Mergers, Acquisitions & Re-Structuring Semester - III

Navleen Kaur
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MERGERS, ACQUISITIONS & RESTRUCTURING

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Tata Steel-Corus: $12.2 billion

Image: B Mutharaman, Tata Steel MD; Ratan Tata, Tata chairman; J Leng, Corus chair; and P Varin, Corus CEO. Photographs: Toby Melville/Reuters

On January 30, 2007, Tata Steel purchased a 100% stake in the Corus Group at 608 pence per share in an all cash deal, cumulatively valued at $12.2 billion. It made Tata Steel the world's fifth-largest steel group.

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Vodafone-Hutchison Essar: $11.1 billion

Image: The then CEO of Vodafone Arun Sarin visits Hutchison Telecommunications head office in Mumbai. Photographs: /Reuters Punit Paranjpe

On February 11, 2007, Vodafone agreed to buy out the controlling interest of 67% held by Li Ka Shing Holdings in Hutch-Essar for $11.1 billion.

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Bharti-Zain Deal: $10.7 billion

In March 2010, Bharti entered into a legally binding definitive agrrement with Zain Group ("Zain") to acquire the sale of 100% of Zain Africa BV , its African Business excluding its operations in Morocco and Sudan, based on an enterprise valuation of USD 10.7 billion. Under the agreement, Bharti will acquire Zain's African mobile service operations in 15 countries with a total customer base of over 42 million.
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CORPORATE RESTRUCTURING
Actions taken to expand or contract a firms basic operations or fundamentally change its assets or financial structure is referred as corporate restructuring.

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FORMS OF CORPORATE RE-STRUCTURING

Expansion
Mergers and Acquisitions Tender Offers Asset Acquisition Joint Ventures Spin offs Split offs Divestitures Equity carve-outs Assets sale

Contraction

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 Corporate Control
Takeover defenses Share repurchases Exchange offers Proxy contests

Changes in Ownership Structures

Leveraged buyout Junk Bonds Going Private ESOPs and MLPs

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EXPANSION
Expansion is a form of restructuring, which results in an increase in the size of the firm. It can take place in the form of a merger, acquisition, tender offer, asset acquisition or a joint venture.

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MERGER
Merger is defined as a combination of two or more companies into a single company. A merger can take place either as an amalgamation or absorption.
Amalgamation is the type of merger that involves fusion of two or more companies. After the amalgamation, the two companies loose their individual identity and a new company comes into existence. This form is generally applied to combinations of firms of equal size. Example: The merger of Brook Bond India Ltd., with Lipton India Ltd., resulted in the formation of a new company Brooke Bond Lipton India Ltd. Absorption is a type of merger that involves fusion of a small company with a large company. After the merger the smaller company ceases to exist. Example: The merger of Oriental Bank Of Commerce with Global Trust Bank. After the merger, GTB ceases to exist while the Oriental Bank Of Commerce expanded and continued.
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TENDER OFFER
Tender offer is a corporate finance term denoting a type of takeover bid. The tender offer is a public, open offer or invitation (usually announced in a newspaper advertisement) by a prospective acquirer to all stockholders of a publicly traded corporation (the target corporation) to tender their stock for sale at a specified price during a specified time, subject to the tendering of a minimum and maximum number of shares. In a tender offer, the bidder contacts shareholders directly; the directors of the company may or may not have endorsed the tender offer proposal.
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 To induce the shareholders of the target company to sell, the acquirer's offer price usually includes a premium over the current market price of the target company's shares. For example, if a target corporation's stock were trading at $10 per share, an acquirer might offer $11.50 per share to shareholders on the condition that 51% of shareholders agree. Cash or securities may be offered to the target company's shareholders, although a tender offer in which securities are offered as consideration is generally referred to as an "exchange offer."
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 Tender offer involves making a public offer for acquiring the shares of the target company with a view to acquire management control in that company. Example: (1) Flextronics International giving an open market offer at Rs. 548 for 20% of paid up capital in Hughes Software Systems. (2) AstraZenca Pharmaceuticals AB, a Swedish firm, announced an open offer to acquire 8.4% stake in AstraZenca Pharma India at a floor price of Rs. 825 per share.

