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RESEARCH METHODOLOGY
Research problem
Research Design
• Exploratory Research
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Data Sources
• Secondary Data
Prowess software
Internet sources
Business Journals (ICFAI JOURNAL ON M & A)
Method of Analysis
Regression Model
Valuation (Enterprise value)
2
To find the closing price of the company’s script on BSE and NSE and
then calculate the percentage script return and to find the daily market
return of SENSEX
To find regression model between script return and market return by
entering the excel formula. Once you enter the regression formula one
chart is shown as above feed the data in the model we could find out the
summary that we got, there are three things important for our research.
They are shown here as, R Square, Alpha and beta. The explanation of
the each of the terms and how to read that data is given below:
3
R-Square
The R-squared value shows how reliable the dependent variable on
independent variable is. It varies between 0 and 1.
Generally R-square of more than 0.5 is considered to be good.
Y-intercept
The ‘a’ is called the Y-intercept because its value is the point at which the
regression line crosses the Y axis i.e. Vertical Axis. It is also called alpha.
Y=a+Bx
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The Enterprise Valuation is calculated as follows:
2. Net Debt
We have calculated the Net Debt by adding the Long Term Borrowing,
Short Term Borrowing and Pension Provisions and then deducting the
Excess Cash.
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3. Enterprise Value
We have calculated the Enterprise Value by adding Net Debt and Total
Shareholder’s Equity.
1. Sales Multiple
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2. EBITDA Multiple
7
4. PE Multiple
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CHAPTER 2
MERGER AND ACQUISITION: INTRODUCTION
“The decision to invest in a new asset would mean internal expansion for
the firm. The new asset would generate returns raising the value of the
corporation. Mergers offer an additional means of expansion, which is
external, i.e. the productive operation is not within the corporation itself.
For firms with limited investment opportunities, mergers can provide new
areas for expansion. In addition to this benefit, the combination of two or
more firms can offer several other advantages to each of the corporations
such as operating economies, risk reduction and tax advantage.”
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Mergers and Acquisitions: Definition
One plus one makes three: this equation is the special alchemy of a
merger or an acquisition. The key principle behind buying a company is to
create shareholder value over and above that of the sum of the two
companies. Two companies together are more valuable than two separate
companies - at least, that's the reasoning behind M&A. This rationale is
particularly alluring to companies when times are tough. Strong
companies will act to buy other companies to create a more competitive,
cost-efficient company.
The companies will come together hoping to gain a greater market share
or to achieve greater efficiency. Because of these potential benefits,
target companies will often agree to be purchased when they know they
cannot survive alone.
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CHAPTER 3
CORPORATE RESTRUCTURING
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Forms of corporate-restructuring
Expansion
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The merger of Tata Oil Mills Ltd. (TOMCO) with Hindustan Lever Ltd.
(HLL) is an example of absorption.
· Tender offer: This involves making a public offer for acquiring the
shares of a target company with a view to acquire management control in
that company. Takeover by Tata Tea of consolidated coffee Ltd. (CCL) is
an example of tender offer where more than 50% of shareholders of CCL
sold their holding to Tata Tea at the offered price which was more than
the investment price.
CONTRACTION
There are generally the following types of contraction:
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· Split-ups: This type of demerger involves the division of parent
company into two or more separate companies where parent company
ceases to exist after the demerger.
· Equity-carve out: This is similar to spin offs, except that same part of
shareholding of this subsidiary company is offered to public through a
public issue and the parent company continues to enjoy control over the
subsidiary company by holding controlling interest in it.
CORPORATE CONTROLS
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recent years. A well known example from the U.S. is that of Levi Strauss
& company
· Equity buyback: This involves the company buying its own shares back
from the market. This results in reduction in the equity capital of the
company. This strengthens the promoter’s position by increasing his
stake in the equity of the company.
· Amalgamation
Amalgamation is an arrangement or reconstruction. It is a legal process
by which two or more companies are to be absorbed or blended with
another. As a result, the amalgamating company loses its existence and
its shareholders become shareholders of new company or the
amalgamated company. In case of amalgamation a new company may
came into existence or an old company may survive while amalgamating
company may lose its existence.
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According to Halsbury’s law of England amalgamation is the blending of
two or more existing companies into one undertaking, the shareholder of
each blending companies becoming substantially the shareholders of
company which will carry on blende undertaking. There may be
amalgamation by transfer of one or more undertaking to a new company
or transfer of one or more undertaking to an existing company.
Amalgamation signifies the transfers of all are some part of assets and
liabilities of one or more than one existing company or two or more
companies to a new company.
The Accounting Standard, AS-14, issued by the Institute of Chartered
Accountants of India has defined the term amalgamation by classifying (i)
Amalgamation in the nature of merger, and (ii) Amalgamation in the
nature of purchase
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· The business of the transferor company is intended to be carried on,
after the amalgamation, by the transferee company.
· No adjustment is intended to be made in the book values of the assets
and liabilities of the transferor company when they are incorporated in
the financial statements of the transferee company except to ensure
uniformity of accounting policies.
· Amalgamation in the nature of merger is an organic unification of two or
more entities or undertaking or fusion of one with another. It is defined
as an amalgamation which satisfies the above conditions.
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ACQUISITION
Acquisition refers to the acquiring of ownership right in the property and
asset without any combination of companies. Thus in acquisition two or
more companies may remain independent, separate legal entity, but
there may be change in control of companies. Acquisition results when
one company purchase the controlling interest in the share capital of
another existing company in any of the following ways:
a) Controlling interest in the other company. By entering into an
agreement with a person or persons holding
b) By subscribing new shares being issued by the other company.
c) By purchasing shares of the other company at a stock exchange, and
d) By making an offer to buy the shares of other company, to the existing
shareholders of that company.
MERGER
Merger refers to a situation when two or more existing firms combine
together and form a new entity. Either a new company may be
incorporated for this purpose or one existing company (generally a bigger
one) survives and another existing company (which is smaller) is merged
into it. Laws in India use the term amalgamation for merger.
· Merger through absorption
· Merger through consolidation
Absorption: Absorption is a combination of two or more companies into
an existing company. All companies except one lose their identity in a
merger through absorption. An example of this type of merger is the
absorption of Tata Fertilisers Ltd.(TFL) TCL, an acquiring company (a
buyer), survived after merger while TFL, an acquired company ( a seller),
ceased to exist. TFL transferred its assets, liabilities and shares to TCL.
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Consolidation: A consolidation is a combination of two or more companies
into a new company .In this type of merger, all companies are legally
dissolved and a new entity is created. In a consolidation, the acquired
company transfers its assets, liabilities and shares to the acquiring
company for cash or exchange of shares. An example of consolidation is
the merger of Hindustan Computers Ltd., Hindustan Instruments Ltd.,
and Indian Reprographics Ltd., to an entirely new company called HCL
Ltd.
TAKEOVER
Acquisition can be undertaken through merger or takeover route.
Takeover is a general term used to define acquisitions only and both
terms are used interchangeably. A takeover may be defined as series of
transacting whereby a person, individual, group of individuals or a
company acquires control over the assets of a company, either directly by
becoming owner of those assets or indirectly by obtaining control of
management of the company.
Takeover is acquisition, by one company of controlling interest of the
other, usually by buying all or majority of shares. Takeover may be of
different types depending upon the purpose of acquiring a company.
1. A takeover may be straight takeover which is accomplished by the
management of the taking over company by acquiring shares of another
company with the intention of operating taken over as an independent
legal entity.
2. The second type of takeover is where ownership of company is
captured to merge both companies into one and operate as single legal
entity.
3. A third type of takeover is takeover of a sick company for its revival.
This is accomplished by an order of Board for Industrial and Financial
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Reconstruction (BIFR) under the provision of Sick Industrial companies
Act, 1985. In India, Board for Industrial and Financial Reconstruction
(BIFR) has also been active for arranging mergers of financially sick
companies with other companies under the package of rehabilitation.
These merger schemes are framed in consultation with the lead bank, the
target firm and the acquiring firm. These mergers are motivated and the
lead bank takes the initiated and decides terms and conditions of merger.
The recent takeover of Modi Cements Ltd., by Gujarat Ambuja Cement
Ltd. was an arranged takeover after the financial reconstruction Modi
Cement Ltd. The fourth kind is the bail-out takeover, which is substantial
acquisition of shares in a financially weak company not being a sick
industrial company in pursuance to a scheme of rehabilitation approved
by public financial institution which is responsible for ensuring compliance
with provision of substantial acquisition of shares and takeover
Regulations, 1997 issued by SEBI which regulate the bailout takeover.
Takeover Bid
This is a technique for affecting either a takeover or an amalgamation. It
may be defined as an offer to acquire shares of a company, whose shares
are not closely held, addressed to the general body of shareholders with a
view to obtaining at least sufficient shares to give the offer or, voting
control of the company. Takeover Bid is thus adopted by company for
taking over the control and management affairs of listed company by
acquiring its controlling interest.
While a takeover bid is used for affecting a takeover, it is frequently
against the wishes of the management of Offeree Company. It may take
the form of an offer to purchase shares for cash or for share for share
exchange or a combination of these two firms.
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Where a takeover bid is used for effecting merger or amalgamation it is
generally by consent of management of both companies. It always takes
place in the form of share for share exchange offer, so that accepting
shareholders of Offeree Company become shareholders of Offeror
Company.
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at a fixed price. This offered price is generally, kept at a level higher than
the current market price in order to induce the shareholders to disinvest
their holding in favor of the acquiring firm. The acquiring firm may also
stipulate in the tender offer as to how many shares it is willing to buy or
may purchase all the shares that are offered for sale.
In case of tender offer, the acquiring firm does not need the prior
approval of the management of the target firm. The offer is kept open for
a specific period within which the shares must be tendered for sale by the
shareholders of the target firm.
Consolidated Coffee Ltd. was takeover by Tata Tea Ltd.by making a
tender offer to the shareholders of the former at a price which was higher
than the prevailing market price.
In India, in recent times, particularly after the announcement of new
takeover code by SEBI, several companies have made tender offers to
acquire the target firm. A popular case is the tender offer made by
Sterlite Ltd. and then counter offer by Alean to acquire the control of
Indian Aluminium Ltd.
Hostile Takeover Bid: The acquiring firm, without the knowledge and
consent of the management of the target firm, may unilaterally pursue
the efforts to gain a controlling interest in the target firm, by purchasing
shares of the later firm at the stock exchanges.
Such case of merger/acquisition is popularity known as ‘raid’. The caparo
group of the U.K. made a hostile takeover bid to takeover DCM Ltd. and
Escorts Ltd. Similarly, some other NRI’s have also made hostile bid to
takeover some other Indian companies.
The new takeover code, as announced by SEBI deals with the hostile
bids.
