Mergers & AcquisitionsMergers & Acquisitions(Case Study)

June 11 2010June 11, 2010

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Sunny Goel II Research Associate IISunny Goel II Research Associate II

Corporate Catalyst India www.cci.in&

ASA & Associates chartered accountants www.asa.in

C t tContents

1) Introduction) Wh t i ?a) What is merger?

b) What is acquisition?

2) Distinction between Mergers & Acquisitions2) Distinction between Mergers & Acquisitions

3) Case study – TATA CORUSa) LBOsa) LBOsb) The Dealc) Negotiationsd) Synergies) y g

4) Snapshot – Bharti Zain

5) Causes for failure of M&A

6) Conclusion

I t d tiIntroduction

Important tools of corporate growthImportant tools of corporate growth

Alternative way to achieve growth is resort to external arrangements like M&A (inorganic growth)

Restructuring the corporation to meet global competition

Main idea – one plus one makes three

Economies of scale

Acquiring new technology

Improved market reach

Staff reduction

85% are using M&A as a core growth strategy85% are using M&A as a core growth strategy.

Wh t i M ?What is Merger?

A true merger in the legal sense occurs when both business di l d f ld th i t d li biliti i t l t ddissolves and fold their assets and liabilities into a newly created third entity. This entails the creation of a new corporation.

A transaction where two firms agree to integrate their A transaction where two firms agree to integrate their operations on a relatively coequal basis because they have resources and capabilities that together may create a stronger competitive advantage create a stronger competitive advantage.

Cl ifi ti f MClassifications of Mergers

Similar kind of business e g TATA and Jaguar &

Horizontal Merger

e.g. TATA and Jaguar & Land Roover.Combination of firms

related to each other in terms of customer

Vertical Concenti

groups, customer functions or alternative technologies.

Vertical Mergerric

Mergers

Combination of firms Conglomerate

Mergersinvolved in different stages of production/operation as forward or backward integration e g cone

Engaged in unrelated line of business activities.

integration e.g. cone supplier with an ice cream maker.

R f MReasons of Merger

Economies of Scale

Marketing and Economic ManagementNecessity

Growth and Diversification

Eliminations of

Competition

Utilization of T Shi ld

Technology Sh i Tax ShieldsSharing

Wh t i A i iti ?What is Acquisition?

An acquisition, also known as a takeover or a An acquisition, also known as a takeover or a buyout, is the buying of one company (the ‘target’) by another. An acquisition may be friendly or hostile. In the former case the companies cooperate in negotiations; in the case, the companies cooperate in negotiations; in the latter case, the takeover target is unwilling to be bought or the target's board has no prior knowledge of the offer. Acquisition usually refers to a purchase of a smaller firm by a larger one.

R f A i itiReasons for Acquisitions

Increased market powerIncreased market power

Learning and Developing new capabilities

Overcoming entry barriers

Cost of new product developmentp p

Increase speed to market

Lower risk than developing new products

Distinction between M d A i itiMerger and Acquisition

When one company takes over another and clearly When one company takes over another and clearly establishes itself as the new owner, the purchase is called an acquisition. From a legal point of view, the target company ceases to exist, the buyer "swallows" target company ceases to exist, the buyer swallows the business and the buyer's stock continues to be traded.

In the pure sense of the term, a merger happens when two firms, often of about the same size, agree to go forward as a single new company rather than remain separately owned and operated. This kind of action is more precisely referred to as a "merger of equals". Both companies' stocks are surrendered and new company stock is issued in its place stock is issued in its place.

TATA TATA CORUSCORUSTATA TATA -- CORUSCORUSA C St dA Case Study

B i f B k dBrief Background

AcquirerAcquirer

Name: Tata Steel

Former Name: Tata Iron and Steel company Limited

Founded: 1907

F d J h dji N ji T tFounder: Jamshedji Nusserwanji Tata

Headquarters: Jamshedpur, Jharkhand

Chairman: Ratan TataChairman: Ratan Tata

Type: Public

Industry: SteelIndustry: Steel

Parent: TATA Group

B i f B k dBrief Background

TargetTarget

Name: Corus

Founded: 1999

Formation: Merger of British Steel Corporation and

K i klijk H N VKoninklijke Hoogovens N.V.

Headquarters: London, England, UK

CEO: Kirby AdamsCEO: Kirby Adams

Type: Subsidiary

Industry: SteelIndustry: Steel

Parent: Tata Steel

Th D l

Official Announcement: April 02, 2007

The Deal

Official Announcement: April 02, 2007

Price of Deal: 608 pence per ordinary share in cash

Total value of Deal: Pound 6 2 billion (USD $12 billion)Total value of Deal: Pound 6.2 billion (USD $12 billion)

Deal Competitor: Companhia Siderurgica Nacional (CSN)

C tit ’ Bid 603 hCompetitor’s Bid: 603 pence per share

Deal process commencement: September 20, 2006

Deal process completion: July 02, 2007

C bi d A biti

Become a global player with a balanced presence in developed

Combined Ambition

European and fast growing Asian marketsAcquire strong position in construction, automotive and packaging market sectorsSi ifi t t i l it d fi ld / b fi ldSignificant raw material security and greenfield / brownfielddevelopmentsLowest cost position in Europe and South-East AsiaOwn development plans

By 2012: EBITDA of

Own development plans

Current: EBITDA of 13%; 25 million tonnes :# 6

25%; 40 million tonnes :# 2

Double the size and profitability

tonnes :# 6

D l I t t V hi l

A holding company was set up by Tata Steel in Singapore to

Deal: Investment Vehicle

g p y p y g p

acquire Corus.

Idea was to have all the foreign acquisitions under one holding

company.

