mergerandaquisitionbs-100101215045-phpapp02

8/3/2019 mergerandaquisitionbs-100101215045-phpapp02

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Under the guidance of our respectedProfessor-

Prof S.V.Bidwai


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Submitted by:Pranav Jalan 08BS0002278

Pravesh Surana 08BS0002328

Prerna Singhal 08BS0002

Priyanka Bhuwania 08BS0002372

Rahul Chandalia 08BS000Rahul Jain 08BS0002500

Ravi Somani 08BS0002638

Rohit Kothari 08BS0002751

Date 12Date 12thth November;09November;09


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Introduction Past History M & A Process Reasons and Issues

Strategic Approach to M&A Takeover Strategies and Defenses Issues and Defects Attributes to effective acquisition Legal Procedure Caselets:

P&G and Gillette Tata-JLR Tata-Corus Adidas-Reebok

Case Study


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Corporate restructuring is the reorganization of corporate entities. The

reorganizing can be within the company itself or with the involvement of other

corporate entities.

A strategy to change business or financial structure.

Radical changes in composition

Process of redesigning.

Example GE witnessed tremendous growth during tenure of Jack Welch

Necessity when the company has grown to the point.

Crucial whenever there is a major shift.

Continuous process.

Result - leaner, more efficient, better organized, and better focused .


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Financial Restructuring Includes raising thefinance, decisions regarding mergers, jointventures and alliances

Operational Restructuring Reformulate thecompany on basis of change in technology andenvironment requirements

Organizational Restructuring In order toincrease efficiency redefining the organizationalstructure or the processes or the systems.

Market Restructuring Is the addition of a newerproduct or shifting one product or segment toanother or enlarge the market for the exitingproducts.


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Culture.

Inadequate focus and commitment of topmanagement towards change program

"What is in it for me" attitude

Mind set/resistance to change

Lack of involvement of employees

Poor planning Resource Availability

Cost and time

Poor communication


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Expansion

Sell offs

Corporate control

Changes in ownership structure..


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A MERGERhappens when two firms, often about same size,

agree to go forward as a new single company rather than remain

separately owned & operated by pooling all their resources

together, to create a sustainable competitive advantage. For

example,both Daimler-Benz & Chrysler ceased to exist when twofirms merged, and a new company Daimler-Chrysler was

created.

When a Company takes over another one & clearly becomes the

new owner ,the purchase is called ACQUISITION. Unlikemergers, acquisitions can sometimes be unfriendly. i.e., when a

firm tries to takeover another by adopting hostile measures.


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Mergers and Acquisitions M&A ,have become very popularstrategy all over the world in last 3 decades.

The value M &A WORLDWIDE increased from $464 Billionin 1990 to $3.4 trillion in 1999-2000, followed by sharp

decline during 2001 & 2002.It has again shown improvementfrom 2003 onwards.

India born Laxmi Nivas Mittal has taken overArcelor inEurope , to form a largest Steel making Company in Europe-Arcelor-Mittal.(117Mtons/Year-Global) .

Tata Steel-Corus(UK) Acquisition by Tata Steel for $12Billion is very significant and a landmark for the IndianCorporateWorld. (28 Mtons/Annum-2006)


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M&A means and includes

ACQUISITIONSMERGERS

PURCHASEOF UNITTAKEOVERSALLIANCES

DIVESTITURESSELL OFFS

DEMERGERS

OWN,RESTRUCT.GOING PRIVATE

LEVERAGEDBuy OUTS

ORG.RESTRUCT.REDESIGN

PERFORMANCEENHANCEMENTPROGRAMMES


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Company-specific RiskCost-of-capital reduction

Operating SynergyScale Economies

Improve margins

Financial SynergyRedeploy capital

Increase ROI

Managerial SynergyImprove management or

replace inefficient one

Market ValuationRelease value


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The 1895-1904 Merger Movement.



The 1960s Merger Movement.

Post 1980 Merger Movement.


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Majorly of Horizontal mergers.

Merging for Monopoly in order to eliminate

competition.

Case: JP Morgan merged with Carnegie Steel.

Ended in 1904 due to severe economic

recession.


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Majorly of Vertical mergers.

Merging for Oligopoly.

Case: FORD- manufacturing tyres of car from

rubber plantations in Brazil.

Ended in 1929 with stock market crash of

Black Tuesday.


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Conglomerate Merger.

Occurred during booming American economy.


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Hostile takeover.

Birth of LBO.

Mega-Merger & Cross border merger.


