mergers, acquisitions & corporate restructuring

8/19/2019 Mergers, Acquisitions & Corporate Restructuring

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Mergers, Acquisitions& Corporate

RestructuringDeepak Bansal


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Introduction in Mergers, Types of Mergers,Merger Strategy-Growth, Synergy,Operating Synergy, Financial Synergy,

Di ersi!cation, Other "cono#ic Moti es,$u%ris $ypothesis of Takeo ers, OtherMoti es, Ta& Moti es Financial " aluation,

'oint (enture and Strategic )lliances*

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In + , only si& de eloping and transitioncountries had #ade any outward in est#ent*

In . /, the nu#%er increased to ./*

Between + 01 and . /, the share of glo%alM2)s %y M34s fro# de eloping andtransition countries rose fro# 56 to +76 in

alue ter#s, and their share in green!eld ande&pansion pro8ects e&ceeded +/ percent in. /*

M&A Background & Scenario


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• ) sur ey shows that 0+6 of the co#panies ha e considered

M2)s and 7 6 ha e actually done a transaction in the past 7years* O er 1 6 say that they e&pect to do a deal in the ne&t7 years* )ll this denotes that we are set for an M2) %oo# inthe years to co#e* Glo%al M2) olu#es of 9. %n a day,India:s 9/0%n for the year . +/ indicates that there is still a

long way to go* The trend is clearly on the way up*• M2) in . +;-+1 - 9 /*; Trillion• M2) in . +1-+0 - 9 /*// Trillion• Octo%er . +5 M2) deals - 9 /;. Billion• The )sian M2) #arket saw +/1 . deals worth 9 +.//* 1

%illion• 4hina alone was the largest #arket with ++0;. deals worth

9+/5*1; %illion

M&A : Background & Scenario…...Contd.


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• Swiss ce#ent #a8or, $olci#, which actd A)4I> *• (ideocon Group=s aca%oratories, which actd* Took o er )tlanta-%ased alu#inu# giant 3o elis Inc* for ES9 ;*5 %illion

• Indian !r#s concluded 1 M2) deals %etween )pril and Septe#%er,spending 9+5 %illion and would ha e sa ed as #uch as s*;/crore A9+*;; %illion %ecause of the o er + 6 rupee appreciationagainst the green%ack, an )ssocha# "co Culse study said*

Indian Scenario - Major Deals …….Contd.-


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)ny change in the %usiness capacity orportfolio that is carried out %y an inorganicroute or a change in the capital structure ofa co#pany that is not a part of its ordinarycourse of %usiness or any change in theownership of or control o er the#anage#ent of the co#pany or aco#%ination thereof*

Corporate Structuring


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Mergers4onsolidation)c


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Why M & A ?• uicker way to growth*• )ccessing new #arkets*• Taking on the glo%al co#petition*• I#pro ing operating #argins and eJciencies, and• )c


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Determinants of M & A

• " er-growing appetite of entrepreneurs to strike deals across sectors*• ) aila%ility of !nancing options K %oth in De%t as well as in "egal Syste#*

>i%eral approach of )nti-trust authorities H regulators in recent years*) aila%ility of the unit H %usiness*

Strategy, planning 2 en iron#ent*

4orporate Go ernance*


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)n atte#pt or a process %y which aco#pany or an indi idual or a group ofindi iduals ac


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By ac


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It refers to the transfer of theassetsHsharesHcontrol fro# the go ern#entto the pri ate sector*

The concept of pu%ic sector undertakingsdisin est#ent takes di erent for#s i*e* fro##ini#u# go ern#ent in est#entApri atiNation to partnership with pri ate

sector, where the go ern#ent is the#a8ority shareholders*

$isin!estment


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It is a strategic %usiness policy where%y a%usiness enterprise for pro!t is for#ed inwhich two or #ore parties shareresponsi%ilities in an agreed #anner, %ypro iding risk capital, technology, patent,trade#ark, %rand na#es and access to#arkets*

