WELCOME TO MERGERS AND ACQUISITIONS

Kumar Bijoy

FIVE WAVES
Started Peaked
1898-1902

Ended
1904 1921 1969 1989

1st
U.S

1897 1916 1965 1981 1992

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2nd 3rd

Global but most pronounced in U.S.

4th 5th

1st Wave: 1897-1904

Impact on 8 specific industries (2/3 of the total mergers)
1. Primary metals 2. Bituminous coal 3. Food products 4. Chemicals 5. Machinery 6. Transportation Equipment 7. Petroleum 8. Fabricated metal products

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1st WAVE
Merging for Monopoly

Horizontal Merger

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1st Wave
Create monopoly
US Steel by J P Morgan Carnegie Steel by Andrew Carnegie

US Steel

75% of mkt.

Smaller Steel Cos

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1st Wave
Creation of trusts Put their stock in a voting trust and agreed not to compete against each other. e.g : Sugar trusts Copper trusts Shipping trusts etc.

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1st Wave
Products: GE Dupont Eastman Kodak Navistar International etc.

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1st Wave.End
Due to financial factors: stock market crash-1904 panic in banking 1907 The Application of anti-trust legislations.

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nd 2

Wave: 1916-1929

Merging For Oligopoly Consolidation Fueled by first world war The anti-trust became more stricter thru Clayton Act,1914 Resulted vertical merger.
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2nd Wave
E.g. Ford Motor vertically integrated co. Mfg. own tyres from rubber produced from its own plantation in Brazil. Mfg. Own steel for body of car which in turn got iron from its own mines and shipped on its own railroad.
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2nd Wave
Conglomerates non related fields
Industries 1. Food products

2. Chemical 3. Primary metals 4. Petroleum 5. Transportation equipments.

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2nd WaveEnd
Stock mkt crash 1929
Black Thursday 29thOct1929.

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3rd Wave: 1965 - 1969

A historically high level of merger activity.

Fueled by booming American Economy.

Acquisition of larger cos by smaller cos.

Conglomerate transaction - Non related, Highly diversified, Unrelated industries.

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3rd Wave
1960s Bull mkt. Eq. Sh - P/E multiple of certain cos.

A T Eq. Sh A Eq. Sh T Stock Swaps

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4th Wave: 1981 - 1989

Hostile take over.
Fortune 500 became the target of acquirers.

Professional corporate raider.

Leveraged buyouts. Role of investment Bankers. Active among European and Japanese firms.
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5th Wave: 1992

Mega mergers.
Cross border mergers. Drivers :- Deregulations, Globalization & Technology.

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Business Combinations
Reasons: Growth Economies of Scale Synergy NAV = PVab ( PVa + PVb ) P E Managerial efficiency Market entry Acquire Technology Diversification Tax shields Strategic
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Business Combinations
Some unstated reasons for acquisitions

Megalomania Hubris spirit

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Why not?
Grasping for a company simply because its on the market or because a competitor wants to buy it It is available for sale It seems very attractive

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Forms of Business Combinations

Consolidation result: a new firm e.g. Sandoz + Ciba Geigy = Novartis Merger result: only one survive e.g. HDFC BK + TIMES BK = HDFC

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Forms of Business Combinations

Takeovers control over mgmt thru substantial portion of its equity . e.g. Credit Swiss Group controlled First Bostons Mgmt thru Equity acquisition. Both remained in existence.
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Forms of Business Combinations

Asset purchases A buyout a division or assets of T e.g. Coca-Cola paid Rs 170Cr to Parle for its Soft drinks brands like Thumps up, Limca, Gold Spot, etc.

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Types of Mergers
Horizontal Merger Vertical Merger Conglomeration Market Extension Merger Product Extension Merger

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Major Acquisitions: Big Deals

TARGET ARCELOR NKK CORP LNM HOLDINGS CORUS KRUPP AG DOFASCO INTL STEEL BUYER MITTAL STEEL KAWASAKI STEEL ISPAT INTL TATA STEEL THYSSEN ARCELOR MITTAL STEEL VALUE ($Bn) 31.00 14.10 13.30 12.00 8.00 5.20 4.80 YEAR 2006 2001 2004 2006 1997 2005 2005

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Merger: Nokia-Siemens
A new 50-50 JV company Nokia-Siemens Network (3rd largest communications equipment provider in the world after Ericsson and Alcatel/Lucent) Annual revenue : Euro 16bn Workforce : 60000 (expected job cuts 1015% in next 4yrs mainly in Germany) Cost reduction of Euro1.5bn per year by 2010
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Theories of Mergers
Differential efficiency Inefficient management Financial synergy Operating synergy Strategic realignment Undervaluation
Short term results Vs Long term investment Market below replacement cost

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Theories of Mergers
Information and signaling Agency problems and Managerialism
Protect or build the empire Free cash flow theory

Market power Tax consideration Redistribution Winners curse - Hubris

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The Acquisition Process

Acquisition Search

Approaching the Target

Passive Strategy Active Strategy

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The Acquisition Process

Valuation
Discounted Cash Flow Method Comparable Companies Method Book Value Method Market Value Method

Negotiation Due Diligence Acquisition Finance

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Valuation
Acquirers perspective Sellers perspective Lenders perspective Investors perspective

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Acquirers perspective
Increase the synergy / Decrease the premium Managerial synergy

HLL & TOMCO

Exchange inefficiency: Vertical integration will circumvent mkt transactions cost

