Mergers & Acquisitions

Before we start.
Why mergers and Acquisitions?
Does it really help? What are the advantages and disadvantages from

mergers and acquisitions? Growth Market Power Tax Savings. Acquire needed resources. Diversification.

Restructuring
It involves change in the organizational structure.
Integral part of the economic paradigm.

Two Types
Internal
IInvestment in new plant & machinery, R & D

External

Mergers, Acquisitions, takeovers.

Corporate Restructuring
Expansion Contraction Corporate Control.

Amalgamation Absorption Tender Offer Asset Acquisition Joint Venture

Demerger Spin-off Equity Carve out Split-off Split-up. Divestitures. Asset Sale.

Going Private. Equity Buy Back. Anti-takeover. Leveraged Buy outs.

 Amalgamation:
Involves fusion of one or more companies. Companies loose their individual identity. New Company comes into existense.

Absorption
Fusion of Small and

large company.
Small Company ceases to exist. Merger of OBC with GTB where GTB ceased to exist.

Tender Offer:
Making Public Offer for acquiring shares of the target

company.

Asset acquisition: This involves buying assets of another company. The assets may be tangible assets like manufacturing units or

intangible like brands.

Joint venture: Two cos. Enter into an agreement to provide resources in order to achieve a particular goal.

Contraction
Reduction in the size of the firm. Spin offs, Split off, Divestitures, Equity carve outs. Bad Apple Theory Reasons: Lack of Inter company Synergy. Labor Consideration.

Competitive Reasons.
Management Deficiency. Concentration of Management Effort.

Eliminate Inefficiencies.

 Strategic:

Change in Corporate Goals. Change in corporate image. Technological reasons. Poor Business Fit. Market Saturation. Takeover Defense. Continual failure to meet goals. Tax Considerations. Shrinking Margins. Better Alternate use of capital. Profits.

Economic:

Spin Offs: Company distributes all its shares in a subsidiary to its own shareholders. A type of sell-off in which a parent company distributes shares on a pro rata basis to its shareholders as div-. These new shares give shareholders ownership rights in a division or part of the parent company that is sold off. A new company is formed having separate management.
Motives: Companies Focus on Core Rather than non core

business. Better Standalone results.

 Subsidiary should be 80% held by the parent co.

It should have been a subsidiary for 5 years.

Tax free for shareholder and the co.

There is no cash flow coming in to the Parent

co. Consideration is always in the form of issuing equity shares to the shareholders.

Example of Spin Off

ABC Ltd.

Software Textile

Steel

Consider a case where ABC Ltd. Has 3 divisions under it, Software,

Textile and steel. If ABC Transfers the assets of Software to another company then it is an example of Spin Off

Working out a Spin Off

 Split Offs A new co. Is created to take over the operations of an existing unit or division. A portion of the existing shareholders receive the shares in the new company in exchange of parent co. Stock. Done basically: To reduce the equity base of the parent co. Resulting into downsizing of the co. holding companies

 A type of sell-off in which shareholders of a parent company exchange their shares in the parent company for shares in the sold-off

entity. They are made attractive by offering : Bonus shares, Shares at a discount in a subsidiary company.

Equity Carve- Out.

Portion of a firm is sold to outsiders. Parent offers shares in a subsidiary to public. Inflow to the co. If there is gain then it is taxable to the co. As CG. Done basically for a subsidiary with high growth and potential.

 Ecos should :
Be a strong candidate with high Growth

Prospects. Able to Borrow on its own strength.

Split Ups
Division of Parent Company

into two or more companies

Parent co. ceases to exist. New Stock is created for each subsidiary and div is also paid

Split Up

ABC Ltd.

Software

Textile

Steel

IF ABC Ltd. Sells all the 3 divisions, then it would be a case of split up where ABC would cease to exist.

DIVESTITURES:
Sale of a portion of a firm to an outside party.
Infusion of cash to parent com. Most of the assets sold. Slump sale.

Even Cl can be sold.

Non core business can be sold. billion in cash.

2009 P&G sold its pharmaceutical unit to Warner Chilcott Plc for $3.1 The deal allowed P&G to focus on its personal care, beauty, and

household product divisions.

The Case of Divestiture by Camlin Ltd.

It had 3 divisions, Consumer Products division (CPD) was into conventional bus. Of stationery products, color products, art materials. Fine Chemicals division ( FCD ): was in mfg and sale of food grade antioxidants and allied products. Pharmaceutical division ( PD): Pd was engaged in the marketing of branded pharma formulations mfg. by its group co. Liva Pharma Ltd.

Asset sale.
Selling tangible and intangible assets to get cash.
Cash remains with the co.

Can be utilized to pay off all Liab or buy a new co.

Corporate Control
Going private:
This involves converting a listed company into a private

company by buying back all the outstanding shares from the markets.
It needs amendment in the Articles.
Approval from CG. Printed copy to be filed with roc within 1 month. Several companies like Castrol India and Phillips India have

done this in recent years.

Buy Back of shares

Equity buyback: This involves the company buying its own shares

back from the market.

