MERGER : <ul><li>Merger is defined as combination of two or more companies into a single company where one survives and the others lose their corporate existence. </li></ul><ul><li>Merger is also defined as amalgamation i.e. it is the fusion of two or more existing companies . </li></ul>ACQUISITION: Acquisition in general sense is acquiring the ownership in the property. In the context of business combinations, an acquisition is the purchase by one company of a controlling interest in the share capital of another existing company. What do you mean by Mergers & Acquisitions ? In Simple words, it is the buying, selling and combining of different companies to grow rapidly without having to create another business entity.
<ul><li>Increased Market Power: </li></ul><ul><ul><li>It is intended to reduce the competitive balance of the industry. </li></ul></ul><ul><li>2) Revamping production facilities: </li></ul><ul><ul><li>To achieve economies of scale by amalgamating production </li></ul></ul><ul><ul><li>facilities through more intensive utilization of plant and resources. </li></ul></ul><ul><li>3) Financial strength: </li></ul><ul><ul><li>To improve liquidity and have direct access to cash resource. </li></ul></ul><ul><li>4) General gains: </li></ul><ul><ul><li>To improve its own image and to offer better satisfaction to </li></ul></ul><ul><ul><li>consumers or users of the product. </li></ul></ul><ul><li>5) Procurement of supplies: </li></ul><ul><ul><li>To obtain economies of purchase in the form of discount, savings in transportation costs, overhead costs in buying department, etc. </li></ul></ul>Reasons for Mergers & Acquisitions…
Murders & Acquisitions… MITTAL STEEL: ARCELOR <ul><li>Paid $32.2 billion (at $50.68 per share) – a premium of 85.86% on Arcelors’ share price of $27.27 on January 26, 2006 (on which Mittal Steel had offered it’s first bid on January 27, 2006) – for Arcelor which was definitely painful for its stakeholders. </li></ul><ul><li>Accepted the condition that Arcelor Mittal, would have higher number of representatives from Arcelor in its board for 3 years. That means Arcelor Mittal will be run by Arcelor’s representatives. This for once makes Mittal Steel stakeholders puzzled as to who bought whom? </li></ul><ul><li>Net income of the company went down from $2.9 billion in Q3 FY ’07 to $2.3 billion for the quarter ending March 31, 2008. Even earnings per share slipped from $2.10 per share to $1.69 over the same period. Not only that, Mittal Steel’s P/E multiple has fallen from nearly 6.6 in January 2006 to 5.6 in 2007. </li></ul>Size does matter! Who said that? Arcelor Mittal may remain numero uno for long, but stakeholders won’t.
Murders & Acquisitions… MARS: WRIGLEYS <ul><li>The sweet coming together of M&M’s candy maker Mars Inc., and the world’s largest chewing gum manufacturer, Wrigley Jr. Co., is expected to leave a bitter taste in the mouths of the competition. However, will this $23 billion deal have enough sugar coated reasons to give its competitors some real toothache trouble? </li></ul><ul><li>Mars’ biggest rival Hershey Co., announced upping its advertising spending by 20% to better compete. Cadbury on its part, has also acquired Green and Black premium chocolate brand which proved to be very successful. Consolidation between the two rival giants (Hershey and Cadbury) also seems to be on the cards. Competition is defiantly on the prowl to bring down the combine’s shareholder value through heavy shelling. </li></ul><ul><li>Therefore, with competition still going strong, it seems that all one can expect from this deal are ‘sweet nothings’! </li></ul>Sweet nothings! Beware! Competition is on the prowl.
Murders & Acquisitions… TATA STEEL: CORUS <ul><li>By clinching the deal, Tata Steel was crowned as the 5th largest steel producer in the world, but it came for a whopping $12.1 billion in equity (608 pence per share) with a premium of 68.7% on Corus’s share price of 360.5 pence on October 4, 2006 and a debt component of another $1.5 billion. That certainly was overvalued. </li></ul><ul><li>From the date of announcement of the offer to the date of the completion of the bid Tata Steel’s share price declined by 11.35%. </li></ul><ul><li>Tata Steel has recently raised Rs.20 billion debt, a part of which would be used to refinance the debt raised for Corus. Commenting on this Joey Chew (Primary credit analyst, S&P) avers, “Medium-term pressure persists in relation to the incremental debt required for funding the company’s ambitious expansion plans, at the same time softening demand will result in weakening profitability and cash flows.” That necessarily explains, paying exorbitantly high price for a loss making entity in the name of globalisation, which makes little business sense. </li></ul>Winners Curse for Tatamagic.. High price doesn’t ensure a good future. Ask Tatas, they may tell you...
