MODULE_5

MERGERS &
ACQUISITIONS

CERTIFICATE COURSE

DEVELOPED BY
Corp Comm Legal

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MODULE - 5

FINANCES & POST MERGER
MANAGEMENT

5.1 INTRODUCTION

Mergers and acquisitions (M&A) are a part of the life organizations will have to look for alternative
cycle of any business. They can enable organizations financing options to pay for their transactions.
to expand, procure new learning, move into new
territories, or enhance their output with one simple Standard merger bargains regularly include
exchange – it's not a big surprise that Mergers & executives, legal counsellors, and investment
Acquisitions activity hit a record high in 2015 in India bankers even before the aggregate acquiring cost is
and still going strong. Be that as it may, alongside considered. Without a virtual Data Room and a
these advantages and opportunities comes great cost sizable measure of money close by, an organization
– for both parties. A standard Merger & Acquisition should discover substitute techniques for financing
arrangement will for the most part include legal Mergers & Acquisitions.
counsellors, executives, and speculation banks, and
that is before the real cost of the securing has been There are various diverse strategies for financing
figured in. mergers and acquisitions, and the selected technique
will depend on the condition of the organization, as
It is certain that mergers and acquisitions are well as on general action in a merger and acquisition
expensive, and without immense measures of funds, and back at the time of the exchange.

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5.2 EXCHANGING STOCK

This is the most commonly recognized alternative However, there is one noteworthy downside to
with regards to financing a Merger & Acquisition utilizing stock as cash to pay for Mergers &
bargain. If one company is looking to merge with or Acquisitions – stock instability/ volatility. Regardless
acquire another, it is safe to accept that they are in of how well an organization is getting along, there is
control of a solid asset report with a robust stock always a risk of a drop in stock, especially if word gets
offering. It is this stock pricing that likely prompted out about a conceivable Merger & Acquisition before
the Mergers &Acquisitions movement in any case. any arrangement has been concluded. Stock markets
flourish with liquidity, so investors can move rapidly
In a typical stock-trade exchange, the purchaser will to offer their stock in the event that they have any
trade shares in their own organization for shares in motivation to feel nervous about the fate of a specific
the offering organization. Financing Mergers & organization. An unannounced or unexplained M&A
Acquisitions with stock is a relatively safe choice as deal would positively bring a couple of inquiries in the
both the parties share the risks between themselves financial press. Moreover, worldwide financial events
after the exchange, implying that watchful can wreak destruction on share costs, regardless of
administration is ensured. Paying with stock is how well the organization is performing.
additionally favourable to a buyer if their offers are
overvalued on the market, as they will get more Most famously, the worldwide financial emergency
stocks in the seller company per shares traded than if thumped trillions of dollars off the estimation of
they were paying for their exchange in real money. In global stock markets, and the recent Brexit aftermath
a merger bargain, investors on both sides can receive saw the famous London Stock Exchange hit
the benefits of a stock-swap in the long haul, as they dangerous lows. Stocks are additionally subject to
will for the most part get an equivalent measure of artificial market developments, for example,
stock in the recently shaped organization those shorting, despite the fact that there are regulatory
outcomes from the transaction, instead of just instruments set up to keep this from having a
accepting cash for their shares. genuinely unfavourable impact on a company’s value.i

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While it is difficult to anticipate what offers will be compromise is reached whereby the sale price
worth later on, it is easy to understand why a few incorporates a blend of shares and cash, reducing the
companies may be hesitant to sell their offers in risk on both the sides and enabling the two companies
return for stock as opposed to money. Often a to keep up a stake in the new organization