Singapore has favorable tax jurisdiction and gave Tata Steel an

easy avenue for raising global resources / funds.

Tata SteelTata Steel

India

Tata Steel Asia

Holdings (Singapore)

Tata Steel U.K.

Corus Group Ltd.

U.K.

N ti ti

September 20, 2006: Corus steel has decided to acquire a strategic partnership with a company that is a low cost producer

Negotiations

strategic partnership with a company that is a low cost producer

October 05, 2006: The Indian steel giant, Tata Steel wants to fulfill its ambition to expand its further

October 06 2006: The initial offer from Tata Steel is considered October 06, 2006: The initial offer from Tata Steel is considered to be too low both by Corus and analysts

October 17, 2006: Tata Steel has kept its offer to 455 p per share

October 20 2006: Corus accepts terms of Pound 4 3 billion October 20, 2006: Corus accepts terms of Pound 4.3 billion takeover bid from Tata Steel

October 23, 2006: The Brazilian Steel Group CSN recruits a leading investment bank to offer advice on possible counter offer to Tata Steel’s bidto Tata Steel s bid

October 27, 2006: Corus was criticized by the chairman of JCB, Sir Anthony Bamford, for its decision to accept an offer from Tata.

N ti ti

November 03, 2006: The Russian steel giant Severstal announces ffi i ll th t it ill t k bid f C

Negotiations

officially that it will not make a bid for Corus

November 18, 2006: the battle over Corus intensifies when Brazilian group CSN approached the board of the company with a bid of 475p per sharebid of 475p per share

December 18, 2006: Within hours of Tata Steel increasing its original bid to 500p per share, Brazil’s CSN made its formal counter bid at 515p per share in cash, 3% more than Tata Steel’s p p ,offer

January 31, 2007: Britain’s Takeover Panel announces in an e-mailed statement that after an auction Tata Steel had agreed to offer Corus investors 608 pence per share in cashoffer Corus investors 608 pence per share in cash

April 02, 2007: Tata Steel manages to win the acquisition to CSN and has the full voting support from Corus’ shareholders.

Fi i

TATA – Corus Deal - $12 billion

Financing

TATA Corus Deal $12 billion

Equity contribution from Tata Steel - $3.38 billion

Credit Suisse leaded, joined by ABN AMRO and Deutsche

Bank in the consortium

Of the $8.12 billion of financing, Credit Suisse provided

45% and ABN AMRO and Deutsche provided 27.5% each.

C lt l I t ti

Tata Steel Corus

Cultural Integration

Tata SteelContinuous Improvement Program – “ASPIRE”

CorusContinuous Improvement Program – “The Corus Way”

Core Values

Trusteeship

Integrity

Core Values – Code of Ethics

Integrity

Creating value in steelIntegrity

Respect for the individual

Credibility

Creating value in steel

Customer focus

Selective growthy

Excellence

World class governance

g

Respect for our people

World class governance

S i

Tata is a low cost steel producer whereas Corus was a high

Synergies

value product manufacturer

Tata was a major supplier to the Indian auto industry and the demand for value added steel products was growing in the demand for value added steel products was growing in this market

Hence there would be a powerful combination of high quality developed and low cost high growth marketsquality developed and low cost high growth markets

Technology transfer and cross-fertilization of R&D capabilities

Capturing global market

A t Gl b l M k t

TATA CORUS

Access to Global Market

23% 8%

IndiaAsia ex India

49%10%9%

3%EuropeUK

69%

Asia ex IndiaROW

29%

N. AmericaAsiaROW

COMBINED ENTITY

37%8% 9%EuropeUKAsia

22%24%

N. AmericaROW

C l i

Tata Steel can target becoming one of the top-3 steel

Conclusion

makers globally by 2015.

The company would have an aggregate capacity of close to 56 million tones per annum.56 million tones per annum.

The company can plan for Greenfield capacities too.

Post deal for smooth functioning Tata Corus defined Group g pStrategy Function:

Strategy / Business Development Group – corporate development

Strategic Modeling Group strategic models and benchmarkingStrategic Modeling Group – strategic models and benchmarking

Industry Group – industry monitoring, market intelligence and issuing assumptions for other two groups

BHARTI BHARTI ZAINZAINBHARTI BHARTI -- ZAINZAINA S h tA Snapshot

Bh ti Z i

Bharti acquired Zain for USD 10.7 bn

Bharti - Zain

Bharti acquired Zain Telecom’s operation in 15 countries

Manoj Kohli, CEO & Joint Managing Director is the key person behind the deal

Deal completed in 45 days

Execution of deal:Financing teamFinancing team

Accounting team

Regulatory team

Legal teamLegal team

Country visits team

Future: Bharti Airtel plan to have 100 million customers, USD 5 billion revenue and USD 2 billion EBITDA by 2013.5 billion revenue and USD 2 billion EBITDA by 2013.

C f F ilCauses for Failures

Payment of higher price: can dilute shareholders’ earnings (Overstated y g p g (/ overestimated synergies)Cultural Clash: conflicting management styles, differing expectations, communication channels, formal/ participative…..Failure to integrate operationsPoor business fit: product/service of acquired company does not fit into acquirer’s sales, distribution systems or geographic requirementsInadequate due diligence: some of the financial and business risks of seller may go undetectedOver leverage/ inappropriate financing structure: may create liquidity/ servicing problemsBoardroom split: lack of compatibility amongst directors of two companies mergedR l t / t d d l i i l t ti f l d Regulatory/ unexpected delays in implementation of merger: can lead to loss of valuable employees, customer, supplier relationships

Hence proper planning and executionproper planning and execution of M&A transaction is a must for it to succeed and not backfiremust for it to succeed and not backfire

Thank YouThank YouThank YouThank You