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Mergers &
Acquisitions
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Before we start.
Why mergers and Acquisitions?
Does it really help?
What are the advantages and disadvantages frommergers and acquisitions?
Growth
Market Power
Tax Savings. Acquire needed resources.
Diversification.
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Restructuring
It involves change in the organizationalstructure.
Integral part of the economic paradigm.Two Types
IInvestment in new plant & machinery, R & D
Internal
Mergers, Acquisitions, takeovers.External
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Corporate Restructuring
Expansion
Amalgamation
Absorption
Tender Offer
AssetAcquisition
Joint Venture
Contraction
Demerger
Spin-off
Equity Carveout
Split-off
Split-up. Divestitures.
Asset Sale.
CorporateControl.
Going Private.
Equity BuyBack.
Anti-takeover.
Leveraged Buy
outs.
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Amalgamation:
Involves fusion of one or more companies.
Companies loose their individual identity.
New Company comes into existense.
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Absorption
Fusion of Small and
large company.
Small Company ceases to exist.
Merger of OBC with GTB where GTB ceased to exist.
Tender Offer:
Making Public Offer for acquiring shares of the target
company.
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Asset acquisition: This involves buying assetsof another company. The assets may betangible assets like manufacturing units orintangible like brands.
Joint venture: Two cos. Enter into anagreement to provide resources in order toachieve a particular goal.
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Contraction
Reduction in the size of the firm. Spin offs, Split off, Divestitures, Equity carve
outs.
Bad Apple Theory Reasons:
Lack of Inter company Synergy.
Labor Consideration. Competitive Reasons.
Management Deficiency.
Concentration of Management Effort.
Eliminate Inefficiencies.
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Strategic: Change in Corporate Goals.
Change in corporate image.
Technological reasons.
Poor Business Fit.
Market Saturation. Takeover Defense.
Economic: Continual failure to meet goals.
Tax Considerations. Shrinking Margins.
Better Alternate use of capital.
Profits.
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Spin Offs:Company distributes all its shares in a subsidiary
to its own shareholders.A type of sell-off in which a parent company
distributes shares on a pro rata basis to itsshareholders as div-. These new shares giveshareholders ownership rights in a division or partof the parent company that is sold off.A new company is formed having separate
management.
Motives:Companies Focus on Core Rather than non core
business.
Better Standalone results.
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Subsidiary should be 80% held by the parentco.
It should have been a subsidiary for 5 years. Tax free for shareholder and the co.
There is no cash flow coming in to the Parentco.
Consideration is always in the form of issuingequity shares to the shareholders.
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Example of Spin Off
Consider a case where ABC Ltd. Has 3 divisions under it, Software,Textile and steel. If ABC Transfers the assets of Software to anothercompany then it is an example of Spin Off
ABC Ltd.
SoftwareTextile
Steel
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Working out a Spin Off
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Split Offs
A new co. Is created to take over the operationsof an existing unit or division.
A portion of the existing shareholders receive theshares in the new company in exchange ofparent co. Stock.
Done basically:
To reduce the equity base of the parent co.Resulting into downsizing of the co.
holding companies
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A type of sell-off in which shareholders of aparent company exchange their shares in theparent company for shares in the sold-offentity.
They are made attractive by offering :
Bonus shares,
Shares at a discount in a subsidiary company.
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Equity Carve- Out.
Portion of a firm is sold to outsiders.
Parent offers shares in a subsidiary to public.
Inflow to the co.If there is gain then it is taxable to the co. As CG.
Done basically for a subsidiary with high growth
and potential.
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Ecos should :
Be a strong candidate with high Growth
Prospects. Able to Borrow on its own strength.
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Split Ups
Division of Parent Company
into two or more companies
Parent co. ceases to exist.
New Stock is created for each subsidiary and div is also paid
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Split Up
ABCLtd.
SoftwareTextile Steel
IF ABC Ltd. Sells all the 3 divisions, then it would be a case of split up where ABC
would cease to exist.
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DIVESTITURES:
Sale of a portion of a firm to an outside party.
Infusion of cash to parent com.
Most of the assets sold.
Slump sale. Even Cl can be sold.
Non core business can be sold.
2009 P&G sold its pharmaceutical unit to Warner Chilcott Plc for $3.1billion in cash.
The deal allowed P&G to focus on its personal care, beauty, andhousehold product divisions.
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The Case of Divestiture by Camlin Ltd.
It had 3 divisions,
Consumer Products division (CPD) was into conventional bus. Of stationeryproducts, color products, art materials.
Fine Chemicals division ( FCD ): was in mfg and sale of food gradeantioxidants and allied products.
Pharmaceutical division ( PD): Pd was engaged in the marketing of brandedpharma formulations mfg. by its group co. Liva Pharma Ltd.
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Asset sale.
Selling tangible and intangible assets to getcash.
Cash remains with the co. Can be utilized to pay off all Liab or buy a
new co.
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Corporate Control
Going private:
This involves converting a listed company into a private
company by buying back all the outstanding shares from the
markets.
It needs amendment in the Articles.
Approval from CG.
Printed copy to be filed with roc within 1 month.