5.3 TAKING ON DEBT

Consenting to take on the debt owed by a dealer is a motivation for would-be creditors who may wish to
great alternative to paying in stock or cash. For some restructure the new company or essentially take
organizations, debt is the reason for any sale, as high control of its assets, for example, property or
interest rates and poor economic conditions make contacts.
repayment outlandish. In these circumstances, the
priority for the indebted company is to reduce the Obviously, it is possible to exchange debt in M&A
risk of further losses and redundancies by as much as deals without the danger of bankruptcy. Under the
possible by entering into an M&A transaction with a terms of the given deal, one company may offer to
company which can guarantee its debts. purchase a specific amount of corporate bonds for a
Unfortunately, the debt of a company can reduce its favourable interest rate, or bonds may be exchanged
sale value significantly, and can even eliminate its iiibetween companies as a means for spreading risk
price. However, from the creditor’s point of view, it and solidifying a merger. Where an organization's
offers a cheap means of acquiring assets.ii debts are relatively small, the creditor may just offer
to take care of their expenses as an additional
Moreover, being responsible for a large amount of an incentive amid the last phases of the exchange.
organization's debt implies increased control over Similarly, with trading stock, assuming debt can
administration in case of liquidation, as in this simply be one part of a complex transaction
example owner of the debt have priority over the agreement.
shareholders. This can be another source of

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5.4 PAYING WITH CASH

Paying with cash is the most obvious alternative to circumstance; however, a forthcoming Merger &
paying for a transaction with stock. Cash transactions Acquisition is one of the better circumstances to
are instant and mess-free, and cash does not require carry one out. The possibility of a forthcoming M&A
the same kind of complicated management as stock transaction can make an investor more amped up for
would. Furthermore, the value of cash is far less the organization's future, as it flags a desire to extend
volatile and does not depend on the performance of a and a long hauling strategy. Initial public offerings
company. One exception is when dealing in multiple dependably pull in market buzz, so by timing the
currencies. Exchange rates can vary wildly, as Initial public offering with an M&A exchange,
evidenced by the market response to the yen organizations can boost investor interests and drive
following the Bank of Japan’s deflation program; and up early offer costs.
the British pound following the Brexit. Currency
exchange fees can also add extra expense to multi- Moreover, increasing the value of an IPO with a M&A
national acquisitions.iv transaction also increases the value of existing
shares. However, IPOs can be a risky way of financing
While cash payments are preferred, the price of ventures. The market can fall just as easily as it can
Mergers & Acquisition transactions can be excessive, rise, and newly-minted companies are more
and not many companies can access so much cash vulnerable to volatility as they do not have a long
from their own funds. track record to reassure investors.v

But there are certain other ways of obtaining cash For this reason, IPOs are falling in popularity – in the
from others before an upcoming Merger & first quarter of 2016, IPO activity had fallen by 82
Acquisition transaction: percent by deal value and 52 percent by deal number
in comparison with the last quarter of 2015.vi
➢ Initial Public Offerings-

Initial Public Offerings are a decent path for an
organization to raise funds in any specific

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➢ Bond issuance- ➢ Loans-

Corporate securities are a speedy and simple method Borrowing money can be an expensive affair when
for getting money, either from existing shareholders undertaking an M&A transaction. Lenders, or owners
or from people in general. Organizations usually who have agreed to accept payments over an
release various bonds covering a characterized extended period of time, will demand a reasonable
timeframe (anything from one year to twenty years), interest rate for the loans they have made. Even when
with a set interest rate (generally under five percent). the interest is relatively small, when you are dealing
In acquiring these bonds, investors are basically with a multi-million-dollar M&A transaction, the
advancing cash to the organization in the desire that costs can really add up. Interest rates, thus, are an
they will receive a return on their capital after some important to be considered in funding M&A
time, once the venture has been made, their cash is transactions with debt, and low interest rates will
secured and can't be touched until the point that the raise the number of transactions funded with loans. In
maturation date. This makes them popular with risk- 2015, for instance, loans became very popular
averse, long term investors, who tend to snap them following central banks’ quantitative easing
up. programs, which greatly reduced US interest rates. In
the first two quarters of 2015, the amount of debt
In 2015, bond issuances reached a record high as ($290 billion) used to fund mergers and acquisitions
companies took advantage of low interest rates in the was triple the amount used in that period of 2014.viii
US to fund their expansion plans and investors sought
alternatives cash savings. According to analysts , However, given that 2015 was the best ever year for
more than $290 billion of debt was raised for M&A M&A transactions, it is not surprising that
purposes last year, almost triple the amount raised in performance slowed slightly in 2016.
2014. However, this trend is very much tied to
borrowing costs, and bond issuances will only Other credit alternatives include re-selling (which is
represent good value for money if they can access just a feasible choice if the organization has a
cheap credit and if they have a clear acquisition goal substantial property portfolio), and bridge financing.
in sight.vii A bridge loan is a transient advance which is proposed
to 'bridge' the gap between expected instalments.

