Role Of MIB In Mergers And Acquisitions

Presented by

KAVITA PATIL 77

PURNIMA NARAYAN 118

Mergers

• A merger is a deal to unite two existing companies into one new company.

• Merger is a tool used by companies , with mutual consent, to increase their long term profitability by expanding their operations.

• Laws in India use the term “Amalgamation” for merger.

• All of these are done to please shareholders and create value.

Types of Mergers

• Conglomerate: nothing in common for united companies.

• Horizontal: both companies are in same industry, deal is part of

consolidation.

• Market Extension: companies sell same products but compete

in different markets.

• Product Extension: add together products that go well together.

• Vertical Merger: two companies that make parts for a finished

good combine.

Acquisition

• An acquisition is a corporate action in which a company buys most, if not all, of another firm's ownership stakes to assume control of it.

• An acquisition occurs when a buying company obtains more than 50% ownership in a target company.

• As part of the exchange, the acquiring company often purchases the target company's stock and other assets, which allows the acquiring company to make decisions regarding the newly acquired assets without the approval of the target company’s shareholders.

• Acquisitions can be paid for in cash, in the acquiring company's stock or a combination of both.

Types of Acquisition

• Hostile Takeover- A hostile takeover is the acquisition of

one company (called the target company) by another

(called the acquirer) that is accomplished by going directly

to the company's shareholders or fighting to replace

management to get the acquisition approved.

• Friendly Takeover- A situation in which a target company's

management and board of directors agree to a merger or

acquisition by another company.

Advantages of M&A

• Accelerated Growth

• Enhanced Profitability

Economies of scale

Operating economies

Synergy

• Diversification of Risk

• Reduction in Tax Liability

• Financial Benefits

Financing constraint

Surplus cash

Debt capacity

Financing cost

• Increased Market Power

MIB Perspective

in

M&A

Strategic Objectives of a Company

• Synergy: Savings Cost, Improving process

• Access to key natural resources or intangible property

• Managing changing business environment

• Diversification

• Management and deal compensation

Statutory FrameworkCompanies Act, 1956

• Main provision that deals with Amalgamation are Section 391-394.

• High court can sanction schemes on any term that may found expedient in public interest, either as a merger or as a purchase by the transferee company.

• Acquisition are governed by provision of Section 372A, It gives power to investment to BOD to the extent of 60% of paid-up-capital.

FEMA and FDI policy

• Merger or Acquisition of foreign company

with and Indian company requires approval

under FEMA and FDI policy either from GOI

or RBI.

• If listed, Pricing of share is pegged to SEBI

formula, based on inter alia.

• If unlisted, DCF method is used.

SCRA

• The listing of shares of an unlisted company is in terms of scheme of arrangement sanctioned by High court.

• At least 25% of paid-up share capital , of unlisted company seeking listing shares are allotted to public holders of shares.

• The unlisted company has not issued/reissued any shares, not covered under the scheme.

The Competition ACT, 2002

• Section 5: Mergers and Acquisition

• Acquirer and acquired jointly owned assets over

Rs.1000 Crore.

• Turnover of over Rs.3000 Crore.

• Group entities should be owned at least up to

26% by voting rights or through control.

Tax Framework

The benefits under IT Act:

• Carry forward and set off losses and unabsorbed

depreciation belonging to the transferor company by the

transferee company.

• Capital gains to shareholders of the transferor company

on account of share swap.

• The write-off of expenses by the transferee company.

Conditions:

• Set off of business losses can only be against business

income.

• Carry forward is allowed for 8 years.

• The amalgamated company should hold continuously for a

period of 5 years at least 75% of the book value of assets.

• The amalgamated company should hold the business of the

parent company for a period of 5 years.

Role of MIB

• Due Diligence

• Valuation

• Study the Market

• Provision of financing

Transaction process in mergers and acquisitions:

Transaction process in a scheme of arrangements:

• Engagement of the investment banker

• Negotiations deal and discussion

• Board approval

• Due diligence and confirmation

• Preparation of the draft scheme

• Court process

• ROC formalities

• Stock exchange formalities

Arriving at the transaction structure

• Amalgamation through mergers

It can be structured as a merger based on how the transactionstructure is evolved between parties.

consider company “A & B”, they will be valued and based onmutual valuation, a share swap ratio is fixed.

Under this arrangement, either whole or predominantly the wholeshares of transferor company will be exchanged for shares intransferee firm as per the share swap ratio.

'Swap Ratio'

The ratio in which an acquiring company will offer its own shares inexchange for the target company's shares during a merger. Tocalculate the swap ratio, companies analyse financial ratios suchas book value, earnings per share, profits after taxand dividends paid, as well as other factors, such as the reasons forthe merger or acquisition.

