Mergers & Acquisition PPT

8/18/2019 Mergers & Acquisition PPT

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Mergers & AcquisitionMergers & Acquisition

IntroductionIntroduction


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Business CombinationsBusiness Combinations

METHODS OF BUSINESSMETHODS OF BUSINESS

COMBINATIONCOMBINATION

There are several methods forThere are several methods forachievin a !usiness com!ination" Itachievin a !usiness com!ination" It

is useful to have an understandin ofis useful to have an understandin of

these different methods"these different methods"


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Business Combinations(Contd)Business Combinations(Contd)Ac#uisitionAc#uisition

An ac#uisition can ta$e the form of a %urchase of the stoc$An ac#uisition can ta$e the form of a %urchase of the stoc$or other e#uit& interests of the taret entit&' or theor other e#uit& interests of the taret entit&' or theac#uisition of all or a su!stantial amount of its assets"ac#uisition of all or a su!stantial amount of its assets"

( Share %urchases ) in a share %urchase the !u&er !u&s( Share %urchases ) in a share %urchase the !u&er !u&s

the shares of the taret com%an& from the shareholders ofthe shares of the taret com%an& from the shareholders ofthe taret com%an&" The !u&er *ill ta$e on the com%an&the taret com%an&" The !u&er *ill ta$e on the com%an&*ith all its assets and lia!ilities"*ith all its assets and lia!ilities"

( Asset %urchases ) in an asset %urchase the !u&er !u&s( Asset %urchases ) in an asset %urchase the !u&er !u&sthe assets of the taret com%an& from the taret com%an&"the assets of the taret com%an& from the taret com%an&"In sim%lest form this leaves the taret com%an& as anIn sim%lest form this leaves the taret com%an& as an

em%t& shell' and the cash it receives from the ac#uisition isem%t& shell' and the cash it receives from the ac#uisition isthen %aid !ac$ to its shareholders !& dividend or throuhthen %aid !ac$ to its shareholders !& dividend or throuhli#uidation" Ho*ever' one of the advantaes of an assetli#uidation" Ho*ever' one of the advantaes of an asset%urchase for the !u&er is that it can +cherr&)%ic$+ the%urchase for the !u&er is that it can +cherr&)%ic$+ theassets that it *ants and leave the assets ) and lia!ilities )assets that it *ants and leave the assets ) and lia!ilities )that it does not"that it does not"


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Business Combinations(Contd)Business Combinations(Contd)

MererMerer

In a merer' t*o se%arate com%aniesIn a merer' t*o se%arate com%aniescom!ine and onl& one of them survives" Incom!ine and onl& one of them survives" In

other *ords' the mered ,ac#uired-other *ords' the mered ,ac#uired-com%an& oes out of e.istence' leavin itscom%an& oes out of e.istence' leavin itsassets and lia!ilities to the ac#uirinassets and lia!ilities to the ac#uirincom%an&" Usuall& *hen t*o com%anies ofcom%an&" Usuall& *hen t*o com%anies of

sinificantl& different si/es mere' thesinificantl& different si/es mere' thesmaller com%an& *ill mere into the larersmaller com%an& *ill mere into the larerone' leavin the larer com%an& intact"one' leavin the larer com%an& intact"


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ConsolidationConsolidation

A consolidation is a com!ination of t*o or moreA consolidation is a com!ination of t*o or morecom%anies in *hich an entirel& ne* cor%oration iscom%anies in *hich an entirel& ne* cor%oration isformed and all merin com%anies cease to e.ist"formed and all merin com%anies cease to e.ist"

Shares of the ne* com%an& are e.chaned forShares of the ne* com%an& are e.chaned forshares of the merin ones" T*o similarl& si/edshares of the merin ones" T*o similarl& si/edcom%anies usuall& consolidate rather than mere"com%anies usuall& consolidate rather than mere"Althouh the distinction !et*een merer andAlthouh the distinction !et*een merer andconsolidation is im%ortant' the terms are oftenconsolidation is im%ortant' the terms are often

used interchanea!l&' *ith either used to referused interchanea!l&' *ith either used to referenerall& to a 0oinin of the assets and lia!ilitiesenerall& to a 0oinin of the assets and lia!ilitiesof t*o com%anies"of t*o com%anies"


