Published on Nov 30, 2023
Business Organizations while going for corporate restructuring in the form of Mergers or Acquisitions do test the water from various perspectives. This is where arises the importance of conducting an exercise for evaluating strategies for the project and then a comparison has to be made so that the interest of the stakeholders of both the entity is not disturbed.
To do the evaluation method of valuing a firm and the impact of merger in the organization, primary data and analytical discussion was obtained from KPMG and Mr. Anindo Dutta (C.A). Further analysis of recent mergers was done to arrive at the conclusion. This thesis is an attempt made to find out the optimum evaluative strategies used by companies in mergers and acquisition, which commences from valuing the firm to evaluating the merged entity.
To do the evaluation the capital budgeting decision has to be done by very carefully estimating the projected free cash flows. For doing so, one has to have an in-depth knowledge to forecast the market the merged entity is entering into. Once this is done then comes the mode of paying the acquired firm. The optimum strategy for paying the acquired firm will depend upon the nature of acquisition
Once the payment mode is determined then an evaluation is to be done to find out whether the brand, the organization culture strategically fits each other. Then once all these evaluations are done then only the M&A deal should be finalized, for which, a team has to be formed with representative comprising from both the corporation.
In Indian Inc M&A activity has grown to unprecedented level and will grow even further. Companies will merge with each other in and particularly - the textile, FMCG, IT & BPO sector in India have witnessed maximum business restructuring for the year 2006. However, with more than half of these deals fails to deliver their expected results, and so comparison of evaluation strategies in M&A is central to merger and acquisition decision making.
The present Research is planned to study the measures that can be discerned as could probably engineer a success in M&A and identify the ingredients that are required to be followed to better a deal as it can be done or negotiated. For this the objectives are as follows:
(1) To compare the processes like valuation of the firm and synergy valuation
(2) To find out an adequate strategy for paying the acquired firm so that there is no over leverage problem in the future.
(3) To determine an optimum evaluation strategy in M&A. Valuing Synergy
Synergy is the magical force that allows for enhanced cost efficiencies of the new business, which can take in the form of revenue enhancement and cost savings. The form of synergy is enlisted below:
Staff reductions - To some extent merger reduces labor.
Economies of scale - Whether it is purchasing a small stationery or acquiring a brand, Economies of scale can be achieved any way. Economies of scale help to reduce cost of production.
Acquiring new technology - Synergies might occur by acquiring new technology.
Improved market reaches and market share- Often Companies to penetrate in newer areas acquire a local company. And synergy can be achieved by the benefits of the marketing and distribution of local company.
There ought to be economies of scale in the combined firm, but in many cases, one and one add does not equal to two. Not necessarily every merger will result in synergy. First of all there has to be a cultural fit between the two merging organization and then only synergy can be achieved. But to have a synergy in long run what requires is that the product or service delivered by the organization might fit the organization product portfolio. Agrees, Samarjit Singh, MD of Candid Marketing, "See acquisition has to be strategically fit both in terms of brand and culture. HLL's acquisition of Modern foods fitted the brand but there was no cultural fit between the two organizations." According to 4Ps- Business and Marketing's article, 'Not Just anybody, please.' unable to sustain losses HLL is putting up Modern Food for sale.
Now the million dollar question arises how to value synergy? Synergy tantamount to Net Economic Value (NEV) which arises from the extra value generated by the combined firm.
Most of the M&A deals has failed to add value because of not conducting a proper comparative evaluation of the various strategies involved both in pre-merger scenario and in post merger scenario. Where Indian companies misses out big time is in checking too quickly and ignoring the SWOT analysis of M&A DEAL. Not only that, most of the managers focusing too narrowly on the impact of mergers in the day-to-day operation of the business. With definite conviction, this tantamount to a recipe for disaster.
But successful acquirers take a different approach. Like Dabur when it acquired Balsara, they tested all the disciplined prioritization and fundamental strategies and principles. Despite being a Finance thesis, strategies that are to be evaluated cannot ignore another crucial issue- culture. Even in global corporate milieu too many merger-bound CEOs do not pay heed to this key factor, which is so much potential that it can make or break an M&A deal. Like HLL's acquisition of Modern Food, did not match with the culture of both the organization and now HLL has plans to sale Modern food. Cultural due diligence can is a systematic device for making fanatic cost-effective assessments of the cultures of both acquirer firm and the target firm
www.stern.nyu.edu
M & As in Banking Industry: A tool for Competitiveness by S.P.R. Vittal
www.indiainfoline.com
https://www.investopedia.com/terms/e/economiesofscale.asp
