Valuation & Financial Re-organization

To know how we can assist you with our Valuation services, please contact

Mr. Chan...
“In the business world, the rearview mirror is
always clearer than the windshield”
Warren Buffett

28/11/2013

Business Le...
Particulars

Pg. No.

Valuation

What and Why

4

How

11

When and Who

23

Tricky Issues

26

Financial Re-organization
...
WHAT & WHY
Value & Valuation

 Value is*


An Economic concept;



An Estimate of likely prices to be concluded by the buyer and s...
Key Facts

PRICE IS NOT THE SAME AS VALUE

VALUE VARIES WITH PERSON, PURPOSE
AND TIME

TRANSACTION CONCLUDES AT
NEGOTIATED...
S Standard of Valuation
T Thesis of Valuation
E Economics of Valuation

M Methodologies of Valuation

28/11/2013

Business...
Standard of
Valuation

Thesis of Valuation Economics of
Valuation

Methodologies of
Valuation

Standard of Value is the hy...
Standard of
Valuation

Thesis of Valuation Economics of
Valuation

Methodologies of
Valuation

Thesis of Value is Premise ...
Standard of
Valuation

Thesis of Valuation Economics of
Valuation

Methodologies of
Valuation

Valuation across business c...
HOW
Intangibles#
Equity#
Net Current
Assets#

Net

Debt#

Stakeholders
# Based on Market Values
28/11/2013

Business Leadershi...
Standard of
Valuation

Thesis of Valuation Economics of
Valuation

Methodologies of
Valuation

Valuation Approaches
Fundam...
Need of several valuation methods?

Each has strengths and weaknesses

Different methods useful in different situations
Ea...
Sources of Information for Valuation
Historical financial results –
Income Statement, Balance
Sheets and Cash Flows

Sourc...
Key drivers of valuation
CASH FLOW
Investor assign value based on the cash flow they expect to receive in the
future
That’...
Valuation depends upon

Purpose
• Mergers
• IPO
• Acquisitions /
Investment

• Voluntary
Assessment

28/11/2013

Regulator...
Choice of Valuation Approaches
“Value in Valuation is a question,

and
Your choice of Method is the first step
towards ans...
Choice of Valuation Approaches

•

In General, Income Approach is preferred;

The dominance of profits for valuation of s...
Company Specific Factors
It is the alignment of
Company’s value via-avis to its external
environment
• Management, Promote...
Industry Risk Analysis
Following factors are required to
be considered:

• Good vs. Difficult industry
• Porter’s 5 forces...
Rule of Thumb
A rule of thumb or benchmark indicator is used as a
reasonableness check against the values determined by th...
WHEN & WHO
Valuation in Indian Regulatory
Environment
SNAPSHOT OF REGULATORY VALUATIONS IN INDIA
Transactions

Prescribed Methodologies

Mandate to be done by

DFCF

CA / MB

V...
Some Specific Tricky Issues
Tricky issues in DFCF
 Pre Money or Post Money: If the effect of the money coming in Company is
taken in Projections, the...
Tricky issues in DFCF (Cont.)
 Adjustment of Company Specific Risk Premium or Small Company Risk
Premium: Small Companies...
Discounts
Discounts & Premiums come into picture when there exist difference between the
subject being valued and the Meth...
Premium
“Beauty lies in the eyes of the beholder; valuation in
those of the buyer”

Financial
Year

No. of
Transactio
ns

...
Excess Cash and Non Operating Assets
Excess cash is defined as ‘total cash (in balance
sheet) – operating cash (i.e. minim...
Cross Holding and Investments

Holdings in other firms can be categorized into:
Types of Cross Holding
Minority, Passive I...
Accounting Practices and Tax issues
Most of the information that is used in
valuation comes from financial statements.
whi...
Valuation Methodologies and Value Impact
Major Valuation Methodologies

Ideal for

Result

Net Asset Value
Net Asset Value...
Financial Re-organization
Capital Market Valuation
Particulars
Surplus Assets [including Cash]
Excess Debt in Capital Structure

Excess Trading Busi...
Reorganization Tools

Tools

Business objectives

Merger

Consolidation of
businesses / entities

De-merger/
hive - off

D...
Key Drivers for Re-organization

Unlocking of Value and
its Sustainability

Restatement of Balance
Sheet

Business clarity...
Points to ensure while implementing the restructuring exercise
The transaction
should be Tax
efficient

It should be easy
...
M&A objectives – What it means?
Synergies & Economies of Scale
Gain access to new markets, customers, products
Diversifica...
Why is there a Mismatch between Buyer & Seller expectations?

