to approval from regulators in the United States and Europe. On the morning of August 15, the two companies entered into a merger agreement at the offered price of $40. On November 17, Motorola Mobility stockholders approved the proposed merger with Google Inc. On 19 December 2012, it was announced that ARRIS Group, Inc. and Motorola Mobility, a Google subsidiary for $2.35 billion in a cash-and-stock transaction approved by the Boards of Directors of both companies.


Target response of the target company can accept the terms of offer if the top managers and share holder feel happy. If they are not happy they go for negotiation in terms of employment for the employee of Target Company and extra benefits for the target company. Google paid 12.5 Billion it is not a big deal even though MOTOROLA accepts it because the acquisition viewed as Google being a white knight, since Motorola just had its fifth straight quarter of losses.


Google has stated that it will run Motorola as an independent company. 99 percent of shareholders gave thumbs up to Big G's acquisition at a recent meeting that comprised 74 percent of all outstanding shares.


Closing the deal once the target company agrees to the tender offer and regulatory requirements are met the merger deal with executor by means of transactions.


On August 15, 2011, Google Inc. announced that it had agreed to acquire the company for US$12.5 billion. The acquisition included a sizeable portfolio of patents owned by Motorola.


On February 13, 2012 Google received final approval from the European Commissioner for Competition and the United States Department of Justice. On May 19, 2012, the People's Republic of China also approved the merger for $12.5 billion, making it the last major trading commission to approve the merger. On 19 December 2012, it was announced that ARRIS Group, Inc. and Motorola Mobility, a Google subsidiary for $2.35 billion in a cash-and-stock transaction approved by the Boards of Directors of both companies.


The merger was completed on May 22, 2012.[6] Google officially unveiled the new logo and new name for Motorola Mobility on June 26, 2013. Motorola Mobility is now simply known as "Motorola - a Google Company


This article has been authored by M.Lavanya from Emeralds School of Business, Tirupati.


Reference:

  • MERGERS AND ACQUSITION – Ravindra vadapalli.
  • FINANCIAL MANAGEMNT - Khan and Jane.
  • Google case study with Motorola-WIKEPEDIA



Advertisements


If you are interested in writing articles for us, Submit Here