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MERGERS & ACQUISITIONS
Restructuring
S.CLEMENT
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Mergers & AcquisitionsMergers & Acquisitions
MERGERMERGERA transaction where two firms agree to integrate their A transaction where two firms agree to integrate their
operations on a relativelyoperations on a relativelyco equal basis because they have resources andco equal basis because they have resources and
capabilities that together may create a stronger capabilities that together may create a stronger competitive advantage.competitive advantage.
** To gain market shareTo gain market share
E.g.E.g. ± ±Hindustan computers, Hindustan instruments,Hindustan computers, Hindustan instruments,Indian software company and Indian ReprographicsIndian software company and Indian Reprographics
merged and created as HCL .merged and created as HCL .
JP Morgan/Chase Manhattan becomesJP Morgan/Chase Manhattan becomes
JP Morgan ChaseJP Morgan Chase
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Acquisition Acquisition
ACQUISITIONACQUISITION A transaction where one firm buys another A transaction where one firm buys another
firm with the intent of more effectivelyfirm with the intent of more effectively
using a core competence by making theusing a core competence by making theacquired firm a subsidiary within itsacquired firm a subsidiary within itsportfolio of businessesportfolio of businesses
Procter and Gamble & GilletteProcter and Gamble & Gillette
ICICI & Bank of MaduraICICI & Bank of Madura
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Takeover Takeover
Takeover Takeover An acquisition where the target firm did not An acquisition where the target firm did not
solicit the bid of the acquiring firmsolicit the bid of the acquiring firm
E.g. RIL acquired RPLE.g. RIL acquired RPL ± ± swap ratio of swap ratio of 1:11. Acquisition helped in integration1:11. Acquisition helped in integration
of in oil & gas exploration/production,of in oil & gas exploration/production,refining, marketing,petro chemicals andrefining, marketing,petro chemicals andtextiles.textiles.
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TYPES OF MERGERTYPES OF MERGER
HORIZONTALHORIZONTAL ± ± two or more companiestwo or more companiesengaged in the same business mergeengaged in the same business merge
for the purpose of economies of scalefor the purpose of economies of scale,competitive edge etc,competitive edge etc .. HorizontalHorizontal
when two competitors combinewhen two competitors combine
Ex) ExxonEx) Exxon± ±Mobil,Mobil,Daimler Daimler--Chrysler Chrysler
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TYPES OF MERGERTYPES OF MERGER
VerticalVertical ± ± engaged in the differentengaged in the differentstages of production in the samestages of production in the sameindustry for the purpose of back ward &industry for the purpose of back ward &
forward integration, to create synergyforward integration, to create synergyetc. Vertical when one companyetc. Vertical when one companyacquires a supplier/customer acquires a supplier/customer
Ex) HeleneEx) Helene--Curtis and Unilever Curtis and Unilever
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TYPES OF MERGERTYPES OF MERGER
ConglomerateConglomerate ± ±
merger between two companiesmerger between two companies
with unrelated business.with unrelated business. Conglomerate when two firms from differentConglomerate when two firms from different
industries combineindustries combine
Ex) Citicorp and Travelers,Ex) Citicorp and Travelers,
CibaCiba--Geigy (contact lens, Ritalin,Geigy (contact lens, Ritalin,Maalox) and Sandoz (Gerber BabyMaalox) and Sandoz (Gerber BabyFood, Ovaltine)Food, Ovaltine) -- NovartisNovartis
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SynergySynergyOperating:Operating:
1.1.Lower CostsLower Costs
2.2.Higher Sales or Higher Sales or P
rofitsP
rofits
Financial:Financial:
1. Lower Taxes1. Lower Taxes
2. Debt Capacity2. Debt Capacity
3. Use of idle cash3. Use of idle cash
WHY M&A
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Reasons for M & AReasons for M & A
Strategic benefitStrategic benefit ± ±to pre empt the competitor.to pre empt the competitor.To gain time advantage since it takes time inTo gain time advantage since it takes time inestablishing the lead. Growth by acquisitionestablishing the lead. Growth by acquisition
is faster than internal growth.is faster than internal growth.Economies of scaleEconomies of scale ± ± effective utilization of effective utilization of resources for cutting cost and gainresources for cutting cost and gaincompetitive edge. E.g. P & G ( marketingcompetitive edge. E.g. P & G ( marketing
skills with limited array of products) withskills with limited array of products) withGillette.Gillette.
