Mergers & Acquisitions

Mergers & AcquisitionsRajendra Mishra School of Engineering EntrepreneurshipReferences: Mergers and Acquisitions Business Strategies for Accountants by William Gole and Joseph Morris, Willey India Pvt. Ltd.Mergers, Acquisitions And Corporate Restructuring by Rabi Narayan Kar, Willey India Pvt. Ltd.Mergers and AcquisitionsMergers and acquisitions have become highly prevalent in todays corporate worldThe aggregate value of such deals in a country is now referred to as an economic indicatorMay unlock value for shareholders Helps acquirer to avoid the pain of starting up a production line or a new product and find synergyFor such company, one plus one makes more than two.2ConceptMerger involves combining two independent companies into one new company.Mahindra Satyam Ltd. was merged with Tech Mahindra Ltd.

Acquisition is the purchase of one company by another in which no new company is formed.Tech Mahindra took over or acquired Satyam Computers Services Ltd.3Some Direct Advantages of Merger Each becomes a business unit of merged entity - one registered office, one set of board of directors, and one set of financial statements. It facilitates centralized decision making. It reduces administrative overhead. Trims down requirement of regulatory compliances.Integrates logistics. The single company works for focused growth. Merger may simplify taxation and reduce tax.4Advantages of acquisition are transaction specific.5Scope of Transactions under the Broader Areas of Mergers and AcquisitionsPurchase a company that is available for sale.Purchase one or more of the business units of a company (referred to as slump sale).Merge another company with itself.The reverse is true from the perspective of the company on sale. Corporate restructuring.

6Special CircumstancesForced MergerThe government has made a draft order to merge National Spot Exchange Ltd (NSEL) with its parent firm Financial Technologies (India) Ltd (FTIL) in 'public interest'.The cases of Satyam Computer Services and Multi-Commodity Exchange also resulted out of Government interventions. 7Steps in Mergers and AcquisitionsStrategic planning and decision makingIdentification of the target companyDue diligenceValuation and negotiationFinancial closureApproval of shareholders and legal clearance Contract, payment, and CloseIntegration

8Strategy PlanningNeed discovery / strategic objectives Analyze build versus acquire decisionsPreparedness of the managementOwn financial position Discussion with banks and financial institutionsAssess other sources of fund9Need Discovery /Strategic ObjectivesInvestment of surplus fund for inorganic growthIncrease market share pricing powerGet larger market access Acquire technologies Acquire skills (Design lab by Mahindra)Acquire distribution network (Ranbaxy by SUN) To avoid the pain in starting a new company10Need Discovery /Strategic Objectives contd.To gain tax advantage (Ispat by JSW)To get access to raw-materials or market (JSW and Gujarat NRE)Global reach (Tata Jaguar Land Rover)Forward and backward integration (RIL and RPL)Acquire brandLeverage on unique knowledge and expertiseAsset stripping

11Identification of Target CompanyCreate core acquisition team Search for potential targetPreliminary screeningEstablish contact with the target company

12Due DiligenceUnderstand unique strength of the company and synergy with the acquirer company.Assessment of real prospect of meeting the desired outcome of the acquisition.Make a realistic assessment of the financial health of the company and potential growth after integration with the acquirer.Analyze remaining useful life of plant and machinery. This is more important in industry segments where technology life is short.13Due Diligence contdAnalyze intangible assets (patents, trademark, brand, copyright), their protection status, any infringement on others assets.Understand quality of human capital.Identify hidden liabilities and assets.

14Due Diligence contdUnderstand possibility of synergy in terms of technology, market, knowledge, finance, distribution, culture and broader mission.Understand the reality as regards strategic assets owned by the company coal block.Understand implication of present and future legal disputes.15Due Diligence contdAssess quality of investment in its books.Understand key issues in favor and against post-acquisition integration.Quality of debtors.

16Composition of Due Diligence TeamFinance and AccountingOutside accountantBusiness developmentLegalHuman resourceInformation technologySales and marketingProduct marketingProduction and operation R&D Taxation expert17Development of the Due Diligence ProgramManagement presentation highlighting the value propositionInterviews with key members of the target company to elicit their views on the prospect of the companyData review to make meaningful assessment of the present status Follow-up discussionTour of the facility Conduct unscheduled meetings so as to get a realistic pictureMake enquiries with regulatory authorities 18External Data SourceAnnual reportsAnalyst reportsDisclosures made in the stock markets where the equity of the company is listedTrade and business periodicals19Industry market research reportCredit rating of the debt issued by the companyOnline news mediaCompany website Reports on industrial outlook in the market to be catered20External Data Source contd.Valuation, negotiation, and structuring the dealApproaches of valuationIncome approachCost approachMarket approach

21ValuationMethods of valuationCapitalization of earningsDiscounted earnings methodMethod of multiplePrice to earnings ratioPrice to book value ratioDividend discounting methodMethod of Net Asset

22Structuring the DealAll cash deal and takeover of debt or no debtAll stock deal and takeover of debt or no debtMix of stock and cash and/or debtMergers usually involve share swap

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