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A = Amalgamating Company: Ceases to Exist

B = Amalgamated Company

B receives all of As assets and liabilities

Shareholders of A receive shares in B and maybe otherbenefits like debentures, cash

Transfer assets and liabilitiesA B


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A, B and C = Amalgamating Companies: Cease to exist

D = Amalgamated Company: may or may not haveexisted before Merger

All assets and liabilities of A, B and C transferred to D

Shareholders in A,B and C get shares in D.

A

DB

C


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Demergers are one type of spin-offs: under s. 391

A = Demerging Company

B = Resulting Company: may or may not have existedearlier

A transfers undertaking to B

B issues shares to shareholders of A

X Y Y

Company BCompany A

Transfers undertaking Y

Shareholders

of

A

Issues shares


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1. Develop a strategic plan for the business.(BusinessPlan)

2. Develop an acquisition plan related to the strategicplan.( Acquisition Plan)

3.

Search companies for acquisitions.(Search)4. Screen and prioritize potential companies.(Screen)5. Initiate contact with target.6. Refine valuation, structure the deal and develop

financial plan.( Negotiation)7. Develop plan for integrating the acquired business.

(Integration Plan)8. Obtain all necessary approvals and implement

closing.9. Implement post closing integration.10. Conduct a post closing evaluation.


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According to Drucker, financial factors provide stimulus for

merger activity. He says that mergers should follow five

rules, in order to be economically viable.

The acquirer must contribute something to the acquired

company. A common core of unity is required.

The acquirer must respect the business of the acquired

company.

Within a year or so, the acquiring company must be able toprovide top management to the acquired company.

Within the first year of the merger, managements in both

companies should receive promotions across the entities


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Horizontal mergers: A horizontal merger involves two firms operating and competing in the same

kind of business activity.

Textiles firm merges raw materials firm.

- Example: Exxon - Mobil

Vertical mergers: Vertical mergers occur between firms in different stages of productionoperation.

- Example: Helene Curtis and Unilever

Conglomerate Mergers:- Conglomerate mergers involve firms engaged in unrelated types of business

activity

- Example: General Electric buying NBC television

Concentric Mergers- Based on specific management functions where as the conglomerate

mergers are based on general management functions

- Example: Citigroup (principally a bank) buying Salomon Smith

Barney (an investment banker/stock brokerage operation


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Problems inProblems inAchieving SuccessAchieving Success

Problems inProblems inAchieving SuccessAchieving Success

I

ntegrationI

ntegrationdifficultiesdifficulties

InadequateInadequateevaluation of targetevaluation of target

Too muchToo muchdiversificationdiversification

Large orLarge orextraordinary debtextraordinary debt

Inability toInability toachieve synergyachieve synergy

Managers overlyManagers overlyfocused on acquisitionsfocused on acquisitions

Too largeToo large

I

ncreasedI

ncreasedmarket powermarket power

OvercomeOvercomeentry barriersentry barriers

Lower riskLower riskcompared to developingcompared to developing

new productsnew products

Cost of newCost of newproduct developmentproduct development

Increased speedIncreased speedto marketto market

IncreasedIncreaseddiversificationdiversification

Avoid excessiveAvoid excessivecompetitioncompetition

M & AM & A

Reasons forReasons forM & AM & A


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Reasons for M & AReasons for M & AReasons for M & AReasons for M & A

Example:Example: BelgianBelgian--Dutch Fortis acquisition of American BankersDutch Fortis acquisition of American Bankers

Insurance GroupInsurance Group

Example:Example: Watson Pharmaceuticals acquisition ofWatson Pharmaceuticals acquisition of TheraTechTheraTech

Example:Example: British Petroleums acquisition of U.S. AmocoBritish Petroleums acquisition of U.S. Amoco

Increased MarketPow

erAcquisition intended to reduce the competitive balance of theAcquisition intended to reduce the competitive balance of theindustryindustry

Overcome Barriers to EntryAcquisitions overcome costly barriers to entry which may makeAcquisitions overcome costly barriers to entry which may makestartstart--ups economically unattractiveups economically unattractive

Buying established businesses reduces risk of startBuying established businesses reduces risk of start--up venturesup ventures

Lower Cost and Risk of NewProduct Development


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Example:Example: General Electrics acquisition of NBCGeneral Electrics acquisition of NBC

Example:Example: Kraft Foods acquisition of Boca BurgerKraft Foods acquisition of Boca Burger

Example:Example: CNETs acquisition of mySimonCNETs acquisition of mySimon

Reasons for M & AReasons for M & AReasons for M & AReasons for M & A

Increased Speed to MarketClosely related to Barriers to Entry, allows market entry in a moreClosely related to Barriers to Entry, allows market entry in a moretimely fashiontimely fashion

