Name Roll No:Ashutosh Agarkar 1Fauzia Hasan 22Jane Nazareth 37Ankit Patel 41Rajitha Pillai 44
Name Roll No:Ashutosh Agarkar 1Fauzia Hasan 22Jane Nazareth 37Ankit Patel 41Rajitha Pillai 44
Mergers & Acquisitions, Joint Ventures and Wholly Owned Subsidiaries
1
Roadmap
M&A’s: MeaningInbound & Outbound M&A’sModes of AcquisitionsTypes of MergersM&A’s: Advantages & FailuresCase study 1: Ranbaxy & Daichii
Joint Ventures: Meaning, Benefits & IssuesCase Study 2: Maruti & SuzukiCase Study 3: Hero & Honda
Wholly Owned SubsidiaryValuation MethodsCase Study 4: Dr Reddy & BetapharmCase study 5: Tata & ChorusCase study 6: Hindalco & Novelis
M&A’s: MeaningInbound & Outbound M&A’sModes of AcquisitionsTypes of MergersM&A’s: Advantages & FailuresCase study 1: Ranbaxy & Daichii
Joint Ventures: Meaning, Benefits & IssuesCase Study 2: Maruti & SuzukiCase Study 3: Hero & Honda
Wholly Owned SubsidiaryValuation MethodsCase Study 4: Dr Reddy & BetapharmCase study 5: Tata & ChorusCase study 6: Hindalco & Novelis
2
Mergers & AcquisitionsM&As are a type of inorganic growth pathsM&As are a type of inorganic growth paths
Merger:-In the pure sense of the term, a merger happens when two firms agree to go forward as a single new company rather than remain separately owned and operated. This kind of action is more precisely referred to as a "merger of equals". Both companies' stocks are surrendered and new company stock is issued in its place. For example, in the 1999 merger of Glaxo Wellcome and SmithKline Beecham, both firms ceased to exist when they merged, and a new company, GlaxoSmithKline, was created.
Merger:-In the pure sense of the term, a merger happens when two firms agree to go forward as a single new company rather than remain separately owned and operated. This kind of action is more precisely referred to as a "merger of equals". Both companies' stocks are surrendered and new company stock is issued in its place. For example, in the 1999 merger of Glaxo Wellcome and SmithKline Beecham, both firms ceased to exist when they merged, and a new company, GlaxoSmithKline, was created.
Acquisition:-When one company takes over another and clearly establishes itself as the new owner, the purchase is called an acquisition. From a legal point of view, the target company ceases to exist, the buyer "swallows" the business and the buyer's stock continues to be traded.
Acquisition:-When one company takes over another and clearly establishes itself as the new owner, the purchase is called an acquisition. From a legal point of view, the target company ceases to exist, the buyer "swallows" the business and the buyer's stock continues to be traded.
3
Inbound & Outbound M&AsInbound M&AInbound M&A are mergers or acquisitions where a foreign company merges with or acquires an Indian companyEg: Daichii acquiring Ranbaxy
Inbound M&AInbound M&A are mergers or acquisitions where a foreign company merges with or acquires an Indian companyEg: Daichii acquiring Ranbaxy
Outbound M&AOutbound M&A are mergers or acquisitions where an Indian company merges with or acquires an foreign companyEg: Tata steel acquiring Corus
Outbound M&AOutbound M&A are mergers or acquisitions where an Indian company merges with or acquires an foreign companyEg: Tata steel acquiring Corus
4
Mode of Acquisitions•Management Buyouts
• A management buyout (MBO) is a form of acquisition where a company's existing management acquire a large part or all of the companyEg: in Sep’07 the UK arm of Virgin Megastores was to be sold off as part of a management buyout, and from Nov’07, was known by a new name, Zaavi
•Hostile Takeovers : A hostile takeover allows a suitor to take over a target company's management unwilling to agree to a merger or takeover.
Eg•Oracle –Peoplesoft•India Cement- Raasi Cement
•Management Buyouts• A management buyout (MBO) is a form of acquisition where a company's existing management acquire a large part or all of the companyEg: in Sep’07 the UK arm of Virgin Megastores was to be sold off as part of a management buyout, and from Nov’07, was known by a new name, Zaavi
•Hostile Takeovers : A hostile takeover allows a suitor to take over a target company's management unwilling to agree to a merger or takeover.
Eg•Oracle –Peoplesoft•India Cement- Raasi Cement
5
Mode of Acquisitions
•Leveraged Buyouts: A leveraged buyout occurs when an investor, typically financial sponsor, acquires a controlling interest in a company's equity and where a significant percentage of the purchase price is financed through leverage (borrowing)
Eg: Tata Corus
•Leveraged Buyouts: A leveraged buyout occurs when an investor, typically financial sponsor, acquires a controlling interest in a company's equity and where a significant percentage of the purchase price is financed through leverage (borrowing)
Eg: Tata Corus
6
TYPES OF MERGERS
Based on Business StructuresHorizontal:- Two companies that are in direct competition and
share the same product lines and markets. Vertical:- A customer and company or a supplier and company.
