Rationale and Valuation techniques for
MERGERS AND ACQUISITIONS
HARISH H.V.* AND C.G. SRIVIDYA**
IBM to Buy Daksh e-Services. Deal Worth Close to USD 150 Million……… Bank of America to Pay $47 Billion in Shares to Buy FleetBoston……….. J.P.Morgan Chase to buy Bank One…. HCL Tech Buys Soft………… 51% Stake in Deutsche Idea Buys 75% Stake in Escotel…………… GM May buy 80% of Fiat Next Year…………..
e come across such headlines on newspaper front pages day in and day out. Why do companies merge? Why do they pay millions and billions of dollars for such acquisitions? Why should a business takeover another? How does a seller put a price on his offer? This article seeks to examine the rationale for Mergers and Acquisitions, popularly known as M and A, as well as valuation techniques that are used in such situations along with some case studies.
M AND A AS A BUSINESS STRATEGY
Broadly, there are two ways to grow a business - through organic growth and through inorganic growth. While taking the organic growth path, the company incrementally grows its people, customers, infrastructure resources and thus revenues and profits, an inorganic growth would provide instantaneous growth enabling the company to skip a few steps on the growth ladder. Mergers and
Acquisition (M&A) is an inorganic growth strategy.
CATEGORIES OF M &A s
Mergers, acquisitions, takeovers, etc. are terms that are generally used interchangeably, but often differ by situation. Merger normally refers to unification of two equal players into one entity. Acquisition refers to one player buying out another to combine the bought entity with itself. Takeovers could be Amicable (such as IBM's acquisition of Daksh) or Hostile (such as Oracle's bid for Peoplesoft). Again, such deals could be Domestic (HLL's acquisition of Modern Foods), International (IBM's acquisition of
*The author is Practice Director (South India). **The author is Manager, Corporate Finance of Grant Thornton India Pvt. Ltd.... [continues]
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