DiversificationQuick way to move into businesses when firm currently lacksQuick way to move into businesses when firm currently lacksexperience and depth in industryexperience and depth in industry

Reshaping Competitive ScopeReshaping Competitive Scope

Firms may use acquisitions to restrict its dependence on a single orFirms may use acquisitions to restrict its dependence on a single ora few products or marketsa few products or markets


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Problems with M & AProblems with M & A

Example:Example:Marks and Spencers acquisition of Brooks BrothersMarks and Spencers acquisition of Brooks Brothers

Example:Example: Intels acquisition of DECs semiconductor divisionIntels acquisition of DECs semiconductor division

Example:Example:AgriBioTechs acquisition of dozens of small seed firmsAgriBioTechs acquisition of dozens of small seed firms

Integration DifficultiesDiffering financial and control systems can make integration of firmsDiffering financial and control systems can make integration of firmsdifficultdifficult

Inadequate Evaluation of TargetWinners Curse bid causes acquirer to overpay for firmWinners Curse bid causes acquirer to overpay for firm

Large or Extraordinary DebtLarge or Extraordinary Debt

Costly debt can create onerous burden on cash outflowsCostly debt can create onerous burden on cash outflows


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Example:Example: Ford and JaguarFord and Jaguar

Example:Example: Quaker Oats and SnappleQuaker Oats and Snapple

Example:Example: GEGE----prior to selling businesses and refocusingprior to selling businesses and refocusing

Inability to Achieve Synergy

Justifying acquisitions can increase estimate of expectedJustifying acquisitions can increase estimate of expectedbenefitsbenefits

Problems with M & AProblems with M & A

Overly DiversifiedAcquirer doesnt have expertise required to manageAcquirer doesnt have expertise required to manageunrelated businessesunrelated businesses

Managers may fail to objectively assess the value of outcomesManagers may fail to objectively assess the value of outcomesachieved through the firms acquisition strategyachieved through the firms acquisition strategy

Managers Overly Focused on AcquisitionsManagers Overly Focused on Acquisitions


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Present Situation Strategy

Growing steadily but in a mature marketwith limited growth

Acquire a company in a youngermarket with higher growth rate

Operating at maximum productivecapacity

Acquire a company makingsimilar products operatingsubstantially below capacity

Under-utilizing management resources Acquire a company into which

the talents can be extended

Marketing an incomplete product range ,or having the potential to sell otherproducts or services to your existingcustomers

Acquire a company withproduct range which iscomplementary


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Lacking key clients in a targeted sector Acquire a company with rightcustomer profile

Need to increase market share Acquire an importantcompetitor

Need to widen capability Acquire a company with keytalents and/or technology

Need more control of suppliers orcustomers

Acquire a company which is, orwhich gives access to asignificant customer or supplier

Preparing for floatation but need toimprove balance sheet

Acquire a company with theright customer profile


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Kinds of takeovers:

Negotiated or Friendly TakeoverThe existing management of a company decides to give

away the control of the company to another group on termsand conditions mutually agreed upon by both the parties.

Open market or Hostile TakeoverA group acquires shares of a company from the open market

in order to take control of the company

Eg:Autoriders Hostile Takeover Bid for Saurashtra Cement

Bail-out TakeoverWhen a financially sick company is taken over by a profit

earning company in order to bail out the former ,it is called abail-out takeover.


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Tender Offer

General offer made publicly and directly to a firms shareholders tobuy their stock at a price well above the current market price.

Street Sweep

The acquirer accumulates large amounts of the stocks in the targetcompany before making the open offer

Bear Hug

The acquirer tries to put pressure on the management of the targetfirm by threatening to make an open offer

Strategic AllianceAn acquirer offers a partnership rather than a buyout of the target

firm.

Brand PowerThe acquiring firm enters into an alliance with other powerful

brands to displace the competitors brand.


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Economic Issues

Legal Issues

Public Policy Issues

Powers of financial institutions

Proxy wars


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Effects on the Acquirer Company

Effects on the Target company

Effects on the Shareholders of the Target

Company Effects on the Shareholders of Acquiring

Company


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Golden Parachutes

Poison Put

Anti-takeover Amendmentso

Super majority amendmentso Fair price amendments

o Classified boards

o Authorization of preferred stock

Poison Pill DefenseTargeted Share Repurchase and Standstill

Agreements

Other Takeover Defences


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A fundamental characteristic of merger isthat the acquiring company takes over theownership of other companies and combines

their operations with its own operations.An acquisition may be defined as an act of

acquiring effective control by one companyover the assets or management of another

company without any combination ofcompanies.