Think of a cone supplier merging with an ice cream maker. Conglomerate:- Two companies that have no common business
areas. Market-extension merger:-Two companies that sell the same
products in different markets. Product-extension merger:- Two companies selling different but
related products in the same market.
Based on Business StructuresHorizontal:- Two companies that are in direct competition and
share the same product lines and markets. Vertical:- A customer and company or a supplier and company.
Think of a cone supplier merging with an ice cream maker. Conglomerate:- Two companies that have no common business
areas. Market-extension merger:-Two companies that sell the same
products in different markets. Product-extension merger:- Two companies selling different but
related products in the same market.
7
TYPES OF MERGERS
Based of method of Financing
Purchase Mergers - This kind of merger occurs when one company purchases another. The purchase is made with cash or through the issue of some kind of debt instrument; the sale is taxable.
Consolidation Mergers - With this merger, a brand new company is formed and both companies are bought and combined under the new entity. The tax terms are the same as those of a purchase merger.
Based of method of Financing
Purchase Mergers - This kind of merger occurs when one company purchases another. The purchase is made with cash or through the issue of some kind of debt instrument; the sale is taxable.
Consolidation Mergers - With this merger, a brand new company is formed and both companies are bought and combined under the new entity. The tax terms are the same as those of a purchase merger.
8
Advantages of M&A
• Economy of scale• Economy of scope• Increased revenue or market share• Cross selling• Synergy• Taxation• Geographical or other diversification• Resource transfer• Vertical integration• Absorption of similar businesses under single
management
• Economy of scale• Economy of scope• Increased revenue or market share• Cross selling• Synergy• Taxation• Geographical or other diversification• Resource transfer• Vertical integration• Absorption of similar businesses under single
management9
Why M & A’s fail…..Research has conclusively shown that most of the mergers fail to achieve
their stated goals.
Some of the reasons identified are:
Corporate Culture Clash
Lack of Communication
Loss of Key people and talent
HR issues
Lack of proper training
Clashes between management
Loss of customers due to apprehensions
Failure to adhere to plans
Research has conclusively shown that most of the mergers fail to achieve their stated goals.
Some of the reasons identified are:
Corporate Culture Clash
Lack of Communication
Loss of Key people and talent
HR issues
Lack of proper training
Clashes between management
Loss of customers due to apprehensions
Failure to adhere to plans
10
Case study 1: Ranbaxy DaichiRanbaxy OverviewRanbaxy Overview
11
The DEAL
Daiichi got to acquire a controlling stake ….51.62% in Ranbaxy for $ 3.4-4.6 billion
Singh family promoters of Ranbaxy sold entire stake 34.8% for Rs 10000 crs ($2.4 bio) at Rs 737/-
Daiichi had to make an open offer to acquire 20% more from other shareholders. Japanese company was to acquire another 4.9% through preferential of share warrants
Ranbaxy was to get $1bn via preferential allotment, funds were to be used to retire debt
Daiichi got to acquire a controlling stake ….51.62% in Ranbaxy for $ 3.4-4.6 billion
Singh family promoters of Ranbaxy sold entire stake 34.8% for Rs 10000 crs ($2.4 bio) at Rs 737/-
Daiichi had to make an open offer to acquire 20% more from other shareholders. Japanese company was to acquire another 4.9% through preferential of share warrants
Ranbaxy was to get $1bn via preferential allotment, funds were to be used to retire debt 12
The DEAL
13
Reasons for TakeoverDaiichi•A complementary business combination•An expanded global reach•Strong growth potential•Cost competitiveness by optimizing usage of R&D and manufacturing facilities
Ranbaxy
•The R&D pipeline was not delivering enough products, the generic market was not generating adequate returns.•Ranbaxy had three choices
•It could spend lot of money in acquiring a big generic company to grow inorganically
•Merge with a global player•Sell-out
•The sell out option was most profitable
14
Conclusion
15
Joint Ventures (JV)• JV is an entity formed between two or more parties to undertake
economic activity together. • The parties agree to create a new entity by both contributing
equity, and they then share in the revenues, expenses, and control of the enterprise.
• The venture can be for one specific project only, or a continuing business relationship such as the Sony Ericsson joint venture.
• This is in contrast to a strategic alliance, which involves no equity stake by the participants, and is a much less rigid arrangement.
• Project Based JV: These are Joint Ventures entered into by companies in order to accomplish a specific project.
• Functional JV: These are Joint Ventures wherein, companies agree to share their functions and facilities such as production, distribution, marketing, etc. to achieve mutual benefit
• JV is an entity formed between two or more parties to undertake economic activity together.
• The parties agree to create a new entity by both contributing equity, and they then share in the revenues, expenses, and control of the enterprise.
