Introductions to Mergers & Acquisitions

Prof. Rahul Kavishwar

Assistant Professor,
KLE Societys IMSR, Hubli.
 Scheme of my presentation
Corporate Restructuring
Corporate Restructuring objectives
Introduction to Mergers and Acquisitions
Mergers & Acquisition
Absorption
Amalgamation
Types of mergers
Motives behind mergers
Advantages of Mergers and Acquisitions
Basis of valuation
Legal framework for M&A
 Corporate Restructuring

Reorganisation
Realignment of Assets & liabilities of
Reorientation organisation

That Result in
Effective, Efficient & competitive manner so that
Increase in Market share
Increase in Brand Image
Synergies business unit
Corporate Restructuring objectives

Corporate Restructuring

Competition

Globalization Technology
 Corporate Restructuring objectives

Globalization:
Market open for foreign players.
Competition:
Foreign companies are ready to offer same products
at a lesser price.
Technology:
Advanced technology from the outside or foreign
companies.
 Introduction to mergers and acquisitions
Corporate restructuring includes mergers and
acquisitions (M&As), amalgamation, takeovers,
spin-offs, leveraged buy-outs, buyback of shares,
capital reorganisation etc.
M&As are the most popular means of corporate
restructuring or business combinations.
The Liberalization, Privatization and
Globalization process which was started in early
1990s has brought many changes in the
economic scene of the country.
Introduction to mergers and acquisitions..
Mergers and acquisition (M&A) have become the
principal tools for corporate restructuring.
There has been a sharp increase in both the number and
size of the M&A in the last two decades.
M&A and restructuring have become a major force in
the financial and economic environment all over the
world.
The use and intensity with which corporate
restructuring is practiced has grown at tremendous pace
since the beginning of the liberalization era, 1991,
thanks to greater competitive pressures and a more
liberal environment.
 Mergers & Acquisition
The term merger is generally used to refer to
the consolidation of companies.
A merger differs from an acquisition in the
manner in which it is financed.
In a merger, a stock swap is involved while in an
acquisition, a cash deal is involved.
A combination of two or more firms into one
firm; it may involve absorption (acquisition) or
consolidation.
 For Example for Mergers & Acquisition
Times Bank & HDFC Bank Ltd
New name as HDFC Bank Ltd
ICICI & ICICI Bank.
New name as ICICI Bank Ltd
Centurion Bank of Punjab & HDFC Bank Ltd
New name as HDFC Bank Ltd
ACC Ltd & Damodar cement
New name as ACC Ltd
ICICI Bank Ltd & Sangali Bank
New name as ICICI Bank Ltd
 Some Examples M & A
Acquirer Target Deal Size Deal type % stake
( $ mn) bought
Aditya Idea 979 Stake 48.14
Birla Group Cellular increase
Essar Essar 850 State 28.75
Group Shipping & increase
Essar oil to 76%
Citi group HDFC ltd 671.3 State 9.27
increase
to
12.86%
 Some Examples.
Acquirer Target Deal Size Deal type % stake
( $ mn) bought
Sterling Tata 300 Minority 8.0%
InfoTech Teleservices Stake
Reliance IPCL 2,638* Controlling -
Industries stake
Indian oil IBP 1,841* Stake -
increase
Grasim Ultratech 1,641* Stake -
cement increase
Deal size in Pounds
 Top 10 M&As in 2010
Tata Chemicals buys British salt
Reliance Power and Reliance Natural Resources
Airtels acquisition of Zain in Africa
Abbotts acquisition of Piramal healthcare solutions
GTL Infrastructure acquisition of Aircel towers
ICICI Bank buys Bank of Rajasthan
Jindal Steel Works and Ispat Ki Kahani
Reckitt Benckiser goes shopping
Mahindra goes international
Fortis Healthcare acquisitions
Difference between Mergers & Acquisitions
Merger is considered to be a
process when two or more
companies come together to
expand their business
operations
deal gets finalized on friendly
terms and both the companies
share equal profits in the newly
created entity.
in a merger two companies of
same size combine to increase
their strength and financial
gains along with breaking the
trade barriers.
One company takes over the
other and rules all its business
operations, it is known as
acquisitions
one company overpowers the
other company and the decision
is mainly taken during
downturns in economy or
during declining profit margins.
acquisition usually two
companies of different sizes
come together to combat the
challenges
 Absorption
In absorption is a financially strong company
rakes over the business of weak company which
loses its identity.
In absorption, one firm acquires one or more
other firms.
For Example:
The Ganesh Bank of Kurundwad Ltd merged The
Federal Bank Ltd
The Ganesh Bank of Kurundwad Ltd is weak bank
The Federal Bank Ltd is a financially strong bank
 Amalgamation
Amalgamation or consolidation refers to a
situation where two or more existing companies
are combined into a new company formed for
news purpose.
The old companies cease to exist and their
shareholders are paid by the new company in
cash or in its shares or debenture.
For Example:
 Amalgamation

