Mergers and Acquisitions - Case Study Example

MERGERS & ACQUISTION Name Institution Lecturer course Date Table of Contents Executive summary 3 Introduction 4 Background information 4 History of merger 5 Picture 5 Definition of mergers and acquisitions 5 Five stages of mergers and acquisition 6 Corporate strategy 7 Valuation 8 Financing of the merger and acquisition 8 Defence tactics 9 Implementation 9 Risks involved in the merger and acquisition process 9 Theory analysis 10 SWOT ANALYSIS 11 Strengths 11 Weakness 11 Opportunities 11 PESTE ANALYSIS 12 CONCLUSION 13 REFERENCES 14 Executive summary Value creation is the new trend in the world of business. Some companies have opted to venture into mergers and acquisitions of other companies. Value creation through this process will introduce economies of scale and economies of scope in a business organization. The prospects of Tata venturing into various businesses will impact in the formation of conglomerates in an industry. The rationale of business acquisition will determine the success of a business. There will critical analysis of various factors which will determine successive process of business merger and acquisition. Mergers and acquisitions will consolidate an industry. Activities of small companies are combined together by being provided by one company. The company is usually large in size. Mergers involve the legal process of consolidating companies into a one, large one Introduction The strategy of TATA chemicals is to enhance its presence in the farm and food sectors. The acquisition will secure raw materials necessary for its operations. It will be possible to secure raw materials t a relatively low cost in Europe and make them optimal for the rest of Europe. The merger and acquisition idea will secure the financial position of the company as this provides prospects of additional cash flows for the company.teh acquisition value was provided by debt finance. Tata chemicals did the financing through a non-recourse basis. Tata is the largest and trusted Indian conglomerate with operations in 80 countries. The services are spread across 6 continents with an employment workforce of 4,750,000 people. The operational sectors of the company include chemicals, consumer products, engineering, information communication and systems, services and materials. Background information Tata chemical limited is an Indian company. The company investment value is approximately 93 million Euros. The company moved to acquire 100% shares in the UK company.th company is the prime owner of brine wells (UK). The idea of acquisition was meant to secure the supply of Brunner Monde operations for the company. Other business interests of the company include gas storage, and the supply of British salt to other companies in the UK. The acquisition value was provided by debt finance. Tata chemicals did the financing through a non-recourse basis. The valuation of the company was 93 million Euros and this prompted the company to seek debt financing on a recourse basis. Debt financing is a process where the acquiring company will pay the debt in parts and either through approach of the banks to offset the debt. Debt financing was preferred by the company since the target company had vast interest which will be used to offset the debt as the process goes by (Hawson, 2013). History of merger The promoters of the company were Ludwig Mond and John Brunner and were formed as a partnership. In 1911the company acquired a soap company with ownership of palm plantations. After a few years, the business name was changed to Unilever. In 1991, there was a break off from ICI of Kenyan and UK soda ash businesses. This led to the formation of Brunner Mond Holdings limited. In 2010, British salt was acquired by Brunner Mond. There was no disclosure of the amount of purchase. This was a vertical merger which was a target of securing and safeguarding supply chain. This was through creation of synergies especially in minimization of transportation costs. This type of merger refers to vertical merger of companies. Picture Definition of mergers and acquisitions Mergers and acquisition represent aspects of corporations intending to penetrate given markets and enhance their dominance. The idea involves buying, and combination of different business entities with the aim of growth in a given sector of industry. Mergers and acquisition present a process of corporate restructuring which will eventually end in reorganization of a company to provide additional value in the activities of a company. Mergers and acquisitions will consolidate an industry. Activities of small companies are combined together by being provided by one company. The company is usually large in size. Mergers involve the legal process of consolidating companies into a one, large one. Acquisition takes place when different company takes over a company and establishes itself with new ownership. Target Company retains existence. Control of the target company is done by the acquiring company. This process normally results n economic and financial consolidation of two entities