• The venture can be for one specific project only, or a continuing business relationship such as the Sony Ericsson joint venture.
• This is in contrast to a strategic alliance, which involves no equity stake by the participants, and is a much less rigid arrangement.
• Project Based JV: These are Joint Ventures entered into by companies in order to accomplish a specific project.
• Functional JV: These are Joint Ventures wherein, companies agree to share their functions and facilities such as production, distribution, marketing, etc. to achieve mutual benefit
16
JV- Goals, Benefits
Goals•Synergies•Transfer of technology/skills•Diversification
Benefits•Complementary Benefits•Acquiring and Sharing Expertise•New Business / Product Development•Capacity Expansion
Goals•Synergies•Transfer of technology/skills•Diversification
Benefits•Complementary Benefits•Acquiring and Sharing Expertise•New Business / Product Development•Capacity Expansion
17
JV- Issues
Issues in Joint Ventures•Due Diligence•Business Strategy•Development of HR Strategies•Implementation
Issues in Joint Ventures•Due Diligence•Business Strategy•Development of HR Strategies•Implementation
18
HISTORY
•Maruti Udyog Ltd was established in February 1981•Actual Production commenced in 1983 with Maruti 800•Project Maruti started by Indira Gandhi & Sanjay Gandhi•Indian experts started search for collaborators•Negotiated with – Toyota, Nissan, Honda & Suzuki•After rounds of negotiation Suzuki was selected•Joint venture of Govt of India & Japanese Company Suzuki Motors CorpPreviously Govt of India owned 80% equity & Suzuki had 20%•Now Indian Financial Institute has 18.28%, Suzuki has 54.24% & 25% equity is public offering
•Maruti Udyog Ltd was established in February 1981•Actual Production commenced in 1983 with Maruti 800•Project Maruti started by Indira Gandhi & Sanjay Gandhi•Indian experts started search for collaborators•Negotiated with – Toyota, Nissan, Honda & Suzuki•After rounds of negotiation Suzuki was selected•Joint venture of Govt of India & Japanese Company Suzuki Motors CorpPreviously Govt of India owned 80% equity & Suzuki had 20%•Now Indian Financial Institute has 18.28%, Suzuki has 54.24% & 25% equity is public offering
Case Study 2: Maruti Suzuki Joint Venture
19
SWOT Analysis
STRENGTHS•Goodwill of Suzuki Brand•Contemporary Technology•Market Share & reliability
WEAKNESS•Japan for technical support
OPPORTUNITIES•Infrastructure•Innovation
THREATS•Govt’s Policies, taxes etc
STRENGTHS•Goodwill of Suzuki Brand•Contemporary Technology•Market Share & reliability
WEAKNESS•Japan for technical support
OPPORTUNITIES•Infrastructure•Innovation
THREATS•Govt’s Policies, taxes etc
20
BENEFITS OF JOINT VENTURE
For MarutiSuzuki Motor Corporation, the parent company, is a global leader in mini and compact cars for three decadesSuzuki’s technical superiorLightweight engine that is clean and fuel efficientNearly 75000 people are employed directly by Maruti Suzuki and its partners
For Suzuki
Large Indian MarketMonopolistic trade in the Indian automobile marketAvailability of resources
For MarutiSuzuki Motor Corporation, the parent company, is a global leader in mini and compact cars for three decadesSuzuki’s technical superiorLightweight engine that is clean and fuel efficientNearly 75000 people are employed directly by Maruti Suzuki and its partners
For Suzuki
Large Indian MarketMonopolistic trade in the Indian automobile marketAvailability of resources
21
The Market before JV
Case Study 3: Hero Honda Joint Venture
•The license raj that existed prior to economic liberalization (1940s-1980s) in India did not allow foreign companies to enter the market.
•In the mid-’80s when the Indian government started permitting foreign companies to enter the Indian market through minority joint ventures.
•The entry of these new foreign companies transformed the very essence of competition from the supply side to the demand side.
•The license raj that existed prior to economic liberalization (1940s-1980s) in India did not allow foreign companies to enter the market.
•In the mid-’80s when the Indian government started permitting foreign companies to enter the Indian market through minority joint ventures.
•The entry of these new foreign companies transformed the very essence of competition from the supply side to the demand side.
22
The Deal Is Done.(June 1984)
• Honda agreed to provide tech. know-how to HHM and setting up manufacturing facilities. This included the future R & D efforts.
• Honda agreed for a lump sum fee of $500,000 & 4% royalty on SP.
• Both Partners held 26% of the equity with other 26% sold to the public and the rest held to financial institutions.
• Honda agreed to provide tech. know-how to HHM and setting up manufacturing facilities. This included the future R & D efforts.
• Honda agreed for a lump sum fee of $500,000 & 4% royalty on SP.
• Both Partners held 26% of the equity with other 26% sold to the public and the rest held to financial institutions.
