MnA_Module_5

MODULE 5

FINANCES AND POST MERGER MANAGEMENT

5.1.Introduction

Mergers and acquisitions (M&A) are a part of the life cycle of any business. They can enable
organizations to expand, procure new learning, move into new territories, or enhance their
output with one simple exchange – it's not a big surprise that Mergers & Acquisitions activity
hit a record high in 2015 in India and still going strong. Be that as it may, alongside these
advantages and opportunities comes great cost – for both parties. A standard Merger &
Acquisition arrangement will for the most part include legal counsellors, executives, and
speculation banks, and that is before the real cost of the securing has been figured in.

It is certain that mergers and acquisitions are expensive, and without immense measures of
funds, organizations will have to look for alternative financing options to pay for their
transactions.

Standard merger bargains regularly include executives, legal counsellors, and investment
bankers even before the aggregate acquiring cost is considered. Without a virtual Data Room
and a sizable measure of money close by, an organization should discover substitute
techniques for financing Mergers & Acquisitions.

There are various diverse strategies for financing mergers and acquisitions, and the selected
technique will depend on the condition of the organization, as well as on general action in a
merger and acquisition and back at the time of the exchange.

5.2. Exchanging Stock

This is the most commonly recognized alternative with regards to financing a Merger &
Acquisition bargain. If one company is looking to merge with or acquire another, it is safe to
accept that they are in control of a solid asset report with a robust stock offering. It is this
stock pricing that likely prompted the Mergers &Acquisitions movement in any case.

In a typical stock-trade exchange, the purchaser will trade shares in their own organization
for shares in the offering organization. Financing Mergers & Acquisitions with stock is a
relatively safe choice as both the parties share the risks between themselves after the
exchange, implying that watchful administration is ensured. Paying with stock is additionally
favourable to a buyer if their offers are overvalued on the market, as they will get more stocks
in the seller company per shares traded than if they were paying for their exchange in real
money. In a merger bargain, investors on both sides can receive the benefits of a stock-swap
in the long haul, as they will for the most part get an equivalent measure of stock in the
recently shaped organization those outcomes from the transaction, instead of just accepting
cash for their shares.

However, there is one noteworthy downside to utilizing stock as cash to pay for Mergers &
Acquisitions – stock instability/ volatility. Regardless of how well an organization is getting
along, there is always a risk of a drop in stock, especially if word gets out about a conceivable
Merger & Acquisition before any arrangement has been concluded. Stock markets flourish
with liquidity, so investors can move rapidly to offer their stock in the event that they have
any motivation to feel nervous about the fate of a specific organization. An unannounced or
unexplained M&A deal would positively bring a couple of inquiries in the financial press.
Moreover, worldwide financial events can wreak destruction on share costs, regardless of
how well the organization is performing.

Most famously, the worldwide financial emergency thumped trillions of dollars off the
estimation of global stock markets, and the recent Brexit aftermath saw the famous London
Stock Exchange hit dangerous lows. Stocks are additionally subject to artificial market
developments, for example, shorting, despite the fact that there are regulatory instruments set
up to keep this from having a genuinely unfavourable impact on a company’s value.1

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

1Best Methods Of Financing Mergers And Acquisitions, (Sep.20, 2017, 9.08 PM),
https://www.idealsvdr.com/blog/methods-of-financing-mergers-and-acquisitions/ (hereinafter called ‘Best
Methods’).

5.3 Taking on Debt

Consenting to take on the debt owed by a dealer is a great alternative to paying in stock or
cash. For some organizations, debt is the reason for any sale, as high interest rates and poor
economic conditions make repayment outlandish. In these circumstances, the priority for the
indebted company is to reduce the risk of further losses and redundancies by as much as
possible by entering into an M&A transaction with a company which can guarantee its debts.
Unfortunately, the debt of a company can reduce its sale value significantly, and can even
eliminate its price. However, from the creditor’s point of view, it offers a cheap means of
acquiring assets.2

Moreover, being responsible for a large amount of an organization's debt implies increased
control over administration in case of liquidation, as in this example owner of the debt have
priority over the shareholders. This can be another source of motivation for would-be
creditors who may wish to restructure the new company or essentially take control of its
assets, for example, property or contacts.

Obviously, it is possible to exchange debt in M&A deals without the danger of bankruptcy.
Under the terms of the given deal, one company may offer to purchase a specific amount of
corporate bonds for a favourable interest rate, or bonds may be exchanged between
companies as a means for spreading risk and solidifying a merger. Where an organization's
debts are relatively small, the creditor may just offer to take care of their expenses as an
additional incentive amid the last phases of the exchange. Similarly, with trading stock,
assuming debt can simply be one part of a complex transaction agreement.

