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GROUP MEMBERS
Prathamesh Potdar Amruta Rele Chetan Sankhe Gitika Thakur Pranit Vanmali Vivek Varier
TYPES OF MERGERS
Horizontal merger: It is a merger of two or more companies that compete in the same industry. Vertical merger: It is a merger which takes place upon the combination of two companies which are operating in the same industry but at different stages of production or distribution system. Reverse mergers: Reverse mergers involve mergers of profir making companies with companies having accumulated losses. 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 nor vertically
MERGER PROCEDURE
1. 2.
3.
4. 5. 6. 7.
8.
9. 10.
Examination of object Clauses Intimation to stock Exchanges Approval of the draft amalgamation proposal by the Respective Boards: Application to the National Company Law Tribunal (NCLT): Dispatch of notice to shareholders and creditors Holding of Meetings of shareholders and creditors Petition to the NCLT for confirmation and passing of NCLT orders Filing the order with the Registrar Transfer of Assets and Liabilities Issue of shares and debentures
CAUSES OF MERGER
Horizontal merger: These involve mergers of two business companies operating and competing in the same kind of activity. They seek to consolidate operations of both companies. These are generally undertaken to: a) Achieve optimum size b) Improve profitability c) Carve out greater market share d) Reduce its administrative and overhead costs. Vertical merger: These mergers are generally endeavored to: a) Increased profitability b) Economic cost (by eliminating avoidable sales tax and excise duty payments) c) Increased market power d) Increased size
Conglomerate merger: a)Synergy arising in the form of economies of scale. b) Cost reduction as a result of integrated operation. c) Risk reduction by avoiding sales and profit instability. d) Achieve optimum size and carve out optimum share in the market. Reverse mergers:
Claim tax savings on account of accumulated losses that increase profits.
STEPS IN ACQUISITIONS
Developing an Acquisition Strategy: A capacity to find firms that trade at less than their true value Access to the funds that will be needed to complete the acquisition Skill in execution Choosing a Target firm and valuing control/synergy
The Value of Corporate Control Valuing Operating Synergy Valuing Financial Synergy
Structuring the Acquisition: Deciding on an Acquisition Price. Payment for the Target Firm
Final Considerations: The managers of acquiring firms clearly weigh in the accounting effects of acquisitions, even when accounting choices have little or no effect on cash flows
HDFC Bank acquisition of Centurion Bank of Punjab for $2.4 billion. Tata Motors acquisition of luxury car maker Jaguar Land Rover for $2.3 billion. This could probably the most ambitious deal after the Ranbaxy one. It certainly landed Tata Motors into lot of trouble. Wind Energy premier Suzlon Energys acquistion of RePower for $1.7 billion. Reliance Industries taking over Reliance Petroleum Limited (RPL) for 8500 crores or $1.6 billion. NTT DoCoMo-Tata Tele services deal for $2.7 billion. The second biggest telecom deal after the Vodafone. Reliance MTN deal if went through would have been a good addition to the list.
VALUATION OF FIRMS
Approaches to Valuation
Income Approach
Market Approach
Asset Approach
INCOME APPROACH
It involves projected cash flows for a specific number of periods plus a terminal value to be discounted to the present, using the appropriate discount rate Difference in the number of periods Types Capitalization Method Discounted Cash Flow Method
MARKET APPROACH
Comparable Company Method Based on the principle of substitution Estimates the value of the firm in relation to the value of other similar firms based on various parameters like earnings, sales, book value, cash flows etc
Reflects the current mood of the market & not the intrinsic value
ASSET APPROACH
Hypothetical sale of the companys underlying assets To achieve control of the assets owned by the target Used in capital intensive industries
Adjusted Book Value Method Estimation of the market value of the assets & liabilities of the firms as a going concern Liquidation Value Method
Replacement Cost Approach Option Pricing Model Used to value assets which have option like features
ROLE OF VALUATION
Portfolio Management
Acquisition Analysis
Corporate Finance
MISCONCEPTIONS IN VALUATION
Valuation models give an exact estimate of value Valuation is a totally objective exercise A well done valuation is a timeless treasure The value estimated is important; the process does not matter The market is always wrong Valuation should be more qualitative for better estimates
LEGAL CONSIDERATIONS
The MoA to be scrutinized Intimation to Stock Exchanges Approval of Draft amalgamation proposal Application to the court Notice to shareholders and creditors Filing the order Transfer of assets and liabilities Issue of shares and debentures
obtain proof that the target business owns key assets such as property, equipment, intellectual property, copyright and patents. obtain details of past, current or pending legal cases
look at the detail in the business' current and possible future contractual obligations with its employees (including pension obligations), customers and suppliers. consider the impact of a change in the business' ownership on existing contracts.