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Takeover and merger
“The distinction between a takeover and merger is that in a takeover the
direct or indirect control over the assets of the acquired company passes
to the acquirer in a merger the shareholding in the combined enterprises
will be spread between the shareholders of the two companies”.
In both cases of takeover and merger the interests of the shareholders of
the company are as follows:
1. Company should takeover or merge with another company only if in
doing so, it improves its profit earning potential measured by earning per
share and
2. The company should agree to be taken if, and only if, shareholders are
likely to be better off with the consideration offered, whether cash or
securities of the company than by retaining their shares in the original
company.
TYPES OF MERGERS
There are four types of mergers as follows
1. Horizontal merger:
It is a merger of two or more companies that compete in the same
industry. It is a merger with a direct competitor and hence expands as
the firm’s operations in the same industry. Horizontal mergers are
designed to produce substantial economies of scale and result in decrease
in the number of competitors in the industry. The merger of Tata Oil Mills
Ltd. with the Hindustan lever Ltd. was a horizontal merger.
In case of horizontal merger, the top management of the company being
meted is generally replaced, by the management of the transferee
company. One potential repercussion of the horizontal merger is that it
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may result in monopolies and restrict the trade. Weinberg and Blank7
define horizontal merger as follows:
“A takeover or merger is horizontal if it involves the joining together of
two companies which are producing essentially the same products or
services or products or services which compete directly with each other
(for example sugar and artificial sweetness). In recent years, the great
majority of takeover and mergers have been horizontal. As horizontal
takeovers and mergers involve a reduction in the number of competing
firms in an industry, they tend to create the greatest concern from an
anti-monopoly point of view, on the other hand horizontal mergers and
takeovers are likely to give the greatest scope for economies of scale and
elimination of duplicate facilities.”
2. Vertical merger:
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of raw material to the relating of final products). “A takeover of merger is
vertical where one of two companies is an actual or potential
supplier of goods or services to the other, so that the two companies are
both engaged in the manufacture or provision of the same goods or
services but at the different stages in the supply route (for example
where a motor car manufacturer takes over a manufacturer of sheet
metal or a car distributing firm). Here the object is usually to ensure a
source of supply or an outlet for products or services, but the effect of the
merger may be to improve efficiency through improving the flow of
production and reducing stock holding and handling costs, where,
however there is a degree of concentration in the markets of either of the
companies, anti-monopoly problems may arise.”
3. Co-generic Merger:
In these, mergers the acquirer and target companies are related through
basic technologies, production processes or markets. The acquired
company represents an extension of product line, market participants or
technologies of the acquiring companies. These mergers represent an
outward movement by the acquiring company from its current set of
business to adjoining business. The acquiring company derive benefits by
exploitation of strategic resources and from entry into a related market
having higher return than it enjoyed earlier. The potential benefit from
these mergers is high because these transactions offer opportunities to
diversify around a common case of strategic resources.
Western and Mansinghka9 classified cogeneric mergers into product
extension and market extension types. When a new product line allied to
or complimentary to an existing product line is added to existing product
line through merger, it defined as product extension merger, Similarly
market extension merger help to add a new market either through same
line of business or adding an allied field . Both these types bear some
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common elements of horizontal, vertical and conglomerate merger. For
example, merger between Hindustan Sanitary ware industries Ltd. and
associated Glass Ltd. is a Product extension merger and merger between
GMM Company Ltd. and Xpro Ltd. contains elements of both product
extension and market extension merger.
4. Conglomerate merger:
These mergers involve firms engaged in unrelated type of business
activities i.e. the business of two companies are not related to each other
horizontally (in the sense of producing the same or competing products),
nor vertically (in the sense of standing towards each other n the
relationship of buyer and supplier or potential buyer and supplier). In a
pure conglomerate, there are no important common factors between the
companies in production, marketing, research and development and
technology. In practice, however, there is some degree of overlap in one
or more of this common factor.
Conglomerate mergers are unification of different kinds of businesses
under one flagship company. The purpose of merger remains utilization of
financial resources enlarged debt capacity and also synergy of managerial
functions. However these transactions are not explicitly aimed at sharing
these resources, technologies, synergies or product market strategies.
Rather, the focus of such conglomerate mergers is on how the acquiring
firm can improve its overall stability and use resources in a better way to
generate additional revenue. It does not have direct impact on acquisition
of monopoly power and is thus favored throughout the world as a means
of diversification.
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CHAPTER 4
MERGER PROCEDURE
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resolution authorizing its directors/executives to pursue the matter
further.
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same has to be published in two newspapers. After hearing the parties
the parties concerned ascertaining that the amalgamation scheme is fair
and reasonable, the NCLT will pass an order sanctioning the same.
However, the NCLT is empowered to modify the scheme and pass orders
accordingly.
8. Filing the order with the Registrar: Certified true copies of the
NCLT order must be filed with the Registrar of Companies within the time
limit specified by the NCLT.
9. Transfer of Assets and Liabilities: After the final orders have been
passed by the NCLT, all the assets and liabilities of the amalgamating
company will, with effect from the appointed date, have to be transferred
to the amalgamated company.
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3. Terms of transfer of assets and liabilities from transferor to transferee
4. Effective date when scheme will came into effect
5. Treatment of specified properties or rights of Transferor Company
6. Terms and conditions of carrying business by Transferor Company
between appointed date and effective date
7. Share capital of Transferor Company and Transferee Company
specifying authorized, issued, subscribed and paid up capital.
8. Proposed share exchange ratio, any condition attached thereto and the
fractional share certificate to be issued.
9. Issue of shares by Transferee Company
10. Transferor company’s staff, workmen, employees and status of
provident fund, Gratuity fund, superannuation fund or any other special
funds created for the purpose of employees.
11. Miscellaneous provisions covering Income Tax dues, contingent and
other accounting entries requiring special treatment.
12. Commitment of transferor and Transferee Company towards making
an application U/S 394 and other applicable provisions of companies Act,
1956 to their respective High court.
13. Enhancement of borrowing limits of transferee company when
scheme coming into effect.
14. Transferor and transferee companies consent to make changes in the
scheme as ordered by the court or other authorities under law and
exercising the powers on behalf of the companies by their respective
boards.
15. Description of power of delegates of Transferee Company to give
effect to the scheme. Qualifications attached to the scheme which
requires approval of different agencies.
16. Effect of non receipt of approvals/sanctions etc.
17. Treatment of expenses connected with the scheme.
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CHAPTER 5
PROCESS OF MERGER AND ACQUISITION
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Their fees must be paid at some point and are embedded into the
purchase price.
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• A letter of intent can be effectively used as a communication tool
that ensures that both parties are working in the same direction
and with the same overall intentions.
The seller and buyer both have a vested interest in finding deal stoppers
at an early stage.
What happens when both parties are direct competitors in the same
industry space and there is a possibility of the deal falling through?
What happens when both parties operate in the same industry space?
The seller does not want to reveal unnecessary information to the buyer,
should the deal not consummate in a final purchase.
This fear of disclosure is particularly acute when the buyer is the seller’s
direct competitor, and for very good reason.
Every company would love to know the detailed financial, marketing, and
sales aspects of its competitor, and due diligence requires that this
information be disclosed.
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Should the transaction fall apart, the seller is placed at a decided
disadvantage compared to the buyer, who disclosed little or no
confidential information about its own internal processes during due
diligence. Once again, the letter of intent comes into play.
Sellers should make their secrecy boundaries clearly known in the letter
of intent.The buyer can either accept or reject those boundaries at this
earlier stage instead of being caught by surprise later.
Non disclosure agreements (NDA’s) are also executed early in the
process specifically with the intent of protecting the secrecy needs of the
parties involved.
Alternate approach
As an alternative approach to immediate full disclosure to the buyer by
the seller, an interim stage can be defined.
Here, the buyer gains access to certain information with the intention of
deciding on a purchase price and set of acceptance conditions.
This approach provides both the seller and buyer with some level of
protection. Due diligence, by its very nature, pushes the threshold of
confidential information disclosure and should be treated with the respect
it deserves.
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A review of intellectual property rights, including trademarks, patents,
and other areas of unique and intrinsic value. This is particularly true for
technology companies.
Outstanding loans that are guaranteed by the company and/or its owners
Technology evaluation that includes development tools, cycles, processes
and personnel. Key value areas should be highlighted and evaluated in
light of acquisition goals.
Financial statement review for the prior three to five years, including the
minutes of board meetings and so on
Annual reports and required stock exchange filings for any publicly traded
company. This action can also be taken during the prequalification
screening stages.
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The more the buyer and seller know about each other, the more
accurately they can assess the likelihood of a successful future business
relationship. Plan for this process takes time. Spend the required time in
the due diligence stage and thoroughly understand what you are
committing to with the sale or purchase.
Arranging finance:
Financing depends on the financial condition of the acquired company as
well as the acquiring company.
The buying and/or selling company must be creditworthy or the deal will
simply not go through.
Buyers have usually lined up financing when the letter of intent is signed
– sellers can ask about the buyer’s ability to fund the purchase before
signing the LOI.
Sellers may seriously consider stalling the M&A stage until the buyer has
shown itself to be creditworthy.
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CHAPTER 6
VALUATION METHODOLOGIES FOR AN M&A
TRANSACTION
37
Structure of value
Selection of Method:
Discounted Cash Flow
Approach:
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• This methodology is used to determine present value of a business
on a ‘going concern’ assumption.
• A DCF technique primarily depends on the projection of future cash
flows and selection of an appropriate discounting factor.
• Enterprise Value is derived based on summation of:
Projected cash flows over a specified projected period
(‘Primary period’); and
Cash flows to perpetuity that a company will generate after
the primary period.
• Equity value is equal to Enterprise value less Net Debt.
Computation of Cost of Capital
Cost of Capital:
Cost of capital is
A function of the investment and the investor
Forward looking and represents investors’ expectations
• The principal factors which influence the risk-free rate,
equity risk premium and level of the beta
Forecasting performance
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Forecast period has the following characteristics:
• The forecasting process should be able to give insightful information
about the overall business risk.
• The length of the forecast period is very critical and should include
the period of accelerated growth or risk.
• The steady state period has the following characteristics:
• Constant or steady rate of growth in line with mature industry
• Capital expenditure and in depreciation are substantially balance
• Rate of return remains substantially constant
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DCF valuation – A sample:
Market Multiples
Comparable companies
• In arriving at the selected range of multiples applied to the
company‘s earnings we consider the overall dynamics of the sector.
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We also include an analysis of the level of sales multiples against
absolute sales and also EBITDA multiples against EBIT margins.
• In arriving at the level of multiple to apply, we have to consider
companies that are broadly in the same size.
• Based on the specific characteristics of the company we consider
multiples in the range that are appropriate in the circumstances.
