turn around mgmt & merger

7/31/2019 Turn Around Mgmt & Merger

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PART-II

A.TURNAROUND MANAGEMENT AND ITS FACTORSThe present business scenario is one wherein constant change is the name of thegame.For any firm to survive in any industry, there has to be constant monitoring andimprovement of its systems and operations. When a firm faces severe cash crisisor a consistent downtrend in its operating profits or net worth, it is on its way tobecoming insolvent. The slide cannot be prevented unless appropriate actions,both internal and external, are initiated to change the future prospects. This

process of bringing about a revival in the firms fortunes is what is termed as

Turnaround Management.

It deals with all aspects of business from personal protection to reviewing indetail the financial, market and sales plans of the business along with cash flowprojections, pricing, staffing and product and services contributions.It discusses how to deal with and establish relationships with bankers, creditorsand vendors as well as the steps to take in downsizing, including the best waysto let people go. It takes an in-depth look at the competition, customers, trendsand the future of the business from a blank paper planning perspective.Kevin Muir emphasizes that in a turnaround situation, major changes need to bemade and that planning and implementing the plans are essential.


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To be concrete, Turnaround management is a process dedicated to corporaterenewal. It uses analysis and planning to save troubled companies and returnsthem to solvency. Turnaround Management involves management review,activity based costing, root failure causes analysis, and SWOT analysis todetermine why the company is failing. Once analysis is completed, a long termstrategic plan and restructuring plan are created. These plans may or may notinvolve a bankruptcy filing. Once approved, turnaround professionals begin to

implement the plan, continually reviewing its progress and make changes to theplan as needed to ensure the company returns to solvency.

There are 3 phases in any Turnaround Management.1 The diagnosis of the impending trouble or the danger signals2. Choosing appropriate Turnaround Strategy3. Implementation of the change process and its monitoring.
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Phase I: Watching out for the danger signal

Do companies turn sick overnight and qualify as potential candidates forturnaround, or do they become sick slowly, which can be stopped by timelycorrective action?

Obviously only the latter is possible. But in reality, most companies do notrecognize this fact.. The following are some of the universally accepted dangersignals, which a company should watch out for: Decreasing market share / Decreasing constant rupee sales Decreasing profitability Increased dependence on debt / Restricted dividend polices Failure to plough back the profits into business / Wrong diversification at theexpense of the core business. Lack of planning Inflexible CEO / Management succession problems / Unquestioning Board ofDirectors A management team unwilling to learn from competitors.

Phase II: Choosing appropriate Strategy

Hoffer, an expert management guru, classifies Turnaround Management intotwo broad categories. They are

1. Strategic TurnaroundAs the name itself suggests, strategic turnaround choices may force the

company to completely change its current way of operations. The choices underthis method are

A new way to compete in the existing business Entering into an altogether new business

Under the first choice, the focus is either on increasing the market share in agiven product market frame work or in repositioning the product marketrelationship. The increase in market share can be achieved by improvingproduct quality perception through dealer push or by a consumer pull.Alternatively, entering a new business as a turnaround strategy can be

approached through the process of product portfolio management.

2. Operating TurnaroundsBasically they are of 4 types and the strategy adopted depends on the varioussituations in which the firm is. All these strategies focus on short-term effectsonly.1 Asset reduction strategies2 Revenue increasing strategies3. Cost cutting strategies

4 Combination strategies


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If a firm is operating much below the Breakeven level, it must take steps toreduce its assets. This will reduce the level of fixed costs and help in reducingthe total costs of the firm. If the firm is operating substantially but not extremely below its breakeven

level, then the appropriate turnaround strategy is to generate extra revenues. Operating closer but below breakeven levels calls for application ofcombination strategies.Under this method all the three namely cost reducing, revenue generating andasset reduction actions are pursued simultaneously in an integrated and balancedmanner. Combination strategies have a direct favourable impact on cash flowsas well as on profits. If the firm is operating around or above the breakevenlevel, cost reduction strategies are preferable as they are easy to carry out andthe firms profits rise once the unnecessary costs are cut down.

Phase III: Implementation of the change process

Implementation plays an important role in any turnaround management.Identification of an appropriate strategy by itself will not guarantee success.Similarly partial adoption of a strategy is also not useful. The selected strategyneeds to be pursued relentlessly and with all out effort to make it work. Thesuccess or otherwise of a Turnaround strategy depends on the commitmentshown by the top management as also the operating management.

Success Stories

The case of Hindustan Machine ToolsHMT was formed to manufacture machine tools with a foreign collaborator.After nearly a decade of operation, it decided to diversify into Watch industry.The effect of this diversification was felt only after 57 years when the mainbusiness of HMT crashed and the company started incurring losses. The watchdivision came to the rescue and it generated cash profits to keep the companygoing.

The case of Bharat Heavy Electricals Limited

The company was started with the objective of producing power generatingequipments and virtually enjoyed monopoly. But as the years went by, becauseof the inability of the State Electricity Boards and private sector to set up newpower plants, its capacity utilisation fell down tremendously. To offset thisdepression, BHEL ventured into Telecommunications, MetropolitanTransportation and Defense production. Due to this timely diversification,BHEL is now one of the rare profit making PSUsConclusion

It can be thus seen that for Turnaround management to be implemented, it is

imperative for the management to be aware of its position in the industry inwhich it is functioning as also its status in the overall scheme of things.


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Consultants play an invaluable part here since they help in identifying andvetting the strategy in the light of the prevailing situations, thus ensuringeffective turnaround of the organisation. With the corporate sector positionedfor a giant leap in India, it is time organisations took stock of their

performances, so as to stay in the race.

When a firm faces severe cash crisis or a consistent down trend in its operatingprofits / net worth, it is on itsway to becoming insolvent. The slide cannot beprevented unless appropriate actions, both internal and external, are initiated tochange the future prospects. This process of bringing about a revival in thefirms fortunes is what is termed as TURNAROUND MANAGEMENT.Turnaround Management involves the formulation and implementation of astrategic plan and a set of actions for corporate renewal and restructuring,typically during times of severe corporate financial distress. Often with the helpof outside turnaround consultants or strategy consultants, a Root Cause Analysisis made and a turnaround plan is devised and executed, assuming that the firmstill offers the potential to return to financial solvency, profitability and strategicviability.