ACCOUNTING METHODOLOGY
Standards prescribing suitable methods of accounting for mergers and acquisitions: 1)Accounting Principles Board(in U.S.A.) 2)The International Accounting Standards(IAS) 3)Financial Reporting Standard (U.K.)
COMPARISON
Pooling of Interest method
1)Treatment of Assets and Liabilities
Purchase method
b)The identity and separation of the preamalgamation reserve is not maintained in the books of purchasing company. c)Profit of the purchased company is not
COMPARISON
Pooling of Interest method
2) Goodwill
Purchase method
COMPARISON
Pooling of Interest method
3) Presentation of Financial Statement
Purchase method
a) Asssets and liabilities of the amalgamating companies are carried over in the books of amalgamated company at their book values.
b) Retained earnings of the amalgamting company appear in the books of the amalgamted company in the same form as it had been in the books of amalgamting company.
company are recorded at their fair value in the books of the purchasing company. b) Retained earnings of the purchased company do not appear in the books of the Purchasing company as the entity of the purchased company is terminated following the acquisition.
c) Assets, liabilities, retained earnings, operating results of the amalgamating companies for the whole year are presented on a combined basis in the financial statement of the amalgamated company.
c) Assets, liabilities, retained earnings, Operating results of the Purchasing company continue to remain in its books at their existing book value because the entity of such company is retained after the acquisition is completed.
COMPARISON
Pooling of Interest method
4) Amortization
Purchase method
COMPARISON
Pooling of Interest method
5) Disclosure Requirement
Purchase method
b) This is optional.
b) exchange of equity shares or other voting shares only to affectuate the amalgamation.
Start by selecting a well-respected internal member of management with sound project management skills. The project manager should be provided with a cross-functional team including finance, credit, operations, information technology, internal audit, risk management and regulatory compliance.
While your internal management team may be very good at performing their current duties, they may not have the time or experience necessary to execute on all aspects of a due diligence project.
Consider professionals that have unique specialization including accounting, risk management, internal audit, investment bankers and tax advisors.
Loan quality Cannot find the bottom on asset quality ALL shortfalls Typically ties in with inaccurate loan risk rating systems or optimistic views of work-out plans Investment impairment Derivatives, sub-prime or high risk securities Long-term contracts Premises, information technology or employment agreements Board composition The parties cannot reach agreement on the new board Disclosure Problems were understood by the candidate bank during pre-screening Deal pricing Inability to reach agreement on pricing, terms and conditions Regulatory challenges Lack of comfort with new risk profile
POST - M & A
According to Executives Online Report, Factors responsible for Changes are :
1. 2. 3. 4. 5.
Restructuring Improvement in Efficiency Cost Reduction M&A New Technology Crucial to any business success is keeping staff motivated, hence the post M&A programmes has a Direct and possibly a negative impact.
VARIOUS ISSUES
Staff Issues Management Problems Senior Management Ownership Leadership Skills
STAFF ISSUES
Decisions comes from the Top. The workforce is usually Tightlipped. Not allowing Enough Time. Shortage of Skills. Lack of Leadership.
MANAGEMENT PROBLEMS
Lack of Management Resource. Management Style and Skills. Lack of Vision. Reluctance to take Decisions. Middle Managers inefficiency. A Distraction for Employees.
LEADERSHIP SKILLS
Areas where Senior Managers could improve were , Effective Change Leadership Communication Delegation of Task and Power. The most important and majorly concerned areas has to be worked upon.
In the period immediately after the deal is announced, there is generally a strong upward movement in the target corporation's domestic currency.
A SECTORIAL COMPOSITION
SECTOR NUMBER %
IT/SOFTWARE/BPO
PHARMACEUTICALS AUTOMOTIVE
90
62 27
29.4
20.3 8.8
19
17 15 14 62 306
6.2
5.5 4.9 4.6 20.3 100.0
CASE STUDY
The deal is noteworthy for its legal aspects as for its commercial significance;
combining cross-border regulatory complexity, innovative bid defence techniques and measures to overcome them dramatic shareholder revolt.
LEGAL COMPLEXITIES
MULTI-JURISDICTIONAL OFFER
The offer was governed by takeover regulations all the jurisdictions in which Arcelors securities were listed (Belgium, France, Luxembourg and Spain). The offer terms and documents required the approval of the relevant securities regulators in each jurisdiction. Mittal is a Dutch NV and its shares, which were part of the consideration offered, are listed on the New York Stock Exchange (the primary listing pre-offer) and on Euronext Amsterdam. Thus, the offer also had to comply with US Securities and Exchange Commission (SEC) rules and regulations, and the offer document (share listing prospectus) required the approval of the SEC and the Dutch securities regulator.
