Mergers & Acquisitions

Nand Kumar AradhyeGanesh NaikRaj KumarRanjan Varma

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Corporate Strategies in M&A

Why? Gain market shareEconomies of scaleEnter new marketsAcquire technologiesStrategic BenefitComplementary resourceTax shieldsUtilisation of surplus fundsManagerial EffectivenessIntegrate vertically

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Why not?

Grasping for a company simply because it’s on the market, or because a competitor wants to buy it .

Overpayment or misguided purchase Reduce cost of debt. Diverse Business; Unmanageable Leaping without looking at the value; Win-

Win or no deal Inability to integrate well.

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Corporate Strategies in M&A

Exploit market power, economies of scale & scope,

and market inefficiencies

Same industry/Same market- Consolidation

Related industries- Horizontal-Jet-Sahara

Same industry/Different market(Conglomerate)-LIC-UTI Bank

Suppliers-Vertical-ITC

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Mechanics of a Merger

Legal ProcedureThe MOA to be scrutinised Intimation to Stock ExchangesApproval of draft amalgamation proposalApplication to the CourtNotice to shareholders and creditorsFiling the orderTransfer of assets and liabilities Issue of shares and debentures

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Mechanics of Merger (Cont’d)

Tax AspectsSection 2(a) of the Income Tax Act defines

amalgamationDepreciation for tax purposesAccumulated lossesUnabsorbed DepreciationCapital Gains Tax

Accounting for Amalgamation is done according to Accounting Standard 14 (AS-14) issued by the Institute of Chartered Accountants of India

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Costs & Benefits

When firm A acquires firm B, A is making a capital investment while B is making capital divestment based on NPV method

Benefit = PV(AB) – {PV(A) + PV(B)} Cost = Cash – PV(B)

NPV to A= Benefit – Cost

NPV to B= Cash – PV(B)

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Screening Potential Deals

Never stop looking Constantly scanning marketplace Be diligent and disciplined

Do not simply react whenever IBanks contact you Look at various potentials in the market, not just the

deal at hand Don’t cast strategy aside in the face of an exciting

opportunity

Can’t make a good stew unless you have good ingredients

shop around to find the best ingredients

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Due Diligence

Look for the devil in the details A 360 approach –

external-internal ………. peel the onion! past-present-future scenario modeling on synergy assumptions

Link due diligence with business planning

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Look for the devils in the details!

Industry / MarketsCustomers / Partners

Competition People

SuppliersCustomer & Vendor Contracts

Operations & SupportPricing and discounts

Finance, Accounting & Taxes

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Look for the devils in the details!

Contingent LiabilitiesCorporate Controls

Intellectual PropertiesHuman Resources

LegalIT – infrastructure & applications

Insurance Synergy – Assumption Testing!!

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Valuation

No magic formulaFuture cash flowEarnings estimatesAssumption modelingDue diligence findingsSynergy

Set limits and stick to financial discipline Maintain reasonable and realistic expectations

X Rationalization: “This deal is strategic – don’t worry, it’s all going to work out in the end no matter what price we pay.”

Wisdom: “If you stumble across too many red flags while evaluating a business, walk away!”

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Making the Deal Happen

Identify the details critical to the deal’s success

Use early negotiations to foster a sense of trust with the target’s top executives

Know who have influence on the deal – target company and your company

Don’t focus on the price yet

Keeping a foot on the brakes

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Making the Deal Good

Negotiate on several fronts simultaneously

Make sure you have alternatives to this deal

Anticipate the competition

Close quickly after setting final terms

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Making the Deal Good

PR: External & internal Integration – Realizing the synergy

dreamTalentCultureStructureTechnologyDiscovering and leveraging the unknown

and unexpected treasures

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Are You the Strongest Acquirer?

Ability to realize synergies Financing capacity Ability to make quick decisions Attractiveness of currency Reputation

Negotiations People treatment Integration

Post-acquisition performance record

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Jargons to understand

Net Present ValueExchange RatioPrice per sharePrice Earning multipleEarningsNumber of Shares/ DebenturesFree Cash FlowMarket price to Book Value ratio

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SEBI Guidelines

NotificationTrigger point for public offerOffer priceContents of Public announcement

To ensure transparency, greater disclosures and protect the interests of small shareholders.

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HOT DEALS

Mittal- ArcelorSBI- GEICICI- Sangli BankUnited Breweries- Shaw WallaceTata- CorusJet- SaharaLIC may buy UTI Bank ( FE, 13.04.2007)

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Air Sahara in Jet Air Fold

Deal for Rs 1450 crore, 40% less than the deal in Jan’ 2006.

NPV of Price is Rs 1200 crore.Rs 200 crore debt of Air Sahara will

increase the acquisition cost.The merged entity will have a market

share of 42% (largest domestic private )Buyout helps Jet Air to go International.

Source: Financial Dailies

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छपते�छपते�

M & A Valuations to come under lens Institute of Independent Valuers to be set up to

standardize techniques and procedures.

Sources: Financial Express, dated 16.04.2007Financial Management by Prasanna Chandra