1. Differences in Risk Assessment arising from  Company Spe...
Swap Ratio Valuation
•

In case of a merger valuation, the emphasis is on arriving at the relative values
of the shares of...
Impact of Swap Ratio Valuation

•

If the exchange ratio is set too high, there will be a transfer of wealth
from the bidd...
CASE STUDY
Calculation of Exchange
Ratio in M&A and
Independent Buyer-Seller
perspective
Merger of a Unlisted Power Company into Listed Steel
Manufacturing Company
Features of Steel Company*
o Frequently Traded ...
Merger of a Unlisted Power Company into Listed Steel
Manufacturing Company
EXCHANGE RATIO & VALUATION –MERGER
• Valuation ...
Pre and Post Shareholding
Pre Merger Shareholding of Steel Company
Category
Promoter

No of shares

Independent
Perspectiv...
De

Mystify
Merger

Industry Outlook
Pros and Cons of Diversified Business in one Entity

- Availability of Inter division Cash Flows for

- Markets perceive l...
However, there are other reasons as well, likeSettling family agreements – Reliance Industries
Unlocking shareholders valu...
Demerger resulted in increased shareholders value

Reliance Group

Market prices (In Rs)
Pre demerger

Post demerger

Reli...
Offering varied legal & financial services, 'Corporate Professionals' has emerged as an innovative leader in
delivering co...
Our Valuation Team

Mr. Chander Sawhney
Vice President
M: +91 9810557353
D: +91 11 40622252
E: chander@indiacp.com

Mr. Ma...
As Close As You Need
As Far As You Go……

Mumbai Office

Delhi Office

Indian Offices

D-28, South Ex., Part-I, New Delhi-1...
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Valuation and Financial Reorganisation

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Valuation and Financial Reorganisation