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Reasons for M & AReasons for M & A
Economies of vertical integrationEconomies of vertical integration ± ±
Tax shieldTax shield
Utilization of surplus cashUtilization of surplus cashComplimentary resourcesComplimentary resources ± ± small firmsmall firm
withinnovative products with big firmwithinnovative products with big firm
engineering capacity and market reach.engineering capacity and market reach.E.g .Asea and Brown Brovery. Now ABBE.g .Asea and Brown Brovery. Now ABB
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Reasons for M & AReasons for M & A
DiversificationDiversification -- to reduce risks and avoidto reduce risks and avoidsaturation. Conglomerate mergerssaturation. Conglomerate mergers
Increased global capital flowsIncreased global capital flows
Managerial effectivenessManagerial effectivenessLower financial costLower financial cost ± ± protection for protection for creditors ( in case of weak firm) and tocreditors ( in case of weak firm) and toreduce financial cost.reduce financial cost.
Changes In regulatory lawsChanges In regulatory laws -- E.g. bankingE.g. bankingSize of firm to face globalization effectSize of firm to face globalization effect(volatility and competition) in the market(volatility and competition) in the market
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Accounting treatment Accounting treatment
MethodsMethods
Pooling of interestPooling of interest ± ±A/L of both the A/L of both thecompanies are aggregated . Difference incompanies are aggregated . Difference incapital on account of share swap ratio iscapital on account of share swap ratio isadjusted in reserves.adjusted in reserves.
Purchase methodPurchase method ± ± A/L transferred at A/L transferred at
market value.market value.If purchase value < B.V = capital reserveIf purchase value < B.V = capital reserve
If purchase value > B.V. = Good will.If purchase value > B.V. = Good will.
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Case studyCase study
Company B agreed to merge with A.Company B agreed to merge with A.
Share swap ratio of 3 :5 is agreed( 3Share swap ratio of 3 :5 is agreed( 3
shares of A will be given for 5 shares of shares of A will be given for 5 shares of B). Par value of both the companies is ReB). Par value of both the companies is Re
10. Share capital of A will increase by 600.10. Share capital of A will increase by 600.
Work outWork out
Pooling & Purchase methodPooling & Purchase method
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LiabilitiesLiabilities AA BB
CapitalCapital 40004000 10001000
C.ReservC.Reserv -- --Sh. Prem.Sh. Prem. 20002000 500500
Gen.Res.Gen.Res. 50005000 10001000
P&LP
&L 10001000 500500LoansLoans 40004000 25002500
CLCL 20002000 15001500
TOTALTOTAL 1800018000 70007000
Net FANet FA 70007000 30003000
investmeninvestmen 30003000 500500
CACA 70007000 30003000
Misc.Exp.Misc.Exp. 10001000 500500
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LiabilitiesLiabilities AA BB poolingpooling purchasepurchase
CapitalCapital 40004000 10001000 46004600 46004600
C.ReservC.Reserv -- -- 400400 19001900Sh. Prem.Sh. Prem. 20002000 500500 25002500 20002000
Gen.Res.Gen.Res. 50005000 10001000 60006000 50005000
P&LP
&L 10001000 500500 15001500 10001000LoansLoans 40004000 25002500 65006500 64006400
CLCL 20002000 15001500 35003500 36003600
TOTALTOTAL 1800018000 70007000 2500025000 2450024500
Net FANet FA 70007000 30003000 1000010000 1020010200
investmeninvestmen 30003000 500500 35003500 34003400
CACA 70007000 30003000 1000010000 99009900
Misc.Exp.Misc.Exp. 10001000 500500 15001500 10001000
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Purchase methodPurchase method
A/L of B is revaluedA/L of B is revaluedNet FA 3200Net FA 3200Investments 400Investments 400CA 2900CA 2900Total assets 6500Total assets 6500CL 1600CL 1600Loans 2400Loans 2400Out side liabilities 4000Out side liabilities 4000Net B.V. of assets 2500Net B.V. of assets 2500Less PC value of shares 600Less PC value of shares 600Net gain on amalgamation 1900Net gain on amalgamation 1900
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Issue in M & AIssue in M & A
Cash flow adjustmentCash flow adjustment
Credit policyCredit policy
Dividend PolicyDividend Policy
Down sizing the man power Down sizing the man power Work cultureWork culture
Ability to mange diverse businessAbility to mange diverse business
IntegrationIntegration -- relation withrelation withcustomers/suppliers/employees.customers/suppliers/employees.
