Business Combinations and Expansions

Key Topics

• Forms of combinations
• Merger types and reasons
• Legal procedures regulating mergers
• Valuation methods
• Financing methods
• Differences between mergers and acquisitions
• Defensive strategies in hostile takeovers
• Recent mergers in India
• Trends in financial services

Expansion of Business Firms

• Significance: Growth stage, increased marketing effort, and expansion into new locations.
• Types of expansion:
  • Internal Expansion: Improving internal capabilities through development, diversification, modernization.
    • Market Penetration: Maximizing profit from existing products within existing markets.
    • Market Development: Entering new markets with existing products.
    • Product Development: Modifying existing products to increase customer value.
  • Diversification: Entering new product lines or markets.
    • Concentric Diversification: Involves related businesses within the same industry.
    • Conglomerate Diversification: Involves unrelated businesses.
  • External Expansion: Utilizing external resources for growth.
    • Merger and Acquisition Strategies
    • Strategic Alliances: Joint ventures, outsourcing, affiliate marketing, technology licensing.

Mergers and Acquisitions (M&A)

• Merger: Combination of two or more companies to form a new entity.
  • Types of Mergers:
    • Mergers through Absorption
    • Consolidation Mergers
• Acquisition: One company taking control of another company's assets and management.

Reasons for Mergers

1. Economies of Scale: Reduced production cost due to increased production.
2. Enhanced Marketing Capacity: Better distribution system increases sales and profit.
3. Operating Economies: Increased operational efficiency.
4. Access to New Technology or patents.
5. Elimination of Competition: Reducing competitors by merging with them.

Legal Procedures for Mergers

1. Approval from Board of Directors.
2. Application to National Company Law Tribunal.
3. Meetings with Shareholders and Creditors.
4. Filing the Scheme of Merger.
5. Transfer of Assets and Liabilities.
6. Issue of Shares.

Laws Regulating Mergers

• Indian Income Tax Act (ITA) 1961.

Valuation Methods

• Direct (Absolute) Valuation Methods:
  • Estimating equity value through financial metrics (e.g., future income models).
• Indirect (Relative) Valuation Methods:
  • Using multiples (e.g., price to earnings ratio, price to EBIT ratio).
• Economic Income Model: Measures value through positive economic income.
• Replacement Cost Method: Estimates cost to replace the target company.

Financing of Mergers

• Cash Offer: Direct payment for acquisition.
• Equity Share Financing: Transfer of equity shares to target company.
• Debt and Preference Share Financing.
• Deferred Payment Plans: Structured payments over time.
• Leveraged Buyouts and Tender Offers: Special purchase methods.
• Hybrids: Combination of cash, equity, and other methods.

Differences Between Mergers and Acquisitions

• Merger: Two companies forming a new entity.
• Acquisition: One company taking control of another.
• Hostile Takeover: Acquisition without the consent of target company.

Defensive Strategies in Hostile Takeovers

• Poison Pill: Making target less attractive by issuing more shares.
• Staggered Board: Replacing board members to thwart take over.
• White Knight: More favorable company acquiring the target.

Recent Mergers in India

• Vodafone and Idea: Telecommunications merger.
• Flipkart and Walmart: Retail sector merger.
• Snapdeal and FreeCharge: E-commerce and mobile recharge services.
• Ultratech Cement and JP Group: Cement industry consolidation.

Recent Trends in Financial Services

• Emergence of Digital Banking: Core banking, ATMs, smart cards, mobile banking.
• Introduction of Microfinance Institutions (MFIs).
• Hedge Funds and Venture Capital: Funds pooling for investments.
• Introduction of Risk Management Tools: Derivatives, futures, options.
• Use of Technology and Online Business Models.
• Introduction of Regulatory Oversight: by government commissions and bodies.