This results in reduction in the equity capital of the company. This strengthens the promoters position by increasing their stake in

the equity of the co.

Example:
Recently Sterlite Ltd. Had proposed to buyback its shares through the open market to acquire a max. of 25% of the equity. Wall Mart Announced a Buy back in 2009.

Anti takeover defenses

With a high value of hostile takeover activity in recent years, takeover defenses both premature and reactive have been restored to

by the companies.
Exchange Offers:

Companies offer exchange offers where shares are exchanged and debt is offered.
This increases the leverage of the co.

Proxy Contests
Attempt by single shareholder or group to take control through proxy mechanism. Bidder uses his/her voting rights and garner support from other shareholders to expel the management. Eg: Microsofts offer to take control on yahoos BOD in 2008 threatened yahoo for proxy contests.

Leveraged buyouts
This involves raising of capital from the

market or institutions by the management to acquire a company on the strength of its assets. This is a method of buying a firm on the basis of borrowed capital.
Example: Tata Tetley deal.

ESOPS
Offering shares to the employees of the co.
It can be used as a mean of finance for

acquisitions, as well as serve as anti takeover defense. Eg. Patni Computers offered ESOPS to its employees, they offered at a price of Rs. 145 for a FV of Rs. 2 Per share.

 What is Merger, acquisition, Joint Venture,?

Combination of two corporations where a

new company is formed and old corporations cease to exist. Types: Vertical Horizontal Conglomerate.

 Acquisition: one company buying stake by purchasing shares/ assets of the other company.

Merger

Acquisition

The case when two companies (often of The case when one company takes over same size) decide to move forward as a another and establishes itself as the single new company instead of new owner of the business. operating business separately.

The stocks of both the companies are surrendered, while new stocks are issued afresh.
For example, Glaxo Wellcome and SmithKline Beehcam ceased to exist and merged to become a new company, known as Glaxo SmithKline.

The buyer company swallows the business of the target company, which ceases to exist. Dr. Reddy's Labs acquired Betapharm through an agreement amounting $597 million

Types of Mergers
Horizontal
Merger of two firms operating and competing in same

kind of Bus. Reduces no. of firms in an industry, hence good for monopoly profits. Merger of Centurian Bank and Bank of Punjab.

 Vertical Mergers:
Mergers of firms at different stages of

production or value chain. Combination of Companies having buyer seller relation.

 Conglomerate: Mergers between firms in unrelated areas of business. Product Extension Mergers: Mergers between firms in

related business activities, also called concentric mergers. in diff. geographic areas.

Geographic Market Extension Mergers: Merger of two firms

Pure conglomerate Mergers: Merger between two firms with unrelated business.

Lets Replay
Spin off
Split off

Equity carve out

ESOPS

Divestiture buy back

Going Private Vertical merger Restructuring Split-up Horizontal Merger Conglomerate merger Leveraged buyouts.

M & A Overview in India

Factors responsible for M & A Activity in India: Corporate investments in industry. FDI Investment. Economic stability Ready to experiment attitude of Indian

industrialists Eg. Despite downturn in 2009, Bharti Airtel was set to merge with MTN.

Biggest M & A deals in India.

Tata Steel acquired 100% stake in Corus Group on January 30, 2007. It was an all cash deal which cumulatively amounted to $12.2 billion. Vodafone purchased interest of 67% owned by Hutch-Essar for a total worth of $11.1 billion on February 11, 2007.

India Aluminium and copper giant Hindalco Industries purchased Canada-based firm Novelis Inc in February 2007. The total worth of the deal was $6-billion.
Indian pharma industry registered its first biggest in 2008 M&A deal through the acquisition of Japanese pharmaceutical company Daiichi Sankyo by Indian major Ranbaxy for $4.5 billion. The Oil and Natural Gas Corp purchased Imperial Energy Plc in January 2009. The deal amounted to $2.8 billion and was considered as one of the biggest takeovers after 96.8% of London based companies' shareholders acknowledged the buyout proposal.

 In November 2008 NTT DoCoMo, the Japan based telecom firm acquired 26% stake in Tata Teleservices for USD 2.7 billion.
India's financial industry saw the merging of two prominent banks - HDFC Bank and

Centurion Bank of Punjab. The deal took place in February 2008 for $2.4 billion.

Tata Motors acquired Jaguar and Land Rover brands from Ford Motor in March 2008. The

deal amounted to $2.3 billion.

2009 saw the acquisition Asarco LLC by Sterlite Industries Ltd's for $1.8 billion making it

ninth biggest-ever M&A agreement involving an Indian company.

In May 2007, Suzlon Energy obtained the Germany-based wind turbine producer

Repower. The 10th largest in India, the M&A deal amounted to $1.7 billion.

M & A

Strategy

Powerful strategy for growth.

Strategy process.
Plan of action designed to achieve a particular goal. May Differ from Co. to Co.

Depends on the policy of the org.

Common Process:

Define Corporate Mission

Analyze, evaluate current business portfolio

Identify new business avenues to enter / exit the business.

BCG Approach
Experience Curve
Product Life Cycle. Portfolio Balance.