MERGERMergery y y y y

The combination of two firms into a new legal entity A new company is created Both sets of shareholders have to approve the transaction. The equation for merger is A+B=C Both companies' stocks are surrendered and new company stock is issued in its place..

ACQUISITIONy

an act of one enterprise of acquiring, directly or indirectly of shares, voting rights, assets or control over the management, of another enterprise . Strong companies will act to buy other companies to create a more competitive, cost-efficient company. The equation for acquisition is A+B=A There is no exchange of stock or consolidation as a new company Tata Steel acquired UK based Corus for $ 8 billion.

y

y y y

TYPES OF MERGERS1.

HorizontalA merger in which two firms in the same industry combine. Often in an attempt to achieve economies of scale and/or scope. Kingfisher jet alliance

2.

VerticalA merger in which one firm acquires a supplier or another firm that is closer to its existing customers. Often in an attempt to control supply or distribution channels. Merck largest drug manufacturer merging with medco largest distributor

3.

ConglomerateA merger in which two firms in unrelated businesses combine. Purpose is often to diversify the company by combining uncorrelated assets and income streams

BENEFITS OF M&AThe primary motive should be the creation of synergy. Synergy value is created from economies of integrating a target and acquiring a company; the amount by which the value of the combined firm exceeds the sum value of the two individual firms.

(V ! VAT -(VA VT )y y y

Staff reduction Economies of scale Improved market reach and industry visibility

Valuation Mattersy Comparative Ratios1.Price-earning ratio 2.Enterprise value to sales ratio

y Replacement Cost y Discounted Cash Flow (DCF)

Reasons for M&Ay Horizontal integration y Vertical integrationy y y y

Assurance of supply Lower inventory cost Not to pay profit to the supplier Transaction cost and disruptions at end of contract

y Improved management y Improved R&D y Hubrisy y

Acquiring for personal motive than economic gains Winners curse

Strategies Of Mergers&Acquisitions Friendly Takeovers Hostile Takeovers

- Tender Offers - Bear Hug - Proxy Fights - Lady Macbeth Strategy

15 - 8

Friendly Takeovers The acquisition of a target company that is willing to be taken over. Usually, the target will

accommodate overtures and provide access to confidential information to facilitate the scoping and due diligence processes.

Hostile Takeovers A hostile takeover allows a suitor to bypass a target company's management unwilling to agree to a merger or takeover. The target has no desire to be acquired and actively rebuffs the acquirer and refuses to provide any confidential information.

Hostile Takeover Tender Offers The tender offer is a public, open offer or invitation by a prospective acquirer to all stockholders of a publicly traded corporation to tender their stock for sale at a specified price during a specified time. To induce the shareholders of the target company to sell, the acquirer's offer price usually includes a premium over the current market price of the target company's shares.

Bear Hug An offer made by one company to buy the shares of another for a much higher per-share price than what that company is worth. The target company's management is essentially forced to accept such a generous offer because it is legally obligated to look out for the best interests of its shareholders.

Lady Macbeth Strategy A corporate-takeover

strategy with which a third party poses as a white knight to gain trust, but then turns around and joins with unfriendly bidders. White Knight & Black Knight.

Proxy Fight An acquiring company,

frustrated by the takeover defences of the management, may initiate a proxy fight to install a more compliant management of the target. Eg: HP s takeover of Compaq.

Defensive Techniques Poison Pills. Selling the crown jewels. White knight

Accounting for Amalgamations

Definitionsy Transferor company means the company which is amalgamated into another company. y Transferee company means the company into which a transferor company is amalgamated. y Reserve means the portion of earnings, receipts or other surplus of an enterprise y Consideration for the amalgamation means the aggregate of the shares and other securities issued and the payment made in the form of cash or other assets by the transferee company to the shareholders of the transferor company.

Amalgamation in the nature of mergery Assets and liabilities of the transferor company become the assets and liabilities of the transferee company. y Equity shareholders of the transferee company. y Issue of equity shares in the transferee company. y Business of the transferor company is intended to be carried on. y No adjustment is intended to be made to the book values of the assets and liabilities

Methods of Accounting for Amalgamations

y The pooling of interests method y The purchase method.

The Pooling of Interests Methody The assets, liabilities and reserves of the transferor company are recorded by the transferee company at their existing carrying amounts y A uniform set of accounting policies is adopted following the amalgamation.