Other Methods
Net Assets Method:
Assets at historical cost or replacement cost on valuation date
considered:
• Intangible assets
• Revaluation of fixed assets
• Deferred tax asset/ liabilities
Some adjustments that may be called for:
• Contingent liabilities
• Investments and Surplus assets
• Inventory and Debtors
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The financial models should produce income statements, balance sheets,
and cash flow statements for the forecast period for a given set of
operating and financing assumptions.
The financial model permits performing the following analyses:
Break-even synergies:
A first calculation of the value of the synergies net of transaction
expenses necessary to maintain the share price of the acquirer at its pre-
merger level
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The fees and expenses to be paid by the parties
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Improved market reach and industry visibility - Companies buy
companies to reach new markets and grow revenues and earnings. A
merge may expand two companies' marketing and distribution, giving
them new sales opportunities. A merger can also improve a company's
standing in the investment community: bigger firms often have an easier
time raising capital than smaller ones.
That said, achieving synergy is easier said than done - it is not
automatically realized once two companies merge. Sure, there ought to
be economies of scale when two businesses are combined, but sometimes
a merger does just the opposite. In many cases, one and one add up to
less than two.
Sadly, synergy opportunities may exist only in the minds of the corporate
leaders and the deal makers. Where there is no value to be created, the
CEO and investment bankers - who have much to gain from a successful
M&A deal - will try to create an image of enhanced value. The market,
however, eventually sees through this and penalizes the company by
assigning it a discounted share price. We'll talk more about why M&A may
fail in a later section of this tutorial.
Conclusion
The financial analysis of the merger is an iterative process that assists the
buyer in carrying out due diligence, testing the consistency of the merger
assumptions, formulating the terms of the offer, and reaching a decision.
Negotiating an acquisition is a process of give and take as the parties get
comfortable with each other and learn about their intentions.
A flexible financial model will assist the acquirer during the negotiation
process by showing the financial and value implications of alternative deal
terms.
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Reaching a final agreement may require the addition of earn outs, collars,
escrows, and other contingencies to the terms of the merger in order to
close the valuation gap separating buyer and seller.
CHAPTER 7
WHY DO COMPANIES THINK OF GOING GLOBAL?
Indian corporations are going global. The recent acquisition of
Corus by Tata has signalled that some of them are looking beyond
the national market and seeing their future as multi-nationals,
competing for space in the global economy with the present
occupants. International power relations are influenced by the
global reach of national capital. Hence the global ambitions of
Indian corporations make geo-political sense and also economic
sense. The Tata-Corus deal is the biggest one so far. But a lot has
been happening since the finance minister loosened controls on
overseas investments by Indian companies in 2003. The volume of
overseas acquisitions by Indian companies has grown from around
$2 billion in 2004 to $4.5 billion in 2005 and it reached over $10
billion in 2006. Videocon, Bharat Forge, Ranbaxy and other pharma
companies, the IT majors and, of course, ONGC are some of the
others who have been active.
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This push by Indian companies is part of a broader outward
expansion by companies from the rapidly developing economies
(RDEs). A study by the Boston Consulting Group (BCG) has
identified 100 globalising companies in 12 RDEs, of which 44 are in
China, 21 in India, 12 in Brazil, 7 in Russia, 6 in Mexico, 5 in
ASEAN, 4 in Turkey and 1 in Egypt. There are of course several
older global players operating out of South Korea, Taiwan,
Singapore and Hong Kong, which are now considered part of the
developed world.
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grow five-fold in size in five years and he could not do that even if
his company expanded at twice the GDP growth rate within India.
The Tata-Corus deal has some of this raw ambition. But it is more
than that. It reflects a rather special value proposition the Tata
management can provide. The Tatas have operated a steel plant
under difficult conditions, coped with competition and developed
plant management, supply management, maintenance and
marketing skills, which constitute a viable business-model for
developed country commodity producers teetering on the edge of
commercial decline. In some ways Mittal’s empire rests on the
same strength as he has brought in management talent from India
even though he himself is based in Europe.
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Chinese companies have built deep relationships with retailers like
Home Depot and Wal-Mart, which give them access to the price-
conscious consumer segment, where they can compete effectively
with present players.
ONGC, China’s national oil company and its main steel company are
different. Their overseas forays are an effort at securing supply
sources. Both China and India are late-comers to this game and
both have large and growing demands for imports of oil and other
minerals. This part of the globalisation process is more a geo-
political than an economic game. Overseas expansion necessarily
involves some financial packaging. Most of these financial services
are today provided by investment bankers abroad. Why not make it
easier for Indian investment bankers to provide these services?
They have the talent but are hemmed in by controls on what they
can do abroad.
One question that arises is whether a capital-scarce country should
be a capital exporter. First, any large country that engages in
foreign trade has to invest abroad for securing markets and raw
material supplies. Second, acquisitions like the Tata-Corus deal do
not involve much export of capital since they are often financed by
foreign borrowing. They are, in effect, an export of management
capacity.
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India’s greatest comparative strength is in project and plant
management under difficult conditions, in intermediate engineering
and IT services and in skill-intensive manufacture. Leveraging this
to our advantage requires a liberal view of overseas expansion by
Indian companies.
CHAPTER 8
TATA GROUP OF COMPANIES
• One of the India’s largest business groups in the country
• It has about 96 operating companies
• Diverse business in 7 sectors
• Revenues equivalent to 5.3% of India’s GDP
• Group revenue FY 2008: Rs 251,543 Cr. / $ 62.5 b
• Group profit FY 2008: Rs 21,578 Cr. / $ 5.4 b
• Its 27 publicly listed companies have a combined market
capitalization which is the 2nd highest among all business houses in
India
• Largest employer in private sector over 300,000 employees
• A shareholder base of over 2.9 million
• Operations in over 80 countries
• Products and services exported to 85 countries
50
estimated at $62.5 billion (around Rs251, 543 crore), of which 61
per cent is from business outside India. The group employs around
350,000 people worldwide. The Tata name has been respected in
India for 140 years for its adherence to strong values and business
ethics.
The business operations of the Tata group currently encompass
seven business sectors: communications and information
technology, engineering, materials, services, energy, consumer
products and chemicals.
51
In tandem with the increasing international footprint of its
companies, the group is also gaining international recognition.
Brand Finance, a UK-based consultancy firm, recently valued the
Tata brand at $11.4 billion and ranked it 57th amongst the Top 100
brands in the world.
52
combined development-related expenditure of the Trusts and the
companies amounts to around 4 per cent of the group’s net profits.
53
CASE-STUDIES
54
CHAPTER 9
9.1 TATA COMMUNICATION-NTT DOCOMO
About the acquisition
Date: - 13th November 2008
Acquirer: - Ntt-Docomo
Target company: - Tata Teleservices Ltd.
Stake: - 26 %
Deal amount: - US$ 2700 m
Sector: - Tele-communication
TATA COMMUNICATIONS
Tata Communications is a leading global provider of a new world of
communications. With a leadership position in emerging markets, Tata
Communications leverages its advanced solutions capabilities and domain
expertise across its global and pan-India network to deliver managed
solutions to multi-national enterprises, service providers and Indian
consumers.
The Tata Global Network includes one of the most advanced and largest
submarine cable networks, a Tier-1 IP network, with connectivity to more
55
than 200 countries across 400 Pops, and nearly 1 million square feet of
data centre and collocation space worldwide.
Tata Communications' depth and breadth of reach in emerging markets
includes leadership in Indian enterprise data services, leadership in global
international voice, and strategic investments in operators in South Africa
(Neo-tel), Sri Lanka (Tata Communications Lanka Limited), Nepal (United
Telecom Limited), and subject to approval by the Chinese government,
China (China Enterprise Communications)
Tata Communications Limited is listed on the Bombay Stock Exchange
and the National Stock Exchange of India and its ADRs are listed on the
New York Stock Exchange. (NYSE: TCL)
NTT-DOCOMO
NTT DOCOMO is Japan's premier provider of leading-edge mobile voice,
data and multimedia services. With more than 55 million customers in
Japan, the company is one of the world's largest mobile communications
operators.
56
DOCOMO launched Osaifu-Keitai™, a mobile wallet platform enabling
quick, contact-less transactions for cash, credit, ID, and more. More than
36 million phones equipped for Osaifu-Keitai services are now in use.
57
their joint activities including Business & Technology Cooperation
Committee.
Tokyo-based DOCOMO, the world’s leading mobile operator, has played a
major role in the evolution of mobile telecommunications through its
development of cutting-edge mobile technologies and services. The
company is a strong market leader used by more than 50 per cent of
Japan’s mobile phone users. DOCOMO, the world’s leading mobile
operator, will work closely with TTSL’s management and provide know-
how to help the company develop its mobile business. TTSL expects to
leverage DOCOMO’s expertise in the development and delivery of value-
added services, where DOCOMO is a firmly established market leader. The
Japanese telecom giant which, with 53 million customers and 51.5% of
the Japanese market, is one of the world's largest players in the
telecommunications industry, bought a 26% stake in Tata Teleservices
Ltd (TTSL) for $2.7 billion. NTT DoCoMo followed up this deal with an
open offer for 20% in Tata Teleservices (Maharashtra) Ltd -- TTML -- the
listed subsidiary of TTSL. At Rs24.70 (50 cents) a share, this means
another $191 million. The offer will open in January.
58
Open offer
Besides, DoCoMo, in accordance with regulations of the Securities and
Exchange Board of India, expects to make an open offer to acquire up to
20 per cent of outstanding equity shares of Tata Teleservices Maharashtra
(TTML), a Tata telecommunication company, through a joint tender offer
along with Tata Sons. TTSL and TTML through the Tata Indicom brand,
have increased their combined share of the fast-growing Indian mobile
market and their combined subscriber base now stands at over 30 million.
Market leader
NTT DoCoMo is a market leader in Japan and is used by over 50 per cent
of Japan’s mobile phone users.
It serves over 53 million customers, including 46 million people
subscribing to FOMATM (in Japan), launched as the world’s first 3G mobile
service based on W-CDMA in 2001.
It offers a variety of leading-edge mobile multimedia services, including i-
mode™, the world’s most popular mobile e-mail/Internet service, used by
48 million people.
With the addition of credit-card and other e-wallet functions, DoCoMo
mobile phones have become versatile tools for daily life. It is listed on the
Tokyo, London and New York stock exchanges. TTSL expects to leverage
DoCoMo’s expertise in the development and delivery of value-added
services, where DoCoMo is a firmly established market leader.
59
IMPACT ON SHAREHOLDER’S WEALTH
P re A cquisition P ost Acquisition
60
Tata Doc om o
25.00
20.00 19.80
15.00 14.57
10.00
5.00
-
O p en P ric e
Ta ta Doc om o
25.00
20.00 19.73
15.00 14.33
10.00
5.00
-
C lo s ing P ric e
61
Pre Acquisition Post Acquisition
Tata Docomo
26.50
26.15
26.00
25.50
25.23
25.00
24.50
T urno ver
62
Pre Acquisition Post Acquisition
25.00 25.00
5.00 5.00
- -
INTERPRETATION
The calculation of five days moving average for the previous as well as
later month from the date of merger is shown. It takes into account the
open, high, low, close, daily turnover as well as calculation of abnormal
return. This takes into account the daily volatilities of the share prices.