Several companies like Castrol India and Phillips India havedone this in recent years.
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Buy Back of shares
Equity buyback: This involves the company buying its own sharesback from the market.
This results in reduction in the equity capital of the company.
This strengthens the promoters position by increasing their stake inthe equity of the co.
Example:
Recently Sterlite Ltd. Had proposed to buyback its shares
through the open market to acquire a max. of 25% of the equity.Wall Mart Announced a Buy back in 2009.
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Anti takeover defenses
With a high value of hostile takeover activityin recent years, takeover defenses bothpremature and reactive have been restored toby the companies.
Exchange Offers:
Companies offer exchange offers whereshares are exchanged and debt is offered.
This increases the leverage of the co.
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Proxy Contests
Attempt by single shareholder or group totake control through proxy mechanism.
Bidder uses his/her voting rights and garner
support from other shareholders to expel themanagement.
Eg: Microsofts offer to take control on yahoos
BOD in 2008 threatened yahoo for proxycontests.
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Leveraged buyouts
This involves raising of capital from the
market or institutions by the management toacquire a company on the strength of itsassets.
This is a method of buying a firm on the basis
of borrowed capital.
Example: Tata Tetley deal.
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ESOPS
Offering shares to the employees of the co.
It can be used as a mean of finance for
acquisitions, as well as serve as anti takeoverdefense.
Eg. Patni Computers offered ESOPS to itsemployees, they offered at a price of Rs. 145
for a FV of Rs. 2 Per share.
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What is Merger, acquisition, Joint Venture,?
Combination of two corporations where a
new company is formed and old corporationscease to exist.
Types:
Vertical
Horizontal
Conglomerate.
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Acquisition: one company buying stake bypurchasing shares/ assets of the othercompany.
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Merger Acquisition
The case when two companies (often ofsame size) decide to move forward as asingle new company instead ofoperating business separately.
The case when one company takes overanother and establishes itself as thenew owner of the business.
The stocks of both the companies aresurrendered, while new stocks areissued afresh.
The buyer company swallows thebusiness of the target company, whichceases to exist.
For example, Glaxo Wellcome andSmithKline Beehcam ceased to exist
and merged to become a newcompany, known as Glaxo SmithKline.
Dr. Reddy's Labs acquired Betapharm
through an agreement amounting $597million
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Types of Mergers
Horizontal
Merger of two firms operating and competing in samekind of Bus.
Reduces no. of firms in an industry, hence good formonopoly profits.
Merger of Centurian Bank and Bank of Punjab.
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Vertical Mergers:
Mergers of firms at different stages of
production or value chain. Combination of Companies having buyer
seller relation.
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Conglomerate:
Mergers between firms in unrelated areas of business.
Product Extension Mergers: Mergers between firms inrelated business activities, also called concentric mergers.
Geographic Market Extension Mergers: Merger of two firmsin diff. geographic areas.
Pure conglomerate Mergers:
Merger between two firms with unrelated business.
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Lets Replay
Spin off Equity carve out
Split off Divestiture buy back ESOPS
Going Private Vertical merger
Restructuring
Split-up
Horizontal Merger Conglomerate merger
Leveraged buyouts.
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Biggest M & A deals in India.
Tata Steel acquired 100% stake in Corus Group on January 30, 2007. It was an all
cash deal which cumulatively amounted to $12.2 billion.
Vodafone purchased interest of 67% owned by Hutch-Essar for a total worth of
$11.1 billion on February 11, 2007.
India Aluminium and copper giant Hindalco Industries purchased Canada-based
firm Novelis Inc in February 2007. The total worth of the deal was $6-billion.
Indian pharma industry registered its first biggest in 2008 M&A deal through the
acquisition of Japanese pharmaceutical company Daiichi Sankyo by Indian majorRanbaxy for $4.5 billion.
The Oil and Natural Gas Corp purchased Imperial Energy Plc in January 2009.
The deal amounted to $2.8 billion and was considered as one of the biggest
takeovers after 96.8% of London based companies' shareholders acknowledged
the buyout proposal.
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In November 2008 NTT DoCoMo, the Japan based telecom firm acquired 26% stake inTata Teleservices for USD 2.7 billion.
India's financial industry saw the merging of two prominent banks - HDFC Bank andCenturion Bank of Punjab. The deal took place in February 2008 for $2.4 billion.
Tata Motors acquired Jaguar and Land Rover brands from Ford Motor in March 2008. Thedeal amounted to $2.3 billion.
2009 saw the acquisition Asarco LLC by Sterlite Industries Ltd's for $1.8 billion making itninth biggest-ever M&A agreement involving an Indian company.
In May 2007, Suzlon Energy obtained the Germany-based wind turbine producerRepower. The 10th largest in India, the M&A deal amounted to $1.7 billion.
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M & A Strategy
Powerful strategy for growth.
Strategy process.
Plan of action designed to achieve a particular goal.
May Differ from Co. to Co. Depends on the policy of the org.
Common Process:
Define Corporate
Mission
Analyze, evaluate
current business
portfolio
Identify new business
avenues to enter / exit
the business.
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BCG Approach
Experience Curve
Product Life Cycle.
Portfolio Balance.