Introductions to Mergers & Acquisitions

Prof. Rahul Kavishwar Assistant Professor, KLE Societys IMSR, Hubli.

Scheme of my presentation
Corporate Restructuring Corporate Restructuring objectives Introduction to Mergers and Acquisitions Mergers & Acquisition Absorption Amalgamation Types of mergers Motives behind mergers Advantages of Mergers and Acquisitions Basis of valuation Legal framework for M&A

Corporate Restructuring
Reorganisation Realignment Reorientation

of Assets & liabilities of organisation

That Result in Effective, Efficient & competitive manner so that Increase in Market share Increase in Brand Image Synergies business unit

Corporate Restructuring objectives

Corporate Restructuring

Competition Globalization Technology

Corporate Restructuring objectives

Globalization:
Market open for foreign players.

Competition:
Foreign companies are ready to offer same products at a lesser price.

Technology:
Advanced technology from the outside or foreign companies.

Introduction to mergers and acquisitions

Corporate restructuring includes mergers and acquisitions (M&As), amalgamation, takeovers, spin-offs, leveraged buy-outs, buyback of shares, capital reorganisation etc. M&As are the most popular means of corporate restructuring or business combinations. The Liberalization, Privatization and Globalization process which was started in early 1990s has brought many changes in the economic scene of the country.

Introduction to mergers and acquisitions..

Mergers and acquisition (M&A) have become the principal tools for corporate restructuring. There has been a sharp increase in both the number and size of the M&A in the last two decades. M&A and restructuring have become a major force in the financial and economic environment all over the world. The use and intensity with which corporate restructuring is practiced has grown at tremendous pace since the beginning of the liberalization era, 1991, thanks to greater competitive pressures and a more liberal environment.

Mergers & Acquisition

The term merger is generally used to refer to the consolidation of companies. A merger differs from an acquisition in the manner in which it is financed. In a merger, a stock swap is involved while in an acquisition, a cash deal is involved. A combination of two or more firms into one firm; it may involve absorption (acquisition) or consolidation.

For Example for Mergers & Acquisition

Times Bank & HDFC Bank Ltd
New name as HDFC Bank Ltd

ICICI & ICICI Bank.

New name as ICICI Bank Ltd

Centurion Bank of Punjab & HDFC Bank Ltd

New name as HDFC Bank Ltd

ACC Ltd & Damodar cement

New name as ACC Ltd

ICICI Bank Ltd & Sangali Bank

New name as ICICI Bank Ltd

Some Examples M & A

Acquirer Target Deal Size Deal type % stake ( $ mn) bought 979 Stake 48.14 increase 850 State 28.75 increase to 76% 671.3 State 9.27 increase to 12.86%

Aditya Birla Group Essar Group

Citi group

Idea Cellular Essar Shipping & Essar oil HDFC ltd

Some Examples.
Acquirer Target Deal Size ( $ mn) Deal type % stake bought

Sterling InfoTech Reliance Industries Indian oil

Tata Teleservices IPCL IBP

300 2,638* 1,841*

Minority Stake
Controlling stake

8.0% -

Grasim

Ultratech cement Deal size in Pounds

1,641*

Stake increase Stake increase

Top 10 M&As in 2010

Tata Chemicals buys British salt Reliance Power and Reliance Natural Resources Airtels acquisition of Zain in Africa Abbotts acquisition of Piramal healthcare solutions GTL Infrastructure acquisition of Aircel towers ICICI Bank buys Bank of Rajasthan Jindal Steel Works and Ispat Ki Kahani Reckitt Benckiser goes shopping Mahindra goes international Fortis Healthcare acquisitions

Difference between Mergers & Acquisitions

Merger is considered to be a process when two or more companies come together to expand their business operations One company takes over the other and rules all its business operations, it is known as acquisitions

deal gets finalized on friendly terms and both the companies share equal profits in the newly created entity.
in a merger two companies of same size combine to increase their strength and financial gains along with breaking the trade barriers.

one company overpowers the other company and the decision is mainly taken during downturns in economy or during declining profit margins. acquisition usually two companies of different sizes come together to combat the challenges

Absorption
In absorption is a financially strong company rakes over the business of weak company which loses its identity. In absorption, one firm acquires one or more other firms. For Example:
The Ganesh Bank of Kurundwad Ltd merged The Federal Bank Ltd
The Ganesh Bank of Kurundwad Ltd is weak bank The Federal Bank Ltd is a financially strong bank

Amalgamation
Amalgamation or consolidation refers to a situation where two or more existing companies are combined into a new company formed for news purpose. The old companies cease to exist and their shareholders are paid by the new company in cash or in its shares or debenture. For Example:

