merger, acquisition and corporate restructuring - 12
TRANSCRIPT
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Merger,acquisition
And Corporate
Restructuring
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Structure Conceptual framework
History of M&A Financial framework
Corporate restructuring
Accounting for amalgamation Tax benefits
Exercise
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CONCEPTIONAL
FRAMEWORK
MEANING OF
MERGERS
ACQUSITIONS
AMALAMATIONS
TAKEOVERS
ABSORPTIONS
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TYPES
OF MERGERS
HORIZONTAL MERGER SIMILAR LINES
OF ACTIVITY
as Ford announced the sale of the two Britishiconic cars to Tata Motors Ltd.
Ford acquired Jaguar for $2.5 bn in 1989 and
Land Rover for $2.75 bn in 2000 but put them on
the market last year after posting losses of $12.6
bn in 2006 - the heaviest in its 103-year history.
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HDFC Bank's merger with Centurion Bank ofPunjab and Walt Disney Company's acquisition of
17.2per cent stake in UTV SoftwareCommunication to increase its stake to 32.10 percent in the company.
In February 2008, as many as 38 cross-borderdeals were announced with total value of $2.80billion, of which 27 were outbound deals with avalue of $2.57 billion.
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Diologic Report Meanwhile, global financial information provider
Diologic in its latest report said that India-targeted
M&A volumes reached $11.9 billion through 345deals so far this year. US was the leadingacquiring country with deals worth 1.6 billiondollars, followed by the UK with $904 million andGermany with USD 584 million.
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ADVANTAGES
REDUCTION OF COMPETITION
PUTTING AN END TO PRICE CUTTING
ECONOMIES OF SCALE IN
PRODUCTION
RESEACH AND DEVELOPMENT
MARKETING AND MANAGEMENT
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VERTICAL MERGER FIRMSSUPPLYING RAW MATERIALS
MERGE WITH FIRM THAT SELLS
ADVANTAGE
LOWER BUYING COST OF MATERIAL
LOWER DISTRIBUITION COST
ASSURED SUPPLIES AND MARKET
COST ADVANTAGE
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CONGLOMERATE MERGERUNRELATED INDUSTRIES MERGE
PURPOSE
DIVERSIFICATION OF RISK
Ex:Time warner-(they were into media &movie production) & AOL-(leading
American website)
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Expansion Merger and Acquisition
Asset acquisition
Joint ventures
Tender offer
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Contraction 1.Spin off-shares in subsidiary distributed to its
own shareholders
Kotak Mahendra Capital finance Ltd formed asubsidiary called Kotak Mahendra CapitalCorporation by spinning off its investmentdivision.
2.Split off- A new company is created to takeoveran existing division or unit.
It does not result in any cash inflow to the parentcompany
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HIS
TORY
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The First wave 1897-1904-horizontal Mergers
Monopolistic Market structure
Mega merger between USSteel and CarnegieSteel.It also merged with 785 separate firms-75%ofSteel production of US.
More than 3000 companies disappeared.
General Electric,Navistar, Standard Oil, Du-Point,American Tobacco-90% of market share
Transformation of regional firms into nationalfirms.
Exploited the economies of scale.
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Table-1 Year Number of mergers
1897 69
1898 303
1899 1208
1900 340 1904 79
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Problems of the first Wave Financial factors
Fraudulent financing
Stock Market crash in 1904 and Banking panicof 1907
Closure of many banks and formation of FederalReserve System.
Easy finance ends here. The US President Teodore Roosevelt and
President William Taft made a crack down onLarge Monopolies.
As a result: ???? What happened to Standard Oil?
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Standard Oil(
SO)
Broken in to 30 Companies.
SO of New Jersey named EXXON
SO of New York named MOBIL
SO of California renamed CHEVRON
S
O of Indiana renamed AMOCO
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TheS
econd Wave 1916-1929
Oligopolies industry structure
Industries like primary metals, petrolium products,food products, chemicals
Outside the previously consolidated heavymanufacturing industries.
