M&A Introduction

Level 1 Module 1 Session 1

IFAP
Reshma Krishnan

Why are you here?

To understand what an Analyst does in the context of
Corporate finance and Investment Banking
To acquire skills critical to being a good analyst
To go beyond corporate finance theory

Logistics
Programme Manager & M&A track faculty- Reshma
Krishnan
Email: re.krishnan@gmail.com

Programme Administrator & soft skill faculty

Pradeep Khanapure
Pradeep.khanapure@imarticus.org

Faculty- Harish Menon

Faculty Hemal Lotia
Walk-in hours Saturday 9-10 (Before Class) on
notified days

Financial Analysis Landscape

INVESTMENT
BANKING
Capital
Raising
Debt
Equity
Advisory
Services

EQUITY &
CREDIT
RESEARCH
Analysis of
stock
markets
worldwide
Economic,
Strategy and
Commodities
Research
Analysis

M&A
Restructuring

Corporate
Debt

PROJECT
FINANCE
Project
Structuring
Portfolio
Monitoring
and
Collections
Risk Analysis
Debt, Subdebt, QuasiEquity
Funding,
Equity
Investments

FINANCIAL ANALYSIS

CONSULTING

Corporate
Finance
Advisory
Forensic and
Dispute
Services
M&A
Transaction
Services
Reorganisatio
n Services

Two guiding Principles

Top
Line

Botto
m
Line

How do I
become
bigger?
Increase my
sales faster
and in a
sustained
manner?
How do I
make more
money?
Increase my
profitability in
a faster and

Vehicles of Growth
Make or
Buy?

OrganicGreenfield
Time
Resources

Brokerage
Firms
IPO Equity
Research
Analysts

Sellside

Inorgan
ic
M&A

Option
s

Market
Price

Equity
Capital
Markets

Financin
g
Private
Equity
Debt

Analy
st

IPO
Project
Finance

Hedge
Funds
Mutual
Funds
Insurance
Companies
HNI
Wealth
Managemen
t

Buyside

Why should you buy? - Strategic

Rationale For M&A
REVENUE

Startup

Grow
th

Maturity

Transformati
on

TIME

Start-up

Growth

Acquire
established
market
access and
track record
Acquire a
platform for
growth

Fill strategic
gaps
Geographic
expansion
Bulk-up of
revenues and
client base
Capability
augmentation
Land grab

Maturity
Market share
consolidation
Introduction of new
business lines
Block & Tackle

Transformation
Acquire a
platform in order
to reorient
business model
around that

What is M&A and how does it create

value?
1+1=3
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.

M&A is not one word

Mergers- Merger of equals. A merger happens when two
firms, often of about the same size, agree to go forward
as a single new company rather than remain separately
owned and operated.
Rare
Exchange of Stock
Daimler- Benz & Chrysler merged to become Daimler
Chrysler
Acquisition-When one company takes over another and
clearly established itself as the new owner, the purchase
is called an acquisition
More often the case
Will buy the entire stock of the company
Tata buying Jaguar

The concept of Synergy- the Holy Grail of

M&A
The magic behind the M&A; the holy grail
Staff Reductions
Competition elimination
Economies of Scale
Acquiring new technology
Improved Market Reach and Industry Visibility

Types of M&A

Horizontal

Mergers

Vertical
Conglomerat
e

Two companies that

are in direct
competition and
share the same
product lines and
markets.
A customer and
company or a
supplier and
company. Think of a
cone supplier
merging with an ice
cream maker.
A garment
manufacturer buying
a confectionary

Understanding the value chain of an

industry
Diamond company expertise across the
value chain
Distributo
rs

Brokers &
Distributors

Preparing Rough
and reselling
Rough Production
and mining

Value Add:
Sorting roughs as
per colour, clarity
and size

Distributo
rs

Cutting and
Polishing

Jewellery
Manufacturing

Value Add:
Sizing the
diamond into shapes
that maximise
yield and
refraction of light

Value Add:
Setting
Cut & Polished
diamonds
into jewellery

Retail Sales of
Diamond Jewellery

Glitters presence across the value chain allows it to bypass the costs of middle men
and also control quality of raw material at each stage thereby leading to higher
margins.

Changing Industry structure: The disappearance of middle man is advantageous to players such as Glitter who do not depend
on them for raw materials and now have the opportunity to cater to major customers like jewellery manufacturers and
retailers on their own leading to a significant expansion in margins.

Inorganic Growth Opportunities: Glitter can focus its inorganic growth efforts across the value chain enabling it to spur its
growth exponentially over the coming years as the fragmented industry starts to consolidate.

Valuation in M&A- How much will you

pay?
Price to Earning Ratio:
Multiple of Earnings of company
Enterprise Value to Sales
Ratio-Multiple of revenues
versus Industry

Make or buy

Comparati
ve
Ratios/Co
mparables

Replacem
ent Cost

Transactio
n
Comparabl
es

Discounte
d Cash
Flow
(DCF)

What have similar transactions

been valued at in terms of P/E and
Revenue Multiples

DCF determines a company's

current value according to its
estimated future cash flows.
Forecasted free cash flows
(operating profit +
depreciation + amortization of
goodwill capital expenditures
cash taxes - change in
working capital) are
discounted to a present value
using the company's weighted
average costs of capital
(WACC).