5.4 Paying With Cash

Paying with cash is the most obvious alternative to paying for a transaction with stock. Cash
transactions are instant and mess-free, and cash does not require the same kind of
complicated management as stock would. Furthermore, the value of cash is far less volatile
and does not depend on the performance of a company. One exception is when dealing in

2Michale Gravel, Mergers And Acquisitions Financing Options, (Sep.20, 2017, 11.56 PM),
http://www.imergeadvisors.com/mergers-acquisitions-financing-options

multiple currencies. Exchange rates can vary wildly, as evidenced by the market response to
the yen following the Bank of Japan’s deflation program; and the British pound following the
Brexit. Currency exchange fees can also add extra expense to multi-national acquisitions.3

While cash payments are preferred, the price of Mergers & Acquisition transactions can be
excessive, and not many companies can access so much cash from their own funds.

But there are certain other ways of obtaining cash from others before an upcoming Merger &
Acquisition transaction:

➢ Initial Public Offerings-

Initial Public Offerings are a decent path for an organization to raise funds in any specific
circumstance; however a forthcoming Merger & Acquisition is one of the better
circumstances to carry one out. The possibility of a forthcoming M&A transaction can make
an investor more amped up for the organization's future, as it flags a desire to extend and a
long hauling strategy. Initial public offerings dependably pull in market buzz, so by timing
the Initial public offering with an M&A exchange, organizations can boost investor interests
and drive up early offer costs.

Moreover, increasing the value of an IPO with a M&A transaction also increases the value of
existing shares. However, IPOs can be a risky way of financing ventures. The market can fall
just as easily as it can rise, and newly-minted companies are more vulnerable to volatility as
they do not have a long track record to reassure investors.4

For this reason, IPOs are falling in popularity – in the first quarter of 2016, IPO activity had
fallen by 82 percent by deal value and 52 percent by deal number in comparison with the last
quarter of 2015.5

➢ Bond issuance-

Corporate securities are a speedy and simple method for getting money, either from existing
shareholders or from people in general. Organizations usually release various bonds covering

3Id. (hereinafter

4Mergers And Acquisitions, http://www.investopedia.com/terms/m/mergersandacquisitions.asp
called ‘Mergers and Acquisitions’)

5Michale Gravel, supra note 1.

a characterized timeframe (anything from one year to twenty years), with a set interest rate
(generally under five percent). In acquiring these bonds, investors are basically advancing
cash to the organization in the desire that they will receive a return on their capital after some
time, once the venture has been made, their cash is secured and can't be touched until the
point that the maturation date. This makes them popular with risk- averse, long term
investors, who tend to snap them up.

In 2015, bond issuances reached a record high as companies took advantage of low interest
rates in the US to fund their expansion plans and investors sought alternatives cash
savings. According to analysts , more than $290 billion of debt was raised for M&A purposes
last year, almost triple the amount raised in 2014. However, this trend is very much tied to
borrowing costs, and bond issuances will only represent good value for money if they can
access cheap credit and if they have a clear acquisition goal in sight.6

➢ Loans-

Borrowing money can be an expensive affair when undertaking an M&A transaction.
Lenders, or owners who have agreed to accept payments over an extended period of time,
will demand a reasonable interest rate for the loans they have made. Even when the interest is
relatively small, when you are dealing with a multi-million-dollar M&A transaction, the costs
can really add up. Interest rates, thus, are an important to be considered in funding M&A
transactions with debt, and low interest rates will raise the number of transactions funded
with loans. In 2015, for instance, loans became very popular following central banks’
quantitative easing programs, which greatly reduced US interest rates. In the first two
quarters of 2015, the amount of debt ($290 billion) used to fund mergers and acquisitions was
triple the amount used in that period of 2014.7

However, given that 2015 was the best ever year for M&A transactions, it is not surprising
that performance slowed slightly in 2016.