The root causes of strategic distress are: PoorVision Poor Strategy Poor Execution

Acts of God certain risks which cause irreparable damage

MORE IMMEDIATE CAUSES INCLUDE WEAK MANAGEMENT, WEAKECONOMY, BUSINESS ECONOMICAL REASONS, OVERINVESTMENT

/ UNDER-INVESTMENT ETC.

STEPS IN TURNAROUND MANAGEMENT PROCESS

Management Change: Consultants may be called in to manage the turnaroundof the firm

Situational Analysis: Assess the situation and future business viability Emergency Action Plan: Implement emergency steps. Develop strategicsurvivor plan Business restructuring: Implement the plan, restructuring the business. Survivethe crisis Return to normalcy: Return to normal operations, profitability and growth


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Stages of Organisational TurnaroundBoyne

This theoretical framework was suggested by Boyne (2006) as a generic modelthat had been distilled from various stage models of decline and recovery in

private organisations.The author searched and identified studies that contained systematic empiricalevidence about the effectiveness of TMS including comparison of successfuland unsuccessful recovery attempts. This search was limited to a journal articleas a rough quality control and search of keywords in which 21 comparativestudies yield the suggested model. Additionally, five qualitative studiesdescribing success stories of recovery processes derived from the public sectorare analysed in order to evaluate whether the model can be applied to publicorganisations. The author concludes that the model of TMS is derived from theprivate sector literature but offer a useful platform for the public organisationcontext.While the previously presented model: Stages of Organisational Turnaround

(McKiernan, 2003) emphasised the stages that a failing organisation goesthrough, Boynes model emphasises the crossroads in managerial strategiesduring a recovery process. Nonetheless, stages and aspects that were coveredearlier will be briefly presented to avoid repetition. This model constitutes amanagerial process that reflects and simplifies seven stages that may becomplex, disordered, occur at the same time, compressed or extended.

1. The Onset of Decline- The first stage refers to the causes of the failure.2. Corrective Action and Recovery to Avert a Turnaround Situation- Acorrective is an action taken in quick response to decline. This action prevents adeep decline from developing and avoids the need to implement TMS.One of the problems in researching organisational failure is making theseparation between a natural, temporary decline and a permanent one (Schendel,Patton, and Riggs, 1976). A corrective action distinguishes between the two. Inother words, in cases where successful corrective actions were employed,

performance returned to be normal, and TMS were not used. In such cases, thesituations could be considered as temporary declines but not as turnaroundsituations. By contrast, cases in which unsuccessful or no corrective actionswere employed, and performance continued to deteriorate, can be considered aspermanent declines. Additionally, corrective action not only helps theorganisation to escape from failure, it encourages organisational learning thatmay prevent future identical breakdowns since it trains the organisation toquickly spot a decline and appropriately react to it. Repeated cases of declinelater on would find a management that has already dealt with such situations. In

LAs for instance, the prompt establishment of a psychologist team for childrenin reaction to a terror attack could be considered as a corrective action.


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A quick response to a crisis could support the education system in this case,and prevent further psychological and emotional damage and deterioration. Inaddition, drawing a lesson afterwards could be an organisational learning actthat would help in similar future crises.

3. Turnaround Situation - This stage refers to the core organisational failure.

4. Search for New Strategies- At a later point in time, the leaders of a failingorganisation might recognise that a new course of action is required. Thisrecognition could trigger the search for new strategies to prevent terminaldecline. The search for new strategies includes preliminary steps such asdiagnosing the causes of failure and determining present organisational needs.However, in accordance to the democratic process, the selection of thesestrategies has to be approved by other bodies, such as the council.

5. a. Selection of New Strategies - The selection of new strategies is a formalmanagerial act that ends in agreed strategies as part of the recovery plan. InLAs, approval of a recovery plan may involve democratic procedures such asconsultation with local volunteers, coalition deals, private-public participationand partnership, and official voting of council members. These proceduresmight delay the implementation of the recovery plan especially if it involves aretrenchment of services which might, in turn lead to stakeholder resistance.However, not every search for strategies ends up in selection of strategies, as

described in stage 5.b.

5. b. No Escape Strategy Found- Selection of new strategy is not guaranteed.Political considerations like those mentioned above or lack of managerial skillsmay find the management with no clear and approved strategy. This problem issevere since it occurs after the failure has struck and although the managementadmitted its existence it failed to start a recovery process. When no recoverystrategy was found and approved, perhaps because political or managerial skillswere missing, the LA will fall into a combination of low performance and high

persistence, which is permanent failure (Meyer and Zucker, 1989).

6. Implementation of New Strategies- This is the core managerial act duringthe recovery process. The management implements TMS: retrenchment,repositioning, and reorganisation. The implementation of TMS could lead toone of the three options presented in stage 7.

7. Turnaround- The ideal outcome of the implementation of TMS isturnaround in organisational performance.


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However, there are no clear-cut timescales and criteria to define whether aprocess has been successful or not. Generally, the relevant benchmark is thereturn to the level of performance that was

CORPORATE TURN AROUND STRATEGY

In many cases, the businesses that end up in receivership have not heeded earlywarning signs and sought the right assistance at the appropriate time.Turnaround experts do not just work with businesses in trouble. Many clientsseek their advice for general profit improvement. Companies must be willing toadmit they need help. The earlier we get engaged, the more options we have torestructure the business.

The three key elements of any turnaround are:

financial restructuring, operational restructuring and stakeholder management.

A turnaround practitioner will use skills in insolvency/corporatefinance/audit; management consulting/CFO; project management;negotiation & stakeholder management; HR skills; financial modelling;as well as lateral thinking ability and the ability to stay calm underpressure.

The key is to critically assess the troubled entitys business plan and

review profit and loss to determine the causes of underperformance suchas rising production costs, loss of customers or increased competition.

Timing is crucial when a company is underperforming. Turnaroundspecialists create and implement rolling 100 day work plans detailing thekey initiatives being targeted to improve business performance andensure that the initiatives are implemented in a timely, efficient manner.

