Mergers & Acquisitions

By Prof. p.m.nayak

Course Contents
Introduction

to M&A
Reasons for M&A
Take Over Code
Due Diligence
Valuations
Take Over Defenses
Leveraged Buyouts
Post Merger Issues

Lets start with what our class thinks about M&A.

M&A is a tool used by companies to perform corporate restructuring.

Is there a difference in merger and acquisition or are they a part of

the same activity?

Merger is defined as a process where in two or more companies

combine in such a way that the target company loses its identity
(absorption) or a completely new company is formed with both
companies losing their identity (consolidation).

IPCLs merger with Reliance Industries is a merger by absorption. HCL

was formed by consolidation of three companies Hindustan
Computers Ltd, Hindustan Instruments and Software Company and
Indian Reprographics Ltd.

So how are Acquisitions different?

The basic differentiating factor is that none of the companies looses its identity.
In an acquisition, the company may not necessarily loose its identity.

An acquisition is defined as an act of acquiring effective control by one

company over assets or management of another company without any
combination of companies. Both companies remain separate legal entities with
a possible change in management control.

ArcelorMittal recently acquired 14.9% stake in Australia based Macarthur Coal.

Idea recently acquired 40.9% stake in Spice Telecom.

To summarize, both activities have the same objective corporate restructuring

to help inorganic growth. That is why they are mentioned in the same league.

A general overview of M&A

Identify potential target company

Immediately involve Investment bankers for expertise
Get investment bankers into the deal by signing a Non-Disclosure Agreement
Share broad financing plans and way forward with respect to the acquisition
Assess debt capacity of company /target and decide on financing route

Arrange for Bridge loan financing towards the deal for the next 12 months or so
Proceed with the deal, focusing on the synergies and benefits
Refinance acquisition Rights Issue, Placements, Convertible Debt, Debt
A successful M&A deal ???

M&A
Origination

M&A
Execution

From an Indian Perspective

Laws in India use the term 'amalgamation' for merger.

The Income Tax Act,1961 [Section 2(1A)] defines amalgamation as the

merger of one or more companies with another or the merger of two or
more companies to form a new company, in such a way that all assets and
liabilities of the amalgamating companies become assets and liabilities of
the amalgamated company and shareholders not less than nine-tenths in
value of the shares in the amalgamating company or companies become
shareholders of the amalgamated company.

The Companies Act 1956, The Income Tax Act 1961, The FEMA 1999, and
The Competition Act 2002 cover all transactions pertaining to M&A in India.

SEBI overviews all M&A transactions which are related to Capital Markets.

M&A can get hostile...

When M&A is done with the approval of the target company, it is called
a Friendly Takeover.

Merger of Business Objects with SAP was a friendly takeover.

When the target companys management disapproves the merger or

acquisition, it is called Hostile Takeover.

ArcelorMittal is the classic example of a Hostile Takeover.

Malcolm Glazer forced his way to 98% holding in Manchester United

shares to finally de list the company.

What about reverse mergers?

When in a merger, the smaller or weaker company retains its identity it is

called a reverse merger.

When a private company merges a public company, it is also called a

reverse merger. The private company acquires a weaker listed company to
avoid the process of going through an IPO.

Three good examples of reverse mergers in India :

Tata Corus
ICICI with ICICI Bank ( We will discuss this example with a case study later in the
lecture)
IDBI with IDBI Bank

Letting them go ..

Spin-Off : The creation of an independent company through the sale or

distribution of new shares of an existing business/division of a
parent company. A spin-off is a type of divestiture.

Hewlett Packard spun off Agilent Technologies into a fully independent

company focusing on high-growth markets in communications,
electronics and life sciences. The shareholders of HP received
proportionate shares in the new entity.

In Australia, a spin off occurs when the company spins off a division
and generates cash for shareholders rather than giving shares to
shareholders.

Worked on a deal where the an airline wanted to spin off its frequent
flyer program by selling 40% stake in the division.

Letting them go ..

A demerger is a form of restructure in which owners of interests in the

head entity (shareholders or unit-holders) gain direct ownership in an
entity that they formerly owned indirectly (the demerged entity).

Zee Telefilms de-merging its business into four entities in 2006 Zee
News Limited, Wire and Wireless India Limited, Dish TV and Zee
Entertainment Enterprise Limited. Shareholders were offered shares in
all four companies.

Split Off is a rare situation whereby the stock of a subsidiary is

exchanged for shares in a parent company. Viacom announced a split off of its interest in

Blockbuster in 2004 whereby Viacom offered its shareholders stock in Blockbuster in exchange for an appropriate amount of
Viacom stock.

In India, when government sells of its stake to privatize a company it is

called disinvestment. REC & Power Grid are good examples.

Global M&A : 2002 2008

Source : Thomson Financial, Deal Logic

Global M&A Perspective till 2006

Cross Border M&A

Any observations ?

Recap of our discussion so far

M&A is a corporate restructuring tool.

Mergers, Acquisitions, De-mergers, Divestments, Reverse Mergers are

all used in M&A activities.

M&A is a common phenomenon in the western world with trillions of

dollars of activities performed every year.

Asia is catching up with its western counterparts in performing M&A.

Lets go to our first case study now

ICICI Bank - A Success Story

The Government of India established ICICI in 1955 as a Financial

Institution (FI)with the objective of financing large industrial
projects.

ICICI acted only as FI and hence was unable to receive deposits.

ICICI was not keen on moving towards banking because as a

bank they will have to maintain liquid reserves.
Trivia question : What is the current CRR? SLR ?Repo Rate ?

Liberalization of the Indian economy in 1992 however changed

this view.

ICICI Bank A Success story

ICICI established its subsidiary ICICI Bank Limited in 1994 to join the wave
of liberalization in India.

ICICI bank started building base for a successful bank all through the 1990s
much on the lines of Citigroup.

In 2002, the Board Members of ICICI took a strategic move to perform a

reverse merger.

The strategic move entailed a reverse merger of ICICI Personal Financial

Services and ICICI Capital Services with ICICI Bank.

ICICI Bank A Success story

The basic objective of the reverse merger was to create universal bank.
And? .

ICICI bank would have access to CASA and not the other way round.

ICICI was unable to sustain NPAs on its balance sheet as it did not have
access to CASA.

The reverse merger took a period of 18 months to happen. Why?

Reason : CRR & SLR

Conclusion : ICICI Bank Case

Was the reverse merger really a success or stroke of good luck ?

Irrespective of the reasons for the success of ICICI bank, the fact that
ICICI is Indias second largest bank based on assets clearly proves that
the strategic move was a success.

ICICI had its vision of becoming one of Indias leading bank and its
strategy was based on this vision.

Should this vision of universal banking be pursued in the wake of the fall
of Citibank?

The success of any organization lies in having a clear vision of its goals.