outside cp knowledge presentation deepak kapoor jims_deal_continuum_11_nov06

Mergers and Acquisitions

“The Deal Continuum – Process, Pitfalls & Precautions”

Deepak Kapoor

Executive Director

[email protected]

ContentsWhy Mergers and Acquisitions?

The Deal Continuum• Road Map to Mergers and Acquisitions• Key Components

Challenges to M&A• Pre Deal• Post Deal

Current M&A Environment

Concluding Thoughts

Contents

Why Mergers and Acquisitions?




Concluding Thoughts

Corporate Growth could be:

• Organic – Safer but slower

• Inorganic – Quicker but riskier

Mergers & Acquisitions are at the core of Corporate zeal for Growth

Why Mergers and Acquisitions ?

• Strategic - Intent to strengthen competitiveness, gain higher market share and create critical size

• Products - Broadening the product portfolio

• Markets - Access to new, lucrative markets

• Integration - Backward/forward/lateral

• Scale economies - Cost Savings/Increased Profitability

• Restructuring - Concentrate on core competencies and Businesses

Financial Strategic





Concluding Thoughts

The Deal Continuum – A Road Map to M&A

Deal/TargetIdentification

Evaluating Deals

Executing Deals

Making Deals Successful

Harvesting Deals

Deal Continuum - Identification

Deal/Target Identification

• Strategy

• Willingness

• Synergies

• Shortlist

• EoI

Deal Continuum - Evaluation


• Initial MoU

• Term Sheet

• Confidentiality

• Information

• Ballpark Value

Signing a preliminary

Memorandum

• Strategy

• Willingness

• Synergies

• Shortlist

• EoI

Deal Continuum - Execution



Memorandum

Pre Investment Appraisal

• Due Diligence

• Deal Drivers

• Identification of Deal Issues Value Adj. Reps &

Warranties

• Strategy

• Willingness

• Synergies

• Shortlist

• EoI

• Initial MoU

• Term Sheet

• Confidentiality

• Information

• Ballpark Value

Deal Continuum - Execution



Memorandum


Valuation and Deal

Structuring

• Valuation

• Bid Strategy

• Negotiations

• Agreements

• Exit Options

• Strategy

• Willingness

• Synergies

• Shortlist

• EoI

• Initial MoU

• Term Sheet

• Confidentiality

• Information

• Ballpark Value

• Due Diligence

• Deal Drivers


Warranties

Deal Continuum - Succeeding



Memorandum


Valuation and Deal

StructuringDeal Closure

• Consideration

• Documentation

• Closing Date

• Remittances

• Approvals

• Strategy

• Willingness

• Synergies

• Shortlist

• EoI

• Initial MoU

• Term Sheet

• Confidentiality

• Information

• Ballpark Value

• Due Diligence

• Deal Drivers


Warranties

• Valuation

• Bid Strategy

• Negotiations

• Agreements

• Exit Options

Deal Continuum - Harvesting



Memorandum


Valuation and Deal

StructuringDeal Closure

Post Deal Integration

• Synergies

• Control

• Integration

• Compliance

• People

• Strategy

• Willingness

• Synergies

• Shortlist

• EoI

• Initial MoU

• Term Sheet

• Confidentiality

• Information

• Ballpark Value

• Due Diligence

• Deal Drivers


Warranties

• Valuation

• Bid Strategy

• Negotiations

• Agreements

• Exit Options

• Consideration

• Documentation

• Closing Date

• Remittances

• Approvals

The Deal Continuum The Current Course Content

Deal/TargetIdentification

Evaluating Deals

Executing Deals

Making Deals Successful

Harvesting Deals

Restructuring

Funding OptionsValuation

Accounting Issues

Legal

Aspects Due

DiligenceCompanies Act

Tax IssuesHR &

Integration





Concluding Thoughts

Key Challenges to Mergers and Acquisitions

Pre Deal

Post Deal

Structuring the Deal

Valuation

Investment Banking

Representations and Warranties

Exit Options

Human Resources


Cultural Issues

Integration Issues

Process Integration

Harvesting the deal

Deal Synergies

Agreements

What do you want & How to get it?(Investment Banking – Deal Sourcing)