Other credit alternatives include re-selling (which is just a feasible choice if the organization
has a substantial property portfolio), and bridge financing. A bridge loan is a transient

6Best Methods, supra note 2.
7Different Methods in Financing Mergers And Acquisition Activities, (Sep. 22, 2017, 6.07 PM),
http://businessessays.net/economics-and-finance/the-different-methods-in-financing-mergers-and-takeovers-
activities/

advance which is proposed to 'bridge' the gap between expected instalments. For example, an
organization might expect a huge number of invoices dividends soon after the M&A
deadline. A bridge loan would cover the shortage by loaning the cash to the organization over
a set period of weeks or months. In a way, this is the payday credit equivalent of the business
world, and ought to be drawn closer if everything else fails. Interest rates are higher than
average, and late instalment penalties can be extreme. Moreover, utilization of a bridge loan
in an M&A exchange may raise concerns with the other party, undermining the arrangement.8

5.5 Post Merger Management

HR experts normally assume essential parts in a procurement centre due diligence activity.
Amid due diligence, data about ability and culture, alongside average evaluations of
representative advantages plans and liabilities, pay programs, employment contracts and
policies, legal exposure, etc. can give insights into the estimation of the value of a property
and its workforce and can diminish the probability of unhappy and expensive astonishments
once the deal is completed.

An exhaustive survey of the acquired organization’s lawful position for the most part takes
place amid the due diligence period of the transactions. This is a period when all individuals’
related arrangements, plans, practices and projects ought to be examined to guarantee
consistence with relevant business laws and regulations.

In the HR field, one area that has significant potential for creating issues is that of retirement
benefits. The inquiries concerning characterized benefit plans, defined contribution plans
vesting, valuation of liabilities and overfunding or underfunding of plans are unpredictable
issues that can make genuine difficulties for individuals from the HR group. Notwithstanding
a review of retirement-related issues, HR also ought to lead a full examination of the target
organization's health care benefits and expenses, and additionally its worker’s compensation
liabilities.

Companies can inadvertently assume significant liability if they do not conduct careful due
diligence before finalizing the transaction.. These potential lawful issues should be tended to
explicitly in the procurement assertion, and the purchasing company or surviving
organization might need to secure an indemnification in the agreement as well. Such an
indemnification arrangement protects an organization from accepting unreasonable dangers,

8Best Methods, supra note 2.

particularly if litigation is pending. Since the two entities will consolidate into one, to be
significant, the indemnification arrangements are probably going to reach out to key officers,
executives and shareholders, which again raises "people issues" that may require the
contribution of HR experts.9
While one or two cases of discrimination or sexual harassment can normally be resolved
fairly easily, the HR team needs to be most concerned with examples of systemic problems
created by a lack of appropriate policies or a failure to enforce those policies. Legal issues
that typically because the most problems include those related to wage/hour issues, leave
issues, etc.

5.6 Key Areas of HR Involvement after the Transaction
The outdated perspective of HR in an absolutely authoritative capacity instead of strategic
one frequently brings about HR experts being excluded from numerous parts of the M&A
procedure in which they could add value to the process.
Having the necessary abilities to viably deal with the interrogation (e.g., information in
representative relations, correspondences, change administration and lawful necessities)
should pick up the certainty of senior administration in HR. Competency in these zones
likewise should empower HR professionals to deal with the complicated procedure of
overseeing HR during mergers and acquisitions.

1. Creation of new policies to guide the new organization- To shape the culture of the
recently merged company, the business must create and communicate to the
employees a relevant people-related strategy. Such a technique ought to incorporate
the improvement of key policies, standards and rules to oversee employee conduct
and related working environment expectations (e.g., participation, time off,
harassment, drug testing, and privacy)

9Post- M&A Issues, (Sep.25,2017, 6.27 PM), https://www.shrm.org/resourcesandtools/tools-and-
samples/toolkits/pages/mergersandacquisitions.aspx

2. Retention of key employees- To retain the key talent that will help make the new
organization more effective, administration ought to communicate its intentions to the
"star performers" as early in the process as is legally conceivable. This implies asking
for access to lead classified meetings with key employees ahead of time of the actual
closing date. Above all, administration ought to be extremely careful not to under
commit on these key individuals, or they will consider other work alternatives. Star
performers know their identity and comprehend their own and expert marketability.

3. Employee selection and downsizing- Early placement of administration is a basic
factor in beginning to balance out the new organization. Any postponements in
putting key supervisors complicate the progress by expanding vulnerability,
redirecting consideration and encouraging interior competition. A noteworthy test for
the acquiring organization is in choosing who to retain, who to redeploy and who to
terminate, and successfully managing those procedures. Moving key staff or even
whole departments might be necessary.

Ideally, the HR and management groups will have possessed the capacity to evaluate
the abilities, capacities, potential and motivations of key employees engaged with the
merger or acquisition. Generally strategies include interviewing and testing methods
and the utilization of outside advisors/ consultants. Once these errands are finished,
the HR group would make quick moves to "re-enlist" and place these workers into
key positions of the new entity.