The work focuses around improving cash flow, stabilizing operations,communicating with key stakeholders to re-build their support, exploringall strategic options and developing a comprehensive turnaroundstrategy.

The turnaround specialist will undertake strategic, financial andoperational reviews to identify areas of underperformance and then workwith management to implement strategies to improve the overall

performance of the business.


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Warning signs to look forThese include when management has been too focused on growingrevenue without considering the impact on margins and profit; if

businesses dont have the right systems and controls in place to managetheir working capital; or if businesses dont have the right managementteam depth of skill and dont review financial and operational

performance regularly.

The key signs that should start senior managements alarm bells ringingare:

Actual/potential bank covenant breaches Working capital growth outstripping revenue growth Profit warnings/missing forecasts/declining margins General industry downturn or industry consolidation Loss of key management personnel or increase in staff turnover Difficulty in obtaining general financeManagement buying sales at the expense of margin Creditor or debtor ageing issues Competitor risk ATO and Super arrears Loss of a major customer Post merger integration issues

Cash flow is the key

Any improvement in working capitalthe amount of cash tied up inaccounts receivable, inventory and accounts payable - is beneficial,especially in current deteriorated market conditions.

Extra capital can be used to pay down debt, fund capital expenditure,satisfy seasonal cash requirements or further invest in growth initiatives

such as research and development.

For specialist performance improvement and turnaround managementfirms, the aim is to deliver strategies which rapidly improve profitabilityand cash flow. To do this, we need to know what drives their business,how to achieve above industry benchmarks and more importantlyimplement strategies that increase the financial performance and value oftheir business.

The following is a summary of the 6 essential elements required (in ourview) to achieve a successful turnaround.


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1. Ability to prove business viability by demonstrating the variousinitiatives that will restore earnings and cash flow2. Ability to manage all key stakeholders and keep them all moving in

the right direction3. Credible management which might mean making certain replacementsto bolster the credibility of management4. An ability to maintain or enhance the reputation of the business5. An ability maintain supplier credit and terms6. An ability to release internal working capital and secure externalfunding.

Studying turnarounds and turnaround practices can help CEOs and

business owners maintain and grow healthy and profitable businesses.Many of the techniques and practices used in turnarounds are good

management fundamentals and differ only in emphasis and execution

between turnarounds and stable companies. Some of the practices need to

be used judiciously and some avoided when dealing with a stable

company. Understanding and applying turnaround practices in non-crisis

situations can, however, be the difference between long-term success or

failure.

Turnaround management is everyday business and its practices andprinciples should be part of every CEOs and business owners bag of

tricks.

BENEFITS

A successful turnaround creates value for all stakeholders and retainsemployment for many employees and management.

1. Revenue enhancement as a turnaround strategyRevenue enhancement focusses on increasing sales through improvement

of systems, processes and technology in the primary value chain

activities:

Customer management processes such as sales and marketing, and after-sales service to increase turnover through more effective sales force

performance, new products, improved functionality and range of

products, new markets, better promotion, etc.

Operations management processes - inbound logistics, operations,outbound logistics - to increase performance on quality and lead time,


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thereby raising customer satisfaction through increased service delivery

capability.

Innovation processes - Research and Development to increase the abilityto offer the market new products.

The lead time for revenue enhancement is normally longer than that of

cost reduction.

If the business is in a financial crisis and revenue enhancement cannot be

funded, revenue enhancement often follows after cost reduction and/or

asset reduction initiatives have generated cash.

Increasing sales are required if the distressed company operate below

breakeven.

Revenue enhancement takes longer to have effect than cost reduction

though.

2. Cost reduction as a turnaround strategy:Cost reduction is the turnaround strategy having the fastest impact on the

bottom line.

Overhead and direct costs in the primary value chain and support

functions are normally reduced to a level that can be borne by the level

of sales that will remain after cost cutting.

Overhead cost reduction takes place in chunks. Removing more and

more chunks eventually means that some business units or product lines

cannot be supported anymore, and the sales associated with those fall

away too.

Cost reduction often involves retrenchment of employees, especially in

turnaround situations where salaries and wages represent a large portion

of the cost structure.

We don't believe in cutting costs to the bone - thereby inhibiting the

organisation's ability to create, fulfil and administer demand.

3. Asset reduction as a turnaround strategyWorking capital reduction is common to any turnaround.
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However, if the distressed company is too far below breakeven, working

capital reduction, revenue enhancement and cost reduction strategies

alone will not suffice.

In this situation, the turnaround strategy is normally to shrink the

business into profitability.

In such cases, cutback action takes the form of shrinking into

profitability by means of portfolio disinvestment.

This involves closure or sale of business units, divisions, operations and

assets, and outsourcing of value chain activities in order to focus on the

remaining profitable or potentially profitable business units or sections of

the value chain.

Such down-scoping represents a kind ofstrategic repositioning by itself.

As with cost reduction, closure and outsourcing of business units

involves retrenchment of employees.

Portfolio disinvestment through selling off assets is often used as

mechanism to raise cash for the turnaround.

TURNAROUND STRATEGIES

1. Reorganisation as a turnaround strategy:In our experience, reorganisation always forms part ofturnaround

management.

Reorganisation deals with all the people issues in the business. It entails

restructuring, restaffing, reskilling and turnaround leadership

revitalisation to yield improved leadership, management, organisational

structure, organisational alignment and culture.

Reorganisation is invariably required to ensure success of the other

turnaround strategies viz. strategic repositioning, revenue enhancement,

cost reduction or asset reduction.

Depending on the turnaround situation, reorganisation can be limited to

leadership alignment, and better management systems for planning and

control of the company.

Often, however, the extent of reorganisation required goes as far as

changes in top management and in the organisational structure.
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In turnaround management it is therefore imperative to resolve the

financial crisis, and rapidly show an impact on cash flow and the bottom

line to prove survivability.

Selection of turnaround strategies therefore has to heed turnaround

phasing requirements, typically:

Stabilise the business, and execute first-stage restructuring such asreorganisation, cost reduction and working capital reduction using short-

term or internally generated finance.

Having gained the support and confidence of stakeholders, embark on themajor restructuring programme involving revenue enhancement and

strategic repositioning using finance of a longer-term nature.