23
Success Story
•HHM had grown consistently, earning the title of the world’s largest motorcycle manufacturer
•World’s largest two-wheeler manufacturer with annual sales volume of over 2 million motorcycles.
•Owns world’s biggest selling motorcycle brand – Hero Honda Splendor.
•Over 9 million motorcycles on Indian roads.
•Deep market penetration with 5000 outlets.
•HHM had grown consistently, earning the title of the world’s largest motorcycle manufacturer
•World’s largest two-wheeler manufacturer with annual sales volume of over 2 million motorcycles.
•Owns world’s biggest selling motorcycle brand – Hero Honda Splendor.
•Over 9 million motorcycles on Indian roads.
•Deep market penetration with 5000 outlets.24
Reasons for success
•The deep penetration network of hero largely benefited the sales.
•Absence of major competitors in initial years.
•Sound and proven technical capabilities of Honda and the reliability of Hero.
•Increased market for motorcycles
•Better Fuel efficiency.
•Change in people’s perception.
•Decrease in price difference with scooters.
•The deep penetration network of hero largely benefited the sales.
•Absence of major competitors in initial years.
•Sound and proven technical capabilities of Honda and the reliability of Hero.
•Increased market for motorcycles
•Better Fuel efficiency.
•Change in people’s perception.
•Decrease in price difference with scooters.
25
Wholly Owned Subsidiary
•What Does Wholly Owned Subsidiary Mean?A subsidiary whose parent company owns 100% of its common stock.
•In other words, the parent company owns the company outright and there are no minority owners.
•What Does Wholly Owned Subsidiary Mean?A subsidiary whose parent company owns 100% of its common stock.
•In other words, the parent company owns the company outright and there are no minority owners.
26
VALUATION METHODS
Valuation means assigning a value to underlying assets
The value should be a fair value
Valuation is not a science; more of an art
Valuation is largely influenced by Valuer’s judgment, knowledge of business, analysis and interpretation and the use of different methods
Valuation varies with purpose
Valuation is time sensitive
Valuation means assigning a value to underlying assets
The value should be a fair value
Valuation is not a science; more of an art
Valuation is largely influenced by Valuer’s judgment, knowledge of business, analysis and interpretation and the use of different methods
Valuation varies with purpose
Valuation is time sensitive
27
Steps in Valuation
Obtaining information
Reviewing data provided
Selecting a method
Applying Method
Conducting sensitivities on assumptions
Assigning Weights
Merger - Exchange Ratio
Reporting
Obtaining information
Reviewing data provided
Selecting a method
Applying Method
Conducting sensitivities on assumptions
Assigning Weights
Merger - Exchange Ratio
Reporting
2828
Principal Methods of Valuation
Asset Based Approach Net Assets Method Replacement Value/Realisable Value
Earning based approach Price Earnings Capitalisation Method Discounted Cash Flow
Market Approach Market Price Market Comparables
Asset Based Approach Net Assets Method Replacement Value/Realisable Value
Earning based approach Price Earnings Capitalisation Method Discounted Cash Flow
Market Approach Market Price Market Comparables
2929
Net Assets MethodThe Value as per Net Asset Method is arrived as follows:
Net Asset Value = Total Assets (excluding misc. expenditure and debit balance of Profit & Loss Account) – Total
LiabilitiesOR
Net Asset Value = Share Capital + Reserves (excluding Revaluation Reserve) – Misc. Expenditure – Debit Balance
of Profit & Loss Account
Following adjustments may be called for:1) Accounting Policies 2)Contingent Liabilities3) Sales Tax Deferment Loan 4)Investments & Surplus
Assets5) Inventory & Debtors 6) Contingent Assets7) Preference Shares 8) ESOPs / Warrants
The Value as per Net Asset Method is arrived as follows:
Net Asset Value = Total Assets (excluding misc. expenditure and debit balance of Profit & Loss Account) – Total
LiabilitiesOR
Net Asset Value = Share Capital + Reserves (excluding Revaluation Reserve) – Misc. Expenditure – Debit Balance
of Profit & Loss Account
Following adjustments may be called for:1) Accounting Policies 2)Contingent Liabilities3) Sales Tax Deferment Loan 4)Investments & Surplus
Assets5) Inventory & Debtors 6) Contingent Assets7) Preference Shares 8) ESOPs / Warrants
3030
Net Assets Method
31
Where this method is used
STRENGTHS LIMITATIONS
Start up Companies Traditional method Service/knowledge based
Investment Companies Investment companies Brand driven companies
No sustainable track record of profits
Capital Intensive Companies
Intangibles/human resources value not captured
Manufacturing companies where fixed assets have greater relevance for earning revenues
Transparent and easy to compute
Errors/misstatements in financial statements
Companies with no reliable evidence of future profits due to violent fluctuations/disruption of business
Dependent on accounting policies followed by company
Earnings Potential ignored31
Price Earnings Capitalisation Method (PECV)
Based on past performance and /or projections Non-recurring & extraordinary items excluded Profits of various years are averaged (simple or weighted).
