vertical mergers

1. VerticalMergers Kartikye Kasera-112 Deepak Mehta -114 Shivendra Singh-122 Rishabh Chopda-305 Ashwin Kumar Mehta-313 Fenil Shah-319

3. Concepts and Procedures for global vertical merger

4. Advantages and Disadvantages

5. Types of Vertical mergers

6. Case Study --

9. The result is either joint ownership or the sale of one firm’s assets to the other. Vertical integration means that the assets that were previously held by two firms are combined into a single firm.

11. Why do mergers fail ? Lack of human integration Mismanagement of cultural issues Lack of communication

13. Companies to compete with the newly merged company becomes hard.

15. raise prices in the market

16. reduce the quality of product in the market.

18. To achieve optimum size so as to reap the benefits of economy of scale;

19. To reduce the duplicate expenses and thereby to improve the profitability;

20. To serve the customer better;

21. To have cohesiveness in control of the organisation;

22. To grow without any gestation period;

24. Example of Vertical Merger Time Warner Incorporated, a major cable operation, and the Turner Corporation, which produces CNN, TBS, and other programming. Pixar-Disney Merger

26. Combined with $870 billion in Q4 2010 that amounts to over $1.2 trillion over 6 months.1 Source: Thomson Financial Services

27. KNIGHTS AND SQUIRES In the case of a hostile takeover, the firm making the bid can be referred to as a 'black knight'. ‘White knight' is a firm that may enter the fray as a 'friendly' bidder. A 'grey knight' is a third firm that is not welcomed by the 'victim', seeking to exploit the situation to their own advantage. ‘Yellow knight' is a firm who originally seeks to launch a hostile takeover bid but then moderates its stance and negotiates on the basis of a merger. ‘White squires‘ is a firm which may not be big enough to be able to take control of another firm but may well seek to buy into the 'victim' firm to prevent the 'black knight' from being able to achieve its takeover plans.

28. Global Procedures for Vertical Mergers

29. Laws vary with countries Most of the developed countries of the world have some form of merger control. Cross border transactions will be subject to the multiple jurisdictions of the home countries of bidders andtargets. The laws differ across the countries and among the organizations. The laws also govern the structure of the merger going to take place. In India, the Companies Act of 1956 is used as a regulation by the companies.

31. It may gain control over some channel of distribution.

34. The Global Guidelines

35. The Process Top management commits towards merger. Search for a merger partner Negotiate with several shortlisted companies suited to be merger partner for settling terms of merger. Initiate the legal procedures in accordance to the government laws.

36. Global guidelines for a merger The scheme of merger should be prepared by the companies, which have arrived at a consensus to merge. Approval of Board of Directors for the scheme. Approval of the scheme by specialized financial institutions/banks/trustees for debenture holders. Intimation to Stock Exchange about proposed merger. Application to Court for directions for meeting of creditors/members.

37. Advertisement of the notice of members meeting. Holding the shareholders general meeting and passing the resolutions. Submission of report of the chairman of the general meeting to Court. Submission of Joint petition to court for sanctioning the scheme Transfer of the assets and liabilities. Allotment of shares to shareholders of transferor company Other Post merger obligations.

38. Tender Offer Process Approval by 50 percent or more of the shareholders of the target firm gives control to the bidder. After the bidder has obtained control, the terms of the transaction may be “written down” on the minority. By law, shareholders of a target firm have a 20-day waiting period before they are required to vote. If another bidder competes with the first, the target shareholders must have an additional 10 business days to evaluate the new offer.

39. Steps The parent forms a wholly/partially owned subsidiary. The target transfers its stock to the parent. The target’s assets and liabilities are transferred to the subsidiary. The merger consideration (parent stock) is paid to the target shareholders for all the target shares. All the target shares are canceled. The target’s stock is wholly owned by the parent.