5. RetrenchmentThe Retrenchment strategy of the turnaround management describes wide-ranging short-term actions, to reduce financial losses, to stabilize the companyand to work against the problems, that caused the poor performance. Theessential content of the Retrenchment strategy is therefore to reduce scope andthe size of a business. This can be done by selling assets, abandoning difficultmarkets, stopping unprofitable production lines, downsizing and outsourcing.

These procedures are used to generate resources, with the intention to utilizethose for more productive activities, and prevent financial losses. Retrenchmentis therefore all about an efficient orientation and a refocus on the core business.Despite that many companies are inhibited to perform cutbacks, some of themmanage to overcome the resistance. As a result they are able get a better marketposition in spite of the reductions they made and increase productivity andefficiency. Most practitioners even mention, that a successful turnaroundwithout a planned retrenchment is rarely feasible.

6.Repositioning

The Repositioning strategy, also known as entrepreneurial strategy, its mainfocus is to generate revenue with new innovations and change in productportfolio and market position. This includes the development of new products,entering new markets, extrapolating alternative sources of revenue andmodifying the image or the mission of a company.
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7.Replacement

Replacement is a strategy, where top managers or the Chief Executive Officer(CEO) are replaced by new ones. This turnaround strategy is used, because it is

theorized that new managers bring recovery and a strategic change, as a resultof their different experience and backgrounds from their previous work. It isalso indispensable to be aware, that new CEOs can cause problems, which are

obstructive to achieve a turnaround. For an example, if they change effectiveorganized routines or introduce new administrative overheads and guidelines.Replacement is especially qualified for situations with opinionated CEOs,

which are not able to think impartial about certain problems. Instead they relyon their past experience for running the business or belittle the situation asshort-termed. The established leaders fail therefore to recognize that a change inthe business strategy is necessary to keep the company viable. There are alsosituations, where CEOs do notice that a current strategy isnt successful as itshould be. But this hasnt to imply, that they are capable or even qualified

enough to accomplish a turnaround. Is a company against a Replacement of aleader, could this end in a situation, where the declining process will becontinued. As result qualified employees resign, the organisation discredits andthe resources left will run out as time goes by.

8. Renewal

With a Renewal a company pursues long-term actions, which are supposed toend in a successful managerial performance. The first step here is to analyse theexisting structures within the organisation. This examination may end with aclosure of some divisions, a development of new markets/ projects or anexpansion in other business areas. A Renewal may also lead to consequenceswithin a company, like the removal of efficient routines or resources. On theother hand are innovative core competencies implemented, which conclude inan increase of knowledge and a stabilization of the company value.


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Hurdles or Challenges

Three critical hurdles or challenges that management faces in any repositioningprogram

1. Design: What type of restructuring is appropriate for dealing with the specificchallenge, problem, or opportunity that the company faces?

2. Execution: How should the restructuring process be managed and the manybarriers to restructuring overcome so that as much value is created as possible?

3. Marketing: How should the restructuring be explained and portrayed toinvestors so that value created inside the company is fully credited to its stockprice?

B. MERGER AND ACUISITION- LIVE EXAMPLE

Defining M&A

The Main Idea One plus one makes three: this equation is the special alchemy

of a merger or an acquisition. The key principle behind buying a company is to

create shareholder value over and above that of the sum of the two companies.

Two companies together are more valuable than two separate companies - at

least, that's the reasoning behind M&A. This rationale is particularly alluring tocompanies when times are tough. Strong companies will act to buy other

companies to create a more competitive, cost-efficient company. The companies

will come together hoping to gain a greater market share or to achieve greater

efficiency. Because of these potential benefits, target companies will often agree

to be purchased when they know they cannot survive alone.

Distinction between Mergers and Acquisitions

Although they are often uttered in the same breath and used as though they weresynonymous, the terms merger and acquisition mean slightly different things.

When one company takes over another and clearly established 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" 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." Bothcompanies' stocks are surrendered and new company stock is issued in its place.


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For example, both Daimler-Benz and Chrysler ceased to exist when the two

firms merged, and a new company, DaimlerChrysler, was created. In practice,

however, actual mergers of equals don't happen very often. Usually, one

company will buy another and, as part of the deal's terms, simply allow the

acquired firm to proclaim that the action is a merger of equals, even if it's

technically an acquisition. Being bought out often carries negative connotations,

therefore, by describing the deal as a merger, deal makers and top managers try

to make the takeover more palatable.

A purchase deal will also 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.

Whether a purchase is considered a merger or an acquisition really depends on

whether the purchase is friendly or hostile and how it is announced. In other

words, the real difference lies in how the purchase is communicated to and

received by the target company's board of directors, employees and

shareholders.

Merger and acquisition has become the most prominent process in the corporate

world. The key factor contributing to the explosion of this innovative form ofrestructuring is the massive number of advantages it offers to the business

world.

Following are some of the knownadvantages of merger and acquisition:

The very first advantage of M&A is synergy that offers a surplus powerthat enables enhanced performance and cost efficiency. When two or

more companies get together and are supported by each other, the

resulting business is sure to gain tremendous profit in terms of financial

gains and work performance.

Cost efficiency is another beneficial aspect of merger and acquisition.This is because any kind of merger actually improves the purchasing

power as there is more negotiation with bulk orders. Apart from that staff

reduction also helps a great deal in cutting cost and increasing profit

margins of the company. Apart from this increase in volume of


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production results in reduced cost of production per unit that eventually

leads to raised economies of scale.

With a merger it is easy to maintain the competitive edge because thereare many issues and strategies that can e well understood and acquired bycombining the resources and talents of two or more companies.

A combination of two companies or two businesses certainly enhancesand strengthens the business network by improving market reach. This

offers new sales opportunities and new areas to explore the possibility of

their business.

With all these benefits, a merger and acquisition deal increases the marketpower of the company which in turn limits the severity of the toughmarket competition. This enables the merged firm to take advantage of

hi-tech technological advancement against obsolescence and price wars.