Amalgamation
R limited
Li q ui da ti o n Pr oc es s

U limited

Y limited

RUBY

B limited

EPS, Profit & Networth

Types of mergers
Mergers may be differentiated on the basis of activities, which are added in the process of the existing product or service lines. Mergers can be a distinguished into the following four types: Horizontal Merger Vertical Merger Conglomerate Merger Concentric Merger

Horizontal Merger
Horizontal merger is a combination of two or more corporate firms dealing in same lines of business activity. Horizontal merger is a co centric merger, which involves combination of two or more business units related to technology, production process, marketing research, development and management. The reason may be elimination or reduction in competition, putting an end to price cutting, economies of scale in production, research and development, marketing and management are the motives underlying such mergers.

Examples of Horizontal Merger

The formation of Brook Bond Lipton India Ltd. through the merger of Lipton India and Brook Bond. The merger of Bank of Mathura with ICICI (Industrial Credit and Investment Corporation of India) Bank. The merger ACC (Associated Cement Companies Ltd.) with Damodar Cement.

Vertical Merger
It is the joining of two or more firms in different stages of production or distribution that are usually separate. The vertical Mergers gains are identified as the lower buying cost of material. Minimization of distribution costs, assured supplies and market increasing or creating barriers to entry for potential competition or placing them at a cost disadvantage. The organization may choose to acquire a supplier (backward integration) or a firm that could distribute its products (forward integration).

Examples of Vertical Merger

ICICI Ltd with ICICI Bank Ltd. IDBI with IDBI Bank Ltd. Time Warner Incorporated, a major cable operation, and the Turner Corporation, which produces CNN, TBS and other programmining. Usha Martin and Usha Beltron merger

Conglomerate Merger
Conglomerate merger is the combination of two or more unrelated business units in respect of technology, production process or market and management. The firms engaged in the different or unrelated activities are combined together. Diversification of risk constitutes the rational for such merger motives. The rationale usually cited for such acquisitions is that the combination opens entry into an attractive business or industry and spreads the companys risk.

Examples of Conglomerate Merger

Walt Disney Company and the American Broadcasting Company. ICICI Ltd is merged with Mahindra tractor ltd. Reliance Industries Ltd merged with Reliance Petroleum Ltd.

Concentric Merger
The conglomerate mergers are based on general management functions. If the activities of the segments brought together are so related that there is carry over on specific management functions. The marketing research, Marketing, financing, production and personnel department.

Examples of Concentric Merger

Citigroup (principally a bank) merged with Salomon Smith Barney, an investment banker/stock brokerage operation Nextlink is a competitive local exchange carrier offering services in 57 cities and building a nationwide IP network. Dial up internet access, high speed DSL and VPN services across the USA and overseas.

Takeover
A takeover generally involves the acquisition of a certain block of equity capital of a company which enables the acquirer to exercise control over the affairs of the company. Takeover is noting but obtaining of control over management of company by other. A takeover may be done through the following ways Open market purchase Negotiated acquisition Preferential allotment

Takeovers
The company which acquires the share of another company is known as Holding company. And the company whose shares are acquired by the holding company is called subsidiary company.
Reliance Infocom Control on Administration & working Reliance Capital market Others 55% 45%

Business Alliances
Business alliances such as joint ventures, strategic alliances, equity partnerships, licensing, franchising alliances, and network alliances have grown significantly. In many situations, well-designed business alliances are viable alternatives to mergers and acquisitions. No wonder they have become common place in diverse fields like high-technology, media and entertainment, automobiles, pharmaceuticals, oil exploration, and financial services.

Examples of Business Alliances.

General Motors and Toyota entered into an unprecedented (extraordinary) joint Venture agreement in the 1980s. In 1999, IBM announced business alliances worth $ 30 billion with companies like Cisco and Dell computers. Oracle has over 15,000 alliances with its business partners.

Common Forms Of Business Alliances

Joint ventures Strategic alliances Equity partnership Licensing Franchising alliance Network alliance

Collaboration
Process where an organisation join hands with another organisation which technically or financially superior and resourceful. Collaboration brings both
Technology Funds

Spinning off / Demerger

Process where a business division or a product line of a company is separately reorganized into a different entity. The entity so formed may either be in the form of a subsidiary company or altogether a separate company. For Example: Ultra Tech Demerger from L & T

Hive off
Sale of loss making division or a product line by a multi product company For Example:

Consolidation
Consolidation is Fusion ( convergence) of two existing companies into a new company in which both the existing companies extinguish. Mixing up of the two companies to make them into a new one in which both the existing companies lose their identity and ease to exist. For Example: HCL Ltd Hindustan Computers, Hindustan instruments

Combination
It is mergers and consolidations as a common term used interchangeably, but carrying legally distinct interpretation. All mergers and acquisitions and amalgamations are business combination.