63
Here, the daily average prices have risen due to positive feedback
of the merger but the turnover has decreased at the same time.
This shows that there are certain shareholders who expect the
share prices to rise much more as compared to actual rise that has
taken place and so they have reduced trading activities and turned
themselves into investors. Such investors value the deal much more
and so they expect the share prices to rise sharply within a period
of year or so.
64
COMPANY’S RETURN BEFORE AND AFTER ACQUISITION
Pre Acquisition
Post Acquisition
65
0.00%
08
08
08
08
08
08
08
08
08
08
08
8
8
8
8
/0
/0
/0
/0
3/
7/
1/
5/
7/
9/
1/
5/
9/
0/
2/
/2
/4
/8
/6
/1
/1
/2
/2
/2
/2
/3
/1
/1
/1
/2
-0.10%
11
11
11
11
10
10
10
10
10
10
11
10
10
10
11
-0.20%
-0.30%
-0.40%
-0.50%
-0.60%
0.04%
0.03%
0.02%
0.01%
0.00%
-0.01%
08
08
08
08
08
08
08
08
08
08
08
08
8
8
/0
/0
/0
/0
4/
4/
6/
8/
0/
2/
4/
6/
8/
0/
0/
2/
/2
/4
/6
/8
/1
/1
/1
/2
/2
/2
/2
/2
/3
/1
/1
/1
12
12
12
12
11
11
11
11
11
11
11
12
12
12
11
11
-0.02%
-0.03%
-0.04%
INTERPRETATION
The return of the target company Tata Communication has been very
poor since the past 15 to 20 days before the acquisition but it almost got
to break-even soon after the acquisition date. This sustained for the next
8 to 10 days but again got back into negative returns zone due to poor
customer support to the newly entered Docomo brand in highly
competitive communications market in India.
66
RATIO ANALYSIS
TATA DOCOMO (13-11- Pre- acquisition Post- Change
08) acquisition (%)
Debt-Equity Ratio 0.11 0.14 27.27%
ROCE (%) 7.33 7.44 1.50%
net profit margin 9.55 10.61 11.10%
P/E 0 12 0
ROE(%) 11.14 10.97 -1.53%
EPS 0.89 1.11 24.72%
OPM(%) 16.2 18.7 15.43%
INTERPRETATION
Debt equity ratio on post acquisition debt is increasing which shows
company debt is increasing after merger.ROCE is constant it has not
change much.Net profit margin increases by 11.10 as it income increases
in post acquisition as compared to pre acquisition. P/E highly increases in
post acquisition from 0 to 12%. ROE is decreasing by 1.53% which shows
that it slightly more debt than equity. EPS is increasing drastically by
24.27% which is very profitable for investors. Operating profit margin is
67
increased by 15.43% which shows that company profit margin is very
fairly profitable.
68
9.2 TATA MOTOR - JLR
TATA MOTORS
• Tata Motors Limited is India's largest automobile company, with
consolidated revenues of Rs.70,938.85 crores (USD 14 billion) in
2008-09
• It is the leader in commercial vehicles segment, and among the top
three in passenger vehicles
• It is the world's fourth largest truck manufacturer, and the world's
second largest bus manufacturer
• The company's 24,000 employees are guided by the vision to be
"best in the manner in which we operate, best in the products we
deliver, and best in our value system and ethics"
• Over 4 million Tata vehicles ply on Indian roads, since the first
rolled out in 1954
• It has manufacturing base in India spread across Jamshedpur
(Jharkhand), Pune (Maharashtra), Lucknow (Uttar Pradesh),
Pantnagar (Uttarakhand) and Dharwad (Karnataka)
• The company's dealership, sales, services and spare parts network
comprises over 3500 touch points
• Tata Motors also distributes and markets Fiat branded cars in India
69
• Tata Motors, the first company from India's engineering sector to
be listed in the New York Stock Exchange (September 2004), has
also emerged as an international automobile company
• It has operations in the UK, South Korea, Thailand and Spain
• In 2004, it acquired the Daewoo Commercial Vehicles Company,
South Korea's second largest truck maker
• In 2005, Tata Motors acquired a 21% stake in Hispano Carrocera, a
reputed Spanish bus and coach manufacturer, and subsequently the
remaining stake in 2009. Hispano's presence is being expanded in
other markets
• In 2006, Tata Motors formed a joint venture with the Brazil-based
Marcopolo, a global leader in body-building for buses and coaches
to manufacture fully-built buses and coaches for India and select
international markets
• Tata Motors is also expanding its international footprint, established
through exports since 1961
• The company's commercial and passenger vehicles are already
being marketed in several countries in Europe, Africa, the Middle
East, South East Asia, South Asia and South America
• In January 2008, Tata Motors unveiled its People's Car, the Tata
Nano, which India and the world have been looking forward to
70
product development centres in Whitley, Coventry and Gaydon,
Warwickshire
• The business is a major wealth generator for the UK Jaguars
exported to 63 countries, with sales to customers conducted
principally through franchised dealers and importers
• That Jaguar and Land Rover are two of the most well-known
automotive names in the world, and that Ford had acquired them
for a collective cost of about $5 billion almost a decade earlier, Tata
Motors seems to have got them at a steal at $2 billion
Terms
Under the terms of the deal Ford will contribute about $600 m to JLR
pension plan. Ford will continue to supply JLR for differing periods with
engines, stamping and other car components, in addition to a variety of
technologies. In addition Ford Motor Credit Company will provide
financing for JLR and customers during a transitional period upto 12
months.
JLR was a part of Ford's Premier Automotive Group (PAG) and were
considered to be British icons. Jaguar was involved in the manufacture of
high-end luxury cars, while Land Rover manufactured high-end SUVs.
71
Tata Motors had several major international acquisitions to its credit. It
had acquired Tetley, South Korea-based Daewoo's commercial vehicle
unit, and Anglo-Dutch Steel maker Corus.
Tata Motors long-term strategy included consolidating its position in the
domestic Indian market and expanding its international footprint by
leveraging on in-house capabilities and products and also through
acquisitions and strategic collaborations.
Analysts were of the view that the acquisition of JLR, which had a global
presence and a repertoire of well established brands, would help Tata
Motors become one of the major players in the global automobile
industry.
Ford Motors Company (Ford) is a leading automaker and the third largest
multinational corporation in the automobile industry. The company
acquired Jaguar from British Leyland Limited in 1989 for US$ 2.5b.
In March 1999, Ford established the PAG with Aston Martin, Jaguar, and
Lincoln. During the year, Volvo was acquired for US$ 6.45 billion, and it
also became a part of the PAG In September 2006, after Allan Mulally
(Mulally) assumed charge as the President and CEO of Ford, he decided
to dismantle the PAG. In March 2007, Ford sold the Aston Martin sports
car unit for US$ 931 million.
72
Tata Motors also entered into long term agreements with FMC for supply
of engines, stampings and other components to JLR. Other areas of
transition support from Ford include IT, accounting and access to test
facilities. The two companies will continue to cooperate in areas such as
design and development through sharing of platforms and joint
development of hybrid technologies and power train engineering.
The Ford Motor Credit Company, the credit providing arm of FMC, will
continue to provide financing for Jaguar Land Rover dealers and
customers for a transition period lasting for a period of 12 months. Tata
Motors is in an advanced stage of negotiations with leading auto finance
providers to support the Jaguar Land Rover business in the UK, Europe
and the US, and is expected to select financial services partners shortly.
On March 26 2008, Tata Motors entered into an agreement with Ford for
the purchase of JLR. Tata Motors agreed to pay US$ 2.3 billion in cash for
a 100% acquisition of the business of JLR. As part of the acquisition, Tata
Motors did not inherit any of the debt liabilties of JLR the acquisition was
totally debt free.
Tata Motors raised $3 billion (about Rs. 12000 crore) through bridge
loans for 15 months from a clutch of banks, including JP Morgan,
Citigroup, and SBI
The Company chartered out plans to raised Rs,7200 crore through three
simultaneous but unlinked rights issue, the proceeds of which will be used
to part-finance the JLR deal of Rs.9228.75 crore. The precise terms of the
issue (the ratio at which these securities will be offered, offer price and
the conversion price) will be decided when the issue are ready to be
made
73
The rights issue will raise the equity capital of Tata Motors by 30-35
percent by March 2009. The company also plans to raise $500-600 million
through an issue of securities in the foreign markets. The company will
share the date of listing at a later date.
The acquisition of JLR was done through the company’s wholly owned
subsidiary TML Holdings (UK).
The Challenges
Morgan Stanley reported that JLR's acquisition appeared negative for Tata
Motors, as it had increased the earnings volatility, given the difficult
economic conditions in the key markets of JLR including the US and
Europe. Moreover, Tata Motors had to incur a huge capital expenditure as
it planned to invest another US$ 1 billion in JLR. This was in addition to
the US$ 2.3 billion it had spent on the acquisition. Tata Motors had also
incurred huge capital expenditure on the development and launch of the
small car Nano and on a joint venture with Fiat to manufacture some of
the company's vehicles in India and Thailand. This, coupled with the
downturn in the global automobile industry, was expected to impact the
profitability of the company in the near future
74
IMPACT ON SHAREHOLDER’S WEALTH
P re Acquisition P ost Acquisition
75
Tata Jaguar
680.00
674.16
660.00
640.00
625.13
620.00
600.00
Open Price
Tata Jaguar
680.00
666.86
660.00
640.00
624.43
620.00
600.00
C lo sing Price
76
P re A c quis itio n P o s t A c quis itio n
Tata Jaguar
150.00
111.36
100.00
67.89
50.00
T urno ver
77
Pre Acquisition Post Acquisition
78
Tata Jaguar
700.00
680.00 683.08
660.00
640.00
635.22
620.00
600.00
Hig h Pric e
Tata Jaguar
660.00 655.57
640.00
620.00 616.35
600.00
580.00
Low Price
INTERPRETATION
The calculation of five days moving average for the previous as well as
later month from the date of merger is shown. It takes into account the
open, high, low, close, daily turnover as well as calculation of abnormal
return. This takes into account the daily volatilities of the share prices.
Here, the daily average prices have fallen in terms of all prices and
even the turnover has decreased. This shows that the investors are
not happy with the valuation of merger and so the overall
sentiment among the investors is very poor. There are certain
shareholders who expect the share prices to fall even much more as
compared to actual fall that has taken place and so they have
79
reduced trading activities and tried to sell and come out of the
situation as soon as possible.
