Merger Acquisition and Corporate Restructuring 1218303642485946 9

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Merger,acquisition And Corporate Restructuring

Structure Conceptual framework History of M&A Financial framework Corporate restructuring Accounting for amalgamation Tax benefits Exercise

CONCEPTIONAL FRAMEWORKMEANING OF MERGERS ACQUSITIONS AMALAMATIONS TAKEOVERS ABSORPTIONS

TYPES OF MERGERS HORIZONTAL MERGER SIMILAR LINES OF ACTIVITY as Ford announced the sale of the two British iconic cars to Tata Motors Ltd. Ford acquired Jaguar for $2.5 bn in 1989 and Land Rover for $2.75 bn in 2000 but put them on the market last year after posting losses of $12.6 bn in 2006 - the heaviest in its 103-year history.

HDFC Bank's merger with Centurion Bank of Punjab and Walt Disney Company's acquisition of 17.2per cent stake in UTV Software Communication to increase its stake to 32.10 per cent in the company. In February 2008, as many as 38 cross-border deals were announced with total value of $2.80 billion, of which 27 were outbound deals with a value of $2.57 billion.

Diologic Report Meanwhile, global financial information provider Diologic in its latest report said that India-targeted M&A volumes reached $11.9 billion through 345 deals so far this year. US was the leading acquiring country with deals worth 1.6 billion dollars, followed by the UK with $904 million and Germany with USD 584 million.

ADVANTAGES REDUCTION OF COMPETITION PUTTING AN END TO PRICE CUTTING ECONOMIES OF SCALE IN PRODUCTION RESEACH AND DEVELOPMENT MARKETING AND MANAGEMENT

VERTICAL MERGER FIRMS SUPPLYING RAW MATERIALS MERGE WITH FIRM THAT SELLS ADVANTAGE LOWER BUYING COST OF MATERIAL LOWER DISTRIBUITION COST ASSURED SUPPLIES AND MARKET COST ADVANTAGE

CONGLOMERATE MERGERUNRELATED INDUSTRIES MERGE PURPOSE DIVERSIFICATION OF RISK Ex:Time warner-(they were into media & movie production) & AOL-(leading American website)

Expansion Merger and Acquisition Asset acquisition Joint ventures Tender offer

Contraction 1.Spin off-shares in subsidiary distributed to its own shareholders Kotak Mahendra Capital finance Ltd formed a subsidiary called Kotak Mahendra Capital Corporation by spinning off its investment division. 2.Split off- A new company is created to takeover an existing division or unit. It does not result in any cash inflow to the parent company

HISTORY

The First wave 1897-1904-horizontal Mergers Monopolistic Market structure Mega merger between US Steel and Carnegie Steel.It also merged with 785 separate firms-75% of Steel production of US. More than 3000 companies disappeared. General Electric,Navistar, Standard Oil, Du-Point, American Tobacco-90% of market share Transformation of regional firms into national firms. Exploited the economies of scale.

Table-1 Year 1897 1898 1899 1900 1904 Number of mergers 69 303 1208 340 79

Problems of the first Wave Financial factors Fraudulent financing Stock Market crash in 1904 and Banking panic of 1907 Closure of many banks and formation of Federal Reserve System. Easy finance ends here. The US President Teodore Roosevelt and President William Taft made a crack down on Large Monopolies. As a result: ???? What happened to Standard Oil?

Standard Oil(SO) Broken in to 30 Companies. SO of New Jersey named EXXON SO of New York named MOBIL SO of California renamed CHEVRON SO of Indiana renamed AMOCO

The Second Wave 1916-1929 Oligopolies industry structure Industries like primary metals, petrolium products, food products, chemicals Outside the previously consolidated heavy manufacturing industries. Product extension merger like IBM and General Foods Vertical mergers In the mining and metal industries(1920)

Prominent Corporations General Motors, IBM, Union Carbide, John DEERE Between 1926 and 1930- there were 4600 mergers took place Result of which between 1919 and 1930 12,000 manufacturing , mining,public utility and banking firms disappeared. This period rail transportation, motor vehicle transportation became national market. Radios in homes, entertainment enhanced the competition. Mass merchandising, national brand advertising

Enhance productivity as a part of war effect. The firms were urged to work together rather than compete The second wave came to an end when stock market crashed on October 29,1929. Investment Bankers played in the first two phases of mergers.

The 1940s The second world war with merger of small firms with larger firms Motive of tax relief High estate taxes There were no increased concentration of wealth Mergers were small.

The third Wave-1965-1969 Merger activity reached its highest level during this period Booming of economy Conglomerate merger period-80% Diversification strategy It is because of ANTI TRUST enforcement Federal government adopted a stronger antitrust enforcement both with horizontal and verticle merger. 1963-1361 mergers; 1970-5152 mergers

Management sciences Management principles were applied in industries. Management graduates were employed to manage conglomerate mergers. There were 6000 mergers which leads to 25000 firms disappeared. Investment Bankers do not finance most of these mergers Finance:-????

Finance for mergers Equity financing Boom in stock market prices Many conglomerate merger failed The Revlon cosmetic entered into health care and failed and suffered in cosmetic industry.