Holding companies
The holding company is the control in the composition of the Board of Directors in another company and such control should emerge from holding of equity shares and thereby more than 50% of the total voting power of such company. A holding company is a company is company which holds more than half of the nominal value of the equity capital of another company, is called subsidiary company. Both holding and subsidiary companies retain their separate legal entities and maintain their separate books of accounts.

Demerger or corporate split or division

It is just opposite to combination. Division of a company takes place when part of its undertaking is transferred to newly formed company or to an existing company.

Motives behind mergers

The motivations for buyers are as follows. To increase the value of the firms stock that is mergers often lead to increase in stock price and or price earning ratio. To increase the growth rate of the firm. To make a good investment a firm may make better use of funds by purchasing instead of ploughing the same funds into internal expansion. To improve the stability of the firms earnings and sales. To balance or fill out the product line.

Motives behind mergers

To diversify the product line when the current products have reached their peak in the life cycle. To reduce competition by purchasing a competitor. To acquire a needful resource quickly. For example: High quality technology or highly innovative management. Tax reasons: prior tax losses which will offset current or future earnings To increase efficiency and profitability, especially if there is synergy between the two companies.

Motives behind mergers

The sellers motives To increase the value of the owners stock and investment in the firm. To increase the firms growth rate by receiving more resources from the acquiring company. To acquire resources to stabilize operations and make them more efficient. Tax reason: if the firm is owned by a family or an individual a merger makes it easier to deal with estate tax problems. To help diversify the owning family holdings beyond the present firm. Management succession for an entrepreneur or dissension among top mangers.

Advantages of Mergers and Acquisitions

Maintaining or accelerating profitable growth of a company. Enhancing profitability through cost reduction. Economic of scale. Operating efficiency Synergy Diversifying the risk of the company by way of acquiring the business of different income streams. Reducing tax liability Enhancing the market power of the company.

Value creation in M&A

Value creation in M&As Marketing synergy Operational synergy Investment synergy Management synergy

Basis of valuation
Valuation of business is done using one or more of these types of models.
Earning Approach (EPS) Market Value Approach (Market value) Book Value Approach ( Book Value ) Negotiated value Approach

Earning Approach
The acquiring firm must consider the effect the merger will have on the EPS of the merged or amalgamated corporation. EPS is the base for swap ratio. = EPS of the acquired company EPS of the acquiring company For example: Times Bank & HDFC Bank Ltd = EPS of the Times Bank EPS of the HDFC Bank

Market Value Approach

The exchange ratio is determined keeping in view the market values of the companies shares involved in in the merger. = Market price per share of the acquired company Market price per share of the acquiring company For example: Times Bank & HDFC Bank Ltd = Market price per share of the Times Bank Market price per share of the HDFC Bank
Market value = EPS / Capitalisation rate Capitalisation rate Normal rate of earning expected from the type of the company whose shares are to evaluated.

Book Value Approach

The exchange ratio is determined according to the book values of the concerned companies shares. = Shareholders Funds or Networth No of equity shares No of equity shares = Book value per share of the acquired company Book value per share of the acquiring company For example: Times Bank & HDFC Bank Ltd = Book value of the Times Bank Book value of the HDFC Bank

Legal framework for M&A

1. Banking Regulation act 1949 2. Industries (development & Regulation) Act 1951 3. Companies Act 1956 4. Securities Contract (Regulation) Act 1956 5. Income Tax Act 1961 6. Monopolies and Restrictive Trade Practices Act, 1969 (MRTP Act) 7. Sick Industrial (Special Provisions) (SICA) Act 1985 8. Securities and Exchange Board of India (SEBI) Regulations 1991

Legal framework for M&A.

9. Depository laws 1996 10. Competitions Act, 2002 11. Securitization and Reconstruction of Financial and Enforcement of Security Interest Act, 2002. 12. High Court Approvals 13. Substantial change in composition of Board 14. Listing Agreement 15. Intellectual Property Law and M&As

Let me sum up my presentation

Corporate Restructuring Corporate Restructuring objectives Introduction to Mergers and Acquisitions Mergers & Acquisition Absorption Amalgamation Types of mergers Motives behind mergers Advantages of Mergers and Acquisitions Basis of valuation Legal framework for M&A

Floor is open for discussion

Thank You