80
COMPANY’S RETURN BEFORE AND AFTER ACQUISITION
PreAcquisition
Post Acquisition
81
0.00%
08
08
08
08
8
8
8
/0
0
/0
/0
/0
/0
/0
/0
/0
/0
/0
/0
/0
2/
6/
8/
5/
0/
4
16
24
27
29
12
14
18
20
22
26
28
2
1
3/
3/
3/
3/
2/
3/
3/
3/
3/
3/
2/
2/
3/
3/
3/
3/
3/
-0.05%
-0.10%
-0.15%
-0.20%
-0.25%
0.03%
0.02%
0.01%
0.00%
-0.01%
8
8
08
08
08
08
8
/0
/0
/0
/0
/0
/0
/0
/0
/0
/0
/0
2/
4/
6/
8/
31
10
12
14
18
20
22
24
28
16
26
-0.02%
4/
4/
4/
4/
3/
4/
4/
4/
4/
4/
4/
4/
4/
4/
4/
-0.03%
-0.04%
-0.05%
-0.06%
-0.07%
INTERPRETATION
As we can see from the line chart that the cumulative return before
merger was negative and the entire trend is moving in the negative
direction due to poor returns of tata motors.
A soon as the acquisition took place, the highly profit generating Jaguar
as well as Land Rover added to the profit and earnings of the tata motors.
The brand value of JLR added to the highly reputable Tata Group and the
company’s balance sheet. This can be clearly seen in the line chart above.
82
RATIO ANALYSIS
TATA MOTORS (27- 03 2008) Pre- Post- Change (%)
acquisition acquisition
Debt-Equity Ratio 0.56 0.97 42.27
ROCE (%) 30.52 6.88 -343.60
net profit margin 6.88 11.47 40.02
P/E 15.45 9.59 -61.11
ROE(%) 30.98 5.34 -480.15
EPS 47.1 18.81 -150.40
OPM(%) 11.16 7.89 -41.44
INTERPRETATION
83
than debt. EPS is increasing drastically by 480.15% which is very
profitable for investors. Operating profit margin is reduced by 41.44%
which shows that company profit margin is very less.
84
9.3 TATA POWER–PT KALTIM PRIMA COAL
TATA POWER
As India’s largest private power utility, we at Tata Power have set the
momentum of growth. In our quest to deliver sustainable energy, we are
spreading our footprint nationwide, creating new benchmarks in
operational efficiencies, investing in global resources and redefining
paradigms.
Our strength lies in fulfilling our commitments and our ability to manage
well in the changing environment. We take pride in building lasting and
trustful relationship with our customers along with a legacy of caring for
our communities in and around our areas of operations. As we strive to
lead the reform process for sustainable power, we are excited to redefine
the contours of Indian ‘Power’ Sector.
85
activities. Moreover, KPC has followed standard determined by Global
Report Initiative (GRI).
Indonesia's world class producer of high coal thermal from one of the
world's largest open pit mining operations
Kaltim Prima Coal receives awards for it's achievements in helath, safety,
environment, and community development
Tata Power Company kicked off the implementation of its ultra mega
power projects by exploring coal mines buyouts overseas for Mundra.
Confirming the move, the Tata Power Managing Director, Mr. Prasad R.
Menon, said on Thursday that Tata Power plans to import around 12
million tonnes of coal annually starting 2012 for its upcoming coal-fired
86
project in Gujarat and the company is also scouting for coal mines
abroad.
Mr. Menon said Tata Power was looking at mine acquisitions and coal
supplies from Australia, Indonesia and South Africa.
Tata Power is yet to finalize the funding pattern for the project, which is
estimated to cost around Rs 18,000 Cr.
Tata Power Company said it has signed a $1.1-billion (Rs 4,950 crore)
deal to buy 30 per cent stakes in two Indonesian coal companies, and in a
related coal trading company, all promoted by PT Bumi Resources Tbk
(Bumi), Indonesia.
87
Tata Power has also signed an offtake agreement with Kaltim Prima,
which entitles it to purchase 10 million tonnes of coal per annum.
The Indian power company is sewing up long-term contracts for coal for
its ambitious five-year, 7000 MW expansion plan.
"This move not only secures our fuel requirements in the light of the
aggressive growth plans charted out by the company, but also opens up
opportunities for Tata Power to own and operate a range of world-class,
competitive and profitable electricity and energy businesses in India and
overseas," he said.
The transaction cost of $1.1 billion is prior to working capital and other
adjustments. The seller PT Bumi Resources could get as much as $200
million more from these adjustments, getting $1.3 billion from the deal.
Tata Power will make this acquisition through an offshore special purpose
vehicle, said a statement from the company. Funding will be done
through a combination of debt in the SPV, internal accruals and
borrowings from Tata Power.
88
including the Mundra UMPP, said Mr S. Ramakrishnan, Executive Director,
Tata Power.
The company will require 21 mt of imported coal for all these planned
projects. The Indonesian deal will take care of 50 per cent of Tata Power's
requirements, which would be capped there. "From a risk point of view,
we don't want to get more than 50 per cent of our requirements from one
country," said Mr Ramakrishnan.
Benefits
The financial impact of the acquisition on Tata Power will be positive over
a five-year time frame; however it would be under marginal pressure for
one or two years, said Mr Ramakrishnan. But, on a consolidated basis,
the deal will be positive from day one, the acquiree companies being
profit-making ones, he said.
Currently, Bumi has 100 per cent stake in PT Arutmin and 95 per cent
stake in Kaltim Prima, he said. Regulations require that Indonesian
promoters own at least 51 per cent stake in these companies.
Bumi had been looking for a buyer for one-third interest in these mines
ever since its attempts to sell the stakes to an investment bank proved
unsuccessful.
89
But Tata Power believed that it was a good deal, whose valuation was
done on the basis of discounted cash flows and entitlement to earnings.
The company had reported revenues of Rs 4,562 crore and net profit of
Rs 610 crore for the year ended March 31, 2006. Its revenues for the
quarter ended December 31, 2006 had been Rs 1,200 crore and net
profit, Rs 280 crore.
90
IMPACT ON SHAREHOLDER’S WEALTH
P re A cquis itio n P o st A cquisitio n
91
Tata Pow er
550.00
540.00 538.56
530.00
520.00
510.00 510.79
500.00
490.00
Open Price
Tata Pow er
550.00
540.00 538.56
530.00
520.00
510.00 510.56
500.00
490.00
C lo sing Price
92
P r e A c q u is it io n P o s t A c q u is itio n
D a te T o ta l T u rn o v e r(R s .) M n D a te T o ta l T u rn o v e r(R s .) M n
1- M a r- 0 7 4 7 .1 3 0 -M a r-0 72 8 .0
2 - M a r- 0 75 3 1.8 2 -A p r-0 7 5 1.6
5 - M a r- 0 7 3 6 .6 13 3 .9 3 -A p r-0 7 3 3 .6 3 4 .1
6 - M a r- 0 7 2 2 .8 13 0 .0 4 -A p r-0 7 2 6 .6 3 2 .9
7 - M a r- 0 7 3 1.1 2 7 .8 6 8 .9 5 -A p r-0 7 3 0 .9 5 4 .1 5 2 .5
8 - M a r- 0 7 2 7 .8 2 7 .3 4 8 .6 9 -A p r-0 7 2 1.7 6 9 .1 5 9 .3
9 - M a r- 0 7 2 0 .7 2 5 .5 2 8 .7 4 2 .1 10 - A p r-0 715 7 .5 7 2 .2 6 6 .7 6 0 .4
12 - M a r- 0 73 3 .9 3 2 .3 3 1.3 3 5 .4 11- A p r- 0 710 8 .6 6 8 .5 6 5 .2 6 0 .3
13 - M a r- 0 7 14 .0 3 0 .7 3 2 .9 3 2 .7 3 5 .6 12 - A p r-0 7 4 2 .5 6 9 .9 5 8 .4 5 7 .9 5 6 .4
14 - M a r- 0 7 6 5 .1 4 0 .8 3 5 .7 3 3 .7 3 4 .3 13 - A p r-0 7 12 .2 4 6 .1 5 2 .0 5 3 .4 5 4 .1
15 - M a r- 0 7 19 .7 3 5 .4 3 4 .7 3 4 .4 3 4 .3 3 5 .0 16 - A p r-0 7 2 8 .4 3 5 .1 4 7 .1 4 9 .9 5 2 .0 5 3 .1
16 - M a r- 0 7 7 1.1 3 9 .1 3 3 .8 3 5 .1 3 5 .0 17 - A p r-0 7 3 8 .9 4 0 .3 4 4 .6 4 8 .9 5 1.1
19 - M a r- 0 7 7 .1 2 7 .6 3 4 .7 3 5 .4 3 5 .9 18 - A p r-0 7 5 3 .2 4 4 .3 4 7 .3 5 0 .1 5 1.8
2 0 - M a r- 0 73 2 .7 2 6 .1 3 6 .7 3 6 .4 19 - A p r-0 7 6 8 .6 5 7 .4 5 3 .4 5 3 .3
2 1- M a r- 0 7 7 .3 4 5 .4 3 7 .1 3 8 .4 2 0 - A p r-0 7 3 2 .1 5 9 .6 5 8 .2 5 6 .7
2 2 - M a r- 0 712 .3 4 5 .1 3 9 .9 2 3 - A p r-0 79 4 .3 6 5 .2 6 2 .8
2 3 - M a r- 0 716 7 .6 4 1.5 4 3 .5 2 4 - A p r-0 75 0 .0 6 4 .6 6 1.8
2 6 - M a r- 0 7 5 .7 4 1.2 2 5 - A p r-0 7 8 1.2 6 7 .0
2 8 - M a r- 0 714 .6 4 4 .3 2 6 - A p r-0 76 5 .4 5 2 .3
2 9 - M a r- 0 7 5 .9 2 7 - A p r-0 74 4 .0
3 0 - M a r- 0 72 8 .0 3 0 - A p r-0 7 2 1.1
Tata Power
60.00
53.08
40.00
35.02
20.00
Turnover
93
P re A c quis itio n P o s t A c quis itio n
94
Tata Pow er
550.00
545.39
540.00
530.00
520.00 518.60
510.00
500.00
Hig h Price
Tata Power
530.00
526.06
520.00
510.00
503.58
500.00
490.00
Low Price
INTERPRETATION
The calculation of five days moving average for the previous as well as
later month from the date of merger is shown. It takes into account the
open, high, low, close, daily turnover as well as calculation of abnormal
return. This takes into account the daily volatilities of the share prices.
Here, the daily average prices have risen in terms of all prices and
even the turnover has increased by more than 50 % from Rs. 35m
to Rs. 53m. This shows that the investors are quite happy with the
merger and they value the deal highly.
95
The daily traders are taking the benefit of increased turnover to
book their intraday profit. The daily High-Low difference has
remained almost constant but the individual highs and lows have
increased by around 4-6%. This shows that investors are quite
supportive to the decision of merger and hence its company’s
management.
