merges and acquisition

8/2/2019 Merges and Acquisition

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Mergers & Acquisitions

Presented by:KAMLESH MEHRA


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Definitions

A merger is a combination of two or more corporations inwhich only one corporation survives and the mergedcorporations go out of business.

Statutory mergeris a merger where the acquiring companyassumes the assets and the liabilities of the merged companies.

A subsidiary mergeris a merger of two companies where thetarget company becomes a subsidiary or part of a subsidiary of

the parent company


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Corporate Restructuring

Corporate restructuring is the process of redesigning one or

more aspects of the business. Restructuring a corporate is often

a necessity when the company has grown to the point that the

original structure can no longer efficiently manage the outputand general of the company.

Corporate Restructuring refers to the changes in

ownership,business mix,asset mix and alliances with a view to

enhance the shareholder value.Hence corporate restructuring

may involve ownership restructuring,business restructuring

and asset restructuring.


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Merger Vs Acquisition

Merger- A Merger may be defined as the combination of two

or more independent business corporations into a single

enterprise, usually involving the absorption of one or more

firms by a dominant firm.

Mergers may be broadly classified as Horizontal, Vertical or

Conglomerate.

Acquisition may be defined as an act of one enterprise of

acquiring, directly or indirectly of shares, voting rights, assets

or control over the management, of another enterprise .


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Motives for Takeovers

Mergers and Acquisitions
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Classifications Mergers and

Acquisitions

1. Horizontal A merger in which two firms in the same industry combine.

Often in an attempt to achieve economies of scale and/or scope.

2. Vertical A merger in which one firm acquires a supplier or another firm that

is closer to its existing customers. Often in an attempt to control supply or distribution channels.

3. Conglomerate A merger in which two firms in unrelated businesses combine.

Purpose is often to diversify the company by combining

uncorrelated assets and income streams4. Cross-border (International) M&As

A merger or acquisition involving a Canadian and a foreign firm aeither the acquiring or target company.
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Mergers and Acquisition Activity

M&A activity seems to come in waves through the

economic cycle domestically, or in response to globalization

issues such as:

Formation and development of trading zones or blocks (EU, North

America Free Trade Agreement

Deregulation

Sector booms such as energy or metals

Table 15 -1 on the following slide depicts major M&A wavessince the late 1800s.
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History of Mergers and Acquisitions

The First Wave 1897-1904- After 1883 depression- Horizontal mergers- Create monopolies

The Second Wave 1916-1929

- Oligopolies- The Clayton Act of 1914

The Third Wave 1965-1969- Conglomerate Mergers- Booming Economy

The Fourth Wave 1981-1989- Hostile Takeovers- Mega-mergers

Mergers of 1990s- Strategic mega-mergers
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Period Major Characteristics of M&A Activity1895 - 1904 Driven by economic expansion, U.S. transcontinental railroad, and the development of

national U.S. capital markets

Characterized by horizontal M&As1922 - 1929 60 percent occurred in fragmented markets (chemical, food processing, mining)

Driven by growth in transportation and merchandising, as well as by communications

developments

1940 - 1947 Characterized by vertical integration

Driven b evasion of rice and uota controls

1960s

Characterized by conglomerate M&As Driven by aerospace industry

Some firms merged to play the earnings per share "growth game" (discussed in the section

The Effect of an Acquisition on Earnings per Share)

1980s Characterized by leveraged buyouts and hostile takeovers

1990s Many international M&As (e.g., Chrysler and Daimler-Benz, Seagram and Martell)

Strategic motives were advanced (although the jury is stil l out on whether this was truly

achieved)1999 - 2001 High technology/Internet M&As

Many stock-financed takeovers, fuelled by inflated stock prices

Many were unsuccessful and/or fell through as the Internet "bubble" burst

2005 - ? Resource-based/international M&A activity

Fuelled by strong industry fundamentals, low financing costs, strong economic conditions

Table 15 - 1 M&A Activity in Canada

Source: Adapted in part f rom Weston, J.F., Wang, F., Chung, S., and Hoag, S. Mergers, Restructuring, and Corporate Control. Toronto:

Prentice-Hall Canada, Inc., 1990.
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Indian M&A Regulatory Environment

The Indian M&A environment is a strongly regulated by the following major pieces of

legislation/bodies:

The Companies Act, 1956

The Takeovers Code, 1997

The Monopolies and Restrictive Trade Practices Act, 1969

The Foreign Exchange Management Act, 1999

The Foreign Investment Promotion Board (FIPB)

The Reserve Bank of India

The Income Tax Act, 1961 Mergers, amalgamations, de-mergers, acquisitions of business units or divisions, are

all governed by The Companies Act for all registered companies

Acquisition of shares in listed Indian companies is governed by The Takeover Code,

1997.
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Motivations for Mergers and AcquisitionsCreation of Synergy Motive for M&As

The primary motive should be the creation of synergy.