R limited Li
q
ui
da
ti
Y limited RUBY
U limited o
n
Pr
oc
es
B limited s

EPS, Profit
& Networth
 Types of mergers

Mergers may be differentiated on the basis of

activities, which are added in the process of the
existing product or service lines.
Mergers can be a distinguished into the following
four types:-
Horizontal Merger
Vertical Merger
Conglomerate Merger
Concentric Merger
 Horizontal Merger
Horizontal merger is a combination of two or more
corporate firms dealing in same lines of business
activity.
Horizontal merger is a co centric merger, which involves
combination of two or more business units related to
technology, production process, marketing research,
development and management.
The reason may be elimination or reduction in
competition, putting an end to price cutting, economies
of scale in production, research and development,
marketing and management are the motives underlying
such mergers.
 Examples of Horizontal Merger
The formation of Brook Bond Lipton India Ltd. through
the merger of Lipton India and Brook Bond.
The merger of Bank of Mathura with ICICI (Industrial
Credit and Investment Corporation of India) Bank.
The merger ACC (Associated Cement Companies Ltd.)
with Damodar Cement.
 Vertical Merger
It is the joining of two or more firms in different stages
of production or distribution that are usually separate.
The vertical Mergers gains are identified as the lower
buying cost of material. Minimization of distribution
costs, assured supplies and market increasing or creating
barriers to entry for potential competition or placing
them at a cost disadvantage.
The organization may choose to acquire a supplier
(backward integration) or a firm that could distribute its
products (forward integration).
 Examples of Vertical Merger
ICICI Ltd with ICICI Bank Ltd.
IDBI with IDBI Bank Ltd.
Time Warner Incorporated, a major cable
operation, and the Turner Corporation, which
produces CNN, TBS and other programmining.
Usha Martin and Usha Beltron merger
 Conglomerate Merger
Conglomerate merger is the combination of two or more
unrelated business units in respect of technology,
production process or market and management.
The firms engaged in the different or unrelated activities
are combined together.
Diversification of risk constitutes the rational for such
merger motives.
The rationale usually cited for such acquisitions is that
the combination opens entry into an attractive business
or industry and spreads the companys risk.
 Examples of Conglomerate Merger
Walt Disney Company and the American Broadcasting
Company.
ICICI Ltd is merged with Mahindra tractor ltd.
Reliance Industries Ltd merged with Reliance Petroleum
Ltd.
 Concentric Merger
The conglomerate mergers are based on general
management functions.
If the activities of the segments brought together
are so related that there is carry over on specific
management functions.
The marketing research, Marketing, financing,
production and personnel department.
 Examples of Concentric Merger
Citigroup (principally a bank) merged with
Salomon Smith Barney, an investment
banker/stock brokerage operation
Nextlink is a competitive local exchange carrier
offering services in 57 cities and building a
nationwide IP network.
Dial up internet access, high speed DSL and VPN
services across the USA and overseas.
 Takeover
A takeover generally involves the acquisition of a
certain block of equity capital of a company which
enables the acquirer to exercise control over the affairs
of the company.
Takeover is noting but obtaining of control over
management of company by other.
A takeover may be done through the following ways
Open market purchase
Negotiated acquisition
Preferential allotment
 Takeovers
The company which acquires the share of
another company is known as Holding company.
And the company whose shares are acquired by
the holding company is called subsidiary
company.

Reliance Control on Reliance

Infocom Administration & Capital market
working
Others
55% 45%
 Business Alliances
Business alliances such as joint ventures,
strategic alliances, equity partnerships, licensing,
franchising alliances, and network alliances have
grown significantly.
In many situations, well-designed business
alliances are viable alternatives to mergers and
acquisitions.
No wonder they have become common place in
diverse fields like high-technology, media and
entertainment, automobiles, pharmaceuticals, oil
exploration, and financial services.
 Examples of Business Alliances.

General Motors and Toyota entered into an

unprecedented (extraordinary) joint Venture
agreement in the 1980s.
In 1999, IBM announced business alliances
worth $ 30 billion with companies like Cisco
and Dell computers.
Oracle has over 15,000 alliances with its
business partners.
 Common Forms Of Business Alliances

Joint ventures
Strategic alliances
Equity partnership
Licensing
Franchising alliance
Network alliance
 Collaboration