Current profit is accorded the highest weight Projected profits discounted for inflation By applying effective tax rate, arrive at maintainable profit Finally appropriate capitalisation rate is applied to arrive at the
value
PECV – Parameters
Future Maintainable Profits Appropriate Tax Rate Capitalisation Rate
Based on past performance and /or projections Non-recurring & extraordinary items excluded Profits of various years are averaged (simple or weighted).
Current profit is accorded the highest weight Projected profits discounted for inflation By applying effective tax rate, arrive at maintainable profit Finally appropriate capitalisation rate is applied to arrive at the
value
PECV – Parameters
Future Maintainable Profits Appropriate Tax Rate Capitalisation Rate
3232
Price Earnings Capitalisation Method (PECV)
33
STRENGTHS LIMITATIONS
Traditional method
Knowledge based companies
Brand Driven companies
Best used for a matured company
Most widely - quoted valuation method in equity markets
Investment/Property company
Company in liquidation
Ignores time value of money
Based on book earnings, cash generation not considered
Dependent on accounting policies followed by company
Lack of comparable firms
No revenues/Negative earnings
33
Discounted Cash Flow Method
DCF – Parameters
Cash Flows Discounting Factor
When to use? Most appropriate for valuing firms
Limited life projects Large initial investments and predictable cash
flows Regulated business Start-up companies
DCF – Parameters
Cash Flows Discounting Factor
When to use? Most appropriate for valuing firms
Limited life projects Large initial investments and predictable cash
flows Regulated business Start-up companies
3434
Discounted Cash Flow Method
35
STRENGTHS LIMITATIONS
Conceptually sound and widely used method
Projections are highly subjective hence could be inaccurate
Values the cash generated and not just the earnings
Inapplicable where projections cannot be made for the horizon period
Not dependent on accounting policies Difficulties in measuring risks (calculation of )
Determination of Values for all fund providers
Has not been specifically examined by the Court though many mergers where DCF was used as one of the method of valuation has been approved
Captures Capital Expenditure needs and Working Capital requirements
Sophisticated enough to deal with complexity of most situations
Other Earnings-Based Methods
EBITDA Multiple Method:- Involves determination of maintainable
EBITDA- Based on projections or past performance.
Weights may be assigned to various years’ EBITDA
- Not affected by the pattern of Funding adopted by Company/ Comparable Companies
Sales Multiple Method:- Compares Enterprise value to Company’s
Sales
EBITDA Multiple Method:- Involves determination of maintainable
EBITDA- Based on projections or past performance.
Weights may be assigned to various years’ EBITDA
- Not affected by the pattern of Funding adopted by Company/ Comparable Companies
Sales Multiple Method:- Compares Enterprise value to Company’s
Sales
36
Market Price Approach
Evaluates the value on the basis of prices quoted on the stock exchange Thinly traded / Dormant Scrip – Low
Floating Stock Significant and Unusual fluctuations
in the Market Price Weighted Average of quoted price for
past 6 months Regulatory bodies often consider
market value as important basis – Preferential allotment, Buyback, Takeover Code
Evaluates the value on the basis of prices quoted on the stock exchange Thinly traded / Dormant Scrip – Low
Floating Stock Significant and Unusual fluctuations
in the Market Price Weighted Average of quoted price for
past 6 months Regulatory bodies often consider
market value as important basis – Preferential allotment, Buyback, Takeover Code
37
Market Comparables
Generally applied in case of unlisted entities Estimates value by relating an element with
underlying element of similar listed companies. Based on market multiples of Comparable
Companies Book Value Multiples Industry Specific Multiples Multiples from Recent M&A Transactions.
Generally applied in case of unlisted entities Estimates value by relating an element with
underlying element of similar listed companies. Based on market multiples of Comparable
Companies Book Value Multiples Industry Specific Multiples Multiples from Recent M&A Transactions.