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Attributes of Effective AcquisitionsAttributes of Effective Acquisitions

ComplementaryAssets or ResourcesBuying firms with assets that meet current

needs to build competitiveness

++

FriendlyAcquisitionsFriendlyAcquisitions

Friendly deals make integration go more smoothly

++

Careful Selection ProcessCareful Selection Process

Deliberate evaluation and negotiations is more likely

to lead to easy integration and building synergies

++

Maintain Financial SlackMaintain Financial Slack

Provide enough additional financial resources so

that profitable projects would not be foregone

++


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Attributes of Effective AcquisitionsAttributes of Effective Acquisitions

Low-to-Moderate DebtLow-to-Moderate Debt

Merged firm maintains financial flexibility

++

FlexibilityFlexibility

Has experience at managing change and is

flexible and adaptable

++

Emphasize InnovationEmphasize Innovation

Continue to invest in R&D as part of the firms

overall strategy

++


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TRANSACTIONSTRUCTURE

Companies Act

Income Tax Act

Stamp Acts

Competition Act

TRANS-BORDERTRANSACTIONS

Foreign ExchangeManagement Act

LISTED COMPANIES

SEBIRegulations

Stock Exchange

Listing Agreement


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Sec 391 394 of Indian companies actcovers M & A.

Examination ofobject clause

Approval fr

om the

board Intimation to share holders and

creditors.Approval from share holders and

creditors.- 75% of SH and creditors to

approve.Application to National Company Law

Tribunal (NCLJ) Intimation to SEs


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Pettion to NCLT for approval

Filing order with ROC

Transfer of assets and Liabilities

Issuance of shares/cash


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THE DEALTHE DEAL


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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 ofTATAs offer.

Nov 18, 06 : The CSN approaches Corus With an offer of475 pence per share

Nov 27, 06 : Board ofCorus 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 per share,then CSN made its counter bid at 515 pence per share in cash

Jan 31, 07 : Tata ad agreed to offer Corus investors 608 pence per share in

cash

Apr 02, 07 : Tata steel manages to win acquisition to CSN and has the full

voting support fromCorus shareholders


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TATA Acquired CORUS on 2nd April 2007 which is 4 times larger than itssize.

The deal price was $ 12 Billion.

TATA Steel,the winner of the auction for CORUS declares a bid of 608

Pence per share. In 2005 when the deal was started the price per share was 455 pence.

TATA Surpassed the final bid from Brazilian steel maker COMPANHIASIDERURGICA NACIONAL (CSN) of 603 pence per share.

The combined entity has become the worlds fifth largest steelmaker

after the deal. For this deal TATA has finance only 4 Billion $ from internal company

resources.

TATA Have secured funding commitments from its advisors.

These advisors were Deutshe bank, ABN Amro and StandardChartered.


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The initial motive behind the deal was not CORUS

revenue size but rather its market value. To compete on global scale because then TATA wasjust at 56th rank in steel production.

CORUS holds a number of Patents and R & Dfacility.

Acquiring Corus will give Tata access to European

customers of steel. Acquisition cost will be lower then setting up new

green field plants and marketing channel.

FOR TATAFOR TATA


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To extend its Global reach through TATA.

To get access to Indian Ore reserves, as well asvirgin market for steel.

To get access to low cost materials. Total Debt of Corus was GBP 1.6bn

Saturated market of Europe.

Better facilities and lower cost of production

Employee cost was 15 % (TATA- 9%) Profit margin was 3.4% (TATA- 17%)

FOR CORUSFOR CORUS


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Major Acquisitions

Target Buyer Value ($ bn) Year

Arcelor Mittal Steel 31 2006

NKK Corp Kawasaki Steel 14.1 2001

LMM Holdings Ispat Intl 13.3 2004

Corus TATA 12.0 2006

Krupp AG Thyssen 8.0 1997

Dofasco Arcelor 5.2 2005

Intl Steel Mittal Steel 4.8 2005


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COMPANYCOMPANY CAPACITY inCAPACITY in

(million tones)(million tones)

1.Arcelor-Mittal

2.Nippon steel

3.Posco

4.JEF steel

5.Tata steel- Corus

110.0

32.0

30.5

30.0

27.7


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Ford, a leading automaker and one of the largest MNC in the globalautomobile industry.