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For example, an organization might expect a huge drawn closer if everything else fails. Interest rates are
number of invoices dividends soon after the M&A higher than average, and late instalment penalties
deadline. A bridge loan would cover the shortage by can be extreme. Moreover, utilization of a bridge loan
loaning the cash to the organization over a set period in an M&A exchange may raise concerns with the
of weeks or months. In a way, this is the payday credit other party, undermining the arrangement.ix
equivalent of the business world, and ought to be

5.5 POST MERGER MANAGEMENT

HR experts normally assume essential parts in a In the HR field, one area that has significant potential
procurement centre due diligence activity. Amid due for creating issues is that of retirement benefits. The
diligence, data about ability and culture, alongside inquiries concerning characterized benefit plans,
average evaluations of representative advantages defined contribution plans vesting, valuation of
plans and liabilities, pay programs, employment liabilities and overfunding or underfunding of plans
contracts and policies, legal exposure, etc. can give are unpredictable issues that can make genuine
insights into the estimation of the value of a property difficulties for individuals from the HR group.
and its workforce and can diminish the probability of Notwithstanding a review of retirement-related
unhappy and expensive astonishments once the deal issues, HR also ought to lead a full examination of the
is completed. target organization's health care benefits and
expenses, and additionally its worker’s compensation
An exhaustive survey of the acquired organization’s liabilities.
lawful position for the most part takes place amid the
due diligence period of the transactions. This is a Companies can inadvertently assume significant
period when all individuals’ related arrangements, liability if they do not conduct careful due diligence
plans, practices and projects ought to be examined to before finalizing the transaction. These potential
guarantee consistence with relevant business laws lawful issues should be tended to explicitly in the
and regulations. procurement assertion, and the purchasing company
or surviving organization might need to secure an

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indemnification in the agreement as well. Such an While one or two cases of discrimination or sexual
indemnification arrangement protects an harassment can normally be resolved fairly easily, the
organization from accepting unreasonable dangers, HR team needs to be most concerned with examples
particularly if litigation is pending. Since the two of systemic problems created by a lack of appropriate
entities will consolidate into one, to be significant, the policies or a failure to enforce those policies. Legal
indemnification arrangements are probably going to issues that typically because the most problems
reach out to key officers, executives and include those related to wage/hour issues, leave
shareholders, which again raises "people issues" that issues, etc.
may require the contribution of HR experts.x

5.6 KEY AREAS OF HR INVOLVEMENT AFTER
THE TRANSACTION

The outdated perspective of HR in an absolutely 1. Creation of new policies to guide the new
authoritative capacity instead of strategic one organization- To shape the culture of the
frequently brings about HR experts being excluded recently merged company, the business must
from numerous parts of the M&A procedure in which create and communicate to the employees a
they could add value to the process. relevant people-related strategy. Such a
technique ought to incorporate the
Having the necessary abilities to viably deal with the improvement of key policies, standards and
interrogation (e.g., information in representative rules to oversee employee conduct and
relations, correspondences, change administration related working environment expectations
and lawful necessities) should pick up the certainty of (e.g., participation, time off, harassment, drug
senior administration in HR. Competency in these testing, and privacy)
zones likewise should empower HR professionals to
deal with the complicated procedure of overseeing
HR during mergers and acquisitions.

