Mergers and Acquisitions

Mergers and acquisitions, (M&A) involves the process of combining two companies into one. The goal of combining two or more businesses is to try and achieve synergy – where the whole (new company) is greater than the sum of its parts (the former two separate entities).

☑Mergers occur when two companies join forces. Such transactions typically happen between two businesses that are about the same size and which recognize advantages the other offers in terms of increasing sales, efficiencies, and capabilities. The terms of the merger are often fairly friendly and mutually agreed to and the two companies become equal partners in the new venture.

☑Acquisitions occur when one company buys another company and folds it into its operations. Sometimes the purchase is friendly and sometimes it is hostile, depending on whether the company being acquired believes it is better off as an operating unit of a larger venture.

⏩Benefits of Combining Forces

1 Improved economies of scale. By being able to purchase raw materials in greater quantities, for example, costs can be reduced.

2 Increased market share. Assuming the two companies are in the same industry, bringing their resources together may result in larger market share.

3 Increased distribution capabilities. By expanding geographically, companies may be able to add to their distribution network.

4 Improved labor talent. Expanding the labor pool from which the new, larger company can draw can aid in growth and development.

5 Enhanced financial resources. The financial wherewithal of two companies is generally greater than one alone, making new investments possible.

⏩Potential Drawbacks

1 Large expenses associated with buying a company, especially if it does not want to be acquired.

2 Higher legal costs, which can be exorbitant if a company does not want to be acquired.

3 The opportunity cost of having to forego other deals in order to focus on bringing two companies together.

4 The possibility of a negative reaction To a merger or acquisition, which drives the company’s stock price lower.

☑Few Examples

TATA STEEL-CORUS: Tata Steel is one of the biggest ever Indian’s steel company and the Corus is Europe’s second largest steel company. In 2007, Tata Steel’s takeover European steel major Corus for the price of $12.02 billion, making the Indian company, the world’s fifth-largest steel producer. Tata Sponge iron, which was a low-cost steel producer in the fast developing region of the world and Corus, which was a high-value product manufacturer in the region of the world demanding value products. The acquisition was intended to give Tata steel access to the European markets and to achieve potential synergies in the areas of manufacturing, procurement, R&D, logistics, and back office operations.

HINDALCO-NOVELIS: The Hindalco Novelis merger marks one of the biggest mergers in the aluminum industry. Hindalco industries Ltd. is an aluminum manufacturing company and is a subsidiary of the Aditya Birla Group and Novelis is the world leader in aluminum rolling, producing an estimated 19percent of the world’s flat-rolled aluminum products. The Hindalco Company entered into an agreement to acquire the Canadian company Novelis for $6 billion, making the combined entity the world’s largest rolled-aluminum Novelis operates as a subsidiary of Hindalco.

ONGC-IMPERIAL ENERGY: Oil and Natural Gas Corporation Limited (ONGC), national oil company of India. Imperial Energy Group is part of the India National Gas Company, ONGC Videsh Ltd (OVL). Imperial Energy includes 5 independent enterprises operating in the territory of Tomsk region, including 2 oil and gas producing enterprises. Oil and Natural Gas Corp. Ltd (ONGC) took control of Imperial Energy UK Based firm operating in Russia for the price of $1.9 billion in early 2009. This acquisition was the second largest investment made by ONGC.

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