Merger, Acquisition and Corporate Restructuring

Merger, Acquisition and Corporate Restructuring

Himanshu Puri Assistant Professor IILM CMS

Merger ? Acquisition ? Corporate Restructuring ? Areas to be considered under this subject:

Motives/Theories Process Parties involved Financing Valuation Consequences on Profitability Legal Norms Integration and Role of HR

Introduction
Growth of a company can be through: - organic/ internal channels/ capital budgeting exercises - inorganic growth/ external channels/ M&As Dynamic Global world coupled with severe competition and technology change makes it necessary to have inorganic growth Restructuring Assets, operations, contractual relationship with shareholders, creditors and other stakeholders leads to

CORPORATE RESTRUCTURING
A strategy through which a firm changes its set of businesses or financial structure. Restructuring includes Change in corporate management Sale of under-utilised assets Relocation of manufacturing facilities Refinancing of corporate debt Reduction of staff Change in ownership Expansion

CORPORATE RESTRUCTURING

CORPORATE RESTRUCTURING
Helps in re-establish the competitive advantage Helps in responding quickly in global dynamic world Helps to meet unexpected challenges Value creation for shareholders M&A is a part of corporate restructuring and is one of its important strategy M&A is a generic term used to represent different types of corporate restructuring

Introduction: M&A
Merger: combining of two or more companies into a single Company Acquisition: of one company by another - acquisition of assets or of entire company or of only intangible assets (brand/ goodwill) - can be friendly or hostile depending upon targets reaction

Corporate Restructuring

(a) (b) (c) (d)

(e)

Assets Sale

Expansion
Mergers and Acquisitions Tender Offers Asset Acquisition Joint Ventures

(a) (b) (c) (d)

Corporate Control
Takeover Defenses Share Repurchases Exchange Offers Proxy Contests

(a) (b) (c) (d)

Contraction
Spin Offs Split Offs Divestitures Equity Carve-outs

Changes in Ownership Structures

(a) Leverage Buyout (b) Going Private (c) Esop

Expansion is a form of restructuring, which results in

an increase in the size of firm. It can take place in the form of a merger, acquisition, tender offer, asset acquisition or a joint venture.

Absorption

Merger is defined as a combination of two or more

companies into a single company. A merger can take place either as an amalgamation or absorption. Amalgamation this type of merger involves fusion of two or more companies. After the amalgamation, the two companies lose their identity and new company comes into existence. A new firm that is hitherto, not in existence comes into being. This is generally applied to combinations of firms of equal size. Ex- Brook Bond and Lipton

this type of merger involves fusion of a small company with a large company. After the merger the smaller company ceases to exist. Example: the merger of oriental bank of commerce with global trust bank. After the merger, GTB ceased to exist while the oriental bank of commerce expanded and continued. BOR and ICICI Bank

Tender Offer involves making a public offer for acquiring

the shares of the target company with a view to acquire management control in that company.

Asset Acquisition involve buying the assets of another company. These assets may be tangible assets like a manufacturing unit or intangible assets like brands. In such acquisitions, the acquirer company can limit its acquisitions to those parts of the firm that coincide with the acquirers needs. Joint Ventures In a joint venture two companies enter into an agreement to provide certain resources towards the achievement of a particular common business goal. It involves intersection of only a small fraction of the activities of the companies involved and usually for a limited duration. The venture partners according to the pre-arranged formula, share the returns obtained from the venture. Ex- Bajaj Alliance

Contraction

is a form of restructuring, which results in a reduction in the size of the firm. It can take place in the form of any of the following forms.

Spin-Offs is a transaction in which a company distributes

on a pro-rata basis all of the shares it owns in a subsidiary to its own shareholders. Hence, the stockholders proportional ownership of shares is the same in the new legal subsidiary as well as the parent firm. The new entity has its own management and is run independently from the parent company. A spin-off does not result in an infusion of cash to the parent company.

Spin offs
Company A without Subsidiary B Subsidiary B Shareholders receive Shares of company B

Spin offs (2)

Company A after spinoff

New company B

Shareholders own shares of combined company. Own the equity in subsidiary implicitly.

