Mergers and Acquisitions - Explained in Simple Language

Today I have an interesting article planned for you – we’ll be learning some new terms too!

MERGERS – it is a very popular term – we’ve all come across this term now and again – we know what it means in general.

Merger is when two companies are merged/ combined together to form a new company.

De-merger is when one company is split into two separate companies.

Amalgamation is when one company is absorbed into another company.

Acquisition is when one company purchases another company.


Why do mergers and acquisitions happen?

 Simply to earn more economic benefits! In business everything is just cold maths.

~ If two companies are doing okay-ish by themselves – but united they can become market leader – then they merge.

~ If a company sees another upcoming company as a potential threat – then it buys its competitors to retain its market position.

~ If a company sees that due to a particular division – the profits of the whole company is suffering – it demerges that segment into a different company or sells it to a willing buyer.

You get the drift?

Before we proceed – some very common terms:
(i) Acquiring company is the company which is acquiring or buying another company.
(ii) Target company is the company which is being bought or acquired.
(iii) Bid/ Bidding is when the acquiring company is putting a price and pursuing acquisition of another company.

Takeover Over Strategies:

As the name suggest these are strategies an acquiring company will use when it is bidding to acquire another company – the target company.


1.      Bear Hug – Like a bear – takes the whole thing into its grasp - the acquiring company threatens the target to make an open offer for being acquired.

2.      Brand Power – Facebook bought Watsapp = alliance with powerful brands to displace the target’s brand(s) and fortify own position even more.

3.      Street Sweep – this one is a mastermind strategy – sort of like enter the enemy camp and compromise it from the inside!

Here the acquiring company accumulates large number of shares in the target company before making an open offer for acquisition. Since the acquiring already owns many shares the target company is left with no choice but to offer itself up for acquisition.

4.      Strategic Alliance – carefully planned acquisition to strengthen one’s market position – this is more of a joint venture – partnership to mutually benefit (like the Air India and Star Alliance, Vistara = Tata sons and Singapore Airlines!) instead of a buyout

And – all this is done to become better in business. Simple.

Defensive Tactics in case of hostile takeovers:

Hostile takeovers are when a company bids for another company – which does not want to be taken over at all! Classic case of the 80’s movie villains kidnapping the heroines.

A takeover bid becomes hostile for many reasons – employees unwilling to join new company, employees may be given the slip, management may be changed etc, etc.

As far as possible hostile takeovers are always avoided – it is never good for business.

However if there exists a situation of a potential hostile takeover – and the target company wants to avoid being taken over, here are some tactics it can use.


1.      Poison Pill – personal favourite – what happens in spy movies? When any enemy spy is captured – what does he do before he can be even pulled up from the ground by our hero spy? – he simply pops a cyanide pill into his mouth – carefully hidden in a fake teeth and goes – dead. So, now the captured spy becomes completely useless to the hero and his gang.

Same thing – when any company is being targeted for a hostile takeover – it tries its best to resist being taken over – and takes a poison pill = to make itself unattractive/ unprofitable/ unworthy of further consideration by the acquiring company.

Now, to make itself unattractive – several different methods may be employed – for example – issuing convertible debentures – thereby diluting control in future will pose a threat to the acquiring company – and hence avoid taking over such a company.

2.      Poison Put – target company issues bonds and encourages the holders of the bonds to encash them at high price – this will result in a heavy cash outflow – and this inturn could help the target company save itself from a hostile take over.

3.      Crown Jewels & Divestiture – crown jewels = the best of the jewels = the best of the lot = any business group’s best/ main/ most profitable venture.

Divestiture is when a company sells or de-merges any part of its business into a subsidiary – and if such de-merged or spin-off is the successful businesses of the group – it means the target company sold its crown jewels to make itself unattractive to the acquiring company.

4.      White Knight – who comes to save a damsel in distress?! A white knight in shiny white armour riding – in most occasions – a white horse!

When a company (damsel in distress) is facing hostile takeover – it offers itself for takeover by a friendly company (the white knight) – to escape being taken over by the (villain) bidding company!

5.      Green Mail – is a peaceful solution to counter hostile takeover – here the target company offers some profitable incentives to the acquiring company as compensation to back off from acquiring it.


6.      Pac Man Defence – surely you must have played Pac Man once in your lifetime! So, you should know – when the pac man eats one of the four power pellets, the ghosts turn blue and run away from the pac man and defends themselves – cuz they can be eaten by the pac man!

So, when a company is being targeted to be acquired – it can counter the bid of the acquiring company – and go after the acquiring company! The acquiring company will be too busy to save itself from being taken over and – as per theory will call off all its initial takeover plans!

Acquiring company backs off and the Target company now will breathe in peace
J

Some noteworthy mergers and acquisitions of recent times:

  1. Tata Motors bought Jaguar Land Rover Co. From Ford way back in 2008 – and is still a thing of pride for us! (U.K. Company)
  2. Facebook bought Watsapp K - this one made a LOT of news.
  3. Air India and Star Alliance (German Group)
  4. Sun Pharmaceuticals bought Ranbaxy Laboratories -
     .. and now Daiichi Sankyo (Japanese Co.) is selling its shares in Sun Pharma which is had received when Sun bought Ranbaxy.
  5. Tata Sons and Singapore Airlines = Vistara
  6. Microsoft bought Nokia! (personally though, I like the name ‘NOKIA’ on the phones  K)
  7. Flipkart took over Myntra.
  8. Reliance Industries Limited bought majority stake in Network 18.
If I’ve missed out on any more note worthy ones please add them in the comments to benefit all.

That is all for today.


I really hope this article is helpful!


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