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M & A - DefinitionsM & A - Definitions

1arious authors ive variet& of1arious authors ive variet& of

definitions for merers anddefinitions for merers and

ac#uisitions"ac#uisitions"

A merer in the true leal senseA merer in the true leal sense

ha%%ens *hen t*o or moreha%%ens *hen t*o or more

!usinesses dissolve and fold their!usinesses dissolve and fold their

assets and lia!ilities into a ne*l&assets and lia!ilities into a ne*l&created third entit&"created third entit&"


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M & A - DefinitionsM & A - Definitions

2 2The !u&in' sellin and com!inin ofThe !u&in' sellin and com!inin ofdifferent com%anies to ro* ra%idl&different com%anies to ro* ra%idl&*ithout havin to create another !usiness*ithout havin to create another !usinessentit&3 entit&3

M 4 As are the most %o%ular means ofM 4 As are the most %o%ular means ofcor%orate restructurin or !usinesscor%orate restructurin or !usinesscom!inations"com!inations" Cor%orate restructurin includes merersCor%orate restructurin includes merers

and ac#uisitions ,M 4 As-' amalamation'and ac#uisitions ,M 4 As-' amalamation'ta$eovers' s%in)offs' leveraed !u&)outs'ta$eovers' s%in)offs' leveraed !u&)outs'!u&!ac$ of shares' ca%ital reoranisation!u&!ac$ of shares' ca%ital reoranisationetc"etc"


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Different definitionsDifferent definitions

2 2A ta$eover refers to the transfer of control of the firm from one rou%A ta$eover refers to the transfer of control of the firm from one rou%

of shareholders ,i"e" the 2!idder3- to anotherof shareholders ,i"e" the 2!idder3- to another

Ta$eovers occur !& ac#uisition' %ro.& contest' or oin %rivateTa$eovers occur !& ac#uisition' %ro.& contest' or oin %rivate

5ro.& contests occur *hen a rou% of shareholders attem%ts to ain5ro.& contests occur *hen a rou% of shareholders attem%ts to ain

controllin seats on the !oard of directors !& votin in ne* directors"controllin seats on the !oard of directors !& votin in ne* directors"

In oin %rivate transactions all the share of a %u!lic firm are %urchasedIn oin %rivate transactions all the share of a %u!lic firm are %urchased

!& a small rou% of investors" The shares are delisted from stoc$!& a small rou% of investors" The shares are delisted from stoc$

e.chanes"e.chanes"


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Basic forms of M & ABasic forms of M & A

MererMerer

6 A!sor%tion of one firm !& another' andA!sor%tion of one firm !& another' and

it ac#uires all of the assets and lia!ilitiesit ac#uires all of the assets and lia!ilities

of the ac#uired firmof the ac#uired firm

6 Ac#uired firm ceases to e.istAc#uired firm ceases to e.ist

Ac#uisitionAc#uisition

6 Of stoc$7 !u&in stoc$ in a %u!lic offerOf stoc$7 !u&in stoc$ in a %u!lic offer

6 Of assets7 !u&in all the assets in anOf assets7 !u&in all the assets in an

offeroffer


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8everaed Bu&out8everaed Bu&out

A leveraed !u&out ,8BO- is a t&%e of ac#uisitionA leveraed !u&out ,8BO- is a t&%e of ac#uisitionthat occurs *hen a rou% of investors' sometimesthat occurs *hen a rou% of investors' sometimesled !& the manaement of a com%an&led !& the manaement of a com%an&