SHARED JURISDICTION
If bidder company is not registered in the country where its making bid for target company, then such bids need to comply with 2 sets of compliancess. & 2 regulators will have juridiction over different elements of bids.
Breakthrough provision: bidder can over ride target shareholders blocking rights
If bidder acquire 90-95% shares of firm, but rest 5% are resisting. Hence left rest members to fix there own threshold and time period. Restriction on share transfer needs to disclosed
MULTI-JURISDICTIONAL OFFER
To complicate matters further, the deadline for implementation of the Takeovers Directive fell during the acceptance period and the implementation arrangements differed in each of the jurisdictions.
ANTI-COMPETITION ISSUES:
Competition/anti-trust filings were required in the EU, the US, Canada and elsewhere. One area of particular interest was the potential impact of including
Dofasco, Inc (Dofasco), a Canadian steel company, within the merged group. Arcelor had acquired control of Dofasco in January 2006 following a takeover battle with ThyssenKrupp AG (ThyssenKrupp), a German steel company.
Mittals operations in North America were already extensive and this led to strategic and competition issues.
ANTI-COMPETITION ISSUES:
Mittal agreed with ThyssenKrupp that, if Mittal acquired a controlling interest in Arcelor, it would cause Arcelor to sell Dofasco to ThyssenKrupp at ThyssenKrupps highest bid price. Mittal proposed to compensate Arcelor for the difference between the price it had paid and the proceeds of the sale to ThyssenKrupp. However, as part of its bid defence, Arcelor transferred Dofasco to Strategic Steel Stichting, a Dutch foundation (stichting) created for the purpose, to prevent any sale of Dofasco for five years (unless the stichting board decides to dissolve the stichting sooner). Dutch stichtings have been used in bid defences before, including in Gucci Group NVs 1999 defence against LVMH Mot Hennessy Louis Vuitton SAs unsolicited (and ultimately unsuccessful) takeover bid. In response, Mittal entered into a pocket consent decree with the US Department of Justice, one of only a handful of such decrees in the past decade, under which it was agreed that any antitrust issue could be resolved through the disposal of an alternative asset if Mittal was unable to sell Dofasco as a result of the stichting.
The most powerful weapon in Arcelors arsenal was fired on 26 May 2006, when the company announced that it had agreed to acquire the mining and steel assets of Alexey Mordashov, including 89.6% of OAO Severstal (Severstal), a Russian steel company
Instead of being structured as a competing bid, the deal was structured as a contribution of assets by Mr Mordashov in return for shares in Arcelor. This meant that the consideration shares could be issued under existing delegations to the Arcelor board of directors, and without the need to seek approval from Arcelor shareholders. Arcelor shareholders were, however, able to veto the Severstal deal, provided that holders of more than 50% of Arcelors share capital voted against it at a shareholders meeting.
This was a much higher threshold than is usual for shareholder approval (typically, twothirds of shareholders present and voting) and, in practice, a veto seemed unlikely, as attendance at past meetings had never been above 35%. The arrangements triggered a shareholder revolt, with between 20 to 30% of Arcelors shareholders signing a letter to Arcelor demanding the right to choose between the Severstal and Mittal proposals. An intense period of negotiations with Mittal followed, culminating in the announcement of the agreed memorandum of understanding between Arcelor and Mittal and the Arcelor boards recommendation of Mittals offer on 25 June 2006. On 26 July 2006, Mittal was able to announce that 92% of Arcelors shares had been tendered in response to its offer. It is intended that Mittal will formally merge into Arcelor later in 2007. On 30 June 2006, Arcelor shareholders holding about 58% of the outstanding share capital voted against the proposed Severstal merger at a rescheduled meeting. It is perhaps in this regard that the practical legacy of the deal in Europe will be most notable.
It was a ground-breaking transaction, particularly in terms of shareholder democracy in Europe, with target shareholders organising and acting in the face of entrenchment measures, says John Brinitzer, a partner at Cleary Gottlieb Steen & Hamilton, who advised on the deal.
Pierre Servan-Schreiber, a partner at Skadden Arps Slate Meagher & Flom agrees: The deal illustrates very clearly the rise of the professional shareholder activist in Europe. In hostile situations, companies must now consider how best to balance the interests of that specific, and very vocal, population of shareholders with those of other stakeholders.
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