Synergy value is created from economies of integrating atarget and acquiring a company; the amount by which the

value of the combined firm exceeds the sum value of the two

individual firms.
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Motives and Determinants of Mergers

Synergy Effect

- Operating Synergy

- Financial Synergy

Diversification Economic Motives- Horizontal Integration

- Vertical Integration

- Tax Motives

NAV= Vab(Va+Vb)PE

Where Vab = combined value of the 2 firms

Vb = market value of the shares of firm B.

Va = As measure of its own value

P = premium paid for B

E = expenses of the operation
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Value Creation Motivations for M&AsOperating Synergies

Operating Synergies

1. Economies of Scale Reducing capacity (consolidation in the number of firms in the

industry)

Spreading fixed costs (increase size of firm so fixed costs per unitare decreased)

Geographic synergies (consolidation in regional disparateoperations to operate on a national or international basis)

2. Economies of Scope

Combination of two activities reduces costs3. Complementary Strengths

Combining the different relative strengths of the two firms createsa firm with both strengths that are complementary to one another.


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Value Creation Motivations for M&A

Efficiency Increases and Financing Synergies

Efficiency Increases

New management team will be more efficient and add more value

than what the target now has.

The combined firm can make use of unusedproduction/sales/marketing channel capacity

Financing Synergy

Reduced cash flow variability

Increase in debt capacity

Reduction in average issuing costs

Fewer information problems
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Value Creation Motivations for M&ATax Benefits and Strategic Realignments

Tax Benefits Make better use of tax deductions and credits

Use them before they lapse or expire (loss carry-back, carry-forward provisions)

Use of deduction in a higher tax bracket to obtain a large tax

shield Use of deductions to offset taxable income (non-operating capital

losses offsetting taxable capital gains that the target firm wasunable to use)

New firm will have operating income to make full use ofavailable CCA.

Strategic Realignments Permits new strategies that were not feasible for prior to the

acquisition because of the acquisition of new management skills,connections to markets or people, and new products/services.
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Managerial Motivations for M&As

Managers may have their own motivations to pursue M&As. The twomost common, are not necessarily in the best interest of the firm orshareholders, but do address common needs of managers

1. Increased firm size

Managers are often more highly rewarded financially for building abigger business (compensation tied to assets under administration for

example) Many associate power and prestige with the size of the firm.

2. Reduced firm risk through diversification

Managers have an undiversified stake in the business (unlike

shareholders who hold a diversified portfolio of investments anddont need the firm to be diversified) and so they tend to dislike risk(volatility of sales and profits)

M&As can be used to diversify the company and reduce volatility(risk) that might concern managers.
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Valuation Issues in Corporate

Takeovers

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Valuation IssuesWhat is Fair Market Value?

Fair market value (FMV) is the highest price obtainable in an openand unrestricted market between knowledgeable, informed andprudent parties acting at arms length, with neither party beingunder any compulsion to transact.

Key phrases in this definition:1. Open and unrestricted market (where supply and demand can freely

operatesee Figure 15 -2 on the following slide)

2. Knowledgeable, informed and prudent parties

3. Arms length

4. Neither party under any compulsion to transact.
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Valuation Issues

Valuation Framework

DemandSupply

B1

S1

P

P*

Q
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Valuation IssuesTypes of Acquirers

Determining fair market value depends on the perspective of theacquirer. Some acquirers are more likely to be able to realizesynergies than others and those with the greatest ability to generatesynergies are the ones who can justify higher prices.

Types of acquirers and the impact of their perspective on value include:

1. Passive investors use estimated cash flows currently present2. Strategic investors use estimated synergies and changes that are

forecast to arise through integration of operations with their own

3. Financials valued on the basis of reorganized and refinancedoperations

4. Managers value the firm based on their own job potential and

ability to motivate staff and reorganize the firms operations. MBOsand LBOs

Market pricing will reflect these different buyers and their importance atdifferent stages of the business cycle.
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Market Pricing Approaches

Reactive Pricing ApproachesModels reacting to general rules of thumb and the relative pricingcompared to other securities

1. Multiples or relative valuation

2. Liquidation or breakup values

Proactive ModelsA valuation method to determine what a target firms value should be

based on future values of cash flow and earnings1. Discounted cash flow (DCF) models
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Reactive ApproachesValuation Using Multiples

1. Find appropriate comparators Individual firm that is highly comparable to the target Industry average if appropriate

2. Adjust/normalize the data (income statement and balance sheet) for differencesbetween target and comparator including: Accounting differences

LIFO versus FIFO Accelerated versus straight-line depreciation Age of depreciable assets Pension liabilities, etc.