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2. Retention of key employees- To retain the Ideally, the HR and management groups will
key talent that will help make the new have possessed the capacity to evaluate the
organization more effective, administration abilities, capacities, potential and motivations
ought to communicate its intentions to the of key employees engaged with the merger or
"star performers" as early in the process as is acquisition. Generally, strategies include
legally conceivable. This implies asking for interviewing and testing methods and the
access to lead classified meetings with key utilization of outside advisors/ consultants.
employees ahead of time of the actual closing Once these errands are finished, the HR
date. Above all, administration ought to be group would make quick moves to "re-enlist"
extremely careful not to under commit on and place these workers into key positions of
these key individuals, or they will consider the new entity.
other work alternatives. Star performers Most M&A deals count on both the
know their identity and comprehend their organizational and financial efficiencies that
own and expert marketability. will result from a reduction in the number of
employees needed to run the new
3. Employee selection and downsizing- Early organization. This result implies that HR will
placement of administration is a basic factor invest a lot of energy surveying employee
in beginning to balance out the new knowledge, skills and abilities (KSAs) to
organization. Any postponements in putting choose who will stay and who will go. The
key supervisors complicate the progress by strategy may include terminations, early
expanding vulnerability, redirecting retirements and a longer-term plan to simply
consideration and encouraging interior not fill certain positions as they are vacated.
competition. A noteworthy test for the The ways in which these decisions are made
acquiring organization is in choosing who to will, in the long run, be as important as the
retain, who to redeploy and who to terminate, actual decisions themselves. Moreover, the
and successfully managing those procedures. manner in which talent management
Moving key staff or even whole departments decisions are made will communicate a great
might be necessary. deal about what the organization’s values.xi

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4. Development of compensation strategies- connect different employee benefits into a
Depending on the circumstances of the deal program that fits the recently shaped
and the compensation policies of the organization, or just dispose of the current
combining companies, the HR will likely be designs and start once again. In any case, the
called on to splice disparate payment plans production of a comprehensive employee
into a program that fits the new organization. benefits program is a complex undertaking,
On the other hand, HR may need to dispose of and one that requires time and energy. All
the first designs and afterward make a through that process, notwithstanding,
program starting with no outside help that employees are certain to be concerned about
meets the objectives and bearing of the the possible changes to their employee
recently blended elements. Either way, old benefits scope and will need to be educated
and new employees will be concerned about about "the new package" when that data is
what is happening with their pay and will want accessible.
full and early disclosure about the changes
being considered. 6. Communications- Having a well-planned

In addition, individuals from the senior communication strategy in place is very
administration group will be on edge to
perceive what sorts of uncommon courses of crucial in the M&A process. Effective
action will be offered to them given the
prominent idea of the new positions. The communication involves providing
advancement of an official remuneration
procedure will require an extra arrangement information on-
of complex basic leadership, and also board
approval.xii ➢ The shared vision for the new company,

5. Creation of a comprehensive employee ➢ The nature and progress of the
benefits program- Just as with remuneration
programs, HR will probably be required to integration and the anticipated benefits,

and

➢ The outcomes and rough timelines for

future decisions. Communicating clear,

consistent and up-to-date information

not only will give employees a sense of

control by keeping them informed, but it

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also can increase the coping abilities of Being straightforward incorporates sharing data
employees and minimize the impact of about when and by what process a choice is required
the integration on performance. to be made.