Most M&A deals count on both the organizational and financial efficiencies that will
result from a reduction in the number of employees needed to run the new
organization. This result implies that HR will invest a lot of energy surveying
employee knowledge, skills and abilities (KSAs) to choose who will stay and who
will go. The strategy may include terminations, early retirements and a longer-term
plan to simply not fill certain positions as they are vacated. The ways in which these
decisions are made will, in the long run, be as important as the actual decisions

themselves. Moreover, the manner in which talent management decisions are made
will communicate a great deal about what the organization’s values.10

4. Development of compensation strategies- Depending on the circumstances of the deal
and the compensation policies of the combining companies, the HR will likely be
called on to splice disparate payment plans into a program that fits the new
organization. On the other hand, HR may need to dispose of the first designs and
afterward make a program starting with no outside help that meets the objectives and
bearing of the recently blended elements. Either way, old and new employees will be
concerned about what is happening with their pay and will want full and early
disclosure about the changes being considered.

In addition, individuals from the senior administration group will be on edge to
perceive what sorts of uncommon courses of action will be offered to them given the
prominent idea of the new positions. The advancement of an official remuneration
procedure will require an extra arrangement of complex basic leadership, and also
board approval.11

5. Creation of a comprehensive employee benefits program- Just as with remuneration
programs, HR will probably be required to connect different employee benefits into a
program that fits the recently shaped organization, or just dispose of the current
designs and start once again. In any case, the production of a comprehensive
employee benefits program is a complex undertaking, and one that requires time and
energy. All through that process, notwithstanding, employees are certain to be
concerned about the possible changes to their employee benefits scope and will need
to be educated about "the new package" when that data is accessible.

6. Communications- Having a well-planned communication strategy in place is very
crucial in the M&A process. Effective communication involves providing information
on-

10Post-Merger Integration – HR, http://huconsultancy.com/post-merger-integration-human-resource/
1110 Steps to a successful M&A Integration, , http://www.bain.com/publications/articles/10-steps-to-successful-
ma-integration.aspx

➢ The shared vision for the new company,
➢ The nature and progress of the 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 also can increase the coping abilities of
employees and minimize the impact of the integration on performance.

The following steps highlight the components of a successful communication program:

➢ Establish multiple routes of communication (e.g., one-on-one meetings, group
sessions, newsletters, intranet updates).

➢ Focus on the themes of change and progress by highlighting projects that are going
well and action items that are being delivered on time.

➢ Repeat the common themes of the M&A to increase employee understanding of the
rationale behind the transaction.

➢ Provide opportunities for employee involvement and feedback.
➢ Ensure that employees understand there will be problems, but give a commitment that

the problems will be identified and addressed as early as possible.12

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. Being
straightforward incorporates sharing data about when and by what process a choice is
required to be made.

Reality likewise implies recognizing a portion of the anxiety and different feelings that are
irrefutably present. Organizations should not give away the impression that everything will
be “normal”, if it not going to be the case.

The bosses should fight the temptation to tell employees that they have "a brilliant future" ,
when they are still confused themselves . Businesses should not sugar-coat matters with false
maxims, for example, calling the arrangement a "merger of equals" when one organization is
obviously the larger partner.

12Post- M&A Issues, (Sep.26,2017, 11.45PM), https://www.shrm.org/resourcesandtools/tools-and-
samples/toolkits/pages/mergersandacquisitions.aspx (hereinafter called ‘Post- M&A Issues’).

When decisions are made about functions and individuals, the organization must treat those
workers who will be negatively influenced by the transaction with pride, regard and support.
Not only is this approach the humane thing to do, but it also is a powerful way of showing
those who remain what kind of company they are now working for and of helping them begin
to develop some positive feelings toward the new organization.

5.7 The Importance of Cultural Fit

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

5.8 Technology and Outsourcing Decisions

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

5.9 Global Issues
Much of the pressure to compete and perform has intensified from globalization and the
emergence of China and India as two of the fastest-growing economies in the world. During
the 1990s and through about 2005, M&A activity was controlled largely by U.S. and
European corporations. The climate has changed as Asian businesses look to expand their
markets and become global players. The Middle East, even with its volatile political and
religious climate, is becoming a hotbed for M&A activity. Countries such as the United Arab
Emirates and Saudi Arabia have plenty of cash flow from their vast oil wealth and are

looking to diversify their business holdings. The cultural and communication issues involved
in a global transaction can create even more complexity for HR practitioners.13

13Post- M&A Issues, supra note 13.