38
Market Comparables
39
STRENGTHS LIMITATIONSEasy to understand and quick to completeInvolves few explicit assumptionsBasic data for publicly traded entities readily availableEasy to explain and present to others
May not capture Intrinsic valueValue gets affected by value of PeersDifficulty in identifying comparable companiesShort term volatility in markets
Industry Best measure of value
Auto Price to Earnings (PE) multiple
Banking PE and Price to Book Value (PBV) or Adjusted PBV multiple
Cement PE, Enterprise Value to Earnings before interest, tax, depreciation & amortization (EV/EBITDA), EV/tonne
Engineering Forward PE, which reflects the order book position of the company
40
Industry Best measure of value
FMCG PE, Return on Equity (RoE) and Return on Capital Employed (RoCE) ratios
Real Estate Net asset value (NAV), which is book value at market prices. Also look at debt levels
Telecom PE and DCF, because there is a future stream of cash flows for upfront heavy investment
Oil & Gas Residual reserves of energy assets
Technology Trailing PE and its growth
41
- The Acquirer• Among the largest domestic pharma
companies in India• Annual turnover of over INR 4900 Cr.• Annual PAT of INR 438 Cr.• Approved by USFDA, MHRA (UK)• Formulations make 37% of company’s product
mix; generic products account for 13%
• Among the largest domestic pharma companies in India
• Annual turnover of over INR 4900 Cr.• Annual PAT of INR 438 Cr.• Approved by USFDA, MHRA (UK)• Formulations make 37% of company’s product
mix; generic products account for 13%
Case Study 4: Dr Reddys & Betapharma
42
- The Target
• Fourth largest generic pharma company in Germany
• EBITD margins between 24 – 26%
• Portfolio of over 145 products
• Fourth largest generic pharma company in Germany
• EBITD margins between 24 – 26%
• Portfolio of over 145 products
43
• Turnover Eur 186 million• 3.5 market share in Germany• Breakup of products
- The Target
44
Valuations
• Sticker Price of €480 mn. from PE firm 3i• Revenues of € 165 mn.• 2.9X revenues and 12X EBITDA• The transaction was funded using a combination of
DRL’s internal cash reserves and committed credit facilities
• Dr Reddy's buys 100% equity of German Co Betapharm for Rs 2,250 cr (Euro 480 mio) — Biggest overseas acquisition by an Indian pharma co
• Sticker Price of €480 mn. from PE firm 3i• Revenues of € 165 mn.• 2.9X revenues and 12X EBITDA• The transaction was funded using a combination of
DRL’s internal cash reserves and committed credit facilities
• Dr Reddy's buys 100% equity of German Co Betapharm for Rs 2,250 cr (Euro 480 mio) — Biggest overseas acquisition by an Indian pharma co
- The Target
45
Goodies for DRL
• Access to lucrative German generic drug market• Enhanced portfolio• Leverage its product development skills and low-
cost manufacturing in India to boost Betapharm’s EBIT margins
• Help DRL realize its ambitions of becoming a $1 billion mid-size global pharma company
• Access to lucrative German generic drug market• Enhanced portfolio• Leverage its product development skills and low-
cost manufacturing in India to boost Betapharm’s EBIT margins
• Help DRL realize its ambitions of becoming a $1 billion mid-size global pharma company
46
Side Effects for DRL
• Betapharm booked losses in 08 & 09• Raw materials problems in Mexico• The German market underwent significant
changes after it acquired the company, shifting to a tender-based model wherein the insurance companies called for tenders from drug makers and the lowest bidder got the order for supply of drugs
• Absence of upsides (revenues arising out of marketing exclusivity of authorized generics)
• Betapharm booked losses in 08 & 09• Raw materials problems in Mexico• The German market underwent significant
changes after it acquired the company, shifting to a tender-based model wherein the insurance companies called for tenders from drug makers and the lowest bidder got the order for supply of drugs
• Absence of upsides (revenues arising out of marketing exclusivity of authorized generics)
47
Present Scenario for DRL
• DRL has long been bleeding under the impact of Betapharm’s losses
• Decline in German sales by 26 per cent• Dr Reddy's Laboratories (DRL) is currently
restructuring German subsidiary Betapharm• Fierce competitive bidding from various generic
companies has increased the acquisition cost for DRL and extended the payback period
• DRL has long been bleeding under the impact of Betapharm’s losses
• Decline in German sales by 26 per cent• Dr Reddy's Laboratories (DRL) is currently
restructuring German subsidiary Betapharm• Fierce competitive bidding from various generic
companies has increased the acquisition cost for DRL and extended the payback period
48
Case Study 5: Tata Corus Merger
• 'Tata Steel', formerly known as TISCO (Tata Iron and Steel Company Limited), was the world's 56th largest and India's 2nd largest steel company with an annual crude steel capacity of 3.8 million tonnes.
• Post Corus merger, Tata Steel is India's second-largest and second-most profitable company in private sector with consolidated revenues of Rs 1,32,110 crore and net profit of over Rs 12,350 crore during the year ended March 31, 2008
• 'Tata Steel', formerly known as TISCO (Tata Iron and Steel Company Limited), was the world's 56th largest and India's 2nd largest steel company with an annual crude steel capacity of 3.8 million tonnes.
• Post Corus merger, Tata Steel is India's second-largest and second-most profitable company in private sector with consolidated revenues of Rs 1,32,110 crore and net profit of over Rs 12,350 crore during the year ended March 31, 2008
49
Corus Overview
• Corus was formed from the merger of Koninklijke Hoogovens N.V., a Dutch steel producer with British Steel Plc on 6 October 1999. It has major integrated steel plants in UK and Netherlands.