40. Common reasons for vertical integration Increased control over quality of supplies or the way the product is marketed Better information about supplies or markets Greater opportunities for differentiation through coordinated effort Opportunity to make greater profits by performing another function in the vertical supply chain

41. Advantages of a vertical integration : Economies of Scale Large scale production that lead to lower unit costs Control of Markets Gain some form of monopoly power Control supply Secure outlets Cost Lower buying cost of material Lower distribution cost Efficiency Improve technical, productive or allocative efficiency

42. Contd.. Shareholder Value Improve the value of the overall business for shareholders Entry barriers to new competitors if the firm can gain sole access to a scarce resource Protects product quality through control of input quality and distribution and service of outputs Improves internal scheduling (e.g., JIT inventory systems) responses to changes in demand

43. Disadvantages of vertical integration Cost disadvantages of internal supply purchasing Increase overhead and capital expenditure low efficiencies due to lack of supplier competition. Limits flexibility In responding to changes in technology, customer preferences, etc. Strategic differences Increases management difficulty Lack of expertise in diversification efforts

44. Contd.. Narrows range of choices available to firm for investment May reduce innovation Established distribution channels may be adversely affected Additional administrative costs

46. Are there any market external factors

48. The company controlled not only the mills where the steel was made, but also the mines where the iron ore was extracted, the coal mines that supplied the coal, the ships that transported the iron ore and the railroads that transported the coal to the factory, the coke ovens where the coal was cooked, etc.

49. The company also focused heavily on developing talent internally from the bottom up, rather than importing it from other companies.

51. Backward Integration

52. Balanced integration

54. A good example of forward integration is when a farmer sells his/her crops at the local market rather than to a distribution center.

57. With a turnover of €4 million and net profit of €2,50,000, the company offers design and engineering services in the automotive sector.

58. Since it is controlling its subsidiary that produces some input.so it is backward integration.

60. The brand is based in downtown Los Angeles , where from a single building they control the dyeing, finishing, designing, sewing, cutting, marketing and distribution of the company's product.Thecompany shoots and distributes its own advertisements, often using its own employees as subjects.[

61. It also owns and operates each of its retail locations.

62. According to the management, the vertically integrated model allows the company to design, cut, distribute and sell an item globally in the span of a week.

63. Since the company controls both the production and distribution of its product, it is an example of a balanced vertically integrated corporation.

65. Managing the soft due diligence activity.

66. Providing input into managing the process of change

67. Advising top management on the merged company’s new organizational structure.

68. Overseeing the communications

69. Managing the learning processes

71. Identifying and developing new competenciesThe strategic contribution of HR as consisting of the “Five P’s”: Philosophy, Policies, Programs, Practices, and Processes. Conclusion Vertical merger success entirely depends on the people who drive the Business, their ability to Execute, Creativity, and Innovation. It is of utmost importance to involve HR Professionals in Vertical merger discussions as it has an impact on key people issues.

72. VERTICAL MERGERS Time Warner & AOL (America Online Inc.)

74. Warner Brothers made a number of well-known Classic Films, such as Casablanca and a number of Hitchcock thrillers.

76. Transformed it into a multi-media company consisting of motion pictures, television production and distribution, studio facilities , magazine publishing and many others.

78. AOL was the first On-line Service requiring the use of proprietary software (computer software licensed under exclusive legal right of its owner)

81. Time Warner's major possessions included the cable networks HBO and CNN, the Warner Brother’s movie and music operations, and Time magazine, while AOL provided internet service to approximately 26 million customers

83. CONCLUSION

84. Increasing Profitability Through Vertical Integration Building barriers to entry Facilitating investments in specialized assets Protecting product quality Improved scheduling

85. Motives

86. Motives

87. The Growth of Firms External Growth: Through amalgamation, merger or takeover (acquisitions) Mergers – agreed amalgamation between two firms

88. Behavioural Objectives Modern firms have to attempt to match competing stakeholder needs: Shareholders Employees Consumers Suppliers Government Local communities Environment

89. Behavioural Objectives Firms may have to balance out their responsibilities: ‘Fat cat pay’ Management rewards – bonuses, etc. Social and environmental audits Employee welfare Meeting consumer needs Paying suppliers on time Satisfying shareholders and ‘The City’ about its policies, plans and actions

90. Diminished Enthusiasm for Vertical Integration Inability to achieve expected returns Lack of proficiency in diversification efforts Conflicting goals of competing businesses Decline of capitation payments Increased demands of core business Substantial changes in payer environment for health plans, hospitals, and post acute services (BBA of 1997) Reduced resources for investment