Product extension merger like IBM and GeneralFoods
Vertical mergers In the mining and metalindustries(1920)
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Prominent Corporations General Motors, IBM, Union Carbide, John DEERE
Between 1926 and 1930- there were 4600 mergers took
place Result of which between 1919 and 1930 12,000
manufacturing , mining,public utility and banking firms
disappeared.
This period rail transportation, motor vehicle transportation
became national market.
Radios in homes, entertainment enhanced the competition.
Mass merchandising, national brand advertising
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Enhance productivity as a part of war effect.
The firms were urged to work together rather than
compete
The second wave came to an end when stock
market crashed on October 29,1929. Investment Bankers played in the first two phases
of mergers.
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The 1940s The second world war with merger of small
firms with larger firms
Motive of tax relief
High estate taxes
There were no increased concentration of
wealth
Mergers were small.
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The third Wave-1965-1969 Merger activity reached its highest level during
this period
Booming of economy Conglomerate merger period-80%
Diversification strategy
It is because of ANTI TRUST enforcement
Federal government adopted a stronger antitrustenforcement both with horizontal and verticlemerger.
1963-1361 mergers; 1970-5152 mergers
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Management sciences Management principles were applied in industries.
Management graduates were employed to manage
conglomerate mergers.
There were 6000 mergers which leads to 25000
firms disappeared.
Investment Bankers do not finance most of thesemergers
Finance:-????
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Finance for mergers Equity financing
Boom in stock market prices
Many conglomerate merger failed
The Revlon cosmetic entered into health
care and failed and suffered in cosmetic
industry.
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The Fourth Wave-1981-1989 Recession in 1974-75
Hostile merger
Take over or targeting on target companys boardof directors.
If the board accepts, it is considered friendly, andif it opposes it, it is deemed to be hostile.
The great mergers such as Oil companies-21.6%Of dollar values of merger and acquisitions
Drugs and medical equipment industries due toderegulation in some industries
Deregulation of airline industries
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Investment bankers played an aggressive
role.
M&A advisory services became a lucrative
source of income for Goldman Sachs
Innovation in acquisition techniques
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The Fifth Wave-1992-till date Once again increased activity in merger in 1992
Mega mergers
Strategic mergers Equity based
Deregulations and technological changes
Banking , telecommunications entertainment andmedia industries
High growth in banking sectors in 1990 as banksgrew greater than central banks.
Banks fund M&A rather than new ventures.
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Oligopoly market structure
Competition declined
Very few competitors
Example: Coco-Cola-44.5%,Pepsi-31.4%,Cadbury
Schweppes-14.4%
Globalisation Not confined to US companies
1995-US companies were acquired
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1981-2395
1989-2366
1990-2074 companies
2001-7528 companies merged
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Major Mergers in the telecom Acquirer Target
Vodafone Mannes man
MCL worldcom Spirit
Bell atlantic GTE
AT&T MeCaw Celluar SBC Pacific Telesis
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Major Mergers in Media and
Entertainment sector AOL Time Warner
VIOCOM CBS
WALT DISNEY CAPITAL ITIES/ABC
AT&T MEDIA ONE
TIME WARNER TURNER BRODCAS
T
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M&A IN INDIA License era-Unrelated diversification
Conglomerate merger
Friendly take over and hostile bids by buyingequity shares
Example: Swaraj paul attempted to raid on EscortsLtd.and DCM Ltd but could not succeed.
The Hindujas raided and took over Ashok leylandand Ennore Foundaries.
Chhabria Group acquired stake in Shaw Wallace,Dunlop india and Falcon Tyres.
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Goenka group from culcutta took over Ceat
tyres.
The Obroi-Pleasant hotels of Rane group.
1989- Tata Tea acquired 50% of the equity
shares of Consolidated Coffee Ltd from
resident shareholders.
merged to form HCL Ltd??.