Types of Mergers and Acquisitions

There are many types of mergers and acquisitions that redefine the business

world with new strategic alliances and improved corporate philosophies. Fromthe business structure perspective, some of the most common and significant

types of mergers and acquisitions are listed below:

1. Horizontal MergerThis kind of merger exists between two companies who compete in the same

industry segment. The two companies combine their operations and gains

strength in terms of improved performance, increased capital, and enhanced

profits. This kind substantially reduces the number of competitors in thesegment and gives a higher edge over competition.

2. Vertical MergerVertical merger is a kind in which two or more companies in the same industry

but in different fields combine together in business. In this form, the companies

in merger decide to combine all the operations and productions under one

shelter. It is like encompassing all the requirements and products of a single

industry segment.


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3. Co-Generic MergerCo-generic merger is a kind in which two or more companies in association are

some way or the other related to the production processes, business markets, or

basic required technologies. It includes the extension of the product line oracquiring components that are all the way required in the daily operations. This

kind offers great opportunities to businesses as it opens a hue gateway to

diversify around a common set of resources and strategic requirements.

4. Conglomerate MergerConglomerate merger is a kind of venture in which two or more companies

belonging to different industrial sectors combine their operations. All the

merged companies are no way related to their kind of business and product linerather their operations overlap that of each other. This is just a unification of

businesses from different verticals under one flagship enterprise or firm. There

are two types of mergers that are distinguished by how the merger is financed.

Each has certain implications for the companies involved and for investors:

o Purchase Mergers - As the name suggests, this kind of merger occurs when

one company purchases another. The purchase is made with cash or through the

issue of some kind of debt instrument; the sale is taxable. Acquiring companies

often prefer this type of merger because it can provide them with a tax benefit.

Acquired assets can be written-up to the actual purchase price, and the

difference between the book value and the purchase price of the assets can

depreciate annually, reducing taxes payable by the acquiring company. We will

discuss this further in part four of this tutorial.

o Consolidation Mergers - With this merger, a brand new company is formed

and both companies are bought and combined under the new entity. The tax

terms are the same as those of a purchase merger.

5. Market-extension mergerTwo companies that sell the same products in different markets.

6. Product-extension mergerTwo companies selling different but related products in the same market.

AcquisitionsAs you can see, an acquisition may be only slightly different froma merger. In fact, it may be different in name only. Like mergers, acquisitions


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are actions through which companies seek economies of scale, efficiencies and

enhanced market visibility. Unlike all mergers, all acquisitions involve one firm

purchasing another - there is no exchange of stock or consolidation as a new

company. Acquisitions are often congenial, and all parties feel satisfied with the

deal. Other times, acquisitions are more hostile. In an acquisition, as in some of

the merger deals we discuss above, a company can buy another company with

cash, stock or a combination of the two. Another possibility, which is common

in smaller deals, is for one company to acquire all the assets of another

company. Company X buys all of Company Y's assets for cash, which means

that Company Y will have only cash (and debt, if they had debt before). Of

course, Company Y becomes merely a shell and will eventually liquidate or

enter another area of business. Another type of acquisition is a reverse merger, a

deal that enables a private company to get publicly-listed in a relatively short

time period. A reverse merger occurs when a private company that has strong

prospects and is eager to raise financing buys a publicly-listed shell company,

usually one with no business and limited assets. The private company reverse

merges into the public company, and together they become an entirely new

public corporation with tradable shares. Regardless of their category or

structure, all mergers and acquisitions have one common goal: they are all

meant to create synergy that makes the value of the combined companies

greater than the sum of the two parts. The success of a merger or acquisition

depends on whether this synergy is achieved.

Valuation

The number as well as the average size of merger and acquisition deals is

increasing in India. During post liberalization, increase in domestic competition

and competition against cheaper imports have made organizations merge

themselves to reap the benefits of a large-sized company. The merger and

acquisition valuation is the building block of a proposed deal. It is a technical

concept that needs to be estimated carefully.

The use of different valuation techniques and principles has made valuation a

subjective process. A conflict in the choice of technique is the main reason for

the failure of many mergers. For instance, the asset value can be determined

both at the market price and the cost price. Therefore, it is important that the

merging parties should first discuss and agree upon the methods of valuation.


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Investors in a company that is aiming to take over another one must determine

whether the purchase will be beneficial to them. In order to do so, they must ask

themselves how much the company being acquired is really worth.

Naturally, both sides of an M&A deal will have different ideas about the worthof a target company: its seller will tend to value the company at as high of a

price as possible, while the buyer will try to get the lowest price that he can.

There are, however, many legitimate ways to value companies. The most

common method is to look at comparable companies in an industry, but deal

makers employ a variety of other methods and tools when assessing a target

company. Here are just a few of them:

1. Comparative Ratios - The following are two examples of the manycomparative metrics on which acquiring companies may base their offers:

A. Price-Earnings Ratio (P/E Ratio) - With the use of this ratio, an

acquiring company makes an offer that is a multiple of the earnings of the

target company. Looking at the P/E for all the stocks within the same

industry group will give the acquiring company good guidance for what

the target's P/E multiple should be.

B. Enterprise-Value-to-Sales Ratio (EV/Sales) - With this ratio, the

acquiring company makes an offer as a multiple of the revenues, again,

while being aware of the price-to-sales ratio of other companies in the

industry.

2. Replacement Cost - In a few cases, acquisitions are based on the cost ofreplacing the target company. For simplicity's sake, suppose the value of acompany is simply the sum of all its equipment and staffing costs. Theacquiring company can literally order the target to sell at that price, or it willcreate a competitor for the same cost. Naturally, it takes a long time to assemblegood management, acquire property and get the right equipment. This method

of establishing a price certainly wouldn't make much sense in a service industrywhere the key assets - people and ideas - are hard to value and develop.

3. Discounted Cash Flow (DCF)- A key valuation tool in M&A, discountedcash flow analysis determines a company's current value according to itsestimated future cash flows. Forecasted free cash flows (operating profit +depreciation + amortization of goodwillcapital expenditurescash taxes -change in working capital) are discounted to a present value using thecompany's weighted average costs of capital (WACC). Admittedly, DCF is

tricky to get right, but few tools can rival this valuation method.


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Break Ups

As mergers capture the imagination of many investors and companies, the idea

of getting smaller might seem counterintuitive. But corporate break-ups, or de-

mergers, can be very attractive options for companies and their shareholders.

