Strategic Financial Management
Chapter 13. Mergers, Acquisitions & Restructuring
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Types of Merger
• Horizontal – Companies of same industry are merged
• Vertical – Companies of different industry are merged
• Reverse – Large or profit making company merges with Small or
• Conglomerate – Companies with unrelated operations merge
• Congeneric – Merging companies are related through basic technologies, production processes or
markets
Mergers, Acquisitions & Restructuring
Amalgamation - When two entitiesmay be a new entity or either one
Merger - Two entitiescombine to dissolveexisting entities and giverise to a new entity.
Acquisitionacquiredsubsidiaryof ownership
Friendlydone in consentapproval of
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Chapter 13. Mergers, Acquisitions & Restructuring
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purely for revision purposes and will not help much in elaborating and understanding
If you have not downloaded these notes directly from our website then we urge you to do so as
update our material on a regular basis and thus there may be a more updated version available
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We have taken due care in ensuring that there are no errors in the content, however if you find any
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Companies of same industry are merged
Companies of different industry are merged
Large or profit making company merges with Small or loss making company
Companies with unrelated operations merge
Merging companies are related through basic technologies, production processes or
Mergers, Acquisitions & Restructuring
entities combine to form one entity (thisone of the combining entities).
Acquisition - One entity takes over another entity andentity either cease to exist or acts as a
subsidiary of the new parent company. There is a senseownership by acquirer in this case.
- Acquisition isconsent with theof the board
Hostile - Acquisition isdone without the consentof the board by acquiringmajority shares
Reconstruction /
Windingcompanyassetsnewapproved)
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elaborating and understanding
you to do so as we
be a more updated version available on the
and practical purposes.
ntent, however if you find anything
loss making company
Merging companies are related through basic technologies, production processes or
Reconstruction / Arrangement / Reorganization
Winding up the existingcompany and transferringassets and liabilites to anew company (courtapproved)
Strategic Financial Management
Chapter 13. Mergers, Acquisitions & Restructuring
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Reasons and Rationale for M&A
• Synergies
o Operating – Similar operations in
o Economies of Scale – Large no. of units gives more bargaining power and lower average cost
o Economies of Scope – Complimentary activities of both companies can be used.
• Diversification – new areas of busi
• Taxation – losses adjustment
• Growth – Quickly grow by acquiring existing small businesses
• Consolidation of production capacities and increasing market power
acquiring all players in the same market
Gains from M&A
Transaction Costs – Legal Charges, Bank fees, Investment Banker fees
Combined Value – Value of acquirer, Stand alone value of target, Value of synergy = Combined Value
Principal steps in M&A
• Manage pre acquisition phase –
• Screen Candidates
• Eliminate not meeting criteria
• Negotiate
• Post-merger integration
Problems for M&A in India
Strategic Financial Management
Chapter 13. Mergers, Acquisitions & Restructuring
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Reasons and Rationale for M&A
Similar operations in both companies are combined has removes duplication
Large no. of units gives more bargaining power and lower average cost
Complimentary activities of both companies can be used.
new areas of business
Quickly grow by acquiring existing small businesses
Consolidation of production capacities and increasing market power – achieving monopoly by
acquiring all players in the same market
Legal Charges, Bank fees, Investment Banker fees
Value of acquirer, Stand alone value of target, Value of synergy = Combined Value
– maintain secrecy
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both companies are combined has removes duplication
Large no. of units gives more bargaining power and lower average cost
Complimentary activities of both companies can be used.
achieving monopoly by
Value of acquirer, Stand alone value of target, Value of synergy = Combined Value
Strategic Financial Management
Chapter 13. Mergers, Acquisitions & Restructuring
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• Family owned corporates – majority shareholding by promoters
• SEBI rules and regulations
• Availability of funds for M&A
• Lack of exit policy
• Absence of efficient capital markets
Due diligence
Test the accuracy of company representations.
• Legal issues,
• Financial and Tax issues,
• Cross-border issues,
• Culture issues
Takeover Strategies
• Street Sweep –acquiring company
an open offer
• Bear hug – While acquirer threatens to make an open offer, the board of Target Company agrees to
a settlement.