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HCL Hindustan Computers, Hindustan
Reprographic, Hindustan
Telecommunications and Indian SoftwareLtd.
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Comparative study US India
Strategic By default(ANZ&Standard chartered
Gains by invest Not benefited by banks
ment bankers
Capital goods consumer goods
Borrowed
Earlier debt later by equity cash/FDI
Anti trust MRTP later The competitionbill 2001
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FINANCIAL FRAMEWORKIT COVERS THREE INTERRELATED
ASPECTS
1.DETERMINING THE FIRMS VALUE
2.FINANCING TECHNIQUES IN MERGER
3.CAPITAL BUDGETING
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DETERMINIG THE FIRMS
VALUEQUANTITATIVE FACTORS BASED ON
1. THE VALUE OF THE ASSETS
BOOK VALUE OWNER S EQUITY
DEPENDS ON FIXED ASSETS AND WORKINGCAPITAL
2. APPRAISAL VALUE- INDEPENDENT APPRISALAGENCIES
3. MARKET VALUE BASED ON STOCK MARKETQUATATIONS ,BUT CHANCE FORSPECULATION
4. EARNING PERSHARE AND P/E RATIO IMPACTOF EPS AFTER MERGER
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EXERCIS
ECOMPANY A
NO. OF SHARES 2
LACS MARKET VALUE
PERSHARE RS.25
EPS RS.3.125
COMPANY B
NO. OF SHARES 1
LAC MARKET VALUE
RS.18.75
EPS RS.2.5
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CONCLUS
IONS
EXCHANGE AT EPS NO EFFECT ON
EPS AFTER MERGER
EXCHANGE MORE THAN EPS RATIO COMPANY WITH LOWER EPS GAINS
IF LESS THAN EPS RATIO COMPANY
WITH HIGHER EPS BEFORE MERGERGAINS
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PRICE EARNING RATIO
APPROACH MEANING
COMPUTATION :
P/E RATIO = MP/EPS
EPS = EAT/NO. OF EQUITY SHARES
MARKET PRICE = P/E (NO. OF TIMES)
* EPS
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EXAMPLE
PRE MERGERSITUATION
FIRM A FIRM B
EAT 6,25,000 2,50,000
NO. OF SHARES 2,00,000 1,00,000
EPS 3.125 2.5
P/ERATIO(TIMES) 8 7.5
MARKET PRICEPER
SHARE(MPS)
25 18.75
TOTAL MARKET
VALUE (N*MPS) OR
(E
AT*P/E
R
ATIO)
50,00,000 18,75,000
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POST MERGER SITUATION 1
(BASEDON CURRENT
MARKET PRICE
SITUATION 2
EXCHANERATIO/ SWAP
RATIO (ASSUMING)
2.5:3.125=.8 1 : 1
EAT(COMBINED FIRM) 6.25+2.5=8.75 8,75,000
NO. OF SHARES 2.8 lakhs 2,00,000+1,00,000=3,00,0
00
EPS 8.75/2.8=3.125 8,75,000/3,00,000=2.91/
P/ERATIO
(ASSUMEDTO BE THE
SAME)
8 7.5
MPS 3.125*8=25 21.825
TOTAL MARKET VALUE 70,00,000 65,47,500
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CONCLUS
ION IF SHARES ARE EXCHANGED BASED
ON CURRENT MARKET PRICE PER
SHARE , POST MARKET PRICE SHAREINCREASED AT HIGHER RATE THAN
EXCHANGED BELOW THIS RATIO
Boot strap effect
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MARKET VALUE AFTER MERGER =MARKET VALUE BEFORE MERGER =68,75,000
NET GAIN = 15,00,000
? IF EXCHANGE RATIO IS 2.5:1 WHO GAINSWHO LOSES