Advantages

The rationale behind a spinoff, tracking stock or carve-out is that "the parts are

greater than the whole." These corporate restructuring techniques, which

involve the separation of a business unit or subsidiary from the parent, can help

a company raise additional equity funds. A break-up can also boost a company's

valuation by providing powerful incentives to the people who work in the

separating unit, and help the parent's management to focus on core operations.Most importantly, shareholders get better information about the business unit

because it issues separate financial statements. This is particularly useful when a

company's traditional line of business differs from the separated business unit.

With separate financial disclosure, investors are better equipped to gauge the

value of the parent corporation. The parent company might attract more

investors and, ultimately, more capital. Also, separating a subsidiary from its

parent can reduce internal competition for corporate funds. For investors, that's

great news: it curbs the kind of negative internal wrangling that can compromisethe unity and productivity of a company. For employees of the new separate

entity, there is a publicly traded stock to motivate and reward them. Stock

options in the parent often provide little incentive to subsidiary managers,

especially because their efforts are buried in the firm's overall performance.

Disadvantages

That said, de-merged firms are likely to be substantially smaller than their

parents, possibly making it harder to tap credit markets and costlier finance thatmay be affordable only for larger companies. And the smaller size of the firm

may mean it has less representation on major indexes, making it more difficult

to attract interest from institutional investors. Meanwhile, there are the extra

costs that the parts of the business face if separated. When a firm divides itself

into smaller units, it may be losing the synergy that it had as a larger entity. For

instance, the division of expenses such as marketing, administration and

research and development (R&D) into different business units may cause

redundant costs without increasing overall revenues.


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Restructuring Methods

There are several restructuring methods: doing an outright sell-off, doing an

equity carve-out, spinning off a unit to existing shareholders or issuing tracking

stock. Each has advantages and disadvantages for companies and investors. Allof these deals are quite complex.

Sell-Offs

A sell-off, also known as a divestiture, is the outright sale of a company

subsidiary. Normally, sell-offs are done because the subsidiary doesn't fit into

the parent company's core strategy. The market may be undervaluing the

combined businesses due to a lack of synergy between the parent and

subsidiary. As a result, management and the board decide that the subsidiary isbetter off under different ownership.

MERGERS AND ACQUISITION STRATEGIES

Strategies play an integral role when it comes to merger and acquisition. A

sound strategic decision and procedure is very important to ensure success and

fulfilling of expected desires. Every company has different cultures and follows

different strategies to define their merger. Some take experience from the past

associations, some take lessons from the associations of their known businesses,

and some hear their own voice and move ahead without wise evaluation and

examination.

Following are some of the most essential strategies of merger and acquisition

that can work wonders in the process:

The first and foremost thing is to determine business plan drivers. It isvery important to convert business strategies to set of drivers or a source

of motivation to help the merger succeed in all possible ways.

There should be a strong understanding of the intended business market,market share, and the technological requirements and geographic location

of the business. The company should also understand and evaluate all the

risks involved and the relative impact on the business.


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Then there is an important need to assess the market by deciding thegrowth factors through future market opportunities, recent trends, and

customer's feedback.

The integration process should be taken in line with consent of themanagement from both the companies venturing into the merger.

Restructuring plans and future parameters should be decided withexchange of information and knowledge from both ends. This involves

considering the work culture, employee selection, and the working

environment as well.

At the end, ensure that all those involved in the merger includingmanagement of the merger companies, stakeholders, board members, andinvestors agree on the defined strategies. Once approved, the merger can

be taken forward to finalizing a deal.

MERGERS AND ACQUISITIONS IN INDIA

Global M&A is one of the most happening and fundamental element of

corporate strategy in today's world. Many companies around the world have

merged with each other with a motive to expand their businesses and enhance

revenue.

In the span of few years there are many companies coming together for

betterment across the globe. Recent mergers and acquisitions 2011 are Lipton

Rosen & Katz in New York, Sullivan & Cromwell LLP in New York, Slaughter &

May in London, Mallesons Stephen Jaques in Sydney, and Osler Hoskin &

Harcourt LLP in Toronto.

Even in India merger and acquisition has become a fashion today with a cut

throat competition in the international market. There are domestic deals like

Penta homes acquiring Agro Dutch Industries, ACC taking over Encore Cement

and Addictive, Dalmia Cement acquiring Orissa Cement, Edelweiss Capital

acquiring Anagram Capital. All these are recent merger and acquisition 2010

valued at about USD 2.16 billion.

Apart from these there are other successful mergers in India as follows:


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Tata Chemicals took over British salt based in UK with a deal of US $ 13billion. This is one of the most successful recent mergers and acquisitions

2010 that made Tata even more powerful with a strong access to British

Salt's facilities that are known to produce about 800,000 tons of pure

white salt annually.

Merger of Reliance Power and Reliance Natural Resources with a deal ofUS $11 billion is another biggest deal in the Indian industry. This merger

between the two made it convenient and easy for the Reliance power to

handle all its power projects as it now enjoys easy availability of natural

gas.

Airtel acquired Zain in Africa with an amount of US $ 10.7 billion to setnew benchmarks in the telecom industry. Zain is known to be the third

largest player in Africa and being acquired by Airtel it is deliberately

increasing its base in the international market.

ICICI Bank's acquisition of Bank of Rajasthan at aout Rs 3000 Crore is agreta move by ICICI to enhance its market share across the Indian

boundaries especially in northern and western regions.

Fortis Healthcare acquired Hong Kong's Quality Healthcare Asia Ltd foraround Rs 882 Crore and is now on move to acquire the largest dental

service provider in Australia, the Dental Corp at about Rs 450 Crore.

Holcim's Acquisitions in 2005

Abstract:

The case explains the two acquisitions

made by Holcim, the Switzerland-based

cement company, in 2005. These two

acquisitions were the India-based

Associate Cement Companies (ACC) and

the UK-based Aggregate Industries (AI).

While the deal with AI increased

shareholder value and involved two

parties, the deal with ACC was relatively

more complex. Holcim entered into an

alliance with Gujarat Ambuja Cement


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Limited (GACL) to acquire ACC.