Old shareholders still own shares of company A, which now only represent ownership of A without B.

Split-offs:

a new company is created to takeover the operations of an existing division or unit. Portion of the existing shareholders receives stock in the new company in exchange for parent company stock. Equity base of the company reduces.

Divestiture,

a divestiture is a sale of a portion of the firm to an outside party, generally resulting in an infusion of cash to the parent.

Split-Ups:

the entire firm is broken up in series of spin-offs, so that the parent company no longer exists and only the new off springs survive. A split-up involves the creation of a new class of stock for each of the parents operating subsidiaries, and then dissolving the parent company.

Divestitures
Company A without Subsidiary B

Divestitures (2)
Company A w/o subsidiary B

Subsidiary B

Cash as consideration

Company C

Old Sub B Company C

Equity carve out (partial IPO) Equity Carve-out,

involves the sale of a portion of the firm through an equity offering to outsiders. Also called partial IPO Parent company sells a percentage of the equity of a subsidiary to the public stock market Receives cash for the percentage sold
Company A without subsidieary B

Subsidiary B

Shareholders implicitly own 100% of equity of subsidiary B through their Company A shares.

Equity carve out (partial IPO)

Asset Sale,
Company A without subsidieary B Portion of Sub B equity Not sold X % of Company B shares X % of sub B equity sold To market for cash In IPO

it involves the sale of tangible or intangible assets of a company to generate cash. When a corporation sell off all its assets to another company, it becomes a corporate shell with cash and or/securities as its sole assets.

Shareholders now own 100% of Company A (without B) And (1-X)% of Company B implicitly Through their company A shares

CORPORATE CONTROL
Share Repurchases involves the company buying its own shares back from the market. Strengthens promoters stake. Exchange Offers one or more classes of securities, the right or option to exchange part or all of their holdings for a different class of securities of the firm. Debt for stock or vice versa. Proxy Contests is an attempt by a single shareholder or a group of shareholders to take control or bring about other changes in a company through the use of the proxy mechanism of corporate voting.

Change in Ownership Structure represents the fourth group of restructuring activities which results in a change in the restructure of the ownership in the firm. The various techniques are given as follows: Leverage Buyout, is a financing technique where debt is used in the acquisition of a company. The term is often applied to a firm-borrowing fund to buy-back its stock to convert from a publicly owned to a privately owned company.

Mergers
Going Private, refers to the transformation of a public corporation into a privately held firm. ESOP is for employees, employee stock option plan.

A + B = AB
Companies A and B become one company (A+B) via an agreement which is
Negotiated with between the firms boards Subsequently voted on by shareholders Company B receives some number of company A shares, plus also (perhaps) some cash. Combining firms through some mutual negotiations usually friendly.

Acquisitions

A+B=A
One company A buys a controlling stake of another company B.
Management/board approval not required No shareholder meeting/vote required Mainly accomplished by Tender Offer

Specific Advantages of Mergers & Acquisitions

Reducing competition Gaining access to new products and services Access to technical expertise Access to an established brand name Economies of scale Diversification of business risk

Specific Disadvantage of Mergers & Acquisitions

Incompatibility of top management Clash of corporate cultures Operational problems Increased business complexity Loss of organizational flexibility

Types of M&As
Horizontal Mergers: when two or more firms dealing in similar lines of activity/ product/ service, combine together; rationale:
elimination/reduction in competition increase market share strategy to end price cutting/ price wars economies of scale in production, R&D, marketing and management

May create conditions triggering concentration of economic power and monopoly

Types of M&As (contd.)

Vertical Mergers: involves two or more stages of production/ distribution that are usually separate Can be: upstream/ backward integration: extends to firms supplying raw materials downstream/ forward integration: extends to firms that sell eventually to the consumer Rationale: lower buying cost of materials lower distribution costs assured supply of raw materials assured markets/ customer base increasing or creating barriers to entry for potential competitors placing competitors at a cost disadvantage

Types of M&As (contd.)