in an industry. The merger ought to be in the best interest of companies. The distinction between mergers and acquisition is as t whether a new company is formed merger results in the formation of a new company while for acquisition a new company is not formed in the long run. Types of mergers and acquisition will depend on the industry in which a given business operates. There is a possibility of forming a business conglomeration with a successive business merging and acquisition (How son, 2013). Five stages of mergers and acquisition The stages include strategic development, stage of organizing to acquire, deal negotiation and restructuring, post acquisition stage, stage of audit and organization learning. The first stage deals with development of corporate strategy. The strategy will deal with looking for ways of optimizing business portfolios which are owned by the company. Portfolio optimization aims to safeguard the interest of the company. Organization for acquisition is the second stage in the process. In order for acquisition to be effective, corporate organization is a precondition. Organization will help to comprehend logic of value creation and eventual lead to post integration process. Organization will equip a company with capabilities, skill and capabilities in the process of acquisition (Daniel, 2001). The third stage will deal with deal negotiation and restructuring. The stage involves valuation of target companies and the selection of advisers. It is prudent to acquire and evaluate intelligence of target companies with due diligence. Negotiation of managerial positions to strike a balance between acquiring and Target Companies is a success factor for the business. Defence of strategies will develop a bid through negotiation. The stage of post acquisition integration will involve a change of management programs of both target and acquiring firms. Coexistence of both firms will require a merge of attitude and firm behaviors. The last stage involves audit of post acquisition and organization learning of the new company. The stage involves emphasis on learning process and prospects of achieving future process of consolidation of economic and financial resources of funds. The five stages works in harmony and coexistence to ensure success in the merging and acquisition of Target Company (Daniel, 2001). Corporate strategy Tata is a leading Indian company with vast interests in various sectors. Tata is the largest and trusted Indian conglomerate with operations in 80 countries. The services are spread across 6 continents with an employment workforce of 4,750,000 people. The operational sectors of the company include chemicals, consumer products, engineering, information communication and systems, services and materials. Mergers and acquisition present a process of corporate restructuring which will eventually end in reorganization of a company to provide additional value in the activities of a company. Mergers and acquisitions will consolidate an industry. Activities of small companies are combined together by being provided by one company. The company is usually large in size. Mergers involve the legal process of consolidating companies into a one, large one. Acquisition takes place when different company takes over a company and establishes itself with new ownership. Target Company retains existence. Control of the target company is done by the acquiring company. This process normally results n economic and financial consolidation of two entities in an industry Valuation Tata chemical limited is an Indian company. The company investment value is approximately 93 million Euros. The company moved to acquire 100% shares in the UK Company. The company is the prime owner of brine wells (UK). The idea of acquisition was meant to secure the supply of Brunner Monde operations for the company. Valuation of business assets and liabilities will determine the settle and buy value of the business. Valuation will determine the business worthy in a given environment. The takeover value will be acquired from the business (Daniel, 2001). Financing of the merger and acquisition The merger and acquisition idea will secure the financial position of the company as this provides prospects of additional cash flows for the company. The acquisition value was provided by debt finance. Tata chemicals did the financing through a non-recourse basis. The valuation of the company was 93 million Euros and this prompted the company to seek debt financing on a recourse basis. Debt financing is a process where the acquiring company will pay the debt in parts and either through approach of the banks to offset the debt. Debt financing was preferred by the company since the target company had vast interest which will be used to offset the debt as the process goes by. Debt financing is common in the business world as it help to acquire large business ventures without the necessity to own large business interest from other business. Defence tactics Tata chemicals signed a binding agreement to have a 100% shareholding in the holding company. The structuring of the