,manaement !u&out or MBO-' !orro*s funds to,manaement !u&out or MBO-' !orro*s funds to%urchase the com%an&" The assets and future%urchase the com%an&" The assets and futureearnins of the com%an& are used to secure theearnins of the com%an& are used to secure thefinancin re#uired to %urchase the com%an&"financin re#uired to %urchase the com%an&"Sometimes em%lo&ees are allo*ed to %artici%ateSometimes em%lo&ees are allo*ed to %artici%ate

throuh an em%lo&ee stoc$ o*nershi% %lan' *hichthrouh an em%lo&ee stoc$ o*nershi% %lan' *hichma& %rovide ta. advantaes and im%rovema& %rovide ta. advantaes and im%roveem%lo&ee %roductivit& !& ivin em%lo&ees anem%lo&ee %roductivit& !& ivin em%lo&ees ane#uit& sta$e in the com%an&"e#uit& sta$e in the com%an&"


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Holdin Com%an&Holdin Com%an&

A holdin com%an& is a com%an& that o*nsA holdin com%an& is a com%an& that o*nssufficient votin stoc$ to have a controllinsufficient votin stoc$ to have a controllininterest in one or more com%anies calledinterest in one or more com%anies called

su!sidiaries" Effective *or$in control orsu!sidiaries" Effective *or$in control orsu!stantial influence can !e ained throuhsu!stantial influence can !e ained throuho*nershi% of as little as 9 %ercent to as much aso*nershi% of as little as 9 %ercent to as much as9: %ercent of the outstandin shares' de%endin9: %ercent of the outstandin shares' de%endinon ho* *idel& the shares are distri!uted" Aon ho* *idel& the shares are distri!uted" A

holdin com%an& that enaes in theholdin com%an& that enaes in themanaement of the su!sidiaries is called a %arentmanaement of the su!sidiaries is called a %arentcom%an&"com%an&"


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DivestituresDivestitures

;hile divestitures do not re%resent a !usiness;hile divestitures do not re%resent a !usinesscom!ination' the& are a means of facilitatin thecom!ination' the& are a means of facilitatin theac#uisition of %art of a com%an&" Sometimesac#uisition of %art of a com%an&" Sometimesdivestitures are used !& com%anies as a means todivestitures are used !& com%anies as a means to

im%rove earnins and shareholder value' or as aim%rove earnins and shareholder value' or as ameans of raisin ca%ital" A divestiture involves themeans of raisin ca%ital" A divestiture involves thesale of a %ortion of a com%an&" T*o %o%ular means ofsale of a %ortion of a com%an&" T*o %o%ular means ofdivestiture are s%in)offs and e#uit& carve)outs"divestiture are s%in)offs and e#uit& carve)outs"

In a s%in)off' a com%an& distri!utes all of its sharesIn a s%in)off' a com%an& distri!utes all of its shares

in a su!sidiar& to the com%an&


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MOTIVE !O" AC#$IITIO%MOTIVE !O" AC#$IITIO%

The overridin motive for an& ac#uisition shouldThe overridin motive for an& ac#uisition should

!e to ma.imi/e shareholder value"!e to ma.imi/e shareholder value"

Economies of scale7 This refers to the fact thatEconomies of scale7 This refers to the fact thatthe com!ined com%an& can often reducethe com!ined com%an& can often reduce

du%licate de%artments or o%erations' lo*erin thedu%licate de%artments or o%erations' lo*erin thecosts of the com%an& relative to theoreticall& thecosts of the com%an& relative to theoreticall& thesame revenue stream' thus increasin %rofit"same revenue stream' thus increasin %rofit"

( Increased revenue=Increased Mar$et Share7( Increased revenue=Increased Mar$et Share7

This motive assumes that the com%an& *ill !eThis motive assumes that the com%an& *ill !ea!sor!in a ma0or com%etitor and increase itsa!sor!in a ma0or com%etitor and increase its%o*er ,!& ca%turin increased mar$et share- to%o*er ,!& ca%turin increased mar$et share- toset %rices"set %rices"