Different capital structures

3. Calculate a variety of ratios for both the target and the comparator including: Price-earnings ratio (trailing) Value/EBITDA Price/Book Value Return on Equity

4. Obtain a range of justifiable values based on the ratios
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Reactive Approaches

Liquidation Valuation

1. Estimate the liquidation value of current assets

2. Estimate the present value of tangible assets

3. Subtract the value of the firms liability from estimated liquidation value

of all the firms assets = liquidation value of the firm.

This approach values the firm based on existing assets and is not forward

looking.
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The Proactive ApproachDiscounted Cash Flow Valuation

The key to using the DCF approach to price a target firm is to obtain goodforecasts of free cash flow

Free cash flows to equity holders represents cash flows left over after all

obligations, including interest payments have been paid.

DCF valuation takes the following steps:

1. Forecast free cash flows

2. Obtain a relevant discount rate

3. Discount the forecast cash flows and sum to estimate the value of thetarget
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Valuation IssuesValuation Framework

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Accounting Implications of

Takeovers

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Accounting for Acquisitions

Historically firms could use one of two approaches to account for businesscombinations

1. Purchase method; and

2. Pooling-of-interest method (no longer allowed)

While more popular in other countries, the pooling of interest is no longerallowed by:

CICA in Canada

Financial Accounting Standards Board (FASB) in the U.S. and Internal Accounting Standards Board (IASB)
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Accounting for AcquisitionsThe Purchase Method

One firm assumes all assets and liabilities and operating results going

forward of the target firm.

How is this done?

All assets and liabilities are expressed at their fair market value (FMV) asof the acquisition date.

If the FMV > the target firms equity, the excess amount is goodwill and

reported as an intangible asset on the left hand side of the balance sheet.

Goodwill is no longer amortized but must be annually assessed to

determine if has been permanently impaired in which case, the valuewill be written down and charged against earnings per share.
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Example of the Purchase MethodAccounting for Acquisitions

Acquisitor purchases Target firm for $1,250 in cash on June

30, 2010.

Acquisitor Pre-

Merger

Target Firm

(Book Value)

Target Firm

(Fair Market

Value)

Current assets 10,000 1,200 1,300

Long-term assets 6,000 800 900

Goodwill

Total Assets 16,000 2,000 2,200

Current liabilities 8,000 800 800

Long-term debt 2,000 200 250

Common stock 2,000 400 1,250

Retained earnings 4,000 600

Total Claims 16,000 2,000 2,300


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Example of the Purchase MethodAccounting for Acquisitions

Acquisitor Pre-Merger

Target Firm(Book Value)

Target Firm

(Fair MarketValue)

Acquisitor PostMerger

Current assets 10,000 1,200 1,300 11,300

Long-term assets 6,000 800 900 6,900

Goodwill 100

Total Assets 16,000 2,000 2,200 18,300

Current liabilities 8,000 800 800 8,800

Long-term debt 2,000 200 250 2,250

Common stock 2,000 400 1,250 3,250

Retained earnings 4,000 600 4,000

Total Claims 16,000 2,000 2,300 18,300

Goodwill = Price paid MV of Target firm Equity

= $1,250 (MV of target assets MV of target Liabilities)

= $1,250 ($2,200 - $1,050)

= $100
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Why Global M&As Fail !!!

Research has conclusively shown that most of the mergers fail toachieve their stated goals.

Some of the reasons identified are:

Corporate Culture Clash

Lack of Communication

Loss of Key people and talent

HR issues

Lack of proper training

Clashes between management

Loss of customers due to apprehensions

Failure to adhere to plans
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Why M&As Fail !!! (contd) Research indicates that senior executives who have personal experience with a merger or

acquisition rate underestimating the importance and difficulty of integrating the two cultures as amajor cause of M&A failures.

Organizational Culture & Cultural Integration

"How we get things done around here" is a short yet evocative definition of Organizationalculture. It includes the emotional, cognitive and behavioral patterns among employees and howthey interact with colleagues, customers, suppliers, and other stakeholders in their original firms.

