The Story of Mergers and Acquisitions from Indian perspective

By

Arpit amar

MERGERS AND ACQUISITIONS

CONTENTS

INTRODUCTION TO M&A M&A REGULATION MOTIVES BEHIND M&A BUSINESS VALUATION FOR M&A FOLLOW-UP FINANCING M&A RISKS IN M&A KINDS OF M&A M&A BY INDIAN COMPANIES FOLLOW-UP

INTRODUCTION TO MERGERS

The merger is combining of two or more companies, generally by offering the stockholders of one company securities in the acquiring company in exchange for the surrender of their stock.

There is a situation when one company splits into two, generating a second company separately listed on a stock exchange. That is called demerger or spin–off or spin-out.

Ex.-

KINGFISHER AND AIR DECCAN IN 2010

HDFC AND CENTURION BANK OF PUNJAB IN 2008

MITTAL STEEL AND ARCELOR IN 2006

INTRODUCTION TO ACQUISITION

An acquisition is the purchase of one company by another company. An acquisition may be friendly or hostile. Acquisition usually refers to a purchase of a smaller firm by a larger one.

Sometimes, however, a smaller firm will acquire management control of a larger or longer established company and keep its name for the combined entity. This is known as a reverse takeover

EXAMPLES

TATA STEEL TAKEOVER OF ANGLO DUTCH STEELMAKER CORUS GROUP IN 2006

PATNI COMPUTERS AND I-GATE IN 2010

ONGC ACQUIRED LONDON BASED FIRM IMPERIAL ENERGY IN 2009

A purchase deal will be called a merger when both CEOs agree that joining together is in the best interest of both of their companies. But when the deal is unfriendly - that is,

when the target company does not want to be purchased - it is always regarded as an acquisition or hostile takeover.

The tactic to prevent hostile takeovers are called shark repellents.

They are

Greenmail Poison pill Pac man defense White knights Golden parachute

Greenmail- greenmailing is the practice of purchasing enough shares in a firm to threaten a takeover and thereby forcing the target firm to buy those shares back at a premium in order to suspend the takeover.

Poison pill- A strategy used by corporations to discourage hostile takeovers. With a poison pill, the target company attempts to make its stock less attractive to the acquirer by diluting cash reserves or issuing shares at discount.

Pac man defense-The Pac-Man defense is a defensive option to stave off a hostile takeover in which a company that is threatened with a hostile takeover "turns the tables" by attempting to acquire its would-be buyer.

White knights- is a third entity that appears with a more palatable offer for taking over a firm when another hostile entity has already unwelcomed by the target firm's management.

Golden parachute-giving lucrative perks to top management in order to avoid hostile takeover

M&A REGULATION

The Indian M&A environment is a strongly regulated by the following major pieces of legislation/bodies:

The Companies Act, 1956 The Takeovers Code, 1997 The Monopolies and Restrictive Trade Practices

Act, 1969 The Foreign Exchange Management Act, 1999 The Foreign Investment Promotion Board (FIPB) The Reserve Bank of India The Income Tax Act, 1961

MOTIVES BEHINDS M&A

Diversification Economies of scale Increase market share prices Reduce tax obligation Cross selling Acquisition of customers Eliminating competition Access to new technology Economies of internal operation. Efficient utilization of resources.

BUSINESS VALUATION FOR M&A

Asset valuation Historical earnings valuation Future maintainable earnings valuation Relative valuation (comparable company &

comparable transactions) Discounted cash flow (DCF) valuation

FOLLOW-UP

Name any two shark-repellent.

Name any three motives behind M&A.

Any example of merger and acquisition.

What is discounted cash flow.

Name any two acts which regulates M&A.

What is white knights.

FINANCING M&A CASH IN HAND-it consumes financial slack (excess cash or

unused debt capacity) and may decrease debt rating. There are no major transaction costs.

ISSUE OF STOCK-it may improve debt rating and reduce cost of debt. Transaction costs include fees for preparation of a proxy statement, an extraordinary shareholder meeting and registration.

ISSUE OF DEBT-it may decrease debt rating and increase cost of debt. Transaction costs include underwriting or closing costs of 1% to 3% of the face value.

SHARES IN TREASURY-A treasury stock or reacquired stock is stock which is bought back by the issuing company reducing the amount of outstanding stock on the open market.

