Summer Preparatory Material

Equit-I, The Finance Club of IIM Indore

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Introduction to M&A Basics
Title / Heading

Introduction to
basics of

Mergers & Acquisitions

• Definitions & Types
• Motives driving M&A
• Banker’s Role in M&A
• Transaction Characteristics
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Mergers & Acquisitions: Definitions & Types
Title / Heading
A Merger between two companies entails their combining into a single entity. The combined entity could either be the one company out of the two merging
entities that survives and lends its name to the combined entity (Merger by Absorption), or a new entity altogether (Merger by Consolidation).
An Acquisition or Takeover implies the purchase by one entity of a controlling stake (>50%) in another company; or a certain division/segment in the
company. In a merger, the new entity essentially has 100% (Note: >50%) of the combining entities. Mergers & Acquisitions are therefore intertwined in meaning.

Types of M&A: Basics

Company
A Type Characteristic Example

Company Horizontal Companies are in Walt Disney Company buys

Merger by Merger the same line of Lucasfilm (Oct 2012)
C Consolidation business; often Vodafone & Idea merger
Company competitors (Aug 2018)
B
Vertical Companies are in Google acquired Motorola
Merger the same value Mobility Holdings (Jun
chain; product or 2012)
Company
service (eg.
X Supplier-
customer)
Company Merger by
X Absorption Conglomerate Companies are in Berkshire Hathaway
Merger unrelated lines of acquires Lubrizol (2011)
Company
Y
business
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Motives/Benefits of an M&A

1. For greater market share and access to new customers

• Eg. Kotak Mahindra Bank’s acquisition of ING Vysya Bank
2. Vertical Integration: Moving up or down the value chain (acquiring your supplier or customer)
• Eg. A steel company could acquire an iron-ore mining giant (backward integration)
3. For technology and intellectual property
• Google’s acquisition of Motorola
• Tata Steel’s acquisition of Corus
4. Financial Reasons – tax savings, buying something cheap and selling it dearer
5. Diversification
• Eg. ITC’s acquisition of Savlon from Johnson & Johnson
6. Face Competition Better (or at an extreme, overpower and eliminate competition)
• Vodafone-Idea merger in the face of Reliance Jio’s competitive threat
7. Increase Bargaining Power
• A larger combined entity will have more negotiating power than 2 smaller entities
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Banker’s Role in an M&A Deal

1. Identification of the right assets

• Benchmark on potential targets
• Zero-in on the best fit
2. Valuation of the Target
• Financial Modelling
• Analyse similar precedent transactions, similar companies
3. Due Diligence
• Check all claims and assumptions – business, financial, legal, etc.
4. Negotiation with the Other Party
5. Regulatory Clearances
• Anti-Trust
• Competition Commission and Other Regulators
6. M&A Roadmap: How to go About the deal
• Structure
• How to fund transaction: Debt or Equity
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Transaction Characteristics of M&A

Types of Purchase Consideration

Forms of an Acquisition:
(a) Cash Offering:
(a) In a stock purchase, the acquirer provides cash, stock, or • Cash is paid to the shareholders of the target
combination of cash and stock in exchange for the stock of company for their stocks
the target firm. (b) Securities Offering:
• Target shareholders receive shares of
• A stock purchase needs shareholder approval common/preferred stock or debt of the acquirer in
• Target shareholders are taxed on any gain exchange of their stocks in the target.
• Acquirer assumes target’s liabilities • The exchange ratio determines the number of
securities received in exchange for a share of target
(b) In an asset purchase, the acquirer buys the assets of the
stock
target firm, paying the target firm directly. (c) Factors influencing method of payment:
• An asset purchase may not need shareholder • Sharing of risk among the acquirer and the target
shareholders.
approval
• Signalling by the acquiring firm.
• Acquirer likely avoid assumption of liabilities • Capital structure of the acquiring firm.

Types of M&A
(a) Accretive Transaction: An acquisition that will increase the acquiring company’s earnings per share (EPS)
(b) Dilutive Transaction: An acquisition that will decrease the acquiring company’s earnings per share (EPS)
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The M&A Process

Hire an investment bank or a group of Perform valuation analysis to further

investment banks (syndicate) evaluate the target

Developing an acquisition strategy and

Negotiations and M&A due diligence
understanding the motive behind the
to confirm acquirer’s assessment
transaction

Set the search criteria (based on size,

Purchase and sale contract to legally
geography etc.) and identify potential target
bind the parties to the agreement
companies

Search for potential target customers based

Financing strategy for the acquisition
on the search criteria developed

Plan for the acquisition by establishing a Closing and integration of the

preliminary talk with the potential company acquisition
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Transaction Characteristics of M&A
Friendly Merger: Hostile Merger:
Offer made through the target’s board of directors Offer made directly to the target’s shareholders
(L&T acquires Mindtree – March 2019)
Approach Target Management

Proxy Fight
Enter into Merger Discussions
A proxy fight is an attempt by those not in control of the business
to use the proxy method of voting to obtain a sufficient number
of shareholder votes to gain control of the board of directors

Perform due diligence

Enter into a definitive merger

agreement Bear Hug
A bear hug is an acquisition strategy where the acquirer makes
Shareholders and regulators an offer to buy the shares of the target company at a price that is
approve clearly higher than what the target is currently worth