Ford acquired Jaguar from British Leyland Limited in 1989 for US$ 2.5 billion

Ford bought Land Rover in 2000 for US$ 2.7 billion from BMW

Over the years, the operations of both Jaguar and Land Rover were fully

integrated Ford reported losses of US$ 12.7 billion in the year 2006

Ford conducted strategic reviews on the two brands and in June 2007announced that it was considering selling JLR

Ford was concerned more about the interest of the workers employed withJLR than the price

JLRs labour union were against selling to private equity firms to be assureof job security

On January 03,2008,Ford announced that it had chosen Tata Motors forthe JLR deal and had entered into focused negotiations with thecompany.

On March 26,2008, Tata Motors agreed to pay US$ 2.3 billion in cash for a100% acquisition of the businesses of JLR.


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Immediate entryto the luxuryperformance carand premium all-terrain vehiclesegments

An improvementin global market

position througha combination ofresources andstrengths

Strengthening oftechnologicaland productdevelopment/innovationcapabilities toaddress changingmarket trends

Enhanced humancapital andmanagerialtalent

Sharing of bestpractices inmanufacturingand qualityassurancesystems andprocesses

Potential

operationalsynergies


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Tata Motors acquired:

Three manufacturingplants

Two advanced designedand engineering centers

Worldwide network of 26national sales companies

Tata Motors did not inheritany of the debt liabilities

of JLR, the acquisition wastotally debt free


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Tata Motors raised a bridge loan of US S$3 billion through a syndicate of banks

The loan was raised through Tata Motors UK,

a special purpose vehicle and a 100%subsidiary of Tata Motors

The interest on the bridge loan was linkedto LIBOR(London Inter Bank Offer Rate)

Tata also proposed to raise around US 500 to600 million through an international issue


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Sales of JLR declined by 11.4% during the 2nd quarter ending Sep.2008

Tata motors had to pump in funds to keep JLRon the move

By the end of Nov.2008,198 employees opted for voluntary retirementand 400 more decide to leave by Jan 2009

With not much of cash generation internally, additional investments of

funds would only add to the debt and interest burden of the company In early Jan 2009,JLR announced 450 jobs cut

Announced that managers would not receive any bonuses in 2009while salary raises would be deferred till Oct 2009

For the quarter ending Dec2008,the sales volumes of JLR decreasedby 35.2% to 49,186

Total car sales in the UK in the year 2009 would be at 1.78 million asagainst 2.4 million in 2008

By the end of 2008,retail vehicle sales were reported at 10.8 million-around 2 million lower than the sales reported in 2007

Consumers were delaying the purchase of new vehicles due to lack ofconsumer loans


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Biggest merger in the history of Consumergoods

P&G acquired Gillette for $57b to become

the worlds largest consumer goods companyAnnual Sales of the combined entity:$60.7b

After purchase of Gillette P&G will have$21b brands with market cap of $200b

P&G paid .975$/share(20% premium),laterbuyback of shares worth $18-22b over 12-18months


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Merging companies: similarity in Corporatehistory

Merger based on a different model where

innovation was the focus rather than thescale

Regulatory concerns: Product overlaps

Consumer goods after 1980s


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P&G strength: Womens personal care products

Gillette strength: Mens grooming category

Complementary in strength cultures and vision tocreate potential for superior sustainable growth

Gillette stock climbed 50% since 2003,profitsjumped on premium products

Acquisition added about 20% to P&G sales, longterm sales growth estimate to 5-7% a year

Operating margin expected to grow by 25 % by2015 from 19% in 2003

The companies expected cost savings of $14-16bn from combining back-room operations andnew growth opportunities.


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more resources to enable intensive collaborativesupply chain initiatives in a more cost-effectiveway.

merger would also bring down the advertisingand media costs owing to greater bargainingpower

Opportunities in developing markets: Gillettewould give exposure to P&G in emergingeconomies like India and Brazil, while P&Gwould distribute Gillette products in China

It will give P&G the much needed boost tofurther strengthen its product categories whereat present it has negligible presence

The deal will help Gillette in improving itsinventory days.


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The merger would result in around 6,000 job cuts,equivalent to 4% of the two companies' combinedworkforce of 140,000. Most of the downsizing will takeplace to eliminate management overlaps andconsolidation of business support functions.

Cultural problems absence because of geographicalproximity P&G is considered a promote-from-within company, and

already had a lot of executive talent at the top.Therefore, absorbing Gillette's management to theirsatisfaction could be difficult

P&G's ability to handle this massive cultural assimilationwould decide the success or failure of this acquisition. Overlaps of some brands


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Pressure for competitors in the industry

competitors could launch new products orstrengthen their supply chain relationships

during this time to gain an edge P&G-Gillette combination could be a

transformative deal for the industry becauseof Gillette's growth potential. Analyst

forecasted that this deal could lead tofurther consolidation in the industry


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