3 Unit

List of topics

• Cross-Border Acquisitions• Reasons for International M&A• Strategic Alliances as an Alternative to M&A• Organizing for Acquisitions• Sources and Limits of Value Creation in M&A• Deal Structuring & Negotiation• Defense Tactics

Cross-Border Acquisitions

Acquisition may be defined as an act of one enterprise of acquiring, directly or indirectly of shares, voting rights, assets or control over the management, of another enterprise .

• In 2009 out of Total 348 Cross Border Deals:Outbound: 240 ($32.37 billion) Inbound: 108 ($15.61 billion)

Target NameTarget Name Acquirer NameAcquirer Name Deal DateDeal Date $ Value of $ Value of Deal (M)Deal (M)

Yahoo! Inc (YHOO)Yahoo! Inc (YHOO) Microsoft Corp (MSFT)Microsoft Corp (MSFT) 02-01-200802-01-2008 43,711.6043,711.60

Inmobiliaria Colonial SA Inmobiliaria Colonial SA Investment Corp of Dubai {ICD} Investment Corp of Dubai {ICD} 01-31-200801-31-2008 15,213.2015,213.20

Rio Tinto PLC Rio Tinto PLC Shining Prospect Pte Ltd. Shining Prospect Pte Ltd. 02-01-200802-01-2008 14,284.2014,284.20

Alcon Inc (ACL)Alcon Inc (ACL) Novartis AG Novartis AG 04-07-200804-07-2008 10,547.5010,547.50

Bolsa de Valores de Sao Paulo Bolsa de Valores de Sao Paulo {Bovespa} {Bovespa}

Bolsa Brasileira de Mercadorias Bolsa Brasileira de Mercadorias {BM&F} {BM&F}

02-20-200802-20-2008 10,309.1010,309.10

Millennium Pharmaceuticals Inc Millennium Pharmaceuticals Inc (MLNM)(MLNM)

Mahogany Acquisition Corp Mahogany Acquisition Corp 04-10-200804-10-2008 8,734.108,734.10

Citigroup Inc (C)Citigroup Inc (C) Government of Singapore Investment Government of Singapore Investment Corp Pte Ltd {GIC} Corp Pte Ltd {GIC}

01-15-200801-15-2008 6,880.006,880.00

Weyerhaeuser Co-Containerboard Weyerhaeuser Co-Containerboard Packaging & Recycling Business Packaging & Recycling Business

International Paper Co (IP)International Paper Co (IP) 03-17-200803-17-2008 6,000.006,000.00

MMX Mineracao e Metalicos SA-MMX Mineracao e Metalicos SA-Certain Assets Certain Assets

Anglo American PLC Anglo American PLC 01-17-200801-17-2008 5,500.005,500.00

Scania AB Scania AB Volkswagen AG Volkswagen AG 03-03-200803-03-2008 4,377.504,377.50

Top Ten Mergers-2008

AcquisitionsMergers

One firm buys another firm.Two firms are combined on a relatively co-equal basis.

Parent stocks are usually retired and new stock issued.

Name may be the original or a combination.

One of the partners take over the dominant management

Can be by means of controlling share, a majority, or all of the target firm’s stock.

Can be friendly or hostile.

Usually done through a tender offer.

Graphical representation of Indian

outbound deals since 2000-09

India’s Direct Investment Abroad

Reasons for International M&A

The two main objectives behind any M&A Transaction, for corporates today is :

• to improve Revenues and Profitability

• Faster growth in scale and quicker access to market

• Competition in Globalised Market.