  1. 1. Valuation & Financial Re-organization To know how we can assist you with our Valuation services, please contact Mr. Chander Sawhney Vice President M: +91 9810557353 E: chander@indiacp.com Mr. Maneesh Srivastava Senior Manager M: +91 9871026040 E: maneesh@indiacp.com
  2. 2. “In the business world, the rearview mirror is always clearer than the windshield” Warren Buffett 28/11/2013 Business Leadership Program – SCHOOL of INSPIRED LEADERSHIP
  3. 3. Particulars Pg. No. Valuation What and Why 4 How 11 When and Who 23 Tricky Issues 26 Financial Re-organization 35 28/11/2013 Business Leadership Program – SCHOOL of INSPIRED LEADERSHIP
  4. 4. WHAT & WHY
  5. 5. Value & Valuation  Value is*  An Economic concept;  An Estimate of likely prices to be concluded by the buyer and seller of a good or service that is available for purchase;  Not a fact.  Valuation is the process of determining the “Economic Worth” of an Asset or Company under certain assumptions and limiting conditions and subject to the data available on the valuation date. * Source -International Valuation Standard Council 28/11/2013 Business Leadership Program – SCHOOL of INSPIRED LEADERSHIP
  6. 6. Key Facts PRICE IS NOT THE SAME AS VALUE VALUE VARIES WITH PERSON, PURPOSE AND TIME TRANSACTION CONCLUDES AT NEGOTIATED PRICES VALUATION IS HYBRID OF ART & SCIENCE 28/11/2013 Business Leadership Program – SCHOOL of INSPIRED LEADERSHIP
  7. 7. S Standard of Valuation T Thesis of Valuation E Economics of Valuation M Methodologies of Valuation 28/11/2013 Business Leadership Program – SCHOOL of INSPIRED LEADERSHIP
  8. 8. Standard of Valuation Thesis of Valuation Economics of Valuation Methodologies of Valuation Standard of Value is the hypothetical conditions under which a business is valued. While selecting the Standard of Value following points is to be taken care of  Subject matter of Valuation;  Purpose of Valuation;  Statute;  Case Laws;  Circumstances. Types of Standard of Value: FAIR MARKET VALUE INVESTMENT VALUE INTRINSIC VALUE FAIR VALUE 28/11/2013 Business Leadership Program – SCHOOL of INSPIRED LEADERSHIP
  9. 9. Standard of Valuation Thesis of Valuation Economics of Valuation Methodologies of Valuation Thesis of Value is Premise of value which relates to the assumptions upon which the valuation is based. Premise of Value  Going Concern – Value as an ongoing operating business enterprise.  Liquidation – Value when business is terminated . It could be ‘forced’ or ‘orderly’.  Value-in-use  Value-in-exchange 28/11/2013 Business Leadership Program – SCHOOL of INSPIRED LEADERSHIP
  10. 10. Standard of Valuation Thesis of Valuation Economics of Valuation Methodologies of Valuation Valuation across business cycle follow the law of economics Turnover/Profits: Drops   Declining Cos. `  Turnover / Profits   Mature Cos.      High Growth Cos.   Growing Cos. Start Up Cos. 28/11/2013         Proven Track Record: Substantial Operating History Method of Valuation: Entirely from Existing Assets Cost of Capital: N.A. Turnover/Profits: Saturated Proven Track Record: Widely Available Method of Valuation: More from Existing Assets Cost of Capital: May be High Turnover/Profits : Good Proven Track Record: Available Valuation Methodology: Business Model with Asset Base Cost of Capital: Reasonable Turnover/Profits: Increasing still Low Proven Track Record: Limited Valuation Methodology: Substantially on Business Model Cost of Capital: Quite High Turnover/Profits: Negligible Proven Track Record: None Valuation Methodology: Entirely on Business Model Cost of Capital: Very High Business Leadership Program – SCHOOL of INSPIRED LEADERSHIP Time
  11. 11. HOW
  12. 12. Intangibles# Equity# Net Current Assets# Net Debt# Stakeholders # Based on Market Values 28/11/2013 Business Leadership Program – SCHOOL of INSPIRED LEADERSHIP Fixed Assets# Assets Value of Business Enterprise Value Enterprise / Business Value
  13. 13. Standard of Valuation Thesis of Valuation Economics of Valuation Methodologies of Valuation Valuation Approaches Fundamental Method Income Based Method Capitalization of Earning Method (Historical) Discounted Cash Flow Method (Projected Time Value) Relative Method Market Based Method Book Value Method Comparable Companies Market Multiples Method (Listed Peers) Contingent Claim Valuation (Option Pricing) Comparable Transaction Multiples Method (Unlisted Peers) Price of Recent Investment Method Liquidation Value Method Replacement Value Method 28/11/2013 Other Method Asset Based Method Rule of Thumb Market Value Method (For Quoted Securities) Business Leadership Program – SCHOOL of INSPIRED LEADERSHIP (Multiples: Customers, Rooms, Seats, No. of visitors etc.) - Depends upon Industry
  14. 14. Need of several valuation methods? Each has strengths and weaknesses Different methods useful in different situations Each gives a different “take” on the value of the company’s stock Provides a range of valuations instead of point estimates Helps in Sanity Check While concluding Value, all the methodologies must be considered and then weights applied as per the facts of the case. In other words, Value conclusion should be based on the Professional Judgement and Simple Average should best be avoided while concluding Value.