• Group turnover for the year to 31 December 2005 was £10.142 billion. Profits were £580 million before tax and £451 million after tax.
• Corus was formed from the merger of Koninklijke Hoogovens N.V., a Dutch steel producer with British Steel Plc on 6 October 1999. It has major integrated steel plants in UK and Netherlands.
• Group turnover for the year to 31 December 2005 was £10.142 billion. Profits were £580 million before tax and £451 million after tax.
50
Synergies from the dealSome of the prominent synergies that could arise from the deal were as follows :• Tata was one of the lowest cost steel producers in the world and had self
sufficiency in raw material. Corus was fighting to keep its productions costs under control and was on the look out for sources of iron ore.
• Tata had a strong retail and distribution network in India and SE Asia. This would give the European manufacturer a in-road into the emerging Asian markets. Tata was a major supplier to the Indian auto industry and the demand for value added steel products was growing in this market. Hence there would be a powerful combination of high quality developed and low cost high growth markets
• There would be technology transfer and cross-fertilization of R&D capabilities between the two companies that specialized in different areas of the value chain
• There was a strong culture fit between the two organizations both of which highly emphasized on continuous improvement and ethics. Tata steel's Continuous Improvement Program ‘Aspire’with the core values :Trusteeship,integrity,respect for individual, credibility and excellence. Corus's Continuous Improvement Program ‘The Corus Way’ with the core values : code of ethics, integrity, creating value in steel, customer focus, selective growth and respect for our people.
Some of the prominent synergies that could arise from the deal were as follows :• Tata was one of the lowest cost steel producers in the world and had self
sufficiency in raw material. Corus was fighting to keep its productions costs under control and was on the look out for sources of iron ore.
• Tata had a strong retail and distribution network in India and SE Asia. This would give the European manufacturer a in-road into the emerging Asian markets. Tata was a major supplier to the Indian auto industry and the demand for value added steel products was growing in this market. Hence there would be a powerful combination of high quality developed and low cost high growth markets
• There would be technology transfer and cross-fertilization of R&D capabilities between the two companies that specialized in different areas of the value chain
• There was a strong culture fit between the two organizations both of which highly emphasized on continuous improvement and ethics. Tata steel's Continuous Improvement Program ‘Aspire’with the core values :Trusteeship,integrity,respect for individual, credibility and excellence. Corus's Continuous Improvement Program ‘The Corus Way’ with the core values : code of ethics, integrity, creating value in steel, customer focus, selective growth and respect for our people.
51
Valuation• On 20 October 2006 the board of directors of Anglo-Dutch steelmaker
Corus accepted a $7.6 billion takeover bid from Tata Steel, the Indian steel company.
• Tata Steel's bid to acquire Corus Group was challenged by CSN, the Brazilian steel maker.
• In November 2006,Brazilian steel marker Companhia Siderúrgica Nacional (CSN) challenged Tata Steel's proposal for acquisition. They countered Tata Steel's offer of 455 pence per share by offering 475 pence per share of Corus.
• Finally , on January 30, 2007, Tata Steel purchased a 100% stake in the Corus Group at 608 pence per share in an all cash deal, cumulatively valued at USD 12.04 Billion.
• The deal is the largest Indian takeover of a foreign company and made Tata Steel the world's fifth-largest steel group.
• On 20 October 2006 the board of directors of Anglo-Dutch steelmaker Corus accepted a $7.6 billion takeover bid from Tata Steel, the Indian steel company.
• Tata Steel's bid to acquire Corus Group was challenged by CSN, the Brazilian steel maker.
• In November 2006,Brazilian steel marker Companhia Siderúrgica Nacional (CSN) challenged Tata Steel's proposal for acquisition. They countered Tata Steel's offer of 455 pence per share by offering 475 pence per share of Corus.
• Finally , on January 30, 2007, Tata Steel purchased a 100% stake in the Corus Group at 608 pence per share in an all cash deal, cumulatively valued at USD 12.04 Billion.
• The deal is the largest Indian takeover of a foreign company and made Tata Steel the world's fifth-largest steel group.
52
Funding the deal – TATA Corus merger
• $3.5–3.8bn infusion from Tata Steel ($2bn as its equity contribution, $1.5–1.8bn through a bridge loan)
• $5.6bn through a LBO ($3.05bn through senior term loan, $2.6bn through high yield loan)
• The funding structure of this deal is the leveraged buyout model that Tata Steel used to fund the Corus buy.
• Effectively, the Tatas are paying only a third of the acquisition price. This was possible because Corus had relatively low debt on its balance sheet and was able to borrow more.
• $3.5–3.8bn infusion from Tata Steel ($2bn as its equity contribution, $1.5–1.8bn through a bridge loan)
• $5.6bn through a LBO ($3.05bn through senior term loan, $2.6bn through high yield loan)
• The funding structure of this deal is the leveraged buyout model that Tata Steel used to fund the Corus buy.