Organizational culture includes the informal practices and the implicitnorms and values that, as

much as the codified rules, silently guide the how of employees' daily work. Cultural Integration is the meshing of the two different Organizational Cultures. And when two

firms combine, deal-makers and process managers always should be careful to integrate theformal rules and policies which previously governed each separate firm.

Failure of Cultural Integration can have adverse impacts on the M&A transaction:

Clash between the two Managements and clash between Management & Employees.

Creates differences among employees which can result in operational inefficiencies.

Negatively affects the value creation process after the transaction is complete

Loss of Key employees

Negatively affects the strategic communication process.

List of Total Mergers and Acquisition(M & A)
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Acquirer Target Sector Deal

Domestic Deals in January, 2010: 32 Deals of value $2.16 Billion

Penta Homes Agro Dutch Industries Agriculture S ($4.26 mn, up from32.5% to 57.7%)

ACCEncore Cement and

AddictiveCement A

Dalmia Cement Orissa Cement Cement S ($37.66mn, 45.4%)

Havells India Standard Electricals Electricals A ($25.53mn)

Gitanjali Gems Morellato India Gems and Jewellery A ($1.06mn)

Ranbaxy Laboratories Biovel Lifesciences Health care A

Delta Corp Advani Pleasure Cruise Hospitality S (50.99%)

Aptech Maya Entertainment Media A ($16.17mn)

Spice Retail Global Access Retail A

Spice Mobiles Spice Televentures Telecom M

DLF DLF-Liand O RourkeReal Estate and

InfrastructureS ($10.64mn, 100%)

GTL Infrastructure

Aircels 17,500 telecom

towers Telecom A($1.78bn)

List of Total Mergers and Acquisition(M & A)of Domestic deals, 2010 in India

T 10 M & A i iti
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Top 10 Mergers & Acquisitionsin India for 2010

Tata Chemicals buys British salt

Tata Chemicals bought British Salt; a UK based white salt producing company for about US $ 13billion. The acquisition gives Tata access to very strong brine supplies and also access to British

Salts facilities as it produces about 800,000 tons of pure white salt every year

Reliance Power and Reliance Natural Resources merger

This deal was valued at US $11 billion and turned out to be one of the biggest deals of the year. It

eased out the path for Reliance power to get natural gas for its power projects

Airtels acquisition of Zain in Africa Airtel acquired Zain at about US $ 10.7 billion to become the third biggest telecom major in the

world. Since Zain is one of the biggest players in Africa covering over 15 countries, Airtels

acquisition gave it the opportunity to establish its base in one of the most important markets in the

coming decade

Abbotts acquisition of Piramal healthcare solutions

Abbott acquired Piramal healthcare solutions at US $ 3.72 billion which was 9 times its sales.Though the valuation of this deal made Piramals take this move, Abbott benefited greatly by

moving to leadership position in the Indian market

GTL Infrastructure acquisition of Aircel towers

This acquisition was worth about US $ 1.8 billion and brought GTL Infrastructure to the third

position in terms of number of mobile towers33000. The money generated gave Aircel the

funds for expansion throughout the country and also for rolling out its 3G service
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ICICI Bank buys Bank of Rajasthan

This merger between the two for a price of Rs 3000 cr would help ICICI improve its market share in

northern as well as western India.

JSW and Ispat Ki Kahani

Jindal Steel Works acquired 41% stake at Rs 2,157 cr in Ispat Industries to make it the largest steel

producer in the country. This move would also help Ispat return to profitability with time

Reckitt Benckiser goes shopping

Reckitt acquired Paras Pharma at a price of US $ 726 million to basically strengthen its healthcare

business in the country. This was Reckitts move to establish itself as a strong consumer healthcare

player in the fast growing Indian market.

Mahindra goes international

Mahindra acquired a 70% controlling stake in troubled South Korea auto major Ssang Yong at US $

463 million. Along with the edge it would give Mahindra in terms of the R & D capabilities, this deal

would also help them utilise the 98 country strong dealer network of Ssang Yong

Fortis Healthcare acquisitionsFortis Healthcare, the unlisted company owned by Malvinder and Shivinder Singh looks set to make it

two in two in terms of acquisitions. After acquiring Hong Kongs Quality Healthcare Asia Ltd for

around Rs 882 cr last month, they are planning on acquiring Dental Corp, the largest dental services

provider in Australia at Rs 450 cr
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In the current cycle of mergers and acquisitions

activity, many companies are contemplating demergers

i ff f l t d b i it

merges and acquisition

Documents