The Fourth Wave-1981-1989 Recession in 1974-75 Hostile merger Take over or targeting on target companys board of directors. If the board accepts, it is considered friendly, and if it opposes it, it is deemed to be hostile. The great mergers such as Oil companies-21.6% Of dollar values of merger and acquisitions Drugs and medical equipment industries due to deregulation in some industries Deregulation of airline industries

Investment bankers played an aggressive role. M&A advisory services became a lucrative source of income for Goldman Sachs Innovation in acquisition techniques

The Fifth Wave-1992-till date Once again increased activity in merger in 1992 Mega mergers Strategic mergers Equity based Deregulations and technological changes Banking , telecommunications entertainment and media industries High growth in banking sectors in 1990 as banks grew greater than central banks. Banks fund M&A rather than new ventures.

Oligopoly market structure Competition declined Very few competitors Example: Coco-Cola-44.5%,Pepsi-31.4%,Cadbury Schweppes-14.4% Globalisation Not confined to US companies 1995-US companies were acquired

1981-2395 1989-2366 1990-2074 companies 2001-7528 companies merged

Major Mergers in the telecom Acquirer Vodafone MCL worldcom Bell atlantic AT&T SBC Target Mannes man Spirit GTE MeCaw Celluar Pacific Telesis

Major Mergers in Media and Entertainment sector AOL Time Warner VIOCOM CBS WALT DISNEY CAPITAL ITIES/ABC AT&T MEDIA ONE TIME WARNER TURNER BRODCAST

M&A IN INDIA License era-Unrelated diversification Conglomerate merger Friendly take over and hostile bids by buying equity shares Example: Swaraj paul attempted to raid on Escorts Ltd.and DCM Ltd but could not succeed. The Hindujas raided and took over Ashok leyland and Ennore Foundaries. Chhabria Group acquired stake in Shaw Wallace, Dunlop india and Falcon Tyres.

Goenka group from culcutta took over Ceat tyres. The Obroi-Pleasant hotels of Rane group. 1989- Tata Tea acquired 50% of the equity shares of Consolidated Coffee Ltd from resident shareholders. merged to form HCL Ltd??.

HCL Hindustan Computers, Hindustan Reprographic, Hindustan Telecommunications and Indian Software Ltd.

Comparative study US Strategic Gains by invest ment bankers Capital goods Borrowed Earlier debt later by equity Anti trust India By default(ANZ& Standard chartered Not benefited by banks consumer goods cash/FDI MRTP later The competition bill 2001

FINANCIAL FRAMEWORKIT COVERS THREE INTERRELATED ASPECTS 1.DETERMINING THE FIRMS VALUE 2.FINANCING TECHNIQUES IN MERGER 3.CAPITAL BUDGETING

DETERMINIG THE FIRMS VALUEQUANTITATIVE FACTORS BASED ON 1. THE VALUE OF THE ASSETS BOOK VALUE OWNERS EQUITY DEPENDS ON FIXED ASSETS AND WORKING CAPITAL 2. APPRAISAL VALUE- INDEPENDENT APPRISAL AGENCIES 3. MARKET VALUE BASED ON STOCK MARKET QUATATIONS ,BUT CHANCE FOR SPECULATION 4. EARNING PER SHARE AND P/E RATIO IMPACT OF EPS AFTER MERGER

EXERCISECOMPANY A NO. OF SHARES 2 LACS MARKET VALUE PER SHARE RS.25 EPS RS.3.125 COMPANY B NO. OF SHARES 1 LAC MARKET VALUE RS.18.75 EPS RS.2.5

CONCLUSIONS EXCHANGE AT EPS NO EFFECT ON EPS AFTER MERGER EXCHANGE MORE THAN EPS RATIO COMPANY WITH LOWER EPS GAINS IF LESS THAN EPS RATIO COMPANY WITH HIGHER EPS BEFORE MERGER GAINS

PRICE EARNING RATIO APPROACH MEANING COMPUTATION : P/E RATIO = MP/EPS EPS = EAT/NO. OF EQUITY SHARES MARKET PRICE = P/E (NO. OF TIMES) * EPS

EXAMPLEPRE MERGER SITUATION EAT NO. OF SHARES EPS FIRM A FIRM B 6,25,000 2,00,000 3.125 2,50,000 1,00,000 2.5

P/E RATIO(TIMES) MARKET PRICE PER SHARE(MPS) TOTAL MARKET VALUE (N*MPS) OR (EAT*P/E RATIO)

8 25 50,00,000

7.5 18.75 18,75,000

POST MERGER

SITUATION 1 (BASED ON CURRENT MARKET PRICE 2.5:3.125=.8 6.25+2.5=8.75 2.8 lakhs

SITUATION 2

EXCHANE RATIO/ SWAP RATIO (ASSUMING) EAT(COMBINED FIRM) NO. OF SHARES

1:1 8,75,000 2,00,000+1,00,000=3,00,0 00 8,75,000/3,00,000=2.91/ 7.5

EPS

8.75/2.8=3.125 8

P/E RATIO (ASSUMED TO BE THE SAME) MPS

3.125*8=25

21.825

TOTAL MARKET VALUE

70,00,000

65,47,500

CONCLUSION IF SHARES ARE EXCHANGED BASED ON CURRENT MARKET PRICE PER SHARE , POST MARKET PRICE SHARE INCREASED AT HIGHER RATE THAN EXCHANGED BELOW THIS RATIO Boot strap effe