The case explains how the deal was

structured and how it gave the companies

involved certain operational advantages.

The case also covers the criticisms that

were raised against the deal.

Details pertaining to other acquisitions carried out by Holcim in the late 1990s

and the early 2000s are also mentioned in the case.

Issues:

Why companies go in for acquisitions alliances.

How strategies alliances/acquisitions create value.

How market maturity of a company affects its acquisition decisions.

Introduction

In 2005, the Glaris, Switzerland-based Holcim Group (Holcim), was one of the

world's leading suppliers of cement, aggregates and ready-mix concrete. It held

majority and minority stakes in a number of companies in more than 70

countries.

Holcim was also involved in consulting and trading services related to

engineering. In 2004, the company had sales of CHF 13,215 million and a net

income of CHF 914 million. Holcim adopted the inorganic growth strategy andwas on an acquisition spree in the 1990s and 2000s. In 2005, Holcim acquired

Aggregate Industries (AI) based in Leicestershire, UK and Associated Cement

Companies Ltd (ACC) in India.

Holcim's acquisition strategy was based on the level of maturity of the market

where the acquired companies were located .

AI, which was a supplier of aggregates, asphalt and ready-mix concrete, addedvalue to Holcim's operations through integration in mature markets like the US


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and UK, while ACC was meant to bring in sustained revenues to Holcim due to

the potential of the cement industry in an emerging economy like India, where

demand for cement was increasing at a higher pace than in Europe and the

United States

BACKGROUND

Holcim was founded in 1912 in the village of Holderbank7 in Switzerland, andin a decade it expanded to other European markets by investing in a number ofcement companies. It invested in African countries like South Africa, and Egyptin the 1930s.

In the 1950s and 1960s, Holcim invested in the North American markets. The

following decades saw the company entering the Asia Pacific region.

Over the years Holcim has increased its stake in a number of companies throughwhich it has been operating in a number of markets. In 2001, it increased itsstake in PT Semen Cibinong Tbk8 from 12.5% to 75%.

In the same year, Holcim acquired 70% of Novi Popovac Cement Factory's

share capital in Serbia.

In 2003, the company took over Cementos de Hispania SA of Spain. In thesame year the company also acquired a Cyprus-based cement company, BogazMadencilik.

In Bulgaria, Holcim went ahead with the acquisition of Plevenski Cement ADfrom the Greece-based Titan Cement Company SA in December 2003.

In January 2004, Holcim announced that it has increased its stake in the

Moscow-based Alpha Cement JSC to 68.8%. In 2004, the company also

acquired Rohrbach Zement & Co. KG at Baden-Wurttemberg, Germany. In

2005, Holcim acquired AI and ACC.

The company's operating segments included cement/clinker,

aggregates/concrete and other products/services. Holcim implemented a long-

term growth strategy. It strengthened its position as an integrated supplier of

building materials by expanding its market presence through strategic

acquisitions...

Acquiring AI


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About AI

In 2003, AI produced 66.4 million tonnes of aggregates, 11.8 million tonnes

of asphalt, 7.0 million cubic metres of ready-mix concrete and 3.7 million

tonnes of pre-cast concrete products. With operations in UK, US, Norwayand Channel Islands, the company employed over 8,600 people working in

more than 650 locations by the end of 2003. Half of the company's revenues

came from the US.

In 2003, AI's revenues increased to 1,459 million from 1,378.2 million in

2002. The company reported a seventh successive year of profit with profit

before tax increasing to 140.1 million in 2003 from 134.5 million in 2002.

Acquiring ACC

Background of the Deal

The cement industry in India was so highly fragmented that even in 2004, the

146.38 MT of installed capacity under large plants category was controlled by

as many as 55 companies. With an installed capacity of approximately 150 MT

in 2005, the Indian cement industry in 2004-05 was the second largest cement

producer in the world accounting for approximately 6% of the global

production.

Outlook

Not only did the deals with AI and ACC result in Holcim's entry into the two

attractive markets of UK and India, but it also brought in immediate revenues to

Holcim. The two acquisitions helped Holcim to achieve increased capacity and

sales in all the product and geographic segments.

"Animation has always been the heart and soul of the Walt Disney Company

and it is wonderful to Bob Iger and the company embrace that heritage by

bringing the outstanding animation talent of the Pixar team back into the fold."3

- Roy Disney Jr. in 2006.

Introduction
http://www.icmrindia.org/casestudies/catalogue/Business%20Strategy/Disney's%20Acquisition%20of%20Pixar.htm#bot3http://www.icmrindia.org/casestudies/catalogue/Business%20Strategy/Disney's%20Acquisition%20of%20Pixar.htm#bot3http://www.icmrindia.org/casestudies/catalogue/Business%20Strategy/Disney's%20Acquisition%20of%20Pixar.htm#bot3


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On January 24, 2006, the US based media and entertainment company - Walt

Disney Company (Disney) announced that it would acquire its animation

partner, Pixar for US$ 7.4 billion in stock. Disney had been in partnership for

producing and distributing animation films with Pixar since 1991. In January

2004, owing to differences with Disney's then CEO Michael Eisner (Eisner),

Pixar had announced that it would partner with another distribution company in

2006.

But Robert Iger (Iger), who took over from Eisner on September 30, 2005,

revived talks with Pixar and finally succeeded in acquiring it. The deal

expected to be finalized by May 2006 would make Steve Jobs (Jobs), CEO

of Apple Computer Inc. (Apple), the major shareholder in Disney with an

equity stake of approximately 7%. This was because Jobs had a 50.6%equity stake in Pixar. He would also become a member of Disney's Board of

Directors. Even after the merger, Disney and Pixar were to work from their

separate headquarters at Burbank, and Emeryville (both in California),

respectively.

Disney's press release said, "This acquisition combines Pixar's preeminent

creative and technological resources with Disney's unparalleled portfolio of

world-class family entertainment, characters, theme parks and other franchises,

resulting in vast potential for new landmark creative output and technological

innovation that can fuel future growth across Disney's businesses."Analysts said

that the deal was more important to Disney than to Pixar.