Reasons for International M&A

D:/Macy Class/MGT 5391/Spring 2006/MandA 9

Increasedmarket power

Overcomeentry barriers

Lower riskcompared to developing

new products

Cost of newproduct development

Increased speedto market

Increaseddiversification

Avoid excessivecompetition

Acquisitions

Reasons for Acquisitions• Increased Market Power– Acquisition intended to reduce the competitive balance of

the industry.– Example: British Petroleum’s acquisition of U.S. Amoco.• Overcome Barriers to Entry• Acquisitions overcome costly barriers to entry which may

make “start-ups” economically unattractive• Example: Belgian-Dutch Fortis’ acquisition of American

Banker’s Insurance Group• Lower Cost and Risk of New Product Development• Buying established businesses reduces risk of start-up

ventures• Example: Watson Pharmaceuticals’ acquisition of TheraTech

• Increased Speed to Market– Closely related to Barriers to Entry, allows market

entry in a more timely fashion– Example: Kraft Food’s acquisition of Boca Burger

• Diversification– Quick way to move into businesses when firm

currently lacks experience and depth in industry– Example: CNET’s acquisition of mySimon

• Reshaping Competitive Scope– Firms may use acquisitions to restrict its dependence

on a single or a few products or markets– Example: General Electric’s acquisition of NBC

Problems in Achieving Success

IntegrationDifficulties/Cultures

Inadequate evaluation of target

Too muchdiversification

Large orextraordinary debt

Inability toachieve synergy

Managers overlyfocused on acquisitions

Too large

Acquisitions

Strategic Alliance• A Strategic Alliance is a formal relationship

between two or more parties to pursue a set of agreed upon goals or to meet a critical business need while remaining independent organizations.

• The alliance is a cooperation or collaboration which aims for a synergy where each partner hopes that the benefits from the alliance will be greater than those from individual efforts. The alliance often involves technology transfer (access to knowledge and expertise), economic specialization , shared expenses and shared risk.

Four types of strategic alliances:

• JOINT VENTURE: is a strategic alliance in which two or more firms create a legally independent company to share some of their resources and capabilities to develop a competitive advantage.

• EQUITY STRATEGIC ALLIANCE: is an alliance in which two or more firms own different percentages of the company they have formed by combining some of their resources and capabilities to create a competitive advantage.

• NON-EQUITY STRATEGIC ALLIANCE: is an alliance in which two or more firms develop a contractual-relationship to share some of their unique resources and capabilities to create a competitive advantage.

• GLOBAL STRATEGIC ALLIANCES: working partnerships between companies (often more than 2) across national boundaries and increasingly across industries. Sometimes formed between company and a foreign government, or among companies and governments

Organizing for Acquisitions• Rationalist view based on hard, economic and

financial evaluation of the acquisition proposal• Acquisition justification articulated in terms of

strategic goals and sources of value gains.• Expected costs and benefits are quantified• The firm is a homogeneous decision-making unit

with the internal constituencies sharing a common objective and perspective on acquisition.

• Organization perspective considers acquisition decision as being influenced by various constituencies with their own objectives, agendas, expectations.

Impact of well-organized acquisition function

• To minimise the impact of fragmented perspectives, escalating momentum, ambiguity in managerial expectations and diversity of managerial motives

• To ensure these deficiencies do not dilute the quality of acquisition, target selection and evaluation, and the need to satisfy the firm’s strategic objectives

• To ensure robust corporate governance scrutiny of acquisition decisions

• To reduce the impact of deal momentum on the terms negotiated and the acquisition premium paid.

How Mergers and Acquisitions Create Value

• It is realized that well-managed business combinations can create value.

• "Synergy" refers to the phenomenon that occurs when the value of the combined enterprise exceeds the value of the companies taken separately.

• Synergies have a real impact on many transactions.

Common synergies include:• Elimination of duplicate staffing, particularly in

administration, accounting, and human resources.• Sale of excess plants, property, and equipment by

combining manufacturing facilities. This may also lead to additional reductions in labor and overhead.

• Reduced risk management, benefit, and compensation costs.

• Economies of scale and expanded opportunities in purchasing, marketing, distribution, and research and development.

• Greater access to capital, at a lower cost.• Increased market power.

