The Hindu Business Line : The young manager's guide to mergers and acquisitions

This week, we are going to step back a little from the routine expounding of everyday advice guaranteed to help all you young managers craft successful careers from the thankless `prepare a report on the footfalls in our store' type assignments you have been burdened with so far. But enough of the advice. I think it is time we looked at the harsh realities of life at the helm of managerial affairs.

It is time, my friends, we got our fundas right.

Now most of you newbie managers must come across several terms and concepts in your workplace every day that seem to be all the rage with your superiors. The CEO and CFO and all the others appear to be coughing up these terms at every management meeting and you simply sit in a corner, quietly sulking, till someone involves you in the proceedings by asking you to bring coffee, take photocopies, adjust seat heights or switch on the overhead projector. This is an alarming trend and must be stopped now.

Last week I got a letter from a reader:

`Dear Sidin, I have joined a company as a Marketing Manager. Things were going fine till suddenly somebody started asking me about my thoughts on `positioning for housewives'. I went red in the face and said I did not like discussing personal things in the office. Everyone laughed at me.

Why?'

So as you can see, a lot of new managers out there are not on top of the latest managerial buzzwords. Lack of exposure, reading only those pages of the newspaper with Sudoku, Dilbert and Sid Says, and choosing electives like `HR and organisational dynamics' in business school because the course was a blast and the grades were easy can all be reasons for this shortfall in knowledge.

Have no fear. You don't have to say no to your puzzles yet. And no need to regret that two-credit paper on `learning management through Bollywood films' that you used to close your MBA on a stupendous academic high. Sid Says, has taken upon itself to educate you newbie managers in the intricacies of important and interesting business concepts so that you never again have to look sheepish during meetings .

Each week, we will choose a suitable topic and have a quick but effective discourse on it. You can then go back and try to express your new-found knowledge and expertise. After a few such sessions, you will be ready for my special column on `don't give up hope — using your notice period wisely'.

So, this week, we will focus on the latest craze in the Indian business scene. It is a concept that is taking desi boardrooms by storm and, most importantly, a lot of not particularly bright people are making a lot of money because of it. And so can you.

I am talking about `mergers and acquisitions' or `M&A' as it is known in knowledgeable circles. Circles which you will be a part of shortly. Now M&A refers to different ways by which two or more companies can come together under one ownership structure. This way, a company might buy another company, two companies might join to form one entity and combinations thereof with two or more entities. But whatever the nature of the M&A, this process is followed by a lot of people losing jobs, a lot of advertising companies winning work and a lot of investment bankers buying yachts, planes and small resort islands.

Now at this point in this discussion about M&A, you have one very important question: How do I become an investment banker? You greedy lot, you... Back to M&As.

So now, the first thing we need to know is why companies go through a prolonged M&A process. For, make no mistake, M&As take a lot of time and cost a lot of money just to get off the ground. So, we must clearly understand the need for companies to merge or acquire another company. Some of them are:

Economies of scale: This is when the increased size of the merged entity gives greater benefit. For instance, if you are the CEO of one company, post merger, you can enjoy the CEO expense accounts of both companies put together.

Diversification: When a company has made humongous losses in one company it decides to buy another company and see if they can run that into the ground as well and thereby comprehensively rule out their current management style and not attribute failure to a particular industry.

Vertical integration: This way, a company which makes say, a car, can then also buy one of its suppliers, say a seat manufacturer, and thereby increase profits with only a 25 per cent decrease in quality and safety.

Predatory: This is when a company notices that another competitor is turning out to be a pain in the backside and eating into its hard-earned profits and market share. It then buys out this little pip-squeak, makes the employees wear purple and yellow uniforms to lower their self-esteem, does away with the quality department altogether and then runs the company into the ground forcing it to shut down and throws out everyone without severance pay or even a farewell party. The buyers then lean back in their rotating chairs and laugh heartily. It is an expensive, but ultimately satisfying strategy. Now that we know why a company does M&A, we must also know how they do this:

Share purchase: This is when the acquirer buys enough shares of the target from the share market, thereby garnering a controlling stake. This strategy is normally unleashed right after the market has crashed to unheard of depths, but the buyer, obviously, had nothing to do with that.

Asset purchase: Here, subsequent to a complete due diligence, the buyer evaluates each and every asset of the target company and then decides to buy the assets at a negotiated price which is normally much lower than market price due to depreciation and due to sudden and unforeseen damage sustained to the factory during the due diligence process. Buyer acts surprised himself.

Next time, we will look at the role played by intermediaries such as banks and venture capital and private equity firms, in the M&A process. That, as I mentioned earlier, is where the real money is.

(The writer, an alumnus of IIM-A, was a management consultant before quitting to work on a book and a full-time writing career)

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