The Acquisition Process
Five Essential Stages:
1. Competitive Analysis
2. Search and Screen
3. Strategy Development
4. Financial Evaluation
5. Negotiation
Target valuation for M&A
1. Earnings based valuation
Strategic Financial Management
Chapter 13. Mergers, Acquisitions & Restructuring
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majority shareholding by promoters
Absence of efficient capital markets
Test the accuracy of company representations. Focus areas:
acquiring company accumulates large no. of shares from open market before making
While acquirer threatens to make an open offer, the board of Target Company agrees to
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accumulates large no. of shares from open market before making
While acquirer threatens to make an open offer, the board of Target Company agrees to
Strategic Financial Management
Chapter 13. Mergers, Acquisitions & Restructuring
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2. Market Based valuation
Reasons for Demerger/Divestment
1. To pay attention on core areas of business
2. Loss making units
3. Size of the firm may be too big to handle
4. Cash requirement
Discounted Cash Flow
•
•
•
•
•
Cost to create•
Capitalised Earning method
•
•
Market Capitalization
(listed)
Comparable multiples
(unlisted)
Strategic Financial Management
Chapter 13. Mergers, Acquisitions & Restructuring
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Reasons for Demerger/Divestment
To pay attention on core areas of business
the firm may be too big to handle
Determine Free Cash flow (Nopat + Dep. -working capital)
Discount the cash flows
Calculate TV (gordon grwoth - stable, growing;
Deduct debt
Final value - standalone value + synergy + loss if
Cost of building up the business from scratchconsideration with some margin over and above
Return on investments that is expected by anbusiness is estimated in the capitalized earningscapitalizing net profits of the business for currentof three years or projected years at required rate
Average Earnings / Required rate of return
• Market value of share x no. of shares
• Identify comparable firms
• Adjust for differences in size, market type etc
• Valuation is done on the basis of appropriatecompanrable firms. P/E, P/B are generally used
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Capex - Changes in
multiple of BV, EBIT)
if compet. acuqires
scratch is taken in toabove that.
an investor. Value ofearnings method by
current year or averagerate of return.
etc.
appropriate multiples ofused.
Strategic Financial Management
Chapter 13. Mergers, Acquisitions & Restructuring
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Different ways of Divestment or Demerger
1. Sell off – Simple sale of a unit, assets etc. by one entity to another
2. Spin off – Part of the business is separated and created as a separate firm
3. Split up – Breaking up entire firm by series of spin offs and creating many entities out of a single
entity
4. Carve out – This is like spinoff, however some shares of new spun off company are sold in the
market by making public offer.
Corporate Controls
Ways to increase corporate control
• Going private – delisting
• Equity buyback – reducing the equity stake
• Buy outs – Management Buyouts
Strategic Financial Management
Chapter 13. Mergers, Acquisitions & Restructuring
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Different ways of Divestment or Demerger
Simple sale of a unit, assets etc. by one entity to another
Part of the business is separated and created as a separate firm
Breaking up entire firm by series of spin offs and creating many entities out of a single
This is like spinoff, however some shares of new spun off company are sold in the
market by making public offer.
ase corporate control
reducing the equity stake
Management Buyouts
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Breaking up entire firm by series of spin offs and creating many entities out of a single
This is like spinoff, however some shares of new spun off company are sold in the
Strategic Financial Management
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3. Asset based valuation: Considers either the book value or net adjusted value. Intangibles are value
separately and then added.
Net Adusted Asset value or Book value
•
Intangible Asset Valuation
•
•
Liquidation Value•
Strategic Financial Management
Chapter 13. Mergers, Acquisitions & Restructuring
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Considers either the book value or net adjusted value. Intangibles are value
• Value is calculated by adjusting the valueliablities to the fair market value
• Cost to create - cost to create and/or cost to replace
• Based on past or future economic benefits
• Capitalization of historic profits - applyinghistoric profits
• Gross profit differential method - valued onpremium a branded or patented product is able
• Excess profit method - Excess returs overbenchmark returns
• Relief from royalty - what the purchaser couldwould be willing to pay, for a license of similar
• Similar to book value, except that liquidationplace of market value
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Considers either the book value or net adjusted value. Intangibles are value
of all assets &
replace
applying a multiple to
on the basis ofable to achieve
over and above
could afford, orsimilar assets.
value is used in
Strategic Financial Management
Chapter 13. Mergers, Acquisitions & Restructuring
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Type of questions asked in previous exams
1. EPS (accretive, decretive); calculate EPS after acquisition
2. Compare two methods of valuation and calculate range of payments
3. To find Exchange ratios given market prices
4. Find market price after merger
5. Separate value of debt and equity under different states of economy given the probabilities in each
economy
Unique Questions: Following questions are selected from previous examinations and cover all the
question types.
Strategic Financial Management
Chapter 13. Mergers, Acquisitions & Restructuring
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asked in previous exams
EPS (accretive, decretive); calculate EPS after acquisition
Compare two methods of valuation and calculate range of payments
To find Exchange ratios given market prices or earnings per share (nobody is at loss)
Separate value of debt and equity under different states of economy given the probabilities in each
ng questions are selected from previous examinations and cover all the
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(nobody is at loss)
Separate value of debt and equity under different states of economy given the probabilities in each
ng questions are selected from previous examinations and cover all the
Strategic Financial Management
Chapter 13. Mergers, Acquisitions & Restructuring
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Question 1
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Chapter 13. Mergers, Acquisitions & Restructuring
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Chapter 13. Mergers, Acquisitions & Restructuring
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Strategic Financial Management
Chapter 13. Mergers, Acquisitions & Restructuring
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Strategic Financial Management
Chapter 13. Mergers, Acquisitions & Restructuring
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Strategic Financial Management
Chapter 13. Mergers, Acquisitions & Restructuring
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Question 2
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Chapter 13. Mergers, Acquisitions & Restructuring
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Chapter 13. Mergers, Acquisitions & Restructuring
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Question 3
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Question 4
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Question 5
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Question 6
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Question 7
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