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ASSET ACQUISITION
Asset Acquisitions involve buying the assets of another company. These assets may be tangible assets like a manufacturing unit or intangible assets like brands. In such acquisitions, the acquirer company can limit its acquisitions to those parts of the firm that coincide with acquirers needs. Example: The acquisition of the cement division of Tata Steel by Laffarge of France. Laffarge acquired only the 1.7 million tonne cement plant and its related assets from Tata Steel. The asset being purchased may also be intangible in nature. For example, Coca-Cola paid Rs.170 crore to Parle to acquire its soft drinks brands like Thums Up, Limca, Gold Spot etc.
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JOINT VENTURE
A joint venture is the coming together of two or more businesses for a specific purpose, which may or may not be for a limited duration. The purpose of the joint venture may be for the entry of the joint venture parties into a new business, or the entry into a new market, which requires the specific skills, expertise, or the investment of each of the joint venture parties. The execution of a joint venture agreement, setting out the rights and obligations of each of the parties is usually a norm for most joint ventures.
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 The joint venture parties may also incorporate a new company which will engage in the proposed business. In such a case, the byelaws of the joint venture company would incorporate the agreement between the joint venture parties. For example: Bharti and Walmart had entered into a joint venture in India to expand in retail sector.

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CONTRACTION
Contraction is a form of restructuring, which results in a reduction in the size of the firm. It can take place in the form of a spin-off, split off, divestiture or an equity carve-out.

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SPIN-OFFS
A spin-off is a transaction in which a company distributes on a pro rata basis all of the shares it owns in a subsidiary to its own shareholders. Hence, the stockholders proportional ownership of shares is the same in the new legal subsidiary as well as the parent firm. The new entity has its own management and is run independently from the parent company. A spin-off does not result in an infusion of cash to parent company. Businesses wishing to 'streamline' their operations often sell less productive, or unrelated subsidiary businesses as spinoffs. The spun-off companies are expected to be worth more as independent entities than as parts of a larger business. Example: Air-India has formed a separate company named Air-India Engineering Services Ltd., by spinningoff its engineering division.
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SPLIT-OFFS
In a split off, a new company is created to takeover the operations of an existing division or unit. A portion of existing shareholders receives stock in a subsidiary (new company) in exchange for parent company stock. The logic of split-off is that the equity base of the parent company is reduced reflecting the downsizing of the firm. Hence the shareholding of the new entity does not reflect the shareholding of the parent firm. A split-off does not result in any cash inflow to the parent company.
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SPLIT-UPS
In a split-up the entire firm is broken up in series of spinoffs, so that the parent company no longer exists and only the new off springs survive. A split-up involves the creation of a new class of stock for each of the parents operating subsidiaries, paying current shareholders a dividend of each new class of stock, and then dissolving the parent company. Stockholders in the new companies may be different as shareholders in the parent company may exchange their stock for stock in one or more of the spin-offs. A corporate action in which a single company splits into two or more separately run companies. Shares of the original company are exchanged for shares in the new companies, with the exact distribution of shares depending on each situation. This is an effective way to break up a company into several independent companies. After a split-up, the original company ceases Copyright exist. to Amity University

 A company can split up for many reasons, but it typically happens for strategic reasons or because the government mandates it. Some companies have a broad range of business lines, often completely unrelated. This can make it difficult for a single management team to maximize the profitability of each line. It can be much more beneficial to shareholders to split up the company into several independent companies, so that each line can be managed individually to maximize profits. The government can also force the splitting up of a company, usually due to concerns over monopolistic practices. In this situation, it is mandatory that each segment of a company that is split up be completely independent from the others, effectively ending the monopoly.

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 Example: The Andhra Pradesh State Electricity Board (APSEB) was split-up in 1999 as part of the Power Sector reforms. The power generation business and the transmission and distribution business has transferred to two separate companies called APGENCO and APTRANSCO respectively. APSEB ceased to exist as a result of split-up.
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DIVESTITURE
A divestiture is a sale of a portion of the firm to an outside party, generally resulting in an infusion of cash to the parent. A firm may choose to sell an undervalued operation that it determines to be non-strategic or unrelated to the core business and to use the proceeds of the sale to fund investments in potentially higher return opportunities. It is a form of expansion on the part of buying company. Example: The Indian Government sold 10% share in ONGC through a public issue.
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EQUITY CARVE-OUT
Diluting the ownership rights of original or existing stockholders (shareholders) by issuing new common stock (ordinary shares) of a firm to new investors. An equity carve-out involve the sale of a portion of the firm through an equity offering to outsiders. New shares of equity are sold to outsiders who give them ownership of a portion of the previously existing firm. A new legal entity is created. The equity holders in the new entity need not be the same as the equity holders in the original seller.