While all of Pixar's films like Toy Story, The Incredibles and FindingNemo were

successful, Disney's animation films like Treasure Planet, Home on the Range and

Brother Bearhad performed below expectations. Some analysts felt that the deal

was priced a bit higher than expected. In the US$ 7.4 billion deal, Disney got a

library of six Pixar films. This seemed expensive for Disney, especially whencompared to Viacom's acquisition of DreamWorks SKG in December 2005, which

had 59 films, for US$ 1.6 billion. However, according to Nelson Gayton, Professor

at Wharton, "Any premium that Disney might have paid for the Pixar acquisition

must also be evaluated in light of the nature of the animation content that Pixar

produces and the distribution possibilities it offers via new technologies."

Industry analysts were of the view that, apart from gaining access to Pixar's technology,

it was important that Disney got a person of the caliber of Jobs on its board. Asserting

this, Tim Bajarin, President, Creative Strategies said, "His biggest impact will be to


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help guide Disney into the digital age and be the mediator of this major media

company's content to the world of next-generation digital content delivery."

Background Note

Disney

n 1923, Walt Elias Disney (Walt)arrived in California from Kansas City, bringing with

im an animation film,Alice's Wonderland.On October 16, 1923, M.J Winkler (Winkler),

distributor, agreed to distribute the Alice Comedies and bought each character for US$

,500. This marked the beginning of Disney Brothers Cartoon Studio, with Walt's brother

Roy Disney (Roy) sharing an equal partnership in the venture. Later, the name was

hanged to Walt Disney Studio. In 1927, after makingAlice Comedies for four years, Waltreated a new character called Oswald the Lucky Rabbitto start a new animation series. By

his time, Winkler had handed over the business to her husband Charles Mintz (Mintz).

After a year, as Oswald gained popularity, Walt tried to re-negotiate his contract for higher

money. However, by that time, Mintz had poached Walt's employees to create an Oswald's

eries in his own studio. Walt also learned that he did not legally own the rights for

Oswald. When Mintz demanded that Walt should work exclusively for him, Walt refused

nd parted ways.

After his break-up with Mintz, Walt wanted to create a character stronger than Oswald. He

isualized a new character in the form of a mouse and planned to name it 'Mortimer,' but

n his wife's suggestion changed it to 'Mickey.' This marked the birth of the world famous

Mickey Mouse' (Mickey). Initially, it was not easy for Walt to sell the new Mickey to the

istributors as it had to compete with the popular Felix the Cat and Oswald. Walt's first

nimation film featuring Mickey, Plane Crazy (released in May 1928), failed to impress

he audience who felt that Mickey resembled Oswald closely. Walt created the second

Mickey feature film titled The llopin' Gaucho, but couldn't find distributors.


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The Disney-Pixar Partnership

n May 1991, Disney entered into an agreement with Pixar for developing and producing

hree computer animated feature films. According to the agreement, Disney agreed to

roduce movies to be developed and directed by Pixar's John Lasseter. Disney agreed to

market and distribute these movies.

Pixar was to receive compensation based on the revenue obtained from distributing these fi

elated products. Including distribution fees, Disney was to get 87% of the distribution proc

elt that the agreement gave Pixar an expert partner in the film business with great marketinThe first film under the agreement was Toy Story which was released in November 1995. I

omputer animated feature film that was of one hour and twenty one minutes duration. The

uge success and generated over US$ 360 million in worldwide revenues. After the release

Disney extended its partnership with Pixar to a co-production agreement in 1997, under wh

greed to produce five original computer-animated feature films, in a span of ten years...

The Acquisition

n March 2005, the Disney Board elected Iger as the company's CEO to succeed Eisner on

eptember 30, 2005. Iger got a call from Jobs who hinted at a possible discusion on

working together again. Analysts felt that Iger would find it difficult to strike a new deal as

roposed by Jobs as it was heavily loaded in favor of Pixar.

However, Iger adapted the proposal his own way. He asked for Disney's content to be

istributed over the Internet through Apple's online store - iTunes. In October 2005, Iger

nd Jobs signed a deal to sell the past and current episodes of television shows of its ABC

nd Disney channels through iTunes. It started with five shows which included the popularhows Desperate Housewives and Lost. Jobs was pleased with the Iger's suggestion of

inking up to offer videos through iTunes. Iger said that the deal with Apple was finalized

n just three days. Meanwhile, Jobs also started re-negotiating on the Disney-Pixar

greement. With this rapprochement, there was speculation that Disney might acquire

Pixar.


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The Rationale

Analysts said this deal was more important to Disney than to Pixar. For Disney, the

cquisition gave it ownership of the world's most famous computer animation studio and

ts talent, with whom it had teamed up to create block busters since the 1990s.

The timing was also perfect as its own animation films had failed one after another. Its first

ull computer animation film Chicken Little (released in November 2005) fared only

marginally well. The deal would bring the technology company Apple (through Steve

obs) closer to Disney, and Iger could further increase the digital content that was being

ffered through Apple. Analysts said that having Jobs on the Disney board would certainly

ive the company the necessary technology edge and direction. Further, with Lasseter, thereative genius behind Pixar's block busters, in charge of the new division, Disney would

et the necessary push in creativity which it seemed to lack in recent times.

The Road Ahead

On the several benefits Disney would derive, Nelson Gayton, Professor at Wharton School

f Business said, "I believe that the acquisition of Pixar was of utmost strategic importance

o Disney, not only because of where Disney's previous distribution relationship with Pixar

eemed headed, but also because of Pixar's potential value to Disney's 'familyntertainment' brand and assets, like theme parks and television, that feed off this brand."

While there were several possible synergies that could arise from the acquisition, there

were also some potential trouble spots for Disney. The rise of Jobs to the Disney board as

he single largest shareholder could become a major worry for Iger as Jobs was slightly

npredictable. The merger, in place of the partnership with Pixar, might make Iger second

o the powerful and experienced Jobs. An industry analyst termed the move bold but

redicted that Iger might leave Disney in a year, saying, "Iger just put a gun to his head."

Analysts felt Iger had to be careful as he was still trying to create his own identity after

eing under the shadow of Eisner, who had been at the helm for more than twenty years...

turn around mgmt & merger

Documents