96
Pre Acquisition
P ost Acquisition
97
0.10%
0.00%
7
07
07
07
07
-0.10%
/0
/0
/0
/0
/0
/0
/0
/0
/0
/0
/0
2/
4/
6/
8/
10
12
14
16
18
20
22
24
26
28
30
3/
3/
3/
3/
3/
3/
3/
3/
3/
3/
3/
3/
3/
3/
3/
-0.20%
-0.30%
-0.40%
-0.50%
-0.60%
-0.70%
0.60%
0.50%
0.40%
0.30%
0.20%
0.10%
0.00%
-0.10%
7
7
07
07
07
07
/0
/0
/0
/0
/0
/0
/0
/0
/0
/0
/0
2/
4/
6/
8/
-0.20%
10
12
14
16
18
20
22
24
26
28
30
4/
4/
4/
4/
4/
4/
4/
4/
4/
4/
4/
4/
4/
4/
4/
-0.30%
INTERPRETATION
As we can see from the line chart that the cumulative return before
acquisition was negative and the entire trend is moving in the negative
direction due to poor returns of Tata Power.
As soon as the acquisition took place, the highly profit generating state
owned Indonesian firm Kaltim Prima Coal Ltd., it added to the profit and
earnings of the Tata Power. The Co. took the benefit by capitalizing on
the high demand and its simultaneously high capacity in power
generation. The target company also being profit making, the effect got
translated in improved earnings.
RATIO ANALYSIS
98
TATA Power (30- 03 2007) Pre- acquisition Post- acquisition Change(%)
Debt-Equity Ratio 0.53 0.47 -11.32
ROCE (%) 8.99 10.99 22.25
net profit margin 10.18 14.65 43.91
P/E 19.54 30.69 57.06
ROE(%) 8.7 12.31 41.49
EPS 29.66 38.19 28.76
OPM(%) 22.1 24.15 9.28
INTERPRETATION
Debt equity ratio is decreasing by 11.32 which show that company has
more liabilit.ROCE increases by 22.25% as compared to pre acquisition as
it gauges that company that generate its earnings from the total pool of
capital which indicates profitability.Net profit margin increases as it
income increases in post acquisition as compared to pre acquisition. P/E
highly decreases in post acquisition by 57.06% which in investor point of
view will be profitable to invest to get high earning. ROE is highly
increasing by 41.49% which shows that it has more equity than debt. EPS
is increasing by 28.76% which is very fair for investors. Operating profit
margin increasing by 9.28% which shows that company profit margin is
very has increase.
99
9.4 TATA STEEL-CORUS
100
About the acquisition
Date: - 30th March 2007
Acquirer: - Tata Steel Limited
Target company: - Corus Plc.
Stake: - 100 %
Deal amount: - US$ 12201 m
Sector: - Steel sector
TATA-STEEL
CORUS STEEL
• Corus is Europe's second largest steel producer formed on 6th
October 1999
• Company has four divisions: Strip product, Long product, Aluminum
and Distribution and Building system
• Total debt of Corus was GBP 1.6 billion
• It has revenues of $ 18.06 billion and profit of $ 626 million
101
Detailed case study
On January 31, 2007, India based Tata Steel Limited (Tata Steel)
acquired the Anglo Dutch steel company, Corus Group Plc (Corus) for US$
12.20 billion. The merged entity, Tata-Corus, employed 84,000 people
across 45 countries in the world. It had the capacity to produce 27 million
tons of steel per annum, making it the fifth largest steel producer in the
world as of early 2007.
Before the acquisition, the major market for Tata Steel was India. The
Indian market accounted for sixty nine percent of the company's total
sales. Almost half of Corus' production of steel was sold in Europe
(excluding UK). The UK consumed twenty nine percent of its production.
After the acquisition, the European market (including UK) would consume
59 percent of the merged entity's total production.
Commenting on the acquisition, Ratan Tata, Chairman, Tata & Sons, said,
"Together, we are a well balanced company, strategically well placed to
compete at the leading edge of a rapidly changing global steel industry"
102
Finally, an auction was initiated on January 31, 2007, and after nine
rounds of bidding, TATA Steel could finally clinch the deal with its final bid
608 pence per share, almost 34% higher than the first bid of 455 pence
per share of Corus.
Expert’s opinion
Many analysts and industry experts felt that the acquisition deal was
rather expensive for Tata Steel and this move would overvalue the steel
industry world over.
Commenting on the deal, Sajjan Jindal, Managing Director, Jindal South
West Steel said, "The price paid is expensive...all steel companies may
get re-rated now but it's a good deal for the industry." Despite the
worries of the deal being expensive for Tata Steel, industry experts were
optimistic that the deal would enhance India's position in the global steel
industry with the world's largest and fifth largest steel producers having
roots in the country. Stressing on the synergies that could arise from this
acquisition, Phanish Puram, Professor of Strategic and International
Management, London Business School said, "The Tata-Corus deal is
different because it links low-cost Indian production and raw materials
and growth markets to high-margin markets and high technology in the
West.
The cost advantage of operating from India can be leveraged in Western
markets, and differentiation based on better technology from Corus can
work in the Asian markets."
103
share in cash valuing the acquisition deal at US$ 7.6 billion. Corus
responded positively to the offer on October 20, 2006.
Agreeing to the takeover, Leng said, "This combination with Tata, for
Corus shareholders and employees alike, represents the right partner at
the right time at the right price and on the right terms." In the first week
of November 2006, there were reports in media that Tata was joining
hands with Corus to acquire the Brazilian steel giant CSN which itself was
keen on acquiring Corus. On November 17, 2006, CSN formally entered
the foray for acquiring Corus with a bid of 475 pence per share. In the
light of CSN's offer, Corus announced that it would defer its extraordinary
meeting of shareholders to December 20, 2006 from December 04, 2006,
in order to allow counter offers from Tata Steel and CSN...
Synergies
There were many likely synergies between Tata Steel, the lowest-cost
producer of steel in the world, and Corus, a large player with a significant
presence in value-added steel segment and a strong distribution network
in Europe. Among the benefits to Tata Steel was the fact that it would be
able to supply semi-finished steel to Corus for finishing at its plants,
which were located closer to the high-value markets...
The Pitfalls
Though the potential benefits of the Corus deal were widely appreciated,
some analysts had doubts about the outcome and effects on Tata Steel's
performance. They pointed out that Corus' EBITDA (earnings before
interest, tax, depreciation and amortization) at 8 percent was much lower
than that of Tata Steel which was at 30 percent in the financial year
2006-07
104
IMPACT ON SHAREHOLDER’S WEALTH
105
P re A c quis itio n P o s t A c quis itio n
106
Tata Corus
480.00
472.40
470.00
460.00
450.00 451.52
440.00
Open Price
Tata Corus
480.00
470.00 471.65
460.00
450.00
447.10
440.00
430.00
C lo sing Pric e
107
P re A c q u is itio n P o s t A c q u is i t io n
D a te T o ta l T u rn o v e r(R s .) M n D a te T o ta l T u rn o v e r(R s .) M n
2 9 -D e c - 0 62 4 9 .3 3 1-J a n -027,7 9 2 .4
2 - J a n - 0 7 2 0 3 .1 1- F e b -0 27 ,0 3 8 .2
3 - J a n - 0 72 8 9 .4 3 2 9 .6 2 - F e b -0 71,6 6 2 .7 1,5 18 .3
4 - J a n - 0 73 7 9 .9 3 2 9 .3 5 - F e b -0 76 0 9 .2 1,0 4 0 .7
5 - J a n - 0 75 2 6 .3 3 4 4 .3 3 2 3 .9 6 - F e b -0 74 8 8 .9 7 18 .7 8 4 6 .5
8 - J a n - 0 72 4 7 .6 3 2 6 .9 3 0 5 .0 7 - F e b -0 74 0 4 .7 4 5 8 .1 6 4 5 .8
9 - J a n - 0 7 2 7 8 .1 2 8 9 .7 2 9 2 .4 2 9 5 .8 8 - F e b -0 74 2 8 .0 4 9 6 .8 5 6 5 .1 6 3 6 .4
10 - J a n - 0 72 0 2 .6 2 3 5 .1 2 8 1.8 2 8 7 .7 9 - F e b -0 73 5 9 .8 5 14 .4 5 4 6 .4 5 8 4 .0
11- J a n - 0 7 19 4 .1 2 6 6 .3 2 7 5 .8 2 8 8 .5 2 9 4 .2 12 - F e b -0 78 0 2 .3 6 3 7 .5 5 7 8 .5 5 7 1.6 5 8 5 .9
12 - J a n - 0 72 5 2 .9 2 9 1.1 2 8 3 .2 2 9 4 .9 2 9 9 .9 13 - F e b -0 75 7 7 .4 6 2 5 .0 5 8 4 .4 5 6 8 .5 5 7 2 .4
15 - J a n - 0 74 0 3 .8 2 9 6 .9 3 0 9 .0 3 0 4 .1 3 14 .0 3 2 3 .9 14 - F e b -0 1,0
7 2 0 .0 6 18 .8 5 8 3 .6 5 6 9 .1 5 7 1.7 5 8 1.6
16 - J a n - 0 74 0 1.9 3 2 6 .6 3 2 4 .8 3 2 4 .5 3 3 7 .0 15 - F e b -0 73 6 5 .6 5 2 6 .0 5 4 9 .6 5 6 8 .7 5 7 9 .5
17 - J a n - 0 72 3 1.8 3 6 4 .4 3 2 7 .7 3 5 8 .2 3 7 4 .4 19 - F e b -0 73 2 8 .4 5 10 .7 5 4 9 .3 5 8 0 .5 5 9 8 .8
18 - J a n - 0 73 4 2 .5 3 4 5 .2 3 7 7 .5 4 0 3 .2 2 0 - F e b -0 73 3 8 .7 4 6 7 .7 5 7 6 .5 6 10 .6
19 - J a n - 0 74 4 1.8 3 0 5 .6 4 5 1.9 4 8 2 .0 2 1- F e b -0 75 0 0 .8 6 2 3 .1 6 4 3 .6 6 6 5 .1
2 2 - J a n - 0 73 0 7 .7 5 4 6 .0 5 3 3 .9 2 2 - F e b -0 78 0 4 .8 7 5 5 .1 7 3 3 .8
2 3 - J a n - 0 72 0 3 .9 6 9 8 .7 7 19 .0 2 3 - F e b -0 17,14 2 .9 8 6 1.5 8 2 2 .5
2 4 - J a n - 01,4
7 3 3 .8 7 7 3 .9 2 6 - F e b -0 79 8 8 .3 9 6 1.6
2 5 - J a n - 0 17,10 6 .2 1,2 7 0 .9 2 7 - F e b -0 78 7 0 .8 9 11.2
2 9 - J a n - 0 78 18 .0 2 8 - F e b -0 17,0 0 1.5
3 1- J a n - 027,7 9 2 .4 1-M a r-0 75 5 2 .4
Tata Corus
800.00
600.00 581.65
400.00
323.90
200.00
Turnover
108
P re A c quis itio n P o s t A c quis itio n
109
Tata Corus
470.00
466.31
460.00
450.00
440.00 442.49
430.00
Lo w Price
INTERPRETATION
The calculation of five days moving average for the previous as well as
later month from the date of merger is shown. It takes into account the
open, high, low, close, daily turnover as well as calculation of abnormal
return. This takes into account the daily volatilities of the share prices.