"&a#ple Enitech and Telnor %y 8ointentures #ake a new co#pany calledEninor*

%oint !enture


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It is not de!ned in the co#panies act + /;*It is often used to descri%e di ision orseparation of di erent undertakings, of a%usiness functioning hitherto under aco##on corporate u#%rella*) sche#e of de#erger is in e ect acorporate partition of a co#pany into two

undertakings, there%y retaining oneundertaking with it and transferring theother undertaking to the resulting co#pany*

$emerger


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Spin-o ◦ It in ol es transfer of all or su%stantially all the

assets, lia%ilities, loans and %usiness Aon a goingconcern %asis of one of the %usiness di ision or

undertakings to another co#pany whose sharesare allotted to the shareholders of the transferorco#pany on a proportionate %asis*

Forms of #emerger


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Split-up◦ It in ol es transfer of all or su%stantially all assets,

lia%ilities, loans and %usinesses Aon a going concern%asis of the co#pany to two or #ore co#panies inwhich, again like spin-o , the shares in each of thenew co#panies are allotted to the originalshareholders of the co#pany on a proportionate%asis %ut unlike spin-o , the transferor co#panyceases to e&ist*

Split-o ◦ It is a spin-o with the di erence that n split-o , all

the shareholders of the transferor co#pany don:t getthe shares of the transferee co#pany in the sa#eproportion in which they held the shares in thetransferor co#pany*


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It is a hy%rid of di estiture and spin-o *In it, a co#pany transfers all the assets, lia%ilities,loans and %usiness of one of itsdi isionsHundertakings to its + percent

su%sidiary* Thus at the ti#e of transfer, the shares are issuedto the transferor co#pany itself and not to itsshareholders*

>ater on, the co#pany sells the shares in parts tooutsiders-whether institutional in estors %y pri ateplace#ent or to retail in estors %y o er for sale*

Car!e-out


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This is a legal process uHs + to + 5 of theco#panies act, + /; %y which a co#pany isallowed to e&tinguish or reduce lia%ility onany of its shares in respect of share capitalnot paid up oris allowed to cancel any paid-up sharecapital which is lost or

is allowed to pay o any paid-up capitalwhich is in e&cess of its re


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It is yet another ery i#portant tool of capitalrestructuring*?hen a co#pany is holding e&cess cash, whichit does not re


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$oriNontal #erger◦ It occurs when two co#petitors co#%ine, for eg* In

+ 0, two petroleu# co#panies, "&&on and Mo%ilco#%ined in a 910* %illion #ega#erger*

◦ )nother eg* In . C!Ner ac


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◦ The transaction ena%led Merck to go fro# %eingthe largest phar#aceutical co#pany to also %eingthe largest integrated producer and distri%utor ofphar#aceuticals*

conglo#erate #erger◦ It occurs when the co#panies are not co#petitors

and do not ha e a %uyer-seller relationship*◦ One e&a#ple would %e Chilip Morris, a to%acco

co#pany, ac


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There are two #oti es for M2)s◦ Faster Growth◦ Synergy

Merger Strategy


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One of the #ost funda#ental #oti es forM2)s is growth*4o#panies seeking to e&pand are facedwith a choice %etween internal or organicgrowth and growth through M2)s*Internal growth #ay %e a slow anduncertain process*

4o#panies #ay grow within their ownindustry or they #ay e&pand outside their%usiness category*

)rowth


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"&pansion outside one:s industry #eansdi ersi!cation*


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The ter# synergy is often associated with thephysical sciences rather than with econo#ics or!nance*It refers to the type of reactions that occur when

two su%stances or factors co#%ine to produce agreater e ect together than that which the su# ofthe two operating independently could account for*For eg*, a synergistic reaction occurs in che#istrywhen two che#icals co#%ine to produce a #orepotent total reaction than the su# of theirseparate e ects*