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MOTIVE !O" AC#$IITIO%MOTIVE !O" AC#$IITIO% ( Cross sellin7 For e""' a !an$ !u&in a stoc$ !ro$er( Cross sellin7 For e""' a !an$ !u&in a stoc$ !ro$er

could then sell its !an$in %roducts to the stoc$could then sell its !an$in %roducts to the stoc$!ro$er


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MOTIVE !O" AC#$IITIO%MOTIVE !O" AC#$IITIO%

?esource transfer7 resources are unevenl&?esource transfer7 resources are unevenl&distri!uted across firms and the interactiondistri!uted across firms and the interactionof taret and ac#uirin firm resources canof taret and ac#uirin firm resources cancreate value throuh either overcomincreate value throuh either overcomin

information as&mmetr& or !& com!inininformation as&mmetr& or !& com!ininscarce resources"scarce resources"

( Financial restructurin7 a chane in( Financial restructurin7 a chane incontrol can lead to a more cost)effectivecontrol can lead to a more cost)effective

or safer ca%ital structure' and moreor safer ca%ital structure' and moreefficient use of financial assets"efficient use of financial assets"

( Business mi. restructurin7 the( Business mi. restructurin7 theac#uirer ma& divest non)core !usinessesac#uirer ma& divest non)core !usinesses


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Benefits of Mergers andBenefits of Mergers and

Acquisitions Acquisitions

The most common advantages ofThe most common advantages of

M&A are:M&A are:

6 Accelerated GrowthAccelerated Growth

6 Enhanced ProfitabilityEnhanced Profitability

Economies of scaleEconomies of scale

Operating economiesOperating economies

Synergy Synergy

6 Diversification of RiskDiversification of Risk


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Benefits of Mergers andBenefits of Mergers and


6Redction in Ta! "iabilityRedction in Ta! "iability

6#inancial $enefits#inancial $enefits

Financing constraint Financing constraint

Surplus cashSurplus cash

Debt capacity Debt capacity

Financing cost Financing cost

6%ncreased Market Power%ncreased Market Power


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Ana'sis of Mergers and Ana'sis of Mergers and


There are three im%ortant ste%sThere are three im%ortant ste%s

involved in the anal&sis of merersinvolved in the anal&sis of merers

or ac#uisitions7or ac#uisitions7

6 5lannin5lannin

6 Search and screeninSearch and screenin

6 Financial evaluationFinancial evaluation


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* +"O T"O$+* +"O T"O$+

AC#$IITIO%, AC#$IITIO%,

There are numerous reasons for a com%an& toThere are numerous reasons for a com%an& to*ant to ro*" >ro*th is often considered vital to*ant to ro*" >ro*th is often considered vital tothe health of a com%an&" A stanatin com%an&the health of a com%an&" A stanatin com%an&

ma& have difficult& attractin hih)#ualit&ma& have difficult& attractin hih)#ualit&manaement" Furthermore' larer com%aniesmanaement" Furthermore' larer com%aniesma& %a& hiher salaries to to% manaement thanma& %a& hiher salaries to to% manaement thansmaller com%anies" In some industries' si/e itselfsmaller com%anies" In some industries' si/e itselfma& !rin com%etitive advantaes" For e.am%le'ma& !rin com%etitive advantaes" For e.am%le'

mar$etin dominance ma& !e strenthenedmar$etin dominance ma& !e strenthenedthrouh im%roved access to advertisin"throuh im%roved access to advertisin"