Here, all the daily average prices have fallen except the turnover
which has increased by approximately 80% from Rs. 323.9m to Rs.
581.65m. This is somewhat shocking as the trading activity has
risen inspite of severe fall in stock prices.
This is indicative of two completely different types of investor
groups involved in the market. One with the positive view about the
acquisition and the others who think the acquisition is overvalued.
Investors with positive sentiments, view this deal to be lucrative in
the long run. So they grab the opportunity to buy the shares at a
low price and those investors on the other hand readily sell their
accumulated shares to save themselves from further fall in prices.
110
COMPANY’S RETURN BEFORE AND AFTER ACQUISITION
111
Pre Acquisition
1/2/2007 1 .1
4% -0.02% -0.02%
1/3/2007 0.54% -0.02% -0.04%
1/4/2007 -0.99% -0.04% -0.08%
1/5/2007 -0.05% -0.03% -0.10%
1/8/2007 -1.46% -0.04% -0.14%
1/9/2007 -0.60% -0.03% -0.18%
1 /10/2007 -1.47% -0.04% -0.22%
1/11/2007 2.02% -0.01% -0.23%
1 /12/2007 3.13% 0.00% -0.23%
1 /15/2007 0.54% -0.02% -0.25%
1 /16/2007 -0.08% -0.03% -0.28%
1 /17/2007 0.14% -0.03% -0.31%
1 /18/2007 0.63% -0.02% -0.33%
1 /19/2007 -0.22% -0.03% -0.36%
1/22/2007 0.21 % -0.03% -0.38%
1/23/2007 -1.15% -0.04% -0.42%
1/24/2007 0.52% -0.02% -0.44%
1/25/2007 1.24% -0.02% -0.46%
1/29/2007 -0.46% -0.03% -0.49%
1 /31/2007 -0.82% -0.03% -0.53%
Post Acquisition
112
0.00%
7
07
7
07
07
/0
/0
/0
/0
/0
/0
/0
/0
/0
/0
/0
0
2/
4/
6/
8/
10
12
14
16
18
20
22
24
26
28
30
-0.10%
1/
1/
1/
1/
1/
1/
1/
1/
1/
1/
1/
1/
1/
1/
1/
-0.20%
-0.30%
-0.40%
-0.50%
-0.60%
0.00%
7
7
07
07
07
07
07
07
-0.10%
/0
/0
/0
/0
/0
/0
/0
/0
/0
1/
3/
5/
7/
9/
1/
11
13
15
17
19
21
23
25
27
2/
2/
2/
2/
2/
3/
2/
2/
2/
2/
2/
2/
2/
2/
2/
-0.20%
-0.30%
-0.40%
-0.50%
-0.60%
INTERPRETATION
As we can see from the line chart that the %cumulative abnormal return
before acquisition was sharply decreasing since past month with not even
a single glimpse of positive return on any single day.
But as soon as the acquisition took place, the earnings showed a
marginal rise and again got back to the level where it was just
before the acquisition. This happened due to very large debt
generated due to overpaying by acquiring the Corus at a very high
price of 608 pence per share as compared to previously valued 455
pence per share.
113
RATIO ANALYSIS
INTERPRETATION
Debt equity ratio on post acquisition increase because Corus debt was
high it was GBP1.6b to buy Corus and so its debt is almost 116% more
than in pre acquisition. ROCE shows that post acquisition is very less as
compared to pre acquisition it has negative percentage because company
has short term returns after one year it will improve in the long run. Net
profit margin has very less change as profit is not much affected. P/E
increases in post acquisition by 30.2% which show high future cash flow.
ROE is decreasing by 37.7 which show that it has more debt than equity.
114
EPS has a very minor change. Operating profit margin is reduced by 9.1%
which shows that it has low profit.
115
9.5 TATA CHEMICALS – GENERAL CHEMICALS
TATA CHEMICALS
Tata Chemical Ltd (TCL) Group is world’s third largest soda ash producer
with a combined capacity of 2.9 million tonne and a market leader in soda
ash and salt in India. TCL is rapidly adding capacity by organic and
inorganic means. It is showing robust growth with strong volume growth
in soda ash, cement, salt, and phosphatic fertiliser.
They have produced soda ash for more than 100 years and are currently
one of the Top 5 global producers. The breadth of practical experience
and ever increasing production efficiency in mining and processing
ensures high-quality soda ash. Their expertise in shipping and storage
enables them to get soda ash when and where customers need it.
116
Detailed case study
After global acquisitions that made it the fifth largest steelmaker and the
second largest branded tea bag owner worldwide, the Tata group was
poised to become the second largest soda ash manufacturer in the world.
Tata Chemicals had signed an agreement to acquire 100 per cent stake in
US-based General Chemical Industrial Products Inc. for $ 1.005 billion
(approx. Rs 4,000 crore).
GCIL is a privately held debt-free company with revenues of $ 400 million
and a healthy bottomline.
Tata Chemicals was also looking to buy Harbinger Capital Partners, a
private equity firm that owns a majority stake in GCIL.
GCIL had a capacity of 2.5 million tonnes of soda ash, while Tata
Chemicals was already at number three position globally (at 3 million
tonnes) after its acquisition of the UK-based Brunner Mond in 2005. GCIL
has access to the world’s largest and most economically recoverable trona
ore deposits (which is converted into soda ash) in Wyoming in the US,
said Mr Khusrokhan.
After the buy, over 50 percent of Tata Chemicals’ capacity would be
through the natural route, providing both sustainability as well as a
natural hedge against the commodity cycle, he said.
As a thumb rule, natural soda ash is more economical and delivers higher
margins, said Mr R Mukundan, Executive Vice-President, Chemicals.
On picking up a US asset in the backdrop of a slowdown in that country,
Mr Mukundan said that soda ash is in the growth phase with worldwide
demand for various applications and that margins are picking up.
Forty per cent of TCL’s revenues are from international sales.
The acquisition would be funded through a mixture of equity and debt.
The company’s stock lost over 7 per cent on the BSE, to close at Rs 305
from previous close of Rs 328.
117
Tata Chemicals now has manufacturing locations in four continents and
access to consumers around the world, including new markets it was not
earlier in, viz. North America, Latin America and certain markets in the
Far East.
Benefits
The acquisition was timely from an Indian viewpoint as the company was
picking up US assets at a time when the rupee was strong.
According to analysts, this would clearly pitch Tata Chemicals into the
number two position worldwide.
More than 50 per cent of Tata Chemicals’ capacity would be through the
natural route which would lead to sustainability in terms of margins.
A 100 per cent equity stake in General Chemical Industrial Products
(GCIP), a US-based soda ash maker, will endow Tata Chemicals with
substantial global scale and manufacturing cost advantages in its soda
ash business. The acquisition is timely; As demand and price trends for
soda ash were at a new high globally, the acquisition helped the company
to quickly capitalize on those trends, without the gestation period that
would have been involved in putting up Greenfield capacities.
The scaling up of capacities came at a time when the global soda ash
cycle was displaying considerable strength, with construction activity in
Asia spurring strong demand, production failing to keep pace and China
curtailing exports of the chemical in order to meet domestic
requirements.
118
The acquisition has been funded through a mixture of term financing
(ECB) of $500 million and bridge financing (in the US) of $350 million,
raising a total of $850 million at competitive rates.
The loan was arranged by seven banks. They include ABN AMRO, Nova
Scotia, Calyon, HSBC, Mizuho Financial Group, Rabobank and Standard
Chartered.
119
P re Acquisition P ost Acquisition
120
Tata Che m
319.00
318.62
318.00
317.00
316.71
316.00
315.00
Open Price
Tata Che m
325.00
322.46
320.00
315.00
313.01
310.00
305.00
C lo sing Price
121
P r e A c q u i s i ti o n P o s t A c q u is itio n
D a te T o ta l T u rn o v e r(R s .) M n D a te T o ta l T u rn o v e r(R s .) M n
2 9 -D e c -0 62 4 9 .3 3 1-J a n -0 72 ,7 9 2 .4
2 -J a n -0 7 2 0 3 .1 1-F e b -0 72 ,0 3 8 .2
3 -J a n -0 7 2 8 9 .4 3 2 9 .6 2 -F e b -0 71,6 6 2 .7 1,5 18 .3
4 -J a n -0 7 3 7 9 .9 3 2 9 .3 5 -F e b -0 7 6 0 9 .2 1,0 4 0 .7
5 -J a n -0 7 5 2 6 .3 3 4 4 .3 3 2 3 .9 6 -F e b -0 7 4 8 8 .9 7 18 .7 8 4 6 .5
8 -J a n -0 7 2 4 7 .6 3 2 6 .9 3 0 5 .0 7 -F e b -0 7 4 0 4 .7 4 5 8 .1 6 4 5 .8
9 -J a n -0 7 2 7 8 .1 2 8 9 .7 2 9 2 .4 2 9 5 .8 8 -F e b -0 7 4 2 8 .0 4 9 6 .8 5 6 5 .1 6 3 6 .4
10 -J a n -0 7 2 0 2 .6 2 3 5 .1 2 8 1.8 2 8 7 .7 9 -F e b -0 7 3 5 9 .8 5 14 .4 5 4 6 .4 5 8 4 .0
11-J a n -0 7 19 4 .1 2 6 6 .3 2 7 5 .8 2 8 8 .5 2 9 4 .2 12 -F e b -0 7 8 0 2 .3 6 3 7 .5 5 7 8 .5 5 7 1.6 5 8 5 .9
12 -J a n -0 7 2 5 2 .9 2 9 1.1 2 8 3 .2 2 9 4 .9 2 9 9 .9 13 -F e b -0 7 5 7 7 .4 6 2 5 .0 5 8 4 .4 5 6 8 .5 5 7 2 .4
15 -J a n -0 7 4 0 3 .8 2 9 6 .9 3 0 9 .0 3 0 4 .1 3 14 .0 3 2 3 .9 14 -F e b -0 71,0 2 0 .0 6 18 .8 5 8 3 .6 5 6 9 .1 5 7 1.7 5 8 1.6
16 -J a n -0 7 4 0 1.9 3 2 6 .6 3 2 4 .8 3 2 4 .5 3 3 7 .0 15 -F e b -0 7 3 6 5 .6 5 2 6 .0 5 4 9 .6 5 6 8 .7 5 7 9 .5
17 -J a n -0 7 2 3 1.8 3 6 4 .4 3 2 7 .7 3 5 8 .2 3 7 4 .4 19 -F e b -0 7 3 2 8 .4 5 10 .7 5 4 9 .3 5 8 0 .5 5 9 8 .8
18 -J a n -0 7 3 4 2 .5 3 4 5 .2 3 7 7 .5 4 0 3 .2 2 0 -F e b -0 73 3 8 .7 4 6 7 .7 5 7 6 .5 6 10 .6
19 -J a n -0 7 4 4 1.8 3 0 5 .6 4 5 1.9 4 8 2 .0 2 1-F e b -0 7 5 0 0 .8 6 2 3 .1 6 4 3 .6 6 6 5 .1
2 2 -J a n -0 73 0 7 .7 5 4 6 .0 5 3 3 .9 2 2 -F e b -0 78 0 4 .8 7 5 5 .1 7 3 3 .8
2 3 -J a n -0 72 0 3 .9 6 9 8 .7 7 19 .0 2 3 -F e b -0 71,14 2 .9 8 6 1.5 8 2 2 .5
2 4 -J a n -0 71,4 3 3 .8 7 7 3 .9 2 6 -F e b -0 79 8 8 .3 9 6 1.6
2 5 -J a n -0 71,10 6 .2 1,2 7 0 .9 2 7 -F e b -0 78 7 0 .8 9 11.2
2 9 -J a n -0 7 8 18 .0 2 8 -F e b -0 71,0 0 1.5
3 1-J a n -0 72 ,7 9 2 .4 1-M a r-0 7 5 5 2 .4
Tata Chem
100.00
80.00 83.94
60.00
48.93
40.00
20.00
-
Turnover
122
P re A c quis itio n P o s t A c quis itio n
123
Tata Che m
315.00
313.60
310.00
305.00 304.58
300.00
Lo w Price
INTERPRETATION
The calculation of five days moving average for the previous as well as
later month from the date of merger is shown. It takes into account the
open, high, low, close, daily turnover as well as calculation of abnormal
return. This takes into account the daily volatilities of the share prices.