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ASSETS SALE
It involves the sale of tangible or intangible assets of a company to generate cash. When a corporation sells off all its assets to another company, it becomes a corporate shell with cash and/or securities as its sole assets. The firm may then distribute the cash to its stockholders as a liquidating dividend and go out of existence. The firm may also choose to continue to do business and use its liquid assets to purchase other assets or companies.
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CORPORATE CONTROL
Firms can also restructure without necessarily acquiring new firms or divesting existing corporations. Corporate control involves obtaining control over the management of the firm. Control is the process by which managers influence other members of an organization to implement the organizational strategies.

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TAKEOVER DEFENSES
With the high level of hostile takeover activity in recent years, takeover defenses, both pre-bid and post-bid have been resorted to by the companies. Pre-bid defenses also called preventive defenses are employed to prevent a sudden, unexpected hostile bid from gaining control of the company. When preventive takeover defenses are not successful in fending off an unwanted bid, the target implements postbid or active defenses. These takeover defenses intend to change the corporate control position of the promoters.

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SHARE REPURCHASES
This involves the company buying its own shares back from the markets. This leads to reduction in equity capital of the company. This in turn strengthens the promoters controlling position by increasing his stake in the equity of the company. It is used as a takeover defense to reduce the number of shares that could be purchased by the potential acquirer.
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EXCHANGE OFFERS
It provides one or more classes of securities of the firm. The term exchange offer necessarily involve new securities of greater market value than the pre exchange offer announcement market value. Exchange offer involves exchanging debt for common stock, which increases leverage, or conversely, exchanging common stock for debt, which decreases leverage. They help a company to change its capital structure while holding the investment policy unchanged.
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PROXY CONTESTS
A proxy contest is an attempt by a single shareholder or a group of shareholders to take control or bring about other changes in a company through the use of proxy mechanism of corporate voting. This term is used mainly in the context of takeovers. The acquirer will persuade existing shareholders to vote out company management so that the company will be easier to takeover. When a group of shareholders are persuaded to join forces and gather enough shareholder proxies to win a corporate vote. This is referred to also as a proxy battle.

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GOING PRIVATE
It refers to the transformation of a public corporation into a privately held firm. It involves purchase of the entire equity interest in a previously public corporation by a small group of investors.

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LEVERAGE BUYOUT (LBO)

Leveraged buyout is a financing technique where debt is used in the acquisition of a company. The acquisition of another company using a significant amount of borrowed money (bonds or loans) to meet the cost of acquisition. Often, the assets of the company being acquired are used as collateral for the loans in addition to the assets of the acquiring company. The purpose of leveraged buyouts is to allow companies to make large acquisitions without having to commit a lot of capital. LBO is defined as the acquisition, financed largely by borrowings, of all the stock, or assets, of a hitherto (until now) public company by a small group of investors. This buying group may be sponsored by buy-out specialists (for example, Kohlberg, Kravis, Roberts & Co.) or investment bankers that arrange such deals.
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MBOs MANAGEMENT BUYOUTS

When the managers and/or executives of a company purchase controlling interest in a company from existing shareholders. In most cases, the management will buy out all the outstanding shareholders and then take the company private because it feels it has the expertise to grow the business better if it controls the ownership. Quite often, management will team up with a venture capitalist to acquire the business because it's a complicated process that requires significant capital.
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MBI MANAGEMENT BY-IN

A corporate action in which an outside manager or management team purchases an ownership stake in the first company and replaces the existing management team. This type of action can occur due to a company appearing undervalued or having a poor management team. There are a wide range of management teams, such as hedge funds and other companies, that look for undervalued companies to purchase. If they find a company that fits with their investment criteria, they will often purchase the company and make it private to unlock the value. More often than not, they replace the management team with their own, which they feel will do a better job at running the company.