? IF EXCHANGE RATIO IS 1:1 WHO GAINSWHO LOSES
? HOW TO CALCULATE TOLERABLE SHAREEXCHANGE RATIO
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DETERMINATION OF
TOLERABLES
HAREEXCHANGE RATIOTOTAL MV
LESS: MINIMUM TO BE GIVEN TO B
75,00,000
10,00,000
NET BENEFIT TO A 65,00,000
NO. OF SHARES OF A TO A CO. SHARE
HOLDERS
1,00,000
DESIRED POST MERGER MPS 65 PERSHARE
NO. OF EQUTY SHARES TO BE ISSUED
BAS
ED ON DES
IRED MARKET PRICE
10,00,000/65 = 15,385 SHARES
TOLERANCE SHARE EXCHANGE
RATIO
50,000/15385 = 3.25 SHARES OF FIRM B,
1 SHARE IN FIRM A
1:3.25
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CONCLUS
ION FIRM WITH HIGHER P/E RATIO CAN
ACQUIRE FIRM WITH LOWER P/E
RATIO WHICH WILL INVARIABLYINCREASES MARKET VALUE AFTER
MERGER
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CAPITAL BUDGETING THE TARGET FIRM SHOULD BE
VALUED BASED ON PV OF
INCREMENTAL CASH INFLOWS
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CORPORATE
RESTRUCTURING FINANCIAL RESTRUCTURING
RESTRUCTURING SCHEMES :
INTENAL AND EXTERNAL
RESTRUCTURING
DEMERGERS
BUYOUTS
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ACCOUNTING FOR
AMALGAMATION POOLING INTEREST METHOD
CONDITIONS AS PER AS 14:
1. ALL ASSETS AND LIABILITIES OF TRANSFEROR CO. TO
BE THE ASSETS OF THE TRANSFREE CO.
2. AT LEAST 90% OF F.V OF EQUITY SHARE HOLDERS
SHOULD BE SHAREHOLDERS OF NEW CO.
3. PURCHACE CONSIDERATION TO BE SETTLED BY THE
NEW CO.
4. THE BUSINESS OF NEW CO. SHOULD CONTINUE
5. NO ADJUSTMENT IS INTENDED TO BE MADE TO BOOK
VALUE OF ASSETS AND LIABILITIES OF TRANSFEROR CO.
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OTHER ACCOUNTING
TREATMENTS1. CROSS HOLDINGS OF SHARES TO BE
CANCELLED SUBSIQUENT TO MERGER
2. INTER CO. TRANSACTIONS LIKEDEBTORS AND CREDITORS SALE OF
GOODS FROM ONE CO. TO ANOTHER
3. SALES TAX PAID ALREADY CAN NOT BE
RECOVERED
INCOME TAX RELATED
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INCOME TAX RELATED
ISSUES FOR
AMALGAMATIONCONDITIONS OF AMALGAMATION UNDER INCOME TAX ACT SEC 2
(1B)
1. ALL ASSETS AND LIABILITIES OF TRANSFEROR CO. TO BE THEASSETS OF THE TRANSFREE CO.
2. SHARE HOLDERS HOLDING NOT LESS THAN 3/4TH IN VALUE OFSHARES OTHER THAN SHARES ALREADY HELD SHOULDBECOME SHARE HOLDERS OF AMALGAMATED COMPANY
EX. NO. OF SHARES OF Altd CO. 1,00,000
NO. OF SHARES HELD BY Bltd IN Altd IS 20,000
NOMINAL VALUE OF SHARE IS RS.10
ASSUME Altd MERGE WITH Bltd THEN 75% OF 1,00,000- 20,000 =60,000 TO BE THE SHARE HOLDES OF B CO.
NOTE:SHARE HOLDERS MAY BE EQUITY OR PREFERNCE SHAREHOLDERS
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OTHER CONDITIONS
THE AMALGAMATED CO. IS AN INDIAN CO.
EXCEPTION
1. IF SHARES OF INDIAN CO.HELD BY FOREIGN BEFORE
MERGER AND SUCH FOREIGN CO. TAKEN OVER BYANOTHER FOREIGN CO.
