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Agenda

� Concepts related to Mergers & Acquisition

� Types of Merger

� Horizontal

� Vertical

� Conglomerate

� Reasons for M&A

� History of M&A

� Financing Methods

� Market Reaction to M&A

� Reasons for Failure

� M&A Scenario in India

Structure

M&A

Amalgamations

Merger De-merger

Acquisitions

Asset

Purchase

Stock

Purchase

SlumpSale

ItemizedSale

Merger

One firm absorbs the assets and liabilities of the other

firm in a merger. The acquiring firm retains its

identity. In many cases, control is shared between the

two management teams. Transactions were generally

conducted on friendly terms.

• In a consolidation, an entirely new firm is created.

• Mergers must comply with applicable state laws. Usually,

shareholders must approve the merger by a vote.

Acquisition

Traditionally, the term describes a situation when a

larger corporation purchases the assets or stock of a

smaller corporation, while control remains

exclusively with the larger corporation.

• Often a tender offer is made to the target firm (friendly) or

directly to the shareholders (often a hostile takeover).

• Transactions that bypass the management are considered

hostile, as the target firm’s managers are generally

opposed to the deal.

Divestiture & Spin-off

• Divestiture: a transaction in which a firm sells one of its

subsidiaries or divisions to another firm.

• Spin-off: a transaction in which a firm either sells or issues

all or part of its subsidiaries to its existing public investors, by

issuing public equity. In 1997 PepsiCo spun-off its restaurant

division. Shareholders received one share of the new

restaurant company (TRICON), for every 10 issues of Pepsi

they held.

Terminology

• Target: The corporation being purchased, when there is aclear buyer and seller.

• Bidder: The corporation that makes the purchase, whenthere is a clear buyer and seller. Also known as the acquiringfirm.

• Friendly: The transaction takes place with the approval ofeach firm’s management.

• Hostile: The transaction is not approved by the managementof the target firm.

Due Diligence

Before the M&A

Pre-deal due

diligence

Post-deal due diligence

Post-close execution

Sniff Test • Opportunistic vs. Strategic

• Economic Sense• Cultural Compatibility• Leadership• Governance

•Understanding everything you can about the Target• Develop Project plan and refine cost, value and schedule estimates

• Implement Program Management and Governance

• Determine your organization and people

strategy

How to deal with challenges within

agreed time frame with available resources

TakeOver Defense

Pre-offer defenses

� Some firms adopt so-called shark-repellent charter amendments to

deter potential bidders

� Staggered boards (board is staggered in groups with only one group

elected each year, thus making it more difficult for bidders to gain

control)

� Require supermajority (above 80%) to approve a merger

� Restrict mergers unless a fair price is received

� Unwelcome acquirers must wait a number of years before a merger

can be completed

� Other pre-offer defenses include

� Poison pills: Existing shareholders are issued the right to buy stock at adiscount if there is a significant purchase of shares by an outsidebidder

� Poison put: Bondholders can demand repayment if there is a hostiletakeover

Post-offer defenses

• Issue new shares or repurchase shares from shareholders at a premium

• Buy assets that the bidder does not want or that can create antitrustproblems

Types

Horizontal

Mergers between two firms in the same line of

business.

• Chemical Bank’s merger with Chase & Nationbank’s

purchase of BankAmerica

• Oil Giants Exxon and Mobil

• British Petroleum (BP) and Amoco

• Kingfisher & Air Deccan

Vertical

Mergers between Companies at different stages

Walt Disney’s acquisition of ABC television

network. Disney planned to use the ABC network to

show “The Lion King” and other recent movies to

huge audience.

� Production Stage- The buyer may expand back

towards the source of raw material or forward in the

direction of the ultimate consumer.

Conglomerate

Merger between Companies in unrelated lines of

businesses. Hugely prevalent between 1960s and

1970s

Reasons for M&A

Reasons for M&A

History of M&A

� First Wave mergers (1897-1904)

� Horizontal mergers took place between manufacturing industries

� Second Wave Mergers (1916-1929)

� Mergers between Oligopolies

� Third wave mergers (1965-69)

� Conglomerate mergers

� Companies taking over larger than themselves

� Fourth Wave mergers (1981-1989)

� Hostile takeovers was the order

� Fifth Wave Mergers (1992-2000)

� Mainly in banking and telecommunications

Financing Methods for M&A

Mergers are generally differentiated from acquisitions partly by the way in

which they are financed and partly by the relative size of the companies.

Various methods of financing an M&A deal exist:

Cash

� Payment by cash. Such transactions are usually termed acquisitions rather

than mergers because the shareholders of the target company are removed

from the picture and the target comes under the (indirect) control of the

bidder's shareholders alone.

� A cash deal would make more sense during a downward trend in the

interest rates. Another advantage of using cash for an acquisition is that

there tends to lesser chances of EPS dilution for the acquiring company.

But a caveat in using cash is that it places constraints on the cash flow of

the company.

Contd…

Financing

� Financing capital may be borrowed from a bank, or raised by an issue of

bonds. Alternatively, the acquirer's stock may be offered as consideration.

Acquisitions financed through debt are known as leveraged buyouts if they

take the target private, and the debt will often be moved down onto

the balance sheet of the acquired company.