• Effectively, the Tatas are paying only a third of the acquisition price. This was possible because Corus had relatively low debt on its balance sheet and was able to borrow more.
53
Case Study 6: HINDALCO - NOVELIS ACQUISITION: CREATING AN ALUMINIUM GLOBAL GIANT
• Indian aluminium giant Hindalco acquired Atlanta based company Novelis Inc, a world leader in aluminium rolling and flat-rolled aluminium products in May 2007.
• Novelis processes around 3 million tonnes of aluminium a year and has sales centers all over the world. In fact, it commands a 19% global market share in the flat rolled products segment, making it a leader.
• Strategically, the acquisition of Novelis takes Hindalco onto the global stage as the leader in downstream aluminium rolled products.
• The transaction made Hindalco the world's largest aluminium rolling company and one of the biggest producers of primary aluminium in Asia, as well as being India's leading copper producer.
• Indian aluminium giant Hindalco acquired Atlanta based company Novelis Inc, a world leader in aluminium rolling and flat-rolled aluminium products in May 2007.
• Novelis processes around 3 million tonnes of aluminium a year and has sales centers all over the world. In fact, it commands a 19% global market share in the flat rolled products segment, making it a leader.
• Strategically, the acquisition of Novelis takes Hindalco onto the global stage as the leader in downstream aluminium rolled products.
• The transaction made Hindalco the world's largest aluminium rolling company and one of the biggest producers of primary aluminium in Asia, as well as being India's leading copper producer. 54
Novelis - Background• World leader in the recycling of used aluminium beverage cans • Recycles more than 35 billion used beverage cans annually. • No. 1 rolled products producer in Europe, South America and Asia, and
the No. 2 producer in North America. • Produces the highest-quality aluminium sheet and foil products for
customers in high -value markets including automotive, transportation, packaging, construction and printing.
• customers include major brands such as Agfa -Gevaert, Alcan, Anheuser-Busch, Ball, Coca-Cola, Crown Cork & Seal, Daching Holdings, Ford, General Motors, Lotte Aluminium, Kodak, Pactiv, Rexam, Ryerson Tull, Tetra Pak, ThyssenKrupp, etc.
• World leader in the recycling of used aluminium beverage cans • Recycles more than 35 billion used beverage cans annually. • No. 1 rolled products producer in Europe, South America and Asia, and
the No. 2 producer in North America. • Produces the highest-quality aluminium sheet and foil products for
customers in high -value markets including automotive, transportation, packaging, construction and printing.
• customers include major brands such as Agfa -Gevaert, Alcan, Anheuser-Busch, Ball, Coca-Cola, Crown Cork & Seal, Daching Holdings, Ford, General Motors, Lotte Aluminium, Kodak, Pactiv, Rexam, Ryerson Tull, Tetra Pak, ThyssenKrupp, etc.
55
Financing Structure put in place by Financing Structure put in place by HindalcoHindalco
Recourse Financing by banks on Corporate Guarantee of Hindalco
3100
Liquidation of Treasury 450
TOTAL 3550
HINDALCO NOVELIS
Figures in USD Millions
Novelis Enterprise Value ~ USD 6 billion
All cash deal
Non Recourse Debt at Novelis
Term Loans 1000
High Yield Bonds 1400
TOTAL 240056
Benefits to Hindalco• establish Hindalco as a global integrated aluminium producer with low-cost alumina and
aluminium production facilities combined with high -end aluminium rolled product capabilities.
• emerge Hindaloc as the biggest rolled aluminium products maker and fifth -largest integrated aluminium manufacturer in the world.
• The acquisition will give the company immediate scale and strong a global footprint. • Hindalco's position as one of the lowest cost producers of primary aluminium in the world is
leverageable into becoming a globally strong player. • Novelis is a globally positioned organization, operating in 11 countries with approximately
12,500 employees. • Novelis will work as a forward integration for Hindalco as the company is expected to ship
primary aluminium to Novelis for downstream value addition.• Novelis has a rolled product capacity of approximately 3 million tonne while Hindalco does
not have any surplus capacity of primary aluminium.
• establish Hindalco as a global integrated aluminium producer with low-cost alumina and aluminium production facilities combined with high -end aluminium rolled product capabilities.
• emerge Hindaloc as the biggest rolled aluminium products maker and fifth -largest integrated aluminium manufacturer in the world.
• The acquisition will give the company immediate scale and strong a global footprint. • Hindalco's position as one of the lowest cost producers of primary aluminium in the world is
leverageable into becoming a globally strong player. • Novelis is a globally positioned organization, operating in 11 countries with approximately
12,500 employees. • Novelis will work as a forward integration for Hindalco as the company is expected to ship
primary aluminium to Novelis for downstream value addition.• Novelis has a rolled product capacity of approximately 3 million tonne while Hindalco does
not have any surplus capacity of primary aluminium.
57
THANK YOU
58