Amalgamation through purchases:

• under this method suppose firm A arrives at a deal price or

purchase consideration for firm B. this would be settled either by

shares in A or in cash or in other securities or by a combination of

both. This method could be adopted whether the undertaking of B

is being acquired in full or in part. This method in transaction

wherein pooling is not intended.

Example- Mittal- Arcelor takeover:

• Mittal steel acquired severstal of Russia through competitive bidding,

later it acquired Arcelor SA, thaugh it was acquisition both the firms

agreed to the mergers.

• As per the final offer, shareholders of Arcelor were given 13 Mittal steel

shares and 188.42 euros in cash for 12 Arcelor convertible bonds.

• The array of investment banks involved in the process are Goldman

Sachs, Credit Suisse, Citigroup and Societe Generale who were advising

Mittal, while Arcelor was being advised by Merrill Lynch, Morgan

Stanley, Deutsche Bank AG, BNP Paribas SA and UBS AG.

• J. P. Morgan Chase & Co was advising the government of Luxembourg,

while Lazard was the counsellor for the Belgian government.

Valuation:

• The acquisition process involves assessing the value of

the target, identifying alternatives for structuring the M &

A transactions, evaluating these, and selecting the structure

that would best enable the organization to achieve its

objectives, and developing an offer.

• To identify a realistic valuation range the best suitable

method is selected.

• The key valuation methods: discounted cash flow analysis,

comparable publicly traded company analysis.

Other valuation methods:

• Breakup Valuation method:

• It is suitable for asset-intensive business models, especially if

companies do not have sustainable future viability. Breakup

Valuation is often used in valuation of sick companies.

• The sum-of-parts value of a publicly traded company. This value

is derived by analyzing each business segment of a company

independently.

• A breakup value analysis may be brought about by investors if the

market cap of the stock is less than the breakup value for a

prolonged period of time.

• If a company is performing poorly, or the stock has not kept up to

the perceived level of "full value", investors may call for the

company to be split apart, with proceeds returned to investors as

cash, stock in spun-off companies, or a combination of both.

LBO Analysis

Leveraged Buyout - LBO:

• A leveraged buyout (LBO) is the acquisition of another company

using a significant amount of borrowed money to meet the cost of

acquisition.

• The assets of the company being acquired are often used

as collateral for the loans, along with the assets of the acquiring

company.

• The purpose of leveraged buyouts is to allow companies to

make large acquisitions without having to commit a lot of

capital.

• LBO considers the availability of debt, cost of debt, estimated

financial costs, available tax shields.

• In an LBO, there is usually a ratio of 90% debt to 10% equity.

Because of this high debt/equity ratio, the bonds issued in the buyout

usually are not investment grade and are referred to as junk bonds.

• Further, many people regard LBOs as an especially ruthless,

predatory tactic. This is because it isn't usually sanctioned by the

target company. Further, it's seen as ironic in that a company's

success, in terms of assets on the balance sheet, can be used against

it as collateral by a hostile company.

Reasons for LBOs

LBOs are conducted for three main reasons:

To take a public company private;

To spin-off a portion of an existing business by selling it;

To transfer private property, as is the case with a change in

small business ownership.

Deal structuring

General features:

• The total deal size based on the valuation agreed to between both

parties

• Share swap ratio arrived at in the case of a merger

• Assets to be taken over at book value or as per revaluation to be

carried out. If revaluation is already completed, these values can be

incorporated

• Liabilities to be taken over if any, as per the book values or

settlements to be reached with creditors

• Exclusions from the list of assets and liabilities to be taken over

• Purchase consideration payable in the case of a buy out or

acquisition

• Extent of shareholding to be acquired, in case of acquisition

• Break up of acquisition between fresh issue and vendor share

purchase if any

• Price per share for fresh issue and share purchase

• Identification of sellers in the case of a share purchase

• Identification of acquirers and extent of acquisition by each

in case of a consortium

• Time frame for the acquisition, staggered acquisition if any,

settlement of purchase consideration, milestone payments if any,

payment mechanisms, etc.

• Mode of settlement of purchase consideration- cash component,

stock component and debt component

• Broad management structure and incentive plan or stock

options for the key managers

• Main conditions precedent to acquisition or buy-out, apart

from statutory approvals

• Break-fee to be paid by the acquirer in case it decides to

disengage from the transaction after the term sheet is signed

• Non-complete agreement between both parties in the

aftermath of the transaction and terms thereof including

payment of non-complete fee if any by the acquirer to the

seller

• Exclusivity period available to both parties to conclude the

deal after the signing of term sheet. At the conclusion of the

exclusivity period, either the transaction should have been

consummated or one of the parties should have broken it off.

In neither case, the term sheet can be extended by mutual

consent, in the absence of which it lapses automatically

without further liability on either party

• Escrow amount to be deposited by the acquirer at the time of

signing of term sheet to demonstrate commitment to the deal.

The Escrow agreement usually stipulates stringent conditions

and the break fee if payable by the acquirer is set off from it