Control Premium
For the most part, acquiring companies nearly always
pay a substantial premium on the stock market value of
the companies they buy. The justification for doing so
nearly always boils down to the notion of synergy; a
merger benefits shareholders when a company's postmerger share price increases by the value of potential
synergy.
Pre Merger value of both firms +Synergy = Pre
Merger Stock Price Post Merger Number of Shares

Indian M&A Market An Overview

M&A in India has grown at a significant rate between 2003
and 2007 at a CAGR of almost 58% with focus being on IT &
ITES, Telecom, Energy & Life sciences sectors. A majority of
the M&A transactions had been cross-borderIndian
in nature.
M&A Market

Source: Grant Thornton

Domestic
Cross border
Inbound- No mega
deals
Outbound- Decline in
the
last few years
because of
Global M&A
the Global Crisis.

Down 2% to 2.78 Trillion

Oil & Gas Led the Global

Sector

42,455 deals

The $54.5bn pending bid for

TNK-BP by Rosneftegaz,
announced on 22nd
October, was the largest
deal of the year and
accounted for 14% of total
Oil & Gas volume

M&A Pitfalls- why over half of them

fail to create any value
Evaluation

Overestimate

Savings

Diligence
and

Inadequate Due Diligence: This

Implementation

Cultural Clash: Companies

imagine the synergies dont

often happens in the auction process

are like people and have

exist.

when speed is of the essence and

their

buyers are expected to finish due

Merging

two

diligence quickly to ensure Closure of

different

cultures

transaction.

results in a failed merger.

Underestimate

integration

and deal costs.

Merger of AOL-Time Warners

February 20, 2007, Bear Sterns

own

personalities.
extremely
often

The 2002 merger of HP and

synergies ascribed to the

ordered by a U. S. Bankruptcy

Compaq is a good example of

deal were over sold. The

Judge in New York to repay $159

culture clash. Significant differences

shareholders of AOL owned

million to the Trustee of Manhattan

were: Compaq tended was market-

55% of the new company

Investment Fund Ltd. for providing

oriented and aggressive, while the

while Time Warner

services to the fund from 1996 to

traditional HP emphasized

shareholders owned only

2000 provides a stark example of

teamwork, consensus and long-term

45%, wall street worry was

the huge risk-to-reward gulf if your

view. Consulting firms helped HP

that the smaller AOL had in

companys due diligence

conduct 144 focus groups and 150

fact bought out the far larger

procedures are not what they

interviews in 22 countries. These

Time Warner.

should be.

firms discovered that the situation

was ready-made for massive culture

Deal Heat/ winners Curse: Bidders get caught up in clash.

a deal and lose sight of
value and strategic fit and focus on winning thereby losing synergies.

Tata Corus- An analysis of why this

time is different
CORUS FAILURE

Corus, the merger between British Steel and Hoogovens in 1999, underestimated the
integration valuing the companies market cap at US$ 6 billion, but in 2005 the company
was worth US$ 250 million.

Corus was an attempt to revive the ailing British Steel which had incurred a net loss of 81
million in the March 1999.

Coruss Failure:

Wishful Thinking!

Chief among them being the cultural mismatch between the merged entities and the lack of
HR involvement when integrating the two entities.

Large scale labour unrest due to the downsizing and rationalization of various operations
seriously impacted the normal functioning of the new organization.

The high valuation of the British pound and stagnation in demand for steel was gradually
undermining the competitiveness of British Steel in the European market.

Tata Corus- An analysis of why this

time is different
TATA CORUS DEAL

Tata Steel acquired Britains Corus for 5.75 billion ($11.3 billion now 12.1) in 2007.

Tata-Corus combine will become the fifth largest steelmaker in the world.

The New TATA-Corus

Access to low-cost slabs:

The ability to export surplus slabs either from Tata Steel's facilities or through
acquisitions in low-cost regions over the next few years will be the key driver of
this deal.

Wishful Thinking!

Restructuring of Corus' existing units:

It is likely that over the next few years, Tata Steel will put through an extensive
restructuring of its underperforming units at Port Talbot and Scunthorpe in the UK,
though it has ruled out any job cuts. It may also prune down high-cost slab facility
at Teesside.

Better Implementation and management of Cultural issues:

The ruling out of job cuts creates a better environment post integration unlike the
one seen in the earlier transaction.

Quantified Potential synergies:

For the first time since this deal surfaced, Tata Steel has quantified that it will
benefit to the tune of $300-350 million every year. However, the benefits from the

Winners Curse!
A tendency for the winning bid in an auction to exceed
the intrinsic value of the item purchased.
Tata Corus had quantified synergies but many reckon
that they might have bid almost
The acquisition by Tata amounted to a total of 608 pence
per ordinary share or 6.2 billion (US $12 billion) which was
paid in cash. First of all, the general assumption is that the
acquisition was not cheap for Tata. The price that they paid
represents a very high 49% premium over the closing mid
market share price of Corus on 4 October, 2006 and a
premium of over 68% over the average closing market
share price over the twelve month period. Moreover, since
the deal was paid for in cash automatically makes it more
expensive, implying a cash outflow from Tata Steel in the
amount of 1.84 billion.

Thank you
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