M&A STRATEGY

Corporate/portfolio strategyBusiness unit strategyAcquisition strategyMarket reviewsBusiness planningExit strategy

FINANCE RAISING & MBO

Bank financing Securitisation MBOs, MBIs and IBOs

ACQUISITIONS

Criteria formulation Target / partner identification Assessment Financial & tax structuring Negotiations Public company takeovers

JVs & ALLIANCES

Corporate & legal structuring Capital structuring Valuation of JV assets Debt restructuring Negotiations Documentation

DISPOSALS

Options appraisals Value enhancing initiatives Buyer identification Information memoranda Marketing Negotiations Project management

PRIVATE EQUITY

Investment identification Investment evaluation Assistance in negotiation Documentation Deal Closure Fund Raising

Challenge No. 1

What would it take to make informed investment decisions?(Due Diligence Reviews)

Due Diligence Review

Buy Side Diligence(Are you buying what you think you are

buying)

• No Access Diligence(How reliable is the Information Memorandum)

• Market Diligence(Helps understand the competitive position)

• Operational Diligence( Are your Operational Assumptions reasonable)

Sell Side Diligence(Do you know the issues buyers may

negotiate on)

• No Access Diligence(Determine how to get maximum, by giving the least)

Challenge No. 2

What price to negotiate for?(Valuation)

• Fair Value

– Open & Unrestricted Market,

– Knowledgeable & Willing Parties,

– Acting at arm’s length

• Price

– Keenness/negotiating strengths of parties

– Degree of competition

– Specific Parties involved

• Timing

– Value could change with time

– Risk perceptions could change

– Change of people

Challenge No. 3

Value (Rs.)

Intrinsic Value - Buyer

Intrinsic Value - Seller

Max. Premium Possible

NO DEAL ZONE FOR BUYER

NO DEAL ZONE FOR SELLER

Seller’s Initial Price

Buyer’s Initial Offer

Possible Deal Price

Reported Control Premium

Value to Buyer vs Value to Seller (Typical Price Bargaining)

What’s the most efficient way to go about it?(Structuring)

• Objective of structuring a transaction is to optimise / maximise achievement of interests of all concerned parties, in full compliance with the law

Purchase of Shares – Investment vs Acquisition vs Disinvestment

Purchase of Assets – Itemized v Slump Sale

Joint Ventures without direct Equity Participation

Outsourcing Arrangements

Spin Off of a “non – core” unit

Other Structures

Challenge No. 4

Understanding of Both Sides to a Transaction and Their Competing Interests(Deal Closure)

Buyer• Pay contract price or

possibly reduce purchase price

Challenge No. 5

• Do not want to assume uncertain liabilities

• Obtain as many assurances from Seller in the form of representations and warranties as possible

• Maximize indemnifications

• Desire to purchase assets

Seller• Maintain or possibly

increase purchase price

• Absolve themselves of exposure to uncertain liabilities

• Minimize assurances provided to the Buyer in the form of representations and warrantees

• Minimize indemnifications

• Desire to sell stock

Preventing Failures(Post Closure)

• Integration “could” get difficult, on account of the following:

– Poor Evaluation of Internal strengths and weaknesses of the

parties involved.– Lack of clarity on how to harvest deal synergies and other

potential benefits– Technological Incompatibility– No proper tracking mechanism for the progress made and how is

it being managed– Cultural Clashes

Challenge No. 6

Although A and B are in the same industry there could be cultural differences

Company A

Voice-mail driven

Consensus driven

Short Term

Consultative

Risk Averse

Fear of numbers

Centralised

Decisive management

Company B

E-mail driven

Hierarchy driven

Dislike projects

Deadlines cause stress

Non confrontational

Scientific debate

Gentlemanly

Fear ‘discomfort’

?Illu

strative

Illustrative

... in organisational and individual behaviours





Concluding Thoughts

Deal Landscape……………2005 and 2006 (6 months)