Tata Tea took over Consolidated Coffee Ltd

Operating synergy: Economies of scale

ICICI acquired ITC classic India Cement acquired Visaka cement, Raasi cement, CCI plant at Yerraguntla

Tax advantages: acquiring sick companies

e.g. Voltas acquired Allwyn Kumar Bijoy

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Acquirers perspective
Regulatory considerations: to bypass the law of fully owned subsidiaries by foreign co. e.g. Whirlpool (Indian Wing) merged with Expo Machinery & Kelvinator India = Whirlpool India Size: e.g. Merger of SCICI & ICICI Financial synergy: channeling of cash/resources Diversifying risk: e.g. Torrent group acquired Ahmadabad electricity Co and Surat electricity

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Sellers perspective
Good price: Godrejs offer of Rs 100cr to Transelectra more attractive than Unilever Better business relationship: SRF Ltd sold SRF finance to G E Caps at lower price Better mgmt and employee care: JRD Tata had imposed a condition on S M Datta of HLL that after merger, not a single employee of TOMCO would be retrenched
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Lenders perspective
Creating shareholders value: e.g. APIDC the lending institution sold its 2.3% stake of Raasi cements to India cements Better corporate governance Better portfolio

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Investors perspective
Addition to their wealth Potential growth: e.g. shareholders of Raasi have positively responded to the open offer of India Cements (Rs 300ps)

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Valuation of Target companies

Financial valuation: calculation of P/E ratio, Intrinsic value (true MPS)

P/E depends on
Goodwill of the business Proven abilities Character of the business

Tangible assets & Intangible assets: valued either at fair value or at the open market value Free cash flows: DCF method (discounted at WACC or higher) The substitution cost is calculated and compared with acquisition cost Kumar Bijoy

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Financial evaluationIndian context

Look at 5Ps

Personnel:

Nicholas lab acquired Roche for its well trained sales force
HLL acquired BBLIL for its 17brands in Tea segment India cement acquired Raasi cement and Visaka cements

Product:

Plant:

Potential:

Whirlpool acquired Kelvinator

SRF finance selected GE Cap as buyer
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Profit:

Pricing the Bid

1.Divide the cos Net Asset Value by its total no of shares i.e. NAV per share 2a.Make a projection of the target cos turnover and profit for the next five years 2b. Discount the profit of 5th yr at expected RoR 2c. Divide the discounted figure by the no. of sh 3. Calculate the average price of the target cos share over the last one year
These three values indicate the range within which initial negotiating price must be quoted.
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Valuations.Practical e.g.
Coca cola has offered the price to Parle soft drinks equal to its turnover Khaitans of Williamson Major have paid a price of Rs290cr to the Union Carbide (Rs 150cr for their future earnings, Rs 100 for the brand value (Eveready) and Rs40cr for giving mgmt stake in co. Whirlpool Corporation paid Rs 300cr for its 51% stake in Kelvinator India. The share price was fixed at Rs 197.16ps (total 1.52cr shares) which is the average share price over the previous six months.
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Lazard Capital applies a thumb rule in valuing a FMCG co i.e. 1 to 1.5 times of its turnover SRF paid a sum of Rs 325cr for acquiring the Ceats Nylon tyre cord plant. A new plant of same capacity would have cost Rs 450cr with a gestation period of 18 months. Bayer India has offered Rs 80ps of ABS. Independent valuers like C C Choksi & co, ICICI securities and SR Batliboi & co had suggested the Rs 65 -70 per share for the offer
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Issues in empirical studies

If value is increased by mergers or tender offer is it maintained? Is value maintained in the short term only for a period of six months or less? Do value increases represent social gains or merely redistribution? How the gains are divided b/w bidders and targets?
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What will be the effects on other firms in the same industry? Whether the return to the common stock of individual firm or group of firms is greater or less than that predicted by general market relationship b/w return and risk What is the reasonable time frame for testing merger success?
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Sell-offs
Opportunistic
Forced Planned

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Forms of Corporate Downsizing

Spin-Off
A new legal entity is created to takeover the operations of an existing division.The Shares of the new unit is distributed pro rata among the existing share holders.

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Forms of Corporate Downsizing

Split-Off
A new legal entity is created to takeover the

operations of an existing division.The Shares of parent

co are exchanged for the shares of the new co. Hence the share-holding of the new entity does not reflect the share holding of the parent firm.
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Forms of Corporate Downsizing

Split-Up
A complete break up of a company into two

or more and parent firm ceases to exist.

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Forms of Corporate Downsizing

Equity Carveouts
Conversion of existing division or unit into a

wholly owned subsidiary.Result in positive cash

flow.

Divestitures
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Forms of Corporate Downsizing

Divestitures
Outright sale of a portion of the firm to

outsiders. The firm receives purchase

consideration in the form of cash or

securities or both.
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The Divestitures Process

Developing Sale Strategy

Negotiated sale

Auction sale

Valuation

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The Divestitures Process

Drafting offer memorandum
Executive Summary Sale procedure Background Operations Marketing Human resources Financial

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The Divestitures ProcessEnd

Identify potential buyers
Negotiation & Closing the deal

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Takeover Defenses
Share Repurchases White Knights Poison Pills

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Takeover Defenses
Corporate Charter Amendments Golden Parachutes Greenmail Standstill Agreements

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Takeover Defenses
Poison Puts White Squire Pacman Strategy Crown Jewels

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Corporate Restructuring
Going Public
Going Private Joint Venture

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