Conglomerate merger: firms engaged in different unrelated activities combine together product extension mergers/ concentric mergers: merger of firms in related business lines geographic market extensions: merger of firms operating in different geographic areas also called diversification elimination of risks by acquiring diversified portfolio is the main motive encash on the boom in a certain product line is also the rationale at times, as mergers are faster routes to growth

MERGER WAVES
FIRST WAVE (1897-1904)
Known as great merger movement. Mainly concentrated on horizontal mergers Creating large monopolies Economy of scale It is said that approximately 71 important oligopolistic or near competitive industries were converted into near monopolies by mergers. financial factors/ stock market crash of 1904 led to its end as there was no easy availability of finance

Second wave of the 1916-1929

Mainly product extension mergers, market extension mergers and vertical mergers This merger wave contributed to oligopolistic structure in many industries with consolidation In war time, firms were urged to work together, rather than compete Investment bankers played a key role

Third Wave of the 1965-69

Highest level of mergers Conglomerate mergers mainly took place(around 80%) Wide acceptance by management principle and professionals to handle diversification Many failed due to little knowledge of acquired industries Mostly financed thru equity because of Booming markets

Fourth Wave of the 1981-89

Hostile deals formed part of this period Concentrated on service industry (finance, retail, healthcare, etc.) Emergence of corporate raiders IB played aggressive role in advisory Increase use of debt to finance Availability of finance helps small firms to acquire large.

Fifth wave of the 1990s

More of strategic mergers Focused on core competitiveness as the source of competitive advantage Expansion was the mantra and M&A was the way to achieve that mantra Globalization led to cross border M&As

Indian Scenario
Divided into pre and post LPG era During licensing era, companies indulged in unrelated diversifications depending upon availability of licenses due to restriction in a particular industry Became conglomerates with sub optimal portfolio of assorted businesses Takeover bids/ corporate bids common Active arrangement of takeover of sick undertakings by BIFR Liberalization led to more streamlined M&A activity Globalization led to more cross border deals Active involvement of SEBI More friendly Competition Act

Top Ten Mergers and Acquisitions in India

Tata Steel acquired 100% stake in Corus Group on January 30, 2007. It was an all cash deal which cumulatively amounted to $12.2 billion. Vodafone purchased administering interest of 67% owned by Hutch-Essar for a total worth of $11.1 billion on February 11, 2007. India Aluminium and copper giant Hindalco Industries purchased Canada-based firm Novelis Inc in February 2007. The total worth of the deal was $6-billion.

Contd.
Indian pharma industry registered its first biggest in 2008 M&A deal through the acquisition of Japanese pharmaceutical company Daiichi Sankyo by Indian major Ranbaxy for $4.5 billion. The Oil and Natural Gas Corp purchased Imperial Energy Plc in January 2009. The deal amounted to $2.8 billion and was considered as one of the biggest takeovers after 96.8% of London based companies' shareholders acknowledged the buyout proposal. In November 2008 NTT DoCoMo, the Japan based telecom firm acquired 26% stake in Tata Teleservices for USD 2.7 billion.

Why do so many M&A fail?

India's financial industry saw the merging of two prominent banks - HDFC Bank and Centurion Bank of Punjab. The deal took place in February 2008 for $2.4 billion. Tata Motors acquired Jaguar and Land Rover brands from Ford Motor in March 2008. The deal amounted to $2.3 billion. 2009 saw the acquisition Asarco LLC by Sterlite Industries Ltd's for $1.8 billion making it ninth biggest-ever M&A agreement involving an Indian company. In May 2007, Suzlon Energy obtained the Germany-based wind turbine producer Repower. The 10th largest in India, the M&A deal amounted to $1.7 billion. Too much money paid; acquired firm not worth as much as acquiring firm thought Acting too quickly - timing Conflicting corporate culture, conflicting management styles, differing expectations Taking on something too big Not sufficient strength to manage Failure to integrate operations Unrealistic or over expectation of possible synergies Poor business fit: product/service of acquired company does not fit into acquirers sales, distribution systems or geographic requirements Inadequate due diligence: some of the financial and business risks of seller may go undetected Boardroom split: lack of compatibility amongst directors of two companies merged Firm acquired by leveraged buyout/ over leverage more debt make difficult to pay fixed obligation