Here, the daily average prices have risen due to positive feedback
of the merger but the turnover has decreased at the same time. This
shows that there are certain shareholders who expect the share prices to
rise much more as compared to actual rise that has taken place and so
they have reduced trading activities and turned themselves into
investors. Such investors value the deal much more and so they expect
the share prices to rise sharply within a period of year or so.
COMPANY’S RETURN BEFORE AND AFTER ACQUISITION
124
Pre Acquisition
Post Acquisition
125
0.00%
08
08
08
8
/0
/0
/0
/0
/0
/0
/0
/0
/0
/0
/0
/0
/0
3/
7/
9/
26
28
11
13
15
17
19
21
23
25
27
1
5
-0.05%
3/
3/
3/
3/
3/
3/
3/
3/
3/
2/
2/
3/
3/
3/
3/
3/
-0.10%
-0.15%
-0.20%
-0.25%
-0.30%
-0.35%
0.05%
0.00%
8
08
08
08
8
08
08
/0
/0
/0
/0
/0
/0
/0
/0
/0
/0
/0
-0.05%
1/
3/
5/
7/
9/
28
30
11
13
21
23
27
15
17
19
25
4/
4/
4/
4/
4/
3/
3/
4/
4/
4/
4/
4/
4/
4/
4/
4/
-0.10%
-0.15%
-0.20%
-0.25%
INTERPRETATION
As we can see from the line chart the earnings of Tata Chemicals has
fallen sharply since one month by about 0.30% to 0.35%.
The effect of poor result continued even after the acquisition of General
Chemicals and went down by 0.2% more in next 30 days. As a result of
poor earnings, even the share prices of Tata Chemicals fell from Rs. 328
per share to Rs. 305 per share.
126
RATIO ANALYSIS
INTERPRETATION
Debt equity ratio is increasing by 47.27% as Tata Chemicals debt is low
as compare to equity.ROCE decreases vey high by 71.03% as compared
to pre acquisition as it gauges that company cannot generate its earnings
from the total pool of capital which indicates less profitability.Net profit
margin decreases highly by 77.46% which shows decrease in income in
post acquisition as compared to pre acquisition. P/E highly decreases in
post acquisition by 25.63% which in investor point of view is not
profitable to invest. ROE is highly decreasing by 71.03% which shows
that the company has incurred a huge loss and should improve its OPM to
127
improve performance. EPS is decreasing by 8.29% there would be a
selling spree in point of view investors. Operating profit margin is
drastically reduced by 68.73% which shows that company profit margin is
very less.
128
CHAPTER 10
VALUATION AND INTERPRETATION
129
capitalization would be $50 million (1 million shares x $50 per share =
$50 million market cap).
Debt: Once you’ve acquired a business, you’ve also acquired its debt. If
you purchased all of the outstanding shares of a chain of ice cream stores
for $10 million (the market capitalization), yet the business had $5
million in debt, you would actually have expended $15 million; $10
million may have come out of your pocket today, but you are now
responsible for repaying the $5 million debt out of the cash flow of the
business – cash flow that otherwise could have gone to other things.
Cash and Cash Equivalents: Once you’ve purchased a business, you own
the cash that is sitting in the bank. After acquiring complete ownership,
you can simply take this cash and put it in your pocket, replacing some of
the money you expended to buy the business. In effect, it serves to
reduce your acquisition price; for that reason, it is subtracted from the
other components when calculating enterprise value.
130
enterprise value. Businesses that tend to fall into this category are more
likely to require little additional reinvestment; instead, the owners can
take the profit out of the business and spend it or put it into other
investments.
EV MULTIPLES F
Source: Prowess
Currency: INR in Crore
Tata Steel and Corus Group deal happened at high multiples compared to
TCPeer
its peers. We can observe that the average multiples of the peer group
company stands half compared to the deal multiples.
Sales Multiple:
as on 31s
The average sales multiple of its peers is 1.17x compared to the deal of
0.68x of Corus Group’s sales. This can be possible due to high sales
value, reducing the multiple to 0.68x. The lowest multiple (Steel
Authority of India) is at 0.73x.
EBITDA Multiple:
EBITDA multiple of its peers averages at 4.38x compared to the deal
multiple of 7.02x of Corus Group’s sales. Even the highest multiple (Jindal
131
Comp
Steel & Power) is at 4.38x. This is almost half of the deal multiple. It can
be observed that Tata played very aggressively.
EBIT Multiple:
EBIT multiple of its peers averaged at 5.54x compared to the deal of
10.19x of Corus Group’s sales. Even the highest multiple (Jindal Steel &
Power) is at 8.39x.
PE Multiple:
The PE multiple of the deal is very high on the account that the margins
of Corus are very low compared to Tata Steel and other peers. The
average PE multiples is 7.95x compared to 68.23x at which the deal
haapened.
EV MULTIPLES F
Source: Prowess
Currency: INR in Crore
DTPeer 132
The deal of Tata Teleservices and NTT Docomo happened at very high
multiples. We can observe that the average multiples of the peer group
company stands very low compared to the deal multiples.
Sales Multiple:
The average sales multiple of its peers is 5.37x compared to the deal of
26.98x (as on 31st March, 2008) of Tata Teleservices’s sales. Even the
highest multiple (Reliance Communication) is at 9.24x. Thus we can
conclude that Tata Teleservices got very good price for its stake dilution
for NTT Docmo.
EBITDA Multiple:
Again the average EBITDA multiple of its peers is very less, 16.35x
compared to the deal of 99.81x (as on 31st March, 2008) of Tata
Teleservices’s sales. Even the highest multiple (Reliance Communication)
is at 26.74x. This is a huge difference. NTT Docomo paid 6 times more
what it should have paid to Tata.
EBIT Multiple:
EBIT multiple of its peers is 25.5x compared to the deal of 952.96x (as on
31st March, 2008) of Tata Teleservices’s sales. Even the highest multiple
(Reliance Communication) is at 41.02x.
PE Multiple:
The PE multiple for Tata Teleservices is negative as its net income is
negative
Note: The multiples are high on account that Sales and the profitability of
Tata Teleservices is low, inturn giving very high multiples. Its sales
stands at Rs. 1,815.5 Cr. compared to the average sales of Rs. 11,490.6
Cr. of its peers.
133
FINDINGS
• Except Tata Motors and Tata Steel, the average daily share prices
of all the three remaining companies have risen. In-spite of
decreased average daily share prices in Tata Corus, the volume of
trading increased substantially thereby indicating the trust on the
TATA group as a whole.
134
• The one month pre and post acquisition percentage cumulative
abnormal return of Tata Communications, Tata Corus reduce to a
very high extent because the actual market return was much low as
compared to expected return.
135
FINDINGS FROM VALUATION OF ENTERPRISE VALUE MULTIPLE
Tata Corus
• Tata Steel and Corus Group deal happened at high multiples
compared to its peers. We can observe that the average multiples of
the peer group company stands half compared to the deal multiples.
Even the highest multiple (Jindal Steel & Power) is at 4.38x. This is
almost half of the deal multiple It can be observed that Tata played
very aggressively as it paid high enterprise value as compared to our
analysis. A reason for Corus to be sold is chance to Bail out of Debt
and Financial stress. TATA Steel Paid 7.02 Times EBITDA of Corus
Enterprise Value. The PE multiple of the deal is very high on the
account that the margins of Corus are very low compared to Tata Steel
and other peers the only company who has high P/E is Jindal steel.
136
of Tata Teleservices is low, in turn giving very high multiples. Its sales
stands at Rs. 1,815.5 Cr. compared to the average sales of Rs.
11,490.6 Cr. of its peers.
CONCLUSION
• Except Tata Steel- Corus deal, all the other 4 acquisitions are well
accepted by not only well accepted by the owners of the company
(the shareholders) but even made the entire Tata group come into
the eyes of fortune 500 list. In-fact it ranked at 56th position at a
global level in 2009
137
• One can study any of the above mentioned company and conclude
that the key underlying decision of these companies expanding
quickly and efficiently is their timely decision of merging and
acquiring appropriate companies
BIBLIOGRAPHY
ELECTRONIC
• http://www.expressindia.com/latest-news/The-10-largest-MA-
deals-so-far-in-2009/465486
• http://business.mapsofindia.com/finance/mergers-
acquisitions/process.html
• http://www.bseindia.com
• http://www.nseindia.com
• http://www.anagram.co.in/anagram/content/ana_home.jsp
• http://www.mergermarket.com
• http://www.economictimes.indiatimes.com
• http://www.hindustantimes.com/business-news
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BOOKS
• Business Standard
• Business India
139