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EBO Employee Buyout

A restructuring strategy in which employees buy a majority stake in their own firms. This form of buyout is often done by firms looking for an alternative to a leveraged buyout. Companies being sold can be either healthy companies or ones that are in significant financial distress. For small firms, an employee buyout will often focus on the sale of the company's entire assets, while for larger firms, the buyout may be on a subsidiary or division of the company. The official way an employee buyout occurs is through an employee stock ownership plan (ESOP). The buyout is complete when the ESOP owns 51% or more of the company's common shares.

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ESOP
In markets like USA, ESOPs are seen as an important HRD (Human Resource Development) tool. In India, the idea is just beginning to catch up. An ESOP is another incentive or compensation tool for a company. The rationale is that stock options generate a sense of ownership among employees. Stock options tend to develop an entrepreneurial spirit among top executives since they own stock and an appreciation in stock prices, if the company does well will add to their wealth. ESOPs help in aligning individual goals with corporate goals. ESOPs also help companies to retain staff, attract talent, motivate employees by enabling them to share the longterm growth of the company.
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LIMITED PARTNERSHIP
A partner in a partnership whose liability is limited to the extent of the partner's share of ownership. Limited partners generally do not have any kind of management responsibility in the partnership in which they invest and are not responsible for its debt obligations. For this reason, limited partners are not considered to be material participants. Because they are not material participants, the income that limited partners realize from their partnerships is treated as passive income, and can be offset with passive losses. However, there are a handful of exceptions to this rule. For example, limited partners who participate in a partnership for more than 500 hours in a year may be considered general partners.

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Limited Partnership (LP)

Two or more partners united to conduct a business jointly, and in which one or more of the partners is liable only to the extent of the amount of money that partner has invested. Limited partners do not receive dividends, but enjoy direct access to the flow of income and expenses. This term is also referred to as a "limited liability partnership" (LLP). The main advantage to this structure is that the owners are generally not liable for the debts of the company.

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Master Limited Partnerships (MLPs)

A master limited partnership is a type of limited partnership whose shares are publically traded. The limited partnership interests are divided into units which trade as shares of common stock. In addition to tradability it has the advantage of limited liability for limited partners. This type of structure is however not prevalent in our country, though there was a move some time back to design necessary regulatory framework for floating such organizations particularly in the contest of divergent needs of IT sector.
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Junk Bond

What Does Junk Bond Mean? A bond rated 'BB' or lower because of its high default risk. Also known as a "high-yield bond" or "speculative bond". Investopedia explains Junk Bond These are usually purchased for

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TYPES OF MERGERS
Merger or acquisition depends upon purpose for which the target company is acquired. Horizontal Merger Vertical Merger Conglomerate Merger

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Horizontal Merger
A horizontal merger involves merger between two firms operating and competing in the same kind of business activity. Example: The merger of Centurion Bank and Bank of Punjab, Oriental Bank of Commerce and GTB in Banking Sector. Tata Industrial Finance Ltd. With Tata Finance Ltd. In Finance Sector. A big merger between Holicim and Gujarat Ambuja Cement Ltd in manufacturing sector Idea Cellular and Escotel in telecom sector. Daimler-Benz and Chrysler in car manufacturing sector.

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Objectives/Purpose Horizontal Merger

To obtain economies of scale of production
Elimination of duplication of facilities and operations Broadening the product line Reduction in investment in working capital Elimination of competition in a product Reduction in advertising costs Increase in market share Exercise of better control on market etc.

Monopoly profits, monopoly power enabling firms to engage in anti-competitive practices.

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Vertical Mergers
A vertical merger involves merger between firms that are in different stages of production or value chain. They are combination of companies that usually have buyer-seller relationships.
Backward Integration: A form of vertical integration that involves the purchase of suppliers in order to reduce dependency. A good example would be if a bakery business bought a wheat farm in order to reduce the risk associated with the dependency on flour. Forward Integration: A business strategy that involves a form of vertical integration whereby activities are expanded to include control of the direct distribution of its products. Horizontal Integration: When a company expands its business into different products that are similar to current lines. Example: A hot dog vendor expanding into selling hamburgers would be an example of horizontal integration.

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Example: Nirmas bid for Gujarat Heavy Chemical (backward integration) or Hindalco bidding for Pennar Aluminium (forward integration). Videocon Groups acquisition of Thomsons Colour Picture Tube in China.