Impact on EPS/MP Impact on EPS/MP Larger the size larger will be the problem to handle.Larger the size larger will be the problem to handle.
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Case studyCase study ± ± P&G and GilletteP&G and Gillette
57 bn $ deal . Win win for both.57 bn $ deal . Win win for both.SynergySynergy ± ± P& GP& G ± ± strong franchise amongstrong franchise amongfemale customers and Gillette in man¶sfemale customers and Gillette in man¶sproducts such as razors, gels, groomingproducts such as razors, gels, groomingproducts etc.products etc.P&GP&G marketingmarketing skill with Gilletteskill with Gillette distributiondistributionnet work will give an competitive edge visnet work will give an competitive edge vis--àà--vis HLL & Colgate. Unilever in global market.vis HLL & Colgate. Unilever in global market.
Size mattersSize matters --Expected cost saving in AdExpected cost saving in Adspend($ 1 bn for both) and bargaining withspend($ 1 bn for both) and bargaining withcustomers (E.g. Wall Mart).customers (E.g. Wall Mart).
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$ in BN$ in BN P & GP & G GILLETTEGILLETTE
S ALESS ALES 51.451.4 10.310.3
PROFITSPROFITS 6.56.5 2.32.3
DIVIDENDSDIVIDENDS 2.52.5 0.70.7
R& D
R& D 1.81.8 0.20.2
PRODUCTSemplPRODUCTSempl
EMPLOYEESEMPLOYEES
Tide,Tide,
Always,Olay,Hea Always,Olay,Hea
d & Shouldersd & Shoulders
Pringles, ArielPringles, Ariel
110,000110,000
Mach 3, OralMach 3, Oral--B,B,
Duracell ,BraunDuracell ,Braun
30,00030,000
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Case studyCase study ± ± P&G and GilletteP&G and Gillette
Deal worth $ 57 bnDeal worth $ 57 bn
Swap ratioSwap ratio ± ± P&G will pay 0.975 for eachP&G will pay 0.975 for eachshare of Gilletteshare of Gillette
P&G to buy its shares worth $ 18P&G to buy its shares worth $ 18--2222bnwith in period of 12bnwith in period of 12--18 months18 months
P&G to 40% in cash and 60% in stockP&G to 40% in cash and 60% in stock
Acquisition to add 20% to P&G sales. Acquisition to add 20% to P&G sales.Forecasted operating margin of 25% byForecasted operating margin of 25% bythe year 2015 as against 19.1 in 2003.the year 2015 as against 19.1 in 2003.
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Case studyCase study ± ± P&G and GilletteP&G and Gillette
Cultural problems do not exist as both theCultural problems do not exist as both the
companies are American with H.Q of P&G companies are American with H.Q of P&G
@ Cincinnati and Gillette in Boston.@ Cincinnati and Gillette in Boston.
