Mergers, Acquisitions And Corporate Restructuring

Prasad G. Godbole

Copyright 2009 Vikas Publishing House Pvt. Ltd. All rights reserved. Prasad G. Godbole. All rights reserved.

Chapter 6
Intents of Target Companies

Copyright 2009 Vikas Publishing House Pvt. Ltd. All rights reserved. Prasad G. Godbole. All rights reserved.

CHAPTER 6

MOTIVES OF TARGET COMPANIES PROMOTERS

CHAPTER 6

Exiting Non-profitable Business

Corus Plc was sold out to Tata Steel since the former was making losses. In the years through 2000 to 2003 it had posted losses of GBP 1.271 billion, 462 million, 404 million and 255 million, respectively. The writing was clear on the wall that unless the company joined hands with a low-cost producer of steel, who also has a captive source of iron ore, its long-term viability was in danger. Thus, it decided to take the wiser route of selling out to Tata Steel.

CHAPTER 6

Exiting Non-profitable Business

National Organic Chemicals

Industries Limited (NOCIL), a one time cash-rich, blue chip company of Mafatlal Group, had to sell its petrochemicals and plastics businesses to Reliance Industries Limited (RIL) after it started incurring heavy losses around the turn of the century.

CHAPTER 6

Exiting Non-synergistic or Non-core Business

Larsen & Toubro (L&T)

demerged its cement business from UltraTech Cement Limited. Thereafter, Grasim Limited, a flagship company of A.V. Birla Group, acquired control over UltraTech .
One of the reasons why L&T sold its cement business to the Birla was to opt out of the noncore business.

CHAPTER 6

Generate Cash Flow for Other Business(es)

India Cement sold 94.69 percent of its stake in Shri Vishnu Cement at an enterprise value of Rs. 385 crore.

The objective behind this was to generate cash for retiring high-cost debts of India Cement and also for funding its expansion plans.

CHAPTER 6

Inability- Real or Perceived - to withstand Competition

In 1998, Lakme Limited sold its brand and cosmetics business to Hindustan Unilever Limited (HUL). The main reason behind this was that Lakme management was finding it difficult to pump in huge money to support its brand in the face of advertisement blitzkrieg by MNCs, especially HUL.

CHAPTER 6

Inability- Real or Perceived - to withstand Competition

In 1993, Ramesh Chauhans Parle Group sold Thums Up, Gold Spot and Limca brands to Coca-Cola for around Rs 400 crore. Parle felt that it was impossible for them to fight with Coke and Pepsi in the market since both these companies could easily spend huge amounts in promoting their brands and sustain themselves despite the heavy losses.

Original Thums up

New Thums up

CHAPTER 6

Inability to Achieve Further Growth

Bazee.com was sold to e-Bay. The intention of the promoters of Bazee.com was to combine their local expertise with global presence, global perspective and the deep pockets of e-Bay to take Bazees business to the next level. Daksh e-Service was merged with IBM so that Daksh e-Service would get continuous jobs from IBM enabling it to grow faster and become the front runner in the outsourcing industry in India.

CHAPTER 6

Trade-off for survival

It is believed that, after supporting L&T against Reliance, Financial institutions were this time favouring Birla group. Birlas were in a position to increase their stake in L&T through creeping acquistion.
Financial Institutions

Thus, L&Ts professional management agreed to give away the cement business to Birla mainly because of their own survival.

CHAPTER 6

Typical Characteristics of Takeover Candidates

Low Market Capitalization vis--vis Intrinsic (Present/Potential) Value Low Market Capitalization vis--vis Replacement Cost of Assets Low Market Capitalization vis--vis Book Value Cash Flows in excess of Debt Servicing Requirements Lowly Geared Companies Underperforming Companies Unexploited Brand Potential Undervalued and Saleable non-operating assets Large Off-Balance Sheet Assets