Deal Structuring & Negotiation

Deal Negotiation

Exit routes

Commercial rights

Valuation

Participatory Rights

Negotiating Terms

• The nature of the fit • Commonality of client base• Financial strength• Strategic intent• Sharing of resources• Applicable Benefits

Negotiation By Tata• September 20, 2006 : Corus Steel has decided

to acquire a strategic partnership with a Company that is a low cost producer

• October 5, 2006 : The Indian steel giant, Tata Steel wants to fulfill its ambition to Expand its business further.

• October 6, 2006 : The initial offer from Tata Steel is considered to be too low both by Corus and analysts.

• October 17, 2006 : Tata Steel has kept its offer to 455p per share.

• October 18, 2006 : Tata still doesn’t react to Corus and its bid price remains the same.

• October 20, 2006 : Corus accepts terms of £ 4.3 billion takeover bid from Tata Steel

• October 23, 2006 : The Brazilian Steel Group CSN recruits a leading investment bank to offer advice on possible counter-offer to Tata Steel’s bid.

• October 27, 2006 : Corus is criticized by the chairman of JCB, Sir Anthony Bamford, for its decision to accept an offer from Tata.

• November 3, 2006 : The Russian steel giant Severstal announces officially that it will not make a bid for Corus.

• November 18, 2006 : The battle over Corus intensifies when Brazilian group CSN approached the board of the company with a bid of 475p per share

• December 18, 2006 : Within hours of Tata Steel increasing its original bid for Corus to 500 pence per share, Brazil's CSN made its formal counter bid for Corus at 515 pence per share in cash, 3% more than Tata Steel‘s Offer.

• January 31, 2007 : Britain's Takeover Panel announces in an e-mailed statement that after an auction Tata Steel had agreed to offer Corus investors 608 pence per share in cash

• April 2, 2007 : Tata Steel manages to win the acquisition to CSN and has the full voting support from Corus’ shareholders.

Bid strategies

• Bid strategy a plan to acquire another company in order to achieve predetermined business and corporate strategy objectives of acquirer.

• Objectives of bid strategy – to acquire suitable target, satisfying acquisition criteria dictated by the objectives of firm’s acquisition programme.

Strategic (pre-bid) defences tactics–Poison pills –Poison pill is a term referring to any

strategy, generally in business or politics, to increase the likelihood of negative results over positive ones for a party that attempts any kind of takeover–takeovers not deterred, wealth effect small

–Corporate charter changes – ineffective takeover deterrents

– Re-incorporation –Incorporation is the forming of a new corporation (a corporation being a legal entity that is effectively recognized as a person under the law). The corporation may be a business, a non-profit organization, sports club or a government of a new city or town.– used by only some firms, wealth effect ambiguous

– Financial restructuring – ESOPs negative effect on takeover, depress target value

• Golden parachute – Adoption signals takeover vulnerability, wealth effect ambiguous

Tactical (post-bid) defences– Greenmail – may reinforce managerial

entrenchment it is the practice of purchasing enough shares in a firm to threaten a takeover and thereby forcing the target firm to buy those shares back at a premium in order to suspend the takeover

– White knight – a white knight may be a corporation, a private company, or a person that intends to help another

–White squire – A white squire is similar to a white knight, except that it only exercises a significant minority stake, as opposed to a majority stake– Litigation – A lawsuit is a civil action brought

before a court of law in which a plaintiff, a party who claims to have received damages from a defendant's actions, seeks a legal or equitable remedy–high premium if successful, wealth losses if bid withdrawn–Pac-Man defence – rarely attempted

Post-offer defences tactics• Success rate for defence 62% but only 47% remained

independent• Significant number of targets acquired by white knights• Test of effectiveness –– Entry of a white knight.– Lobbying friendly shareholders.– Support of unions.– Litigation– Divestment had a significantly negative impact on

defence.• Other strategies ineffective in defeating hostile bidder

Thank you