Synergy


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Si#ply stated, synergy refers to thepheno#enon of .P.Q/*In #ergers this translates into the a%ility ofa corporate co#%ination to %e #orepro!ta%le than the indi idual parts of the

!r#s that were co#%ined* The anticipated e&istence of synergistic%ene!ts allows !r#s to incur the e&pensesof the ac


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Operating synergy co#es in two for#s◦ e enue enhance#ents◦ 4ost reduction

These re enue enhance#ents andeJciency gains or operating econo#ies#ay %e deri ed in horiNontal or ertical#ergers*

*perating synergy


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It refers to the possi%ility that the cost ofcapital #ay %e lowered %y co#%ining one or#ore co#panies*

The e&tent to which !nancial synergy e&istsin corporate co#%inations, the costs ofcapital should %e lowered*

Financia synergy


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It #eans growing outside a co#pany:s currentindustry category*

This #oti e played a #a8or role in the ac


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Di ersi!cation and the ac


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In addition to econo#ies of scale anddi ersi!cation %ene!ts, there are two otherecono#ic #oti es for M2)s◦ $oriNontal integration◦ (ertical integration$oriNontal integration refers to the increase in#arket share and #arket power that resultsfro# ac


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4o#%inations that result in an increase in #arketshare #ay ha e a signi!cant i#pact on theco#%ined !r#=s #arket power*?hether #arket power actually increases depends

on the siNe of the #erging !r#s and the le el ofco#petition in the industry*"cono#ic theory categoriNes industries within twoe&tre#e for#s of #arket structure*On one side of this spectru# is pure co#petition,which is a #arket that is characteriNed %ynu#erous %uyers and sellers, perfect infor#ation,and ho#ogenous, undi erentiated products*

ori onta integration


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Gi en these conditions, each seller is a pricetaker with no a%ility to in uence #arket price*On the other end of the industry spectru# is#onopoly, which is an industry with one seller*

The #onopolists has the a%ility to select theprice-output co#%ination that #a&i#iNes pro!ts*

The #onopolists is not guaranteed a pro!t%ecause it is insulated fro# direct co#petiti epressures*

The #onopolists #ay or #ay not earn a pro!t,depending on the #agnitude of its costsrelati e to re enues at the opti#al Rpro!t#a&i#iNation price-output co#%ination*


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$oriNontal integration in ol es a #o e#entfro# the co#petiti e end of the spectru#toward the #onopoly end*


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(ertical integration in ol es the ac


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Mo%il was strong in re!ning and #arketing%ut low on reser es, whereas Superior hadlarge oil and gas reser es %ut lackedre!ning and #arketing operations*)n e&a#ple of forward integration would %eif a !r# with large reser es %ought anotherco#pany that had a strong #arketing andretailing capa%ility*


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)n interesting hypothesis regarding takeo er#oti es was proposed %y oll*$e considered the role that hu%ris, or thepride of the #anagers in the ac


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oll and others who ha e researched thishypothesis to e&plain why #anagers #ight pay

a pre#iu# for a !r# that the #arket hasalready correctly alued*Managers ha e superi#posed their own

aluation o er that of an o%8ecti ely

deter#ined #arket aluation* Their position is that the pride of #anage#entallows the# to %elie e that their aluation issuperior to that of the #arket*

I#plicit in this theory is an underlyingcon iction that the #arket is eJcient and canpro ide the %est indicator of the alue of a !r#*


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I#pro ed #anage#entI#pro ed research and de elop#entI#pro ed distri%ution

*ther moti!es


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?hether ta& #oti es are an i#portantdeter#inant of M2)s has %een a #uch-de%ated topic in !nance*4ertain studies ha e concluded thatac


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Defence )gainst $ostile Takeo er,Coisson Cill, Bear $ug, Green#ail, Cac#an*Cost Merger $* * and 4ultural Issues*

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mergers, acquisitions & corporate restructuring

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