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* +"O T"O$+* +"O T"O$+

AC#$IITIO%, AC#$IITIO%,

In addition' a lare com%an& ma& haveIn addition' a lare com%an& ma& havesinificantl& hiher %roduction or distri!utionsinificantl& hiher %roduction or distri!utionefficiencies than a smaller one" Sometimesefficiencies than a smaller one" Sometimesro*th is a means of survival" For e.am%le'ro*th is a means of survival" For e.am%le'com%anies in the telecommunications industr&com%anies in the telecommunications industr&have ro*n throuh ac#uisition in an effort tohave ro*n throuh ac#uisition in an effort tocom%ete to control %hone lines' ca!le s&stems'com%ete to control %hone lines' ca!le s&stems'and content" Firms in the defense industr& haveand content" Firms in the defense industr& havemered to survive in a declinin mar$et" Finall&'mered to survive in a declinin mar$et" Finall&'ta. la*s ma& encourae merer ro*th"ta. la*s ma& encourae merer ro*th"


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Comanies at "is.,Comanies at "is.,

Chronic under%erformersChronic under%erformers

5erce%tion of 2missed o%%ortunities@ 5erce%tion of 2missed o%%ortunities@ 8o*er mar$et ca%itali/ation relative8o*er mar$et ca%itali/ation relative

to %eersto %eers

Su!stantial cash !alancesSu!stantial cash !alances


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/e0eraged Bu'-outs/e0eraged Bu'-outsAA leveraged byotleveraged byot ,8BO- is an ac#uisition of a,8BO- is an ac#uisition of acom%an& in *hich the ac#uisition is su!stantiall&com%an& in *hich the ac#uisition is su!stantiall&financed throuh de!t" ;hen the manaers !u& theirfinanced throuh de!t" ;hen the manaers !u& theircom%an& from its o*ners em%lo&in de!t' thecom%an& from its o*ners em%lo&in de!t' theleveraed !u&)out is calledleveraed !u&)out is called management byotmanagement byot ,MBO-",MBO-"

The follo*in firms are enerall& the tarets for 8BOs7The follo*in firms are enerall& the tarets for 8BOs76 Hih ro*th' hih mar$et share firmsHih ro*th' hih mar$et share firms6 Hih %rofit %otential firmsHih %rofit %otential firms6 Hih li#uidit& and hih de!t ca%acit& firmsHih li#uidit& and hih de!t ca%acit& firms6

8o* o%eratin ris$ firms8o* o%eratin ris$ firms

The evaluation of 8BO transactions involves the sameThe evaluation of 8BO transactions involves the sameanal&sis as for merers and ac#uisitions" The DCFanal&sis as for merers and ac#uisitions" The DCFa%%roach is used to value an 8BO"a%%roach is used to value an 8BO"


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Tender Offer and ostie Ta.eo0er Tender Offer and ostie Ta.eo0er

AA tender offertender offer is a formal offer tois a formal offer to%urchase a iven num!er of a com%an&@s%urchase a iven num!er of a com%an&@sshares at a s%ecific %rice"shares at a s%ecific %rice"

Tender offer can !e used in t*o situations"Tender offer can !e used in t*o situations" 6 First' the ac#uirin com%an& ma& directl& a%%roachFirst' the ac#uirin com%an& ma& directl& a%%roachthe taret com%an& for its ta$eover" If the taretthe taret com%an& for its ta$eover" If the taretcom%an& does not aree' then the ac#uirincom%an& does not aree' then the ac#uirincom%an& ma& directl& a%%roach the shareholderscom%an& ma& directl& a%%roach the shareholders

!& means of a tender offer"!& means of a tender offer"6 Second' the tender offer ma& !e used *ithout an&Second' the tender offer ma& !e used *ithout an&neotiations' and it ma& !e tantamount to aneotiations' and it ma& !e tantamount to ahostile takeover'hostile takeover'


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"eguation of Mergers and"eguation of Mergers and

Ta.eo0ers in IndiaTa.eo0ers in India

%n %ndia( mergers and ac)isitions are%n %ndia( mergers and ac)isitions are

reglated throgh:reglated throgh:6 The %rovision of the Com%anies Act' :9'The %rovision of the Com%anies Act' :9'