Complimentary in strength in products, &Complimentary in strength in products, &
visionvision
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Case studyCase study ± ± P&G and GilletteP&G and Gillette
Flip sideFlip side ± ±
Size to handleSize to handle
Down size of man power Down size of man power ± ± buy out will costbuy out will cost
jobs. Expected job cut around 6000 jobs. Expected job cut around 6000Gillette on the crest of the waveGillette on the crest of the wave ± ± how far how far
P & G will squeeze the value out of GilletteP & G will squeeze the value out of Gilletteas product innovation is a costly affair.as product innovation is a costly affair.
Gillette admittedGillette admitted ± ± competition from rivalscompetition from rivals(E.g. Duracell electric(E.g. Duracell electric-- battery division) willbattery division) willmake a dent on the future cash flows.make a dent on the future cash flows.
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Indian experienceIndian experience
MRTP ActMRTP Act -- hurdle in M&A.hurdle in M&A.
Lack of structured mechanism for takeLack of structured mechanism for take
over over Lack of funding for M&A by banks/FIs.Lack of funding for M&A by banks/FIs.
SEBI introduced take over code in 1997.SEBI introduced take over code in 1997.
Globalization effect
Globalization effect ± ±consolidation/privatization/ increase in FDIconsolidation/privatization/ increase in FDI
cap/ADR & GDR etc.cap/ADR & GDR etc.
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Indian experienceIndian experience
ElectroluxElectrolux-- Kelvinator merger Kelvinator merger ± ± ElectroluxElectroluxacquired Voltas¶white goods division for Reacquired Voltas¶white goods division for Re160 cr (Electrolux Voltas has got a160 cr (Electrolux Voltas has got a
manufacturing capacity of 50,000manufacturing capacity of 50,000refrigerators and 2,00,000 washing machinesrefrigerators and 2,00,000 washing machinesp.a.). Voltas &Allwyn Electrolux further p.a.). Voltas &Allwyn Electrolux further acquired Kelvinator.acquired Kelvinator.
Merger of McLeod with Eveready industriesMerger of McLeod with Eveready industries ..Merger involved swap of 3 McLeod sharesMerger involved swap of 3 McLeod sharesfor 2 of Ever ready Industries.for 2 of Ever ready Industries.
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Indian experienceIndian experience
BPL groupBPL group made a for way merger withmade a for way merger with
BPL Sanyo Technologies, BPL SanyoBPL Sanyo Technologies, BPL Sanyo
utilities, BPL refrigeration and BPL ltd.utilities, BPL refrigeration and BPL ltd.
Merger of Videocon Narmada ElectronicsMerger of Videocon Narmada Electronics
with Videocon International ltd.with Videocon International ltd.
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Indian experienceIndian experience
Pharma companies took lead in M & A toPharma companies took lead in M & A to
face global competition/patentface global competition/patent
regime/market penetration.regime/market penetration.
ZYDUS Cadila acquired GermanZYDUS Cadila acquired German
Remedies in India.Remedies in India.
Nicolas Piramal acquired Roche productsNicolas Piramal acquired Roche products ..
DRL acquired Meridian Health care &DRL acquired Meridian Health care &
BMS Lab in U.K.BMS Lab in U.K.
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Indian experienceIndian experience
India Cements has taken over Rasi Cement.India Cements has taken over Rasi Cement.It started with acquiring 18% share with theIt started with acquiring 18% share with thehelp of promoters to avoid hostile take over.help of promoters to avoid hostile take over.
IC acquired further 20% through open publicIC acquired further 20% through open publicoffer route under take over code and finallyoffer route under take over code and finallypaid Re 445 cr( for Rasi) to promoters andpaid Re 445 cr( for Rasi) to promoters andRe 115 cr for acquiring Vishnu cements,Re 115 cr for acquiring Vishnu cements,group company of Rasi Cement.group company of Rasi Cement.
Acquisition helped IC to gain access cementAcquisition helped IC to gain access cementmarket in A.P. and consolidation its positionmarket in A.P. and consolidation its positionin south India.in south India.