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Agenda

Concepts related to Mergers & Acquisition

Types of Merger

Horizontal

Vertical

Conglomerate

Reasons for M&A

History of M&A

Financing Methods

Market Reaction to M&A

Reasons for Failure

M&A Scenario in India
 Structure
M&A

Amalgamations Acquisitions

Asset Stock
Merger De-merger
Purchase Purchase

Slump Itemized
Sale Sale
 Merger
One firm absorbs the assets and liabilities of the other
firm in a merger. The acquiring firm retains its
identity. In many cases, control is shared between the
two management teams. Transactions were generally
conducted on friendly terms.

• In a consolidation, an entirely new firm is created.

• Mergers must comply with applicable state laws. Usually,

shareholders must approve the merger by a vote.
 Acquisition
Traditionally, the term describes a situation when a
larger corporation purchases the assets or stock of a
smaller corporation, while control remains
exclusively with the larger corporation.

• Often a tender offer is made to the target firm (friendly) or

directly to the shareholders (often a hostile takeover).

• Transactions that bypass the management are considered

hostile, as the target firm’s managers are generally
opposed to the deal.
 Divestiture & Spin-off
• Divestiture: a transaction in which a firm sells one of its
subsidiaries or divisions to another firm.

• Spin-off: a transaction in which a firm either sells or issues

all or part of its subsidiaries to its existing public investors, by
issuing public equity. In 1997 PepsiCo spun-off its restaurant
division. Shareholders received one share of the new
restaurant company (TRICON), for every 10 issues of Pepsi
they held.
 Terminology
• Target: The corporation being purchased, when there is a
clear buyer and seller.

• Bidder: The corporation that makes the purchase, when

there is a clear buyer and seller. Also known as the acquiring
firm.

• Friendly: The transaction takes place with the approval of

each firm’s management.

• Hostile: The transaction is not approved by the management

of the target firm.
 Due Diligence
Before the M&A
Pre-deal
due
diligence
Sniff Test
• Opportunistic vs.
Post-deal due diligence
Strategic
• Economic Sense
• Cultural Post-close execution
Compatibility
• Leadership
• Governance
•Understanding everything you can about
the Target
• Develop Project plan and refine cost,
value
and schedule estimates How to deal with
• Implement Program Management and challenges within
Governance agreed time frame with
• Determine your organization and people available resources
strategy
 TakeOver Defense
Pre-offer defenses

Some firms adopt so-called shark-repellent charter amendments to

deter potential bidders

Staggered boards (board is staggered in groups with only one group

elected each year, thus making it more difficult for bidders to gain
control)

Require supermajority (above 80%) to approve a merger

Restrict mergers unless a fair price is received

Unwelcome acquirers must wait a number of years before a merger
can be completed

Other pre-offer defenses include

Poison pills: Existing shareholders are issued the right to buy stock at a
discount if there is a significant purchase of shares by an outside
bidder

Poison put: Bondholders can demand repayment if there is a hostile
takeover

Post-offer defenses

• Issue new shares or repurchase shares from shareholders at a premium

• Buy assets that the bidder does not want or that can create antitrust
problems
Types
 Horizontal
Mergers between two firms in the same line of
business.
• Chemical Bank’s merger with Chase & Nationbank’s
purchase of BankAmerica
• Oil Giants Exxon and Mobil
• British Petroleum (BP) and Amoco
• Kingfisher & Air Deccan
 Vertical
Mergers between Companies at different stages
Walt Disney’s acquisition of ABC television
network. Disney planned to use the ABC network to
show “The Lion King” and other recent movies to
huge audience.

Production Stage- The buyer may expand back

towards the source of raw material or forward in the
direction of the ultimate consumer.
 Conglomerate

Merger between Companies in unrelated lines of

businesses. Hugely prevalent between 1960s and
1970s
Reasons for M&A
Reasons for M&A
History of M&A

First Wave mergers (1897-1904)

Horizontal mergers took place between manufacturing industries

Second Wave Mergers (1916-1929)

Mergers between Oligopolies

Third wave mergers (1965-69)

Conglomerate mergers

Companies taking over larger than themselves

Fourth Wave mergers (1981-1989)

Hostile takeovers was the order

Fifth Wave Mergers (1992-2000)

Mainly in banking and telecommunications
Financing Methods for M&A
Mergers are generally differentiated from acquisitions partly by the way in
which they are financed and partly by the relative size of the companies.
Various methods of financing an M&A deal exist:

Cash

Payment by cash. Such transactions are usually termed acquisitions rather
than mergers because the shareholders of the target company are removed
from the picture and the target comes under the (indirect) control of the
bidder's shareholders alone.

A cash deal would make more sense during a downward trend in the
interest rates. Another advantage of using cash for an acquisition is that
there tends to lesser chances of EPS dilution for the acquiring company.
But a caveat in using cash is that it places constraints on the cash flow of
the company.
Contd…
Financing

Financing capital may be borrowed from a bank, or raised by an issue of
bonds. Alternatively, the acquirer's stock may be offered as consideration.
Acquisitions financed through debt are known as leveraged buyouts if they
take the target private, and the debt will often be moved down onto
the balance sheet of the acquired company.

