m&aacqusitions

8/9/2019 M&AACQUSITIONS

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MERGERS & ACQUISITIONS

Restructuring

S.CLEMENT



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



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



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.



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




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




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



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



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.




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




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



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.



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



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



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



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



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.



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).



$ 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




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.




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




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.



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.




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.




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.




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.




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.

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