deal was done through holding company. The agreement was on a consideration of 93 million sterling pounds. Implementation The desire to acquire the company was motivated by the vast interest in the brine wells. The wells are many in the UK. The salt products have a 50% shareholding in the market of UK. The acquisition is an opportunity to secure long term supplies of brine to the rest of Europe and other continents. Some f the company supplies of the company include Magadi, Kenya and plants in North switch in the UK. Risks involved in the merger and acquisition process The target company risks losing its identity in the market. This is through change of attitude and behaviors of the two firms. There will be a learning process of the need to merge organization culture with the corporate strategy. The closure of the deal was subject to regulatory approvals and was done after 30-35 days as a legal requirement. Some of the other risks involve in the acquisition involve inheriting the debts of the target company. Some f the associates of the company include alkaline products. The financing module will include debt financing. This is risky in terms of default or hidden terms of the takeover agreements (Daniel, 2001). Theory analysis The process of value creation will involve the need to assess the corporate value in a given industry. Corporate assessment will determine incidences of market penetration. It is the responsibility of top management to venture into markets which will increase cash flow and revenue prospects in a given industry. Value creation is as a result business processes such as business process re-engineering and outsourcing processes. The theory will focus on game theory and value creation. These in most cases rely on psychology of senior management. According to the game theory, one can argue that managers play with the psychology of other stakeholder in acquiring the assets and operations of other business organization. Game theory involves the process of trying to monitor the strategic movements of the business opponents so as to penetrate the business market (Marcarthy, 2013). This implies that there is a need for different stakeholders to evaluate the value of acquisitions before the acquisitions in order to establish whether the acquisition will create more value to the company or will benefit a few individuals such as managers of the business organization. Evaluation of the strategies will protect the business from incurring losses and market stagnation. Therefore, it is important to analyze the value of the acquisition before decisions are made. This means that stakeholders should carry out an analysis either SWOT Analysis or PEST analysis to evaluates the benefit of the merger or acquisition as establish whether the acquisition will lead to value creation of financial losses to the business organization. SWOT ANALYSIS Strengths The company has a wide financial base and ambitious plan t penetrate many industries. The merger and acquisition process will involve legal and binding process of acquisition of the company. The steady supply f brine will create market presence in the rest of Europe for the company. Financing of the process is through debt financing and this is through recourse process. This is strength as the company will still have financial liquidity. Weakness The process requires vast financial resources to finance the deal. This did prompt the company to seek for debt financing of the deal in the market. There are possible prospects of opposition to enter some markets as there is cultural convergence of some countries. There is negative publicity of some of the chemical products and this will curtail the profit prospects. There is a deferred payment in the business deal. This is in the tune three million pounds. However this is a small proportion out of possible 93 million pounds for the deal (Buono, 2003). Opportunities The brine wells have a useful lifetime of 50 years in the market. The company has an existing capacity to produce an annual tone of 7.20 lakh. This will be an opportunity to secure brine supplies in the long term. The security is an efficiency asset in the UK market. The deal will assist to meet some market targets like brine wells. Cost optimization will improve financial operations in the European markets. There is a steady supply of brine to the industry and this will streamline operations of the company. The acquisition will upsurge company profits up to 15 million pounds in a single year. The savings for the company will be annual sum of two million pounds. There are also prospects of generating additional cash flows for the company once the deal is sealed. There are also prospects of brine production for the company. For instance, storage of gas business model will increase revenues for the company. PESTE ANALYSIS PESTE analysis involves the process of evaluating the political, economic, social and technological factors that are likely to affect the acquisition. This is because PESTE analysis ensures that managers of business organization are able to acquire a company that does not