Mergers & Acquisitions

Corporate Strategies in M&A

Why?
Gain market share Economies of scale Enter new markets Acquire technologies Strategic Benefit Complementary resource Tax shields Utilisation of surplus funds Managerial Effectiveness Integrate vertically

Why not?

Grasping for a company simply because its on the market, or because a competitor wants to buy it . Overpayment or misguided purchase Reduce cost of debt. Diverse Business; Unmanageable Leaping without looking at the value; WinWin or no deal Inability to integrate well.

Corporate Strategies in M&A

Exploit market power, economies of scale & scope, and market inefficiencies
Related industries - Horizontal -Jet-Sahara Same industry/ Different market (Conglomerate) -LIC-UTI Bank

Same industry/ Same market - Consolidation

Suppliers -Vertical -ITC

Mechanics of a Merger

Legal Procedure
The MOA to be scrutinised Intimation to Stock Exchanges Approval of draft amalgamation proposal Application to the Court Notice to shareholders and creditors Filing the order Transfer of assets and liabilities Issue of shares and debentures

Mechanics of Merger (Contd)

Tax Aspects
Section 2(a) of the Income Tax Act defines amalgamation Depreciation for tax purposes Accumulated losses Unabsorbed Depreciation Capital Gains Tax Accounting for Amalgamation is done according to Accounting Standard 14 (AS-14) issued by the Institute of Chartered Accountants of India

Costs & Benefits

When firm A acquires firm B, A is making a capital investment while B is making capital divestment based on NPV method Benefit = PV(AB) {PV(A) + PV(B)} Cost = Cash PV(B) NPV to A= Benefit Cost NPV to B= Cash PV(B)

Screening Potential Deals

Never stop looking Constantly scanning marketplace Be diligent and disciplined Do not simply react whenever IBanks contact you Look at various potentials in the market, not just the deal at hand Dont cast strategy aside in the face of an exciting opportunity

Cant make a good stew unless you have good ingredients shop around to find the best ingredients
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Due Diligence

Look for the devil in the details A 360 approach

external-internal . peel the onion! past-present-future scenario modeling on synergy assumptions

Link due diligence with business planning

Look for the devils in the details!

Industry / Markets Customers / Partners Competition People Suppliers Customer & Vendor Contracts Operations & Support Pricing and discounts Finance, Accounting & Taxes
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Look for the devils in the details!

Contingent Liabilities Corporate Controls Intellectual Properties Human Resources Legal IT infrastructure & applications Insurance Synergy Assumption Testing!!
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Valuation

No magic formula Future cash flow Earnings estimates Assumption modeling Due diligence findings Synergy Set limits and stick to financial discipline Maintain reasonable and realistic expectations
This deal is strategic dont worry, its all going to work out in the end no matter what price we pay.

X Rationalization:

Wisdom: If you stumble across too many red flags while evaluating
a business, walk away!
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Making the Deal Happen

Identify the details critical to the deals success

Use early negotiations to foster a sense of trust with the targets top executives
Know who have influence on the deal target company and your company Dont focus on the price yet Keeping a foot on the brakes

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Making the Deal Good

Negotiate on several fronts simultaneously

Make sure you have alternatives to this deal Anticipate the competition Close quickly after setting final terms

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Making the Deal Good

PR: External & internal Integration Realizing the synergy dream

Talent

Culture
Structure Technology

Discovering

and leveraging the unknown and unexpected treasures

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Are You the Strongest Acquirer?

Ability to realize synergies Financing capacity Ability to make quick decisions Attractiveness of currency Reputation

Negotiations People treatment Integration

Post-acquisition performance record

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Jargons to understand
Net Present Value Exchange Ratio Price per share Price Earning multiple Earnings Number of Shares/ Debentures Free Cash Flow Market price to Book Value ratio

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SEBI Guidelines
Notification Trigger point for public offer Offer price Contents of Public announcement

To ensure transparency, greater disclosures and protect the interests of small shareholders.

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HOT DEALS
Mittal- Arcelor SBI- GE ICICI- Sangli Bank United Breweries- Shaw Wallace Tata- Corus Jet- Sahara LIC may buy UTI Bank ( FE, 13.04.2007)

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Air Sahara in Jet Air Fold

Deal for Rs 1450 crore, 40% less than the deal in Jan 2006. NPV of Price is Rs 1200 crore. Rs 200 crore debt of Air Sahara will increase the acquisition cost. The merged entity will have a market share of 42% (largest domestic private ) Buyout helps Jet Air to go International.

Source: Financial Dailies

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M & A Valuations to come under lens

Institute of Independent Valuers to be set up to standardize techniques and procedures.

Sources: Financial Express, dated 16.04.2007 Financial Management by Prasanna Chandra

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