6 The Mono%olies and ?estrictive Trade 5racticeThe Mono%olies and ?estrictive Trade 5ractice,M?T5- Act' :',M?T5- Act' :'

6 The Forein E.chane Manaement Act' :'The Forein E.chane Manaement Act' :'

6 The Income Ta. Act' ::' andThe Income Ta. Act' ::' and

6 The Securities and Controls ,?eulations- Act'The Securities and Controls ,?eulations- Act':9":9" The Securities and E.chane Board of India ,SEBI- has issuedThe Securities and E.chane Board of India ,SEBI- has issued

uidelines to reulate merers' ac#uisitions and ta$eovers"uidelines to reulate merers' ac#uisitions and ta$eovers"


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"eguation of Mergers and"eguation of Mergers and

Ta.eo0ers in IndiaTa.eo0ers in India

"egal Measres against Takeovers"egal Measres against Takeovers

Refsal to Register the Transfer of *hares:Refsal to Register the Transfer of *hares:6 a leal re#uirement relatin to the transfer of shares have nota leal re#uirement relatin to the transfer of shares have not

!e com%lied *ith or!e com%lied *ith or6 the transfer is in contravention of the la* orthe transfer is in contravention of the la* or

6 the transfer is %rohi!ited !& a court order orthe transfer is %rohi!ited !& a court order or6 the transfer is not in the interests of the com%an& and thethe transfer is not in the interests of the com%an& and the

%u!lic"%u!lic"

Protection of Minority *hareholders+Protection of Minority *hareholders+%nterests%nterests

*E$% Gidelines for Takeovers:*E$% Gidelines for Takeovers:6 Disclosure of share acquisition/holdingDisclosure of share acquisition/holding 6 Public announcement and open offerPublic announcement and open offer

Offer priceOffer price

DisclosureDisclosure

Offer document Offer document


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/ega 1rocedures/ega 1rocedures

Permission for merger Permission for merger

Information to the stock exchange Information to the stock exchange

ppro!al of board of directors ppro!al of board of directors

pplication in the "igh #ourt pplication in the "igh #ourt Shareholders$ and creditors$ meetingsShareholders$ and creditors$ meetings

%ransfer of assets and liabilities%ransfer of assets and liabilities

Payment by cash or securitiesPayment by cash or securities

fA ti f M d


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Accounting for Mergers and Accounting for Mergers and


Pooling of %nterests MethodPooling of %nterests Method

In theIn the ,ooling of interests,ooling of interests methodmethod of accountin' the !alance sheetof accountin' the !alance sheet

items and the %rofit and loss items ofitems and the %rofit and loss items ofthe mered firms are com!inedthe mered firms are com!ined*ithout recordin the effects of*ithout recordin the effects ofmerer" This im%lies that asset'merer" This im%lies that asset'

lia!ilities and other items of thelia!ilities and other items of theac#uirin and the ac#uired firms areac#uirin and the ac#uired firms aresim%l& added at the !oo$ valuessim%l& added at the !oo$ values*ithout ma$in an& ad0ustments"*ithout ma$in an& ad0ustments"

A i f M dA ti f M d


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Accounting for Mergers and Accounting for Mergers and


Prchase MethodPrchase Method

Under theUnder the ,rchase method,rchase method , , thetheassets and lia!ilities of the ac#uirinassets and lia!ilities of the ac#uirin

firm after the ac#uisition of thefirm after the ac#uisition of thetaret firm ma& !e stated at theirtaret firm ma& !e stated at theire.itin carr&in amounts or at thee.itin carr&in amounts or at theamounts ad0usted for the %urchaseamounts ad0usted for the %urchase

%rice %aid to the taret com%an&"%rice %aid to the taret com%an&"


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T'es of strategic fitT'es of strategic fit

>eora%hic ?oll 6u% M4A>eora%hic ?oll 6u% M4A

5roduct or Mar$et e.tension5roduct or Mar$et e.tension

raft 6US:" !illionraft 6US:" !illion?4D?4D

Industr& converence M4AIndustr& converence M4A

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Mergers & Acquisition PPT

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