present any political or environmental challenges that are likely to interfere with the financial stability of the acquisition hence lowering the value of the creation. Political factors include legislation which will affect the operations of the business. Legal requirements represent additional cost for the business. Economic factors include the prevailing economic condition in terms of inflation, unemployment, economic growth and balance of trade. Economic conditions will affect taxation and profit levels in a company. Social cultural factors such as lifestyles, events like public holidays will affect business acquisition. Technological factor are crucial in the process of mergers and acquisition. There is a positive correlation between business operations and technology. Technological innovations will prosper returns of the business (Schnozzle, 2012). CONCLUSION The process of value creation will involve the need to assess the corporate value in a given industry. Corporate assessment will determine incidences of market penetration. The operational sectors of the company include chemicals, consumer products, engineering, information communication and systems, services and materials. Mergers and acquisition present a process of corporate restructuring which will eventually end in reorganization of a company to provide additional value in the activities of a company. Mergers and acquisitions will consolidate an industry. Activities of small companies are combined together by being provided by one company. The company is usually large in size. Mergers involve the legal process of consolidating companies into a one, large one. Debt financing is a process where the acquiring company will pay the debt in parts and either through approach of the banks to offset the debt. Debt financing was preferred by the company since the target company had vast interest which will be used to offset the debt as the process goes by. REFERENCES BAKER, H. KENT. (2011). The Art of Capital Restructuring Creating Shareholder Value through Mergers and Acquisitions. Wiley. http://www.books24x7.com/marc.asp?bookid=41753. BÖSECKE, K. (2009). Value creation in mergers, acquisitions, and alliances. Wiesbaden, Gabler. http://dx.doi.org/10.1007/978-3-8349-8316-9. BRITO, D., & CATALÃO-LOPES, M. (2006). Mergers and acquisitions: the industrial organization perspective. Alphen a. d. Rijn [u.a.], Kluwer Law Internat. BRUNER, R. F. (2004). Applied mergers and acquisitions. Hoboken, N.J., John Wiley & Sons. BUONO, A. F., & BOWDITCH, J. L. (2003). The human side of mergers and acquisitions: managing collisions between people, cultures, and organizations. Washington, DC, Beard Books. CARNEY, W. J. (2009). Mergers and acquisitions. Austin, Wolters Kluwer Law & Business. COOPER, C. L., & FINKELSTEIN, S. (2011). Advances in mergers and acquisitions. Vol. 10 Vol. 10. Bingley, Emerald. COYLE, B. (2000). Mergers and acquisitions. Chicago, Glenlake Pub. Co. DAMODARAN, H., & NILEKANI, N. (2008). India's new capitalists: caste, business, and industry in a modern nation. Ranikhet, Permanent Black in association with New India Foundation. DANIEL, T. A., & METCALF, G. S. (2001). The management of people in mergers and acquisitions. Westport, Conn, Quorum Books. DEPAMPHILIS, D. M. (2011). Mergers and acquisitions basics all you need to know. Burlington, MA, Academic Press. http://public.eblib.com/EBLPublic/PublicView.do?ptiID=648807. FRENSCH, F. (2007). The social side of mergers and acquisitions cooperation relationships after mergers and acquisitions. Wiesbaden, Dt. Univ.-Verl. http://dx.doi.org/10.1007/978-3-8350-9576-2. GAUGHAN, P. A. (2013). Maximizing corporate value through mergers and acquisitions a strategic growth guide. New York, Wiley. http://public.eblib.com/EBLPublic/PublicView.do?ptiID=1164805. HALIBOZEK, E. P., & KOVACICH, G. L. (2005). Mergers and acquisitions security: corporate reorganizations and security management. Amsterdam, Elsever Butterworth Heinemann HOWSON, P. (2003). Due diligence: the critical stage in acquisitions and mergers. Burlington, VT, Gower. MCCARTHY, K. J., & DOLFSMA, W. (2013). Understanding mergers and acquisitions in the 21st century: a multidisciplinary approach. Houndmills, Basingstoke, Palgrave Macmillan. SCHERTZINGER, A. (2009). Creating value in insurance mergers and acquisitions. Wiesbaden, Gabler. http://dx.doi.org/10.1007/978-3-8349-8210-0. SCHOLZE, H. (2012). Glass: nature, structure, and properties. [S.l.], Springer. SHERMAN, A. J., & SHERMAN, A. J. (2011). Mergers & acquisitions from A to Z. New York, American Management Association STRAUB, T. (2007). Reasons for frequent failure in mergers and acquisitions: a comprehensive analysis. Wiesbaden, Deutscher Universitäts-Verlag. SUDARSANAM, S. (2003). Creating value from mergers and acquisitions: the challenges ; an integrated and international perspective. Harlow [u.a.], Prentice Hall/Financial Times [u.a.]. WESSELS, D., & AMP, M., KOLLER, T., & GOEDHART, M. (2013). Valuation measuring and managing the value of companies. Hoboken, N.J., Wiley. http://rbdigital.oneclickdigital.com. Read More