Process where an organisation join hands with

another organisation which technically or
financially superior and resourceful.
Collaboration brings both
Technology
Funds
 Spinning off / Demerger
Process where a business division or a product
line of a company is separately reorganized into
a different entity.
The entity so formed may either be in the form
of a subsidiary company or altogether a separate
company.
For Example: Ultra Tech Demerger from L & T
 Hive off
Sale of loss making division or a product line by
a multi product company
For Example:
 Consolidation
Consolidation is Fusion ( convergence) of two existing
companies into a new company in which both the
existing companies extinguish.
Mixing up of the two companies to make them into a
new one in which both the existing companies lose their
identity and ease to exist.
For Example:
HCL Ltd Hindustan Computers, Hindustan
instruments
 Combination
It is mergers and consolidations as a common term used
interchangeably, but carrying legally distinct
interpretation.
All mergers and acquisitions and amalgamations are
business combination.
 Holding companies
The holding company is the control in the composition
of the Board of Directors in another company and such
control should emerge from holding of equity shares and
thereby more than 50% of the total voting power of such
company.
A holding company is a company is company which
holds more than half of the nominal value of the equity
capital of another company, is called subsidiary
company.
Both holding and subsidiary companies retain their
separate legal entities and maintain their separate books
of accounts.
 Demerger or corporate split or division
It is just opposite to combination.
Division of a company takes place when part of its
undertaking is transferred to newly formed company or
to an existing company.
 Motives behind mergers
The motivations for buyers are as follows.
To increase the value of the firms stock that is
mergers often lead to increase in stock price and or
price earning ratio.
To increase the growth rate of the firm.
To make a good investment a firm may make better
use of funds by purchasing instead of ploughing the
same funds into internal expansion.
To improve the stability of the firms earnings and
sales.
To balance or fill out the product line.
 Motives behind mergers
To diversify the product line when the current
products have reached their peak in the life cycle.
To reduce competition by purchasing a competitor.
To acquire a needful resource quickly.
For example: High quality technology or highly
innovative management.
Tax reasons: prior tax losses which will offset current
or future earnings
To increase efficiency and profitability, especially if
there is synergy between the two companies.
 Motives behind mergers
The sellers motives
To increase the value of the owners stock and investment
in the firm.
To increase the firms growth rate by receiving more
resources from the acquiring company.
To acquire resources to stabilize operations and make them
more efficient.
Tax reason: if the firm is owned by a family or an
individual a merger makes it easier to deal with estate tax
problems.
To help diversify the owning family holdings beyond the
present firm.
Management succession for an entrepreneur or dissension
among top mangers.
 Advantages of Mergers and Acquisitions
Maintaining or accelerating profitable growth of a
company.
Enhancing profitability through cost reduction.
Economic of scale.
Operating efficiency
Synergy
Diversifying the risk of the company by way of
acquiring the business of different income streams.
Reducing tax liability
Enhancing the market power of the company.
 Value creation in M&A
Value creation in M&As
Marketing synergy
Operational synergy
Investment synergy
Management synergy
 Basis of valuation
Valuation of business is done using one or more
of these types of models.
Earning Approach (EPS)
Market Value Approach (Market value)
Book Value Approach ( Book Value )
Negotiated value Approach
 Earning Approach
The acquiring firm must consider the effect the
merger will have on the EPS of the merged or
amalgamated corporation.
EPS is the base for swap ratio.
= EPS of the acquired company
EPS of the acquiring company
For example: Times Bank & HDFC Bank Ltd
= EPS of the Times Bank
EPS of the HDFC Bank
 Market Value Approach
The exchange ratio is determined keeping in view the
market values of the companies shares involved in in the
merger.
= Market price per share of the acquired company
Market price per share of the acquiring company
For example: Times Bank & HDFC Bank Ltd
= Market price per share of the Times Bank
Market price per share of the HDFC Bank
Market value = EPS / Capitalisation rate
Capitalisation rate
Normal rate of earning expected from the type of the company
whose shares are to evaluated.
 Book Value Approach
The exchange ratio is determined according to
the book values of the concerned companies
shares.
= Shareholders Funds or Networth
No of equity shares No of equity shares
= Book value per share of the acquired company
Book value per share of the acquiring company
For example: Times Bank & HDFC Bank Ltd
= Book value of the Times Bank
Book value of the HDFC Bank
 Legal framework for M&A
1. Banking Regulation act 1949
2. Industries (development & Regulation) Act
1951
3. Companies Act 1956
4. Securities Contract (Regulation) Act 1956
5. Income Tax Act 1961
6. Monopolies and Restrictive Trade Practices
Act, 1969 (MRTP Act)
7. Sick Industrial (Special Provisions) (SICA)
Act 1985
8. Securities and Exchange Board of India (SEBI)
Regulations 1991
 Legal framework for M&A.
9. Depository laws 1996
10. Competitions Act, 2002
11. Securitization and Reconstruction of Financial
and Enforcement of Security Interest Act,
2002.
12. High Court Approvals
13. Substantial change in composition of Board
14. Listing Agreement
15. Intellectual Property Law and M&As
 Let me sum up my presentation
Corporate Restructuring
Corporate Restructuring objectives
Introduction to Mergers and Acquisitions
Mergers & Acquisition
Absorption
Amalgamation
Types of mergers
Motives behind mergers
Advantages of Mergers and Acquisitions
Basis of valuation
Legal framework for M&A
Floor is open for discussion
Thank You