2. ATLEAST 25% OF THE FOREIGN CO. (BEFORE MERGER)
TO BE SHARE HOLDERS OF THE NEW FOREIGN CO.
? WHAT IS THE BENEFIT TO THE AMALGAMATED CO.
AMALGAMATING CO.(OLD CO.)
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NO CAPITAL GAIN ON TRANSFER ON CAPITAL ASSETS BY THETRANSFEROR CO. UNDERSEC 47(VI) OF I.T ACT
? CAN NEW CO. CARRY FORWAD AND SET OF LOSS ANDDEPRECIATION
SEC 72 A TO BE FULFILLED
1. ACCUMULATED LOSSES REMAIN UNABSORBED FOR 3 OR MOREYEARS
2. 75% OF BOOK VALUE TO BE HELD ATLEAST FOR 2 YEARSBEFORE AMALGAMATION
3. THE AMALGAMATED CO. CONTINUES TO HOLD 3/4TH OF BOOKVALUE ATLEAST FOR 5 YEARS
4. NEW CO. SHOULD CONTINUE FOR ANOTHER 5 YEARS
5. NEW CO. SHOULD ACHIEVE ATLEAST 50%OF INSTALLEDCAPACITY BEFORE END OF 5 YEARS AND SHOULD CONTINUEFOR 5 YEARS
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6. THE NEW AMALGAMATED CO. SHOULD FURNISH TO ASSESSING OFFICER
ABOUT PARTICULARS OF PRODUCTION
BENEFIT
THISSCHEME IS ALSO APPLICABLE TO BANKING INSTITUTIONS
?TATA VOLTAS & KELVINATOR HYDERABAD DIVISION vs. CBDT
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EXAMPLE
A LTD AMALGAMATES WITH B LTD
AS ON 2007
PARTICULARS DOES NOT
SATISFY SEC
2(1B) & 72 A
SATISFIES 2(1B)
BUT DOES NOT
SATISFY 72 A
SATISFIES BOTH
2(1B) & 72 A
A MERGES WITH
B (A GOES OUT)
NO BENEFIT
TO A & B
DOES NOT
ATTRACT
CAPITAL GAINFOR A BUT NO
GAIN FOR B
NO CAPITAL
GAIN TAX &
ACCUMULATEDLOSSES &
UNABSORBED
DEPERICIATION
CAN BE
CARRIED
FORWARD
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? If b merges with a & b goes out of marketwho gains under above 3 situations
? If a&b merge with c what are the tax
implication under above situationsAssume b is a loss making co.& Haveaccumulated losses & unabsorbeddepreciation
? If c is not an Indian co.
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OTHER TAX BENEFITS
1. Expenditure on amalgamation or de-merger allowed under sec
35DD both revenue and capital expenditure allowed
2. Expenditure on scientific research can be carried forward
3. Expenditure on acquisition of patent rights copyrights depreciationcan be provided
4. Expenditure for obtaining license for tele-communication service
can be written off
5. Preliminary expenses
6. Capital expenditure on family planning
7. Bad debts are allowed
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Tax Concession To Share
Holders Of Amalgamating Co.
No capital gain tax provided, new co. is an
Indian co.& Shareholders are acquiredeverything in shares
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EXERCISE
PARTICULARS CO. A CO. B
EAT 1,40,000 37,500
NO. OF SHARES 20,000 7,500
EPS 7 5
MARKET PRICE 70 40
P/E RATIO 10 8
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Co. A is acquiring co. B Exchanging one share for
every 1.5 shares of B ltd & p/e ratio will continueeven after merger
? Are they better or worse of than they were beforein merger
? Determine the range of minimum & maximumratio between the two firms
? A is an Indian co.
? A is a foreign co.
? A merges with T & formed a new co. AT ltd? What are the tax planning required before & after
merger