The following steps highlight the components of a Reality likewise implies recognizing a portion of the
successful communication program: anxiety and different feelings that are irrefutably
present. Organizations should not give away the
➢ Establish multiple routes of communication impression that everything will be “normal”, if it not
(e.g., one-on-one meetings, group sessions, going to be the case.
newsletters, intranet updates).
The bosses should fight the temptation to tell
➢ Focus on the themes of change and progress employees that they have "a brilliant future" , when
by highlighting projects that are going well they are still confused themselves . Businesses should
and action items that are being delivered on not sugar-coat matters with false maxims, for
time. example, calling the arrangement a "merger of
equals" when one organization is obviously the larger
➢ Repeat the common themes of the M&A to partner.
increase employee understanding of the
rationale behind the transaction. When decisions are made about functions and
individuals, the organization must treat those
➢ Provide opportunities for employee workers who will be negatively influenced by the
involvement and feedback. transaction with pride, regard and support. Not only
is this approach the humane thing to do, but it also is
➢ Ensure that employees understand there will a powerful way of showing those who remain what
be problems, but give a commitment that the kind of company they are now working for and of
problems will be identified and addressed as helping them begin to develop some positive feelings
early as possible.xiii toward the new organization.

The manner of implementation of restructuring is
very critical to successful integration. The acquiring
entity must be straightforward about what is
happening and what is planned.

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5.7 THE IMPORTANCE OF CULTURAL FIT

Cultural similarity issues regularly emerge when association and impacts all regions of group life, the
uniting at least two societies in the M&A procedure. M&A joining dependably has a level of misalignment,
Since culture envelops the convictions and paying little mind to the apparent comparability
suppositions shared by individuals from an between the two firms.

5.8 TECHNOLOGY & OUTSOURCING
DECISIONS

Overseeing HR innovation and choosing which frameworks and individuals abilities of both
frameworks to keep or supplant, and additionally organizations. Innovation mix must happen
which functions to outsource, can be an exceedingly completely and rapidly enough that typical
complex endeavor. Making on such choices requires operations never seem bothered to clients.
that businesses altogether survey the HR

5.9 GLOBAL ISSUES

Much of the pressure to compete and perform has through about 2005, M&A activity was controlled
intensified from globalization and the emergence of largely by U.S. and European corporations. The
China and India as two of the fastest-growing climate has changed as Asian businesses look to
economies in the world. During the 1990s and
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expand their markets and become global players. The

Middle East, even with its volatile political and vast oil wealth and are looking to diversify their
religious climate, is becoming a hotbed for M&A business holdings. The cultural and communication
activity. Countries such as the United Arab Emirates issues involved in a global transaction can create
and Saudi Arabia have plenty of cash flow from their even more complexity for HR practitioners.xiv

iBest Methods Of Financing Mergers And Acquisitions, http://businessessays.net/economics-and-finance/the-different-

(Sep.20, 2017, 9.08 PM), methods-in-financing-mergers-and-takeovers-activities/
ixBest Methods, supra note 2.
https://www.idealsvdr.com/blog/methods-of-financing- xPost- M&A Issues, (Sep.25,2017, 6.27 PM),
mergers-and-acquisitions/ (hereinafter called ‘Best Methods’).
https://www.shrm.org/resourcesandtools/tools-and-
iiMichale Gravel, Mergers And Acquisitions Financing
samples/toolkits/pages/mergersandacquisitions.aspx
Options, (Sep.20, 2017, 11.56 PM), xiPost-Merger Integration – HR,

http://www.imergeadvisors.com/mergers-acquisitions- http://huconsultancy.com/post-merger-integration-human-

financing-options resource/
xii10 Steps to a successful M&A Integration, ,
iii
http://www.bain.com/publications/articles/10-steps-to-
ivId.
vMergers And Acquisitions, successful-ma-integration.aspx
xiiiPost- M&A Issues, (Sep.26,2017, 11.45PM),
http://www.investopedia.com/terms/m/mergersandacquisitions
.asp (hereinafter called ‘Mergers and Acquisitions’) https://www.shrm.org/resourcesandtools/tools-and-
viMichale Gravel, supra note 1.
viiBest Methods, supra note 2. samples/toolkits/pages/mergersandacquisitions.aspx
viiiDifferent Methods in Financing Mergers And Acquisition (hereinafter called ‘Post- M&A Issues’).
xivPost- M&A Issues, supra note 13.
Activities, (Sep. 22, 2017, 6.07 PM),

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