� An acquisition can involve a combination of cash and debt, or a

combination of cash and stock of the purchasing entity.

Hybrids

� An acquisition can involve a combination of cash and debt, or a

combination of cash and stock of the purchasing entity

First, the bad news…

Most deals do not create value

Market Reaction to Mergers

� Empirical evidence has shown that upon announcement of a

merger bid, on average:

� Share price of the targeted company rise 16%

� Share price of acquiring company are essentially unchanged (a fall of

0.7%)

� Value of total package (buyer plus seller) rises on average by 1.8%

� Sellers earn higher returns because

� Buyers are typically substantially much larger firms that the significant

gains from the merger do not affect the firm’s share price

� More importantly, it is often the case that there is a competition among

bidders, which increases the gains for the target firm(HCL-INFOSYS-

AXON)

Reasons for failure

• The organization enters a fundamentally unprofitable industry or refuses to

exit from one.

• The organization steps far away from what is known. They key strategic

drivers of profitability have less to do with focus and relatedness and more

to do with knowledge, mastery and competencies.

• The economic benefits of the deal are improbable.

• Success is less likely when there are many competitive bids (public

companies) as opposed to less competitive segments of the market like

private firms and assets.

• Poor structuring of the deal – the use of cash, debt financing, tax shields,

staged payments, merger of equals terms and earn out incentive structures

are all associated with higher buyer returns.

• Poor governance – oversight and delegation of decision making authority

within the firm.

International Stats of M&A

Break-up by Value

36%

45%

15%4%

Americas Europe Asia-Pacific Africa/Middle East

Break-up by Value

36%

45%

15%4%

Americas Europe Asia-Pacific Africa/Middle East

Break-up by No of Deals

37%

41%

6%

16%

Americas Europe Asia-Pacific Africa/Middle East

Break-up by No of Deals

37%

41%

6%

16%

Americas Europe Asia-Pacific Africa/Middle East

M&A Scenario In India

Economic Times

Indian Companies Going Abroad

“The Indian Multinational”- A steel company in UK, an oil & gas

explorer in Norway, a generic drug

manufacturer in Germany; all have one

thing in common - they are all flying the

Indian tricolor

Value of outbound deals larger

than inbound-In Jan-March 2007, 40 out-bound deals

with a total value of € 15bn Led by Tata-

Corus, Hindalco-Novelis, Aban-Sinvest

Companies looking to expand

their product portfolio, access

new markets, technologies

from regional to global player

Indian Outbound Deal

Question 1

� Which was the biggest deal in Indian

M&A history?

Tata Corus Deal

Top 10 Acquisitions by Indian

Companies

Rank Acquirer Targeted Co.Targeted Country Deal Value( in U.S$ bn) Industry

1 Tata Steel Corus Group plc. UK 12 Steel

2 Hindalco Novelis Canada 5.98 Aluminium

3 Videocon

Daewoo

Electronics Corp. Korea 0.729 Electronics

4 Dr. Reddy's Labs Betapharm Germany 0.597 Pharmaceutical

5 Suzlon Energy Hansen Group Belgium 0.565 Energy

6 HPCL

Kenya Petroleum

Refinery Ltd. Kenya 0.5 Oil And Gas

7 Ranbaxy Labs Terapia SA Romania 0.324 Pharmaceutical

8 Tata Steel Natsteel Singapore 0.293 Steel

9 Videocon Thomson SA France 0.29 Electronics

10 VSNL Teleglobe Canada 0.239 Telecom

Total 21.519

Change in RBI policy

• Hiked the overseas investment limit from 300 per cent of the net worth to

400 per cent of the net worth;

• Hiked the limit on overseas portfolio investment by Indian companies

from 35 per cent of their net worth to 50 per cent of their net worth;

• Allowed Indian residents to remit up to US$ 2,00,000 per financial year,

from US$ 1,00,000 previously, for any current or capital account

transaction or a combination of both.

• Allowed mutual funds to make an aggregate investment to the tune of US$

5 billion in overseas avenues, from an earlier cap of

US$ 4 billion.

Question 2

• Which was the largest M&A deal in

2008 in India?

Daiichi-Sankyo’s Acquisition of Ranbaxy

for $4.5 bn

M&A Scenario in India (2008)

• Top 10 deals accounted for 64%

when compared to that in 73% in

2007

• 9 out of 10 top deals in 2008 were

cross border in nature

• Average deal value is $69.03

million in 2008 when compared to

$93.55 million in 2007

• 37% of total M&A deal in 2008

accounted to Telecom, Pharma,

Healthcare and Biotech.

Sector wise Breakup of M&A

deals by value Sep-Oct 2008

Question 3

Find the M&A…..

TATA-JAGUAR DEAL

Overall Scenario of M&A

� Cash rich firms, owing to slow growth and tight liquidity both at home and

overseas are curbing big aspirations for mergers and acquisitions. Eg:

Infosys - Cash of US $ 1.9 Bn

� Compare that to China, where acquisition volume is up 156 percent to

$47.9 billion, though cross border acquisition plans by Chinese companies

are closely tied to the government and are less impacted by

financing constraints.

� In case of Indian Companies there are no takers for the new issue of

stocks for the Mergers and acquisitions. Eg Tata Motors and Hindalco

Question 4FIND THE M&A