An acquisition can involve a combination of cash and debt, or a

combination of cash and stock of the purchasing entity.

Hybrids

An acquisition can involve a combination of cash and debt, or a
combination of cash and stock of the purchasing entity
 First, the bad news…
Most deals do not create value
Market Reaction to Mergers

Empirical evidence has shown that upon announcement of a
merger bid, on average:

Share price of the targeted company rise 16%

Share price of acquiring company are essentially unchanged (a fall of
0.7%)

Value of total package (buyer plus seller) rises on average by 1.8%

Sellers earn higher returns because

Buyers are typically substantially much larger firms that the significant
gains from the merger do not affect the firm’s share price

More importantly, it is often the case that there is a competition among
bidders, which increases the gains for the target firm(HCL-INFOSYS-
AXON)
 Reasons for failure
• The organization enters a fundamentally unprofitable industry or refuses to
exit from one.
• The organization steps far away from what is known. They key strategic
drivers of profitability have less to do with focus and relatedness and more
to do with knowledge, mastery and competencies.
• The economic benefits of the deal are improbable.
• Success is less likely when there are many competitive bids (public
companies) as opposed to less competitive segments of the market like
private firms and assets.
• Poor structuring of the deal – the use of cash, debt financing, tax shields,
staged payments, merger of equals terms and earn out incentive structures
are all associated with higher buyer returns.
• Poor governance – oversight and delegation of decision making authority
within the firm.
International Stats of M&A
Break-up by No of Deals
6%
16%
37%

41%

Americas Europe Asia-Pacific Africa/Middle East

Break-up by Value

4%
15%
36%

45%

Americas Europe Asia-Pacific Africa/Middle East

M&A Scenario In India
Economic Times
 Indian Companies Going Abroad
“The Indian Multinational”
- A steel company in UK, an oil & gas
explorer in Norway, a generic drug
manufacturer in Germany; all have one
thing in common - they are all flying the
Indian tricolor

Value of outbound deals larger

than inbound
-In Jan-March 2007, 40 out-bound deals
with a total value of € 15bn Led by Tata-
Corus, Hindalco-Novelis, Aban-Sinvest

Companies looking to expand

their product portfolio, access
new markets, technologies
from regional to global player
Indian Outbound Deal
Question 1

Which was the biggest deal in Indian

M&A history?

Tata Corus Deal

 Top 10 Acquisitions by Indian
Companies
Targeted
Rank Acquirer Targeted Co. Country Deal Value( in U.S$ bn) Industry
1 Tata Steel Corus Group plc. UK 12 Steel
2 Hindalco Novelis Canada 5.98 Aluminium
Daewoo
3 Videocon Electronics Corp. Korea 0.729 Electronics
4 Dr. Reddy's Labs Betapharm Germany 0.597 Pharmaceutical
5 Suzlon Energy Hansen Group Belgium 0.565 Energy
Kenya Petroleum
6 HPCL Refinery Ltd. Kenya 0.5 Oil And Gas
7 Ranbaxy Labs Terapia SA Romania 0.324 Pharmaceutical
8 Tata Steel Natsteel Singapore 0.293 Steel
9 Videocon Thomson SA France 0.29 Electronics
10 VSNL Teleglobe Canada 0.239 Telecom
Total 21.519
 Change in RBI policy
• Hiked the overseas investment limit from 300 per cent of the net worth to
400 per cent of the net worth;

• Hiked the limit on overseas portfolio investment by Indian companies

from 35 per cent of their net worth to 50 per cent of their net worth;

• Allowed Indian residents to remit up to US$ 2,00,000 per financial year,

from US$ 1,00,000 previously, for any current or capital account
transaction or a combination of both.

• Allowed mutual funds to make an aggregate investment to the tune of US$

5 billion in overseas avenues, from an earlier cap of
US$ 4 billion.
Question 2

• Which was the largest M&A deal in

2008 in India?

Daiichi-Sankyo’s Acquisition of Ranbaxy

for $4.5 bn
 M&A Scenario in India (2008)
• Top 10 deals accounted for 64%
when compared to that in 73% in
2007

• 9 out of 10 top deals in 2008 were

cross border in nature

• Average deal value is $69.03

million in 2008 when compared to
$93.55 million in 2007

• 37% of total M&A deal in 2008

accounted to Telecom, Pharma,
Healthcare and Biotech.
Sector wise Breakup of M&A
deals by value Sep-Oct 2008
Question 3
Find the M&A…..

TATA-JAGUAR DEAL
Overall Scenario of M&A

Cash rich firms, owing to slow growth and tight liquidity both at home and
overseas are curbing big aspirations for mergers and acquisitions. Eg:
Infosys - Cash of US $ 1.9 Bn

Compare that to China, where acquisition volume is up 156 percent to

$47.9 billion, though cross border acquisition plans by Chinese companies
are closely tied to the government and are less impacted by
financing constraints.

In case of Indian Companies there are no takers for the new issue of
stocks for the Mergers and acquisitions. Eg Tata Motors and Hindalco
Question 4
FIND THE M&A