REASONS FOR RISKS IN M&A

Integration poorly planned and managed Underestimated cultural & human risks Loss of key success enablers (e.g. staff) Inaccurate financial due diligence Neglecting current business Legal (non participating competitor) or regulatory

intervention market shifts during the merger process (such as changes

in market conditions of demand, financing, etc.) Death or departure of key personnel from the target

entities. Failure, or inability to offer sufficient compensation to the

vendors

TYPES OF MERGERS

Horizontal Merger: when two companies on the same level merge, so two that have the same market that they are trading to and the same product type. For example: Bank of Rajasthan and Bank of Mathura with ICICI bank. Merger of Lipton India with brook bond forming brook bond Lipton India ltd.

Vertical Merger: A merger between two companies producing different goods or services for one specific finished product. For example vertical product portfolio of Reliance industries from oil and gas production, refining, drilling, , transporting and extracting petrochemicals.

Conglomerate Merger : A conglomerate is a combination of two or more corporations engaged in entirely different businesses together into one corporate structure, usually involving a parent company and several (or many) subsidiaries. A conglomerate is a multi-industry company. for example: expected merger of Telecom giant Bharti with retail giant Wal-Mart.

GLOBAL M&A BY INDIAN COMPANIES

Bharti Airtel : It has completed its $9 billion acquisition of African operations from Kuwait's Zain in a deal that makes the Indian firm the world's fifth biggest cell phone company by subscribers. Undoubtedly the father of all acquisition deals in India and is the biggest acquisition in the history of India.

Tata acquired Corus: Tata Steel took over the Anglo-Dutch firm Corus Group in 2006 to create the fifth largest steel company of the world. The deal was worth $7.6 billion (Rs. 36,650 crore) at that time.

Hindalco acquired Novalis: Aditya Birla Group’s Hindalco Industries Limited, India’s largest non-ferrous metals company, acquired the Canada based firm Novalis in an all-cash transaction for $6 billion.

Tata acquired Jaguar and Land Rover: Tata shook the automobile market once again in 2008 when it snapped Britain’s most famous automobile manufacturers, Jaguar and Land Rover, in a $2.3 billion deal with Ford, their American owners. The deal showed India’s growing global ambition in owning the best brands.

Essel Packaging acquired Propack: Subhash Chandra’s Essel Packaging Ltd (EPL) acquired the Swiss tube packaging major Propack, and joined hands to become the world’s largest in laminated tubes. This deal was made way back in 2000 and an Indian MNC became the World No.1 because of it.

Wockhardt acquired Negma Laboratories: In 2007, Pharmaceutical and biotechnology major Wockhardt bought the fourth largest independent, integrated pharmaceutical group in France, Negma Laboratories. At a deal of $265 million, Wockhardt became the largest Indian pharmaceutical company in Europe.

Ranbaxy acquired 3 European drug-makers: In 2006, Ranbaxy Laboratories Ltd. (RLL) created quite a stir when it announced the acquisition of 3 drug-makers in Europe, all within a week’s time. Allen S.p.A, a division of GlaxoSmithKline (GSK) in Italy, Romania’s largest independent generic drug producer Terapia and drug maker Ethimed NV in Belgium, three of these firms were acquired by the Indian firm.

Times Group Acquired Virgin Radio: Bennett Coleman & Co Ltd, India’s largest media group and the holding company of the Times of India group, bought Virgin Radio in the UK in a £53.2 million (Rs 445cr approx) deal with SMG Plc. in 2008.

Mahindra & Mahindra acquired Schoneweiss: Mahindra & Mahindra acquired 90% stakes of Schoneweiss, a leading company in the forging sector in Germany. The deal took place in 2007, and consolidated Mahindra’s position in the global market.

Sterlite acquired Asarco: Sterlite Industries, a part of the Vedanta Group signed an agreement regarding the acquisition of european copper mining company Asarco for $ 2.6 billion in 2008. The deal surpassed Tata’s $2.3 billion deal of acquiring Land Rover and Jaguar. After the finalization of the deal Sterlite would become third largest copper mining company in the world.

FOLLOW-UP

Name any two modes of financing of M&A deal.

While financing M&A which option has negative effect on debt rating

What kind of merger will happen if India today group merge with Bennet &connect corp.ltd.

What is horizontal merger.

Name the two acquisition made by TATA group.

Name any three risk that may occur during M&A deals.

Thank you