Murders & Acquisitions… HINDALCO: NOVELIS <ul><li>Hindalco took over Novelis Inc., which on a net worth of $322 million, had a debt of $2.33 billion (that’s a debt-equity ratio of 7.23:1)!. </li></ul><ul><li>With $3.03 billion bridge loan that it took for Novelis acquisition, Hindalco is already on a rough road. With the debt market tightening, the metal maker is left with no choice but to dilute its equity through a 1:3 rights issue and at a discount. </li></ul><ul><li>Further, high interest costs, which rose by over 490% (from Rs.3.13 billion in FY07 to Rs.18.49 billion in FY08), have already dented Hindalco’s earnings per share in FY08, which fell 41% to just Rs.15.76 in FY08 from Rs.26.73 in FY07. </li></ul><ul><li>Besides, with Novelis having posted a pre-tax loss of $62 million in FY08, the Hindalco stock is unlikely to find many takers. The question now is – who will rescue Hindalco? Not at least Novelis, they say! </li></ul>When predator falls prey! With high interest cost Hindalco is already on a rough road
Murders & Acquisitions… ESSAR STEEL : ALGOMA STEEL INC <ul><li>Marriages are made in heaven! Whether true or not, but as India’s Essar Steel tied a knot with Canadian giant Algoma Steel Inc. last year, many believed this one was. After all this subsidiary of Essar Global had paid Rs.2087.63 a share (a 48% premium over Algoma’s 20-day average share price ending February 14, 2007) to acquire Algoma for a whopping $1.63 billion. </li></ul><ul><li>“ Algoma is an excellent addition to our existing steel business and offers growth potential” said Essar Steel spokesperson. Of course, all this may sound as an excellent performance by Essar Steel, but does that hold true for Algoma as well? Algoma’s net losses for the quarter ending March 31, 2008 were $25.3 million compared to the net income of $23.1 million for the three months ended March 31, 2007. Even the Essar Steel’s so called growth story isn’t that bright. Its earnings per share (EPS) has come down to just 1.32 during the first half of FY2007-08 from 4.38 at the end of FY2007. In addition, the rising interest cost is proving hazardous to the company’s health. </li></ul>Steely future! Algoma’s rising loss, a cause of worry
Murders & Acquisitions… TATA MOTORS: JLR <ul><li>Jaguar and Land Rover (JLR), two of the iconic brands, are now a part of the Tata kitty. With this, Tata Motors has catapulted itself into the premium global car market. Well, there ends the happy part. The share prices have been continually heading southwards ever since the deal was announced and has plummeted by a thunderous 39.37% till date. </li></ul><ul><li>According to Edelweiss Securities, the consolidated profit could move down by 9% and 12% respectively for FY09 and FY10 on account of sluggish outlook for commercial vehicles. So, it was only in the long term that JLR would have delivered some good. But, now due to the economic downturn in the US, that ‘longterm’ is set to get stretched further, which means very soon Tata Motors will start repenting for the debt that they have taken to fund the deal. </li></ul><ul><li>If in the Corus deal they jeopardised the stakeholders’ wealth by paying an exorbitant amount, in case of JLR they are set to destroy it for their irrational exuberance. </li></ul>The second time Oh God! Will they ever learn?
<ul><li>Integration Facilities: </li></ul><ul><ul><li>Different Financial & Control Systems can make integration of </li></ul></ul><ul><ul><li>firms difficult. </li></ul></ul><ul><li>2) Large or Extraordinary Debt: </li></ul><ul><ul><li>Costly Debt can create onerous burden on cash outflows. </li></ul></ul><ul><li>3) Inadequate Evaluation of Target: </li></ul><ul><ul><li>Inadequate Evaluation causes acquirer to overpay for the firm. </li></ul></ul><ul><li>4) Inability to achieve synergy: </li></ul><ul><ul><li>Justifying Acquisitions can increase estimate of expected benefits. </li></ul></ul><ul><li>5) Overly Diversified: </li></ul><ul><ul><li>Acquirer doesn’t have expertise required to manage unrelated businesses </li></ul></ul>Why Mergers & Acquisitions Fail?
Conclusion What works for the company is announced with much fanfare, but what remains hidden is that what does not work!!!