Total 343 M&A deals in 2005 valued at US$ 16.3 bn

192 cross-border transactions 136 outbound with a total deal value of ~US$ 4.3 bn

Outbound deals higher in number but lower in value

Largest proportion of outbound deals in 2005 in Europe (50% of deal value) followed by North America (24%)

As per analysts, the UK remains the gateway for investments (and markets) by India Inc in Europe, and is the leading destination for FDI in Europe

The last 10 years : US most attractive destination (accounting for a fourth of all outbound

investments approved) UK and British Virgin Islands was second (one-fifth of all investments

approved)

Strategic investors looking positively towards India

M&A inbound

Year Aquirer Indian Company Sector StakeConsideration (US$ million)

2006 Mylan Labs, US Matrix Laboratories Pharma 71.5% 736

2006 Hutchison Whampoa Hutchison Essar Telecom Services 5% 580

2006Electronic Data Systems Corporation (EDS)

MphasiS BFL IT/ BPO 52% 380

2006 Chevron, USReliance Petroleum Ltd

Oil & Gas 5% 300

2006 Ciments Francis, France Zuari Cements Cement 50% 134

2005 Vodafone Bharti Tele-Ventures Telecom Services 10% 1500

2005Maxis, Malaysia & The Reddy Family, India

Aircel Telecom Services 100% 1080

2005 Holcim, SwitzerlandAmbuja Cement India Ltd.

Cement 67% 800

2005 Oracle i-flex Solutions Software 41% 550

2005 Huber Group, Germany Micro Inks Printing & Stationery 59% 220

Year Indian Aquirer Company Sector StakeConsideration (US$ million)

2006 ONGC VideshPetrobras’ BC-10 block in offshore Brazil

Oil & Gas 15% 1400

2006 Tata TeaGlaceau, “enhanced water” drinks maker (US)

FMCG 30% 667

2006 Suzlon EnergyHansen Transmissions, Belgium

Wind Energy 100% 588

2006 Dr. Reddys LaboratoriesBetapharm Arzneimittel GmbH, Germany

Pharma 100% 572

2006 Ranbaxy Laboratories Terpia, Romania Pharma 96.70% 324

2006 Ballarpur Industries, JP MorganSabah Forest Industries, Malaysia

Paper & Pulp 97.78% 261

2006 Tata Coffee Eight O'Clock, USA Retail 100% 220

2005 Matrix Laboratories Docpharma, Belgium Pharma 22% 263

2005 Apeejay Surendra Group Premier Group, UK Tea 100% 141

2005 Tata Chemicals Brunner Mond Group, UK Chemicals 63.5% 112

Indian companies venturing overseas M&A outbound

Issues in Cross Border Transactions

Issues Inbound Outbound

Valuation & Due Diligence Related

Difficulty in carrying detailed analysis and due diligence Structured information sharing & start of due diligence Informal arrangements & related party transactions Robust forecasts & projections Review of the independent auditors’ work papers People Related

Flexibility of labour laws Employee liabilities



Assets Related

Clarity of title Perception on assets (ownership vs lease) Idle or under-utilised assets Environmental Issues

Understanding of regulatory issues Systems & Controls Environmental Obligations



Cultural Issues - Pre & Post Deal

Willingness to take risk Expectation on Management Interaction Escrow mechanism Reps & Warranties Regulatory approvals Colour of the skin





Concluding Thoughts

Successful deals

• a risk/reward game

• more sophisticated vendors are making life (much) harder

• The deal does not finish on signing

• … that just gives you the opportunity to win or lose later

Best practice processes can reduce risk

• pro-active management of issues is key

• get ahead of the process, it’s very difficult to catch up

• small(er) deals require just as much effort and attention

Speed, Focus, Stability & Ruthless prioritisation

Concluding Thoughts

Thank You!

outside cp knowledge presentation deepak kapoor jims_deal_continuum_11_nov06

Business

deal deal synergies

deal continuum road

ma dealtarget identification

riskier mergers acquisitions

key challenges

diligence companies

corporate growth

core of corporate zeal