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Objectives/ Purpose of Vertical Merger

To expand its operations by backward or forward integration. To reduce inventories of raw materials and finished goods. Implements its production plans as per objectives. Economizes on working capital investments. Technological economies. Elimination of transaction costs. Improved planning for inventory and production. Reconciliation of divergent interests of parties to a transaction etc. Anti-competitive effects.

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Conglomerate Merger
Conglomerate mergers is a merger between firms that are involved in totally unrelated business activities. There are two types of conglomerate mergers: pure and mixed. Pure conglomerate mergers involve firms with nothing in common, while mixed conglomerate mergers involve firms that are looking for product extensions or market extensions (geographic market extension merger).

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Objectives/Purpose Conglomerate Merger

There are many reasons for firms to want to merge, which include utilization of financial resources, increasing market share, synergy and cross selling. Firms also merge to diversify and reduce their risk exposure. Such type of merger enhances overall stability of acquirer company and creates balance in companys total portfolio of diverse products and production processes. However, if a conglomerate becomes too large as a result of acquisitions, the performance of the entire firm can suffer. This was seen during the conglomerate merger phase of the 1960s.
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Congeneric Merger
Congeneric mergers occur where two merging firms are in the same general industry, but they have no mutual buyer/customer or supplier relationship, such as a merger between a bank and a leasing company. An example of a congeneric merger is Citigroup's acquisition of Travelers Insurance. While both were in the financial services industry, they had different product lines.
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What motivate sellers towards M&A activities

Seller opt for M&A because: High income taxes may hamper the potential growth of small companies. Their main source of finance is retained earnings, and taxes eat into these. Taxes also limit their borrowing power. Owners of small companies may like to diversify their personal investments. Selling out to a diversified company could mean more income than continuing as a separate unit, providing an opportunity to improve the investment position of owners. Financial limitations due to restrictions on working capital financing may lead to selling the unit.
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 Technological advances invariably reduce product life. Companies are therefore required to make R&D investments. In case company is not able to finance these activities, it may opt for a merger. Owner(s) may wish to retire and there may not be an apparent worthy successor in closely held companies. Inability of top management to keep up with the competition may lead to selling of the company. An attractive offer may trigger the selling of the company.

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 In partnerships, an unequal load but an equal share in the profits may motivate partners to sell. Small companies may desire to connect with large ones. Top management management load. may desire to reduce the

The dissension among the owner-managers may lead to a sale. The company may lose key management personnel and hence Copyright Amity University sell the unit.

What motivates buyers towards M&A activities.

Acquiring a new product, new plant capacity or new production organization. Greater degree of vertical integration, synergy and growth. Swift addition of facilities, products, personnel and processes. Increased market control, desire to achieve economies of scale and multiunit operations.
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 Possibility of economies of scale in distribution and advertising. Financial advantage of larger size through either improved marketability of stock or increased availability of outside capital. Greater control of patents. Acquisition of technological skills. Maintenance of profits through a bigger operation

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 Stability of earnings through merger of different cyclical and seasonal trends. Acquisition of financial resources Response to changes in anti trust laws Tax advantages. Gains from sales of securities.

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Why do Mergers Fail?

Lack of Communication Lack of Direct Involvement by Human Resources Lack of Training Loss of Key People and Talented Employees Loss of Customers Corporate Culture Clash Power Politics Inadequate Planning/ Inconsistent Strategy Overstated Synergies Poor Business Fit Inadequate Due Diligence Over Leverage Boardroom Split Regulatory Delay

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Recommendations for a Successful Merger

Extensive and Regular Communication Effective Planning Retaining Key People Managing Cultural Differences Training and Development Post-Merger Integration Teams

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Takeover/Acquisition
A corporate action in which a company buys most, if not all, of the target company's ownership stakes in order to assume control of the target firm. Acquisitions are often made as part of a company's growth strategy whereby it is more beneficial to take over an existing firm's operations and niche compared to expanding on its own. Acquisitions are often paid in cash, the acquiring company's stock or a combination of both. Acquisitions can be either friendly or hostile. Friendly acquisitions occur when the target firm expresses its agreement to be acquired, whereas hostile acquisitions don't have the same agreement from the target firm and the acquiring firm needs to actively purchase large stakes of the target company in order to have a majority stake.
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Acquisition Premium
The difference between the actual cost for acquiring a target firm versus the estimate made of its value before the acquisition. During a merger and acquisition, companies will first estimate the cost that they wish to pay for a target firm. As the entire M&A process takes many weeks, the price paid for the target firm may in fact be higher or lower than its market price at the time of completion because of economic fluctuations.
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Takeover Tactics