The Purchase Methody Allocates the consideration to individual identifiable assets and liabilities of the transferor company on the basis of their fair values at the date of amalgamation. y Creation of specific provisions for the expected costs

Treatment of Reserves on Amalgamationy Amalgamation in the nature of merger, the identity of the reserves is preserved

y Amalgamation in the nature of purchase, the identity of the reserves, other than the statutory reserves dealt, is not preserved

Treatment of Goodwill Arising on Amalgamationy Goodwill arising on amalgamation represents a payment

made in anticipation of future incomey Treat it as an asset to be amortized to income on a

systematic basis

Balance of Profit and Loss AccountAmalgamation in the nature of merger y Aggregated with the corresponding balance appearing in the financial statements of the transferee company Amalgamation in the nature of purchase y Loses its identity

Disclosurey Names and general nature of business of the

amalgamating companies y Effective date of amalgamation for accounting purposes y The method of accounting used to reflect the amalgamation

DisclosuresPooling of interestsy Description and number of shares issued y The amount of any difference between the consideration and the value of net identifiable assets Purchase method y Consideration for the amalgamation and a description of the consideration paid y Period of amortisation of any goodwill

The Case of RIL RPL Merger

RIL Highlightsy Enviable track record in refining y Consistently demonstrated higher GRMs compared to

global benchmarks y Jamnagar refinery World class with a competitive capital cost

RPL Highlightsy Crude processing capacity of 580,000 barrels/day y Built to supply ultra-clean fuels to meet the world s

evolving needs y Focus on high growth transportation fuel segment

Merger Rationaley Unlock synergies from combined operations

Crude sourcing, Product placement, Supply Chain Optimisation y Greater flexibility in operations planning y Optimised utilisation of secondary process units and infrastructure y Integrated energy companies consistently get higher valuations vis--vis pure refiners

Merger Detailsy Merger ratio of 1 share of RIL for every 16 shares of

RPL y RPL shares held by RIL to be cancelled. No fresh treasury stock created y RIL to issue 6.92 crore shares to RPL shareholders y Promoter holding in RIL will reduce from 49% to 47%

Impact of Merger Proposaly RIL among top 10 private sector refining

companies globally y Will own 2 of the world s 3 largest, most complex modern refineries y Will be the world s largest producer of ultra-clean fuels at a single location y Among 50 most profitable companies globally y Among five largest producers of Polypropylene

RPL Performance

y

Source: Moneycontrol

RIL Performance

y

Source: Moneycontrol

The Case of TATA Corus Acquisition

Sep 20, 06 : CORUS uses the strategy to work with low cost producer Oct 06, 06 : Initial offer by TATA is considered to be too low. Oct 17, 06: TATA kept its offer to 455 pence per share. Oct 20, 06 : CORUS accepts the offer of 4.3 billion. Oct 23, 06 : Brazilian Steel Group CSN counter-offer to TATAs offer. Oct 27, 06 : CORUS criticized by JCB for acceptance of TATAs offer. Nov 18, 06 : The CSN approaches Corus With an offer of 475 pence/share Nov 27, 06 : Board of Corus decides to give more time for shareholders to decide whether it issue forward a formal offer. Dec h18,06 : Tata increases its original bid for Corus 500 pence/share, then CSN made its counter bid at 515 pence/share in cash Jan 31, 07 : TATA agreed to offer Corus investors 608 pence/share in cash Apr 02, 07 : Tata steel manages to win acquisition to CSN and has the full voting support from Corus shareholders

Synergies for Corusy Global Reach y Total debt of Corus as on the date of acquisitiony y

y y

GBP1.6 Billion Corus needed supply of raw materials at lower cost Though Corus had revenues of $18.06bn, its profit was a mere $626mn compared to Tata s revenue of $4.84bn and profit of $824mn Production facilities of Corus were relatively old with high cost production Employee cost is 15% (Tata 9%)

Synergies for TATAy Tata has been looking to manufacture finished products in y

y y

y y

mature markets like Europe Diversified product mix Reduces risks Higher end products will add to bottom line Corus holds a number of patents and R&D facilities and immediate access to advanced technology Greenfield plant Cost Time Will catapult Tata from 55th largest producer to 5th largest. Will make it difficult for other companies to make a hostile bid for TATA Steels

Financing the dealy Tata Corus deal

$12.1 Billion y Contribution from Tata Steel - $3.88 Billion $2bn equity $1.8 billion Bridge loan y Lead by credit Suisse, later joined by ABN AMRO and Deutsche Bank in the consortium y Of the $ 8.12 billion of financing , Credit Suisse provided 45% and ABN AMRO and Deutsche provided 27.5% each.

Pre and Post AcquisitionTATADate of announcement 536.60 Date of Acquisition- 464.90 Today s price- 536.10

TATA acquires 21.1 % stake in Corus

CorusOn the date of announcement 360.5 Pence/share On the date of Acquisition-608 pence/share

TATA becomes 5th largest steel manufacturing company in the world post acquisition.