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 Bear hug is a takeover strategy in which the acquirer, without previous warnings, sends a letter to the directors of the target company announcing the acquisition proposal and demanding a quick decision. The name "bear hug" reflects the persuasiveness of the offering company's overly generous offer to the target company. By offering such a large premium, the acquiring company essentially uses its clout to squeeze an agreement out of the target company's management. An offer made by one company to buy the shares of another for a much higher per-share price than what that company is worth. A bear hug offer is usually made when there is doubt that the target company's management will be willing to sell. By offering a price far in excess of the target company's current value, the offering party can usually obtain an agreement. The target company's management is essentially forced to accept such a generous offer because it is legally obligated to look out for the best interests of its shareholders.
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Bear Hug

Proxy Contests
A proxy contest is an attempt by a single shareholder or a group of shareholders to take control or bring about other changes in a company through the use of proxy mechanism of corporate voting. This term is used mainly in the context of takeovers. The acquirer will persuade existing shareholders to vote out company management so that the company will be easier to takeover. When a group of shareholders are persuaded to join forces and gather enough shareholder proxies to win a corporate vote. This is referred to also as a proxy battle.

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Tender Offers
An offer to purchase some or all of shareholders' shares in a corporation. The price offered is usually at a premium to the market price. Tender offers may be friendly or unfriendly. Securities and Exchange Commission laws require any corporation or individual acquiring 5% of a company to disclose information to the SEC, the target company and the exchange. The acquirer pursues takeover (without consent of the target) by making tender offer directly to the shareholders of the target company to sell their shares. This offer is made for cash. A tender offer puts individual shareholders under pressure to tender their shares regardless of their collective interests with each other.

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 A tender offer is more expensive than a negotiated deal because of various costs associated with it like publication costs, legal filing fees etc. Once the tender offer is initiated, it is more likely that the target will ultimately be acquired, though not necessarily by the firm that initiated the tender offer.

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Open Market Operations

An order placed by an insider, after all appropriate documentation has been filed, to buy or sell restricted securities openly on an exchange. This is simply an order placed by an insider to buy or sell shares according to the rules and regulations set out by the SEC. The importance of an open market order is that the insider is voluntarily buying or selling shares at or close to the market price. The stock is accumulated in this way mainly to get the voting rights associated with the stock it has purchased. The voting power so acquired can be used later in a proxy fight to remove takeover defenses, or to win the shareholder approval, or for the election of the members of the targets board etc. If the bid to takeover is not successful the stock acquired can be sold at a gain and used to recover the legal and investment banking expenses incurred.
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Street Sweep
If the stock is too strictly held by current stockholders who are long term investors or if the bidder is unable to get the required number of shares, then the bidder may choose to adopt a street sweep. A street sweep involves searching for owners of large blocks of target stock (like the institutional investors), and quickly buying a large amount of stock to gain control. Investment strategy where a large portion of a company's shares are bought at one time. Most commonly, this occurs when an individual, group, or company is trying to takeover or gain control of another company. Also called market sweep.
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Dawn Raid
The action of a firm or investor buying a substantial amount of shares in a company (making it a target firm) first thing in the morning when the stock markets open. This is done by a stock broker acting on behalf of the acquirer (the predator) to avoid drawing attention to buying. Because the bidding company builds a substantial stake in its target at the prevailing stock market price, the takeover costs are likely to be significantly lower than they would be had the acquiring company first made a formal takeover bid. Like the dawn raid in war, the corporate dawn raid is done early in the morning, so by the time the target realizes it's being attacked, it's too late - the investor has already scooped up some controlling interest. However, only a maximum of 15% of a firm's shares can be bought this way. So, after a successful dawn raid, the raiding firm is likely to make a takeover bid to acquire the rest of the target company.
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Saturday Night Special

It is a sudden attempt by one company to takeover another by making a public tender offer. The name comes from the fact that this practice used to be done over the weekends. The term alludes to the fact that many takeover bids are announced over the weekend in order to avoid too much publicity.

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