  15. 15. Sources of Information for Valuation Historical financial results – Income Statement, Balance Sheets and Cash Flows Sources of Information Data available in Public Domain – Stock Exchange / MCA/SEBI/Independent Report Data on comparable companies – SALES/EVEBITDA/ PAT/BV Promoters and Management background Discussion and Representation with/by the management of the Company 28/11/2013 Data on projects planned/under implementation including future projection Business Leadership Program – SCHOOL of INSPIRED LEADERSHIP Industry and Regulatory trends
  16. 16. Key drivers of valuation CASH FLOW Investor assign value based on the cash flow they expect to receive in the future That’s why DCF is most - Dividends / distributions - Sale of liquidation proceeds Value of a cash flow stream is a function of - Timing of cash Receipt prominent valuation method - Risk associated with the cashflow ASSETS Operating Assets - Assets used in the operation of the business including working capital, Property, Plant & Equipment & Intangible assets - Valuing of operating assets is generally reflected in the cash flow generated by the business Non - Operating Assets - Assets not used in the operations including excess cash balances, and assets held for investment purposes, such as vacant land & Securities - Investors generally do not give much value to such assets and Structure modification may be necessary Need for Restructuring 28/11/2013 Business Leadership Program – SCHOOL of INSPIRED LEADERSHIP
  17. 17. Valuation depends upon Purpose • Mergers • IPO • Acquisitions / Investment • Voluntary Assessment 28/11/2013 Regulatory Accounting • RBI • ESOP • Income Tax • Purchase Price Allocation • SEBI • Impairment / • Stock Exchange Diminution • Companies Act Business Leadership Program – SCHOOL of INSPIRED LEADERSHIP Dispute Resolution Value Creation • Company Law • Equity Research Board/ Courts • Credit Rating • Arbitration • Corporate • Mediation Planning
  18. 18. Choice of Valuation Approaches “Value in Valuation is a question, and Your choice of Method is the first step towards answer” Applicability of a particular approach depends upon: On whose behalf? – one buyer vs another buyer, buyer vs seller; For what purpose? – independent strategic acquisition, group company consolidation, cross border transaction; When? – distress situation, industry downturn, boom etc; 28/11/2013 Business Leadership Program – SCHOOL of INSPIRED LEADERSHIP
  19. 19. Choice of Valuation Approaches • In General, Income Approach is preferred; The dominance of profits for valuation of share was emphasised in “McCathies case” (Taxation, 69 CLR 1) where it was said that “the real value of shares in a company will depend more on the profits which the company has been making and should be capable of making, having regard to the nature of its business, than upon the amount which the shares would realise on liquidation”.  This was also re-iterated by the Indian Courts in Commissioner of Wealth Tax v. Mahadeo Jalan’s case (S.C.) (86 ITR 621) and Additional Commissioner of Gift Tax v. Kusumben D. Mahadevia (S.C.) (122 ITR 38). • However, Asset Approach is preferred in case of Asset heavy companies and on liquidation; • Market Approach is preferred in case of listed entity and to evaluate the value of unlisted company by comparing it with its listed peers; 28/11/2013 Business Leadership Program – SCHOOL of INSPIRED LEADERSHIP
  20. 20. Company Specific Factors It is the alignment of Company’s value via-avis to its external environment • Management, Promoter Group • Operating, Capital and Corporate Finance Strategies • Competitive advantages and cost position • Product / Service offering / differentiation / pricing power •Scale & Diversification •Customer / Supplier concentration •Corporate Governance •Future prospects / Growth potential •Industry peer group •Regulatory environment 28/11/2013 Business Leadership Program – SCHOOL of INSPIRED LEADERSHIP
  21. 21. Industry Risk Analysis Following factors are required to be considered: • Good vs. Difficult industry • Porter’s 5 forces • Industry life cycle (growth) • Industry cyclicality (earnings quality) • Leading indicators • Competition (ROIC) • Pricing dynamics; Demand vs. Supply (ROIC) • Changing business environments • Regulation (ROIC) • Product characteristics (earnings quality) • Capital intensity and cost base (ROIC) • Event risk 28/11/2013 Business Leadership Program – SCHOOL of INSPIRED LEADERSHIP
  22. 22. Rule of Thumb A rule of thumb or benchmark indicator is used as a reasonableness check against the values determined by the use of other valuation approaches. Industry Valuation Parameters Hospital EV/Room Engineering Mcap/Order Book Mutual Fund Asset under management OIL EV/ Barrel of equivalent Print Media EV/Subscriber Power EV/MW, EBITDA/Per Unit Entertainment & Media EV/Per screen Metals EBITDA/Ton, EV/Metric ton Textiles EBITDA depend upon capacity utilization Percentage & per spindle value Pharma Bulk Drugs New Drug Approvals , Patents Airlines EV/Plane or EV/passenger Shipping EV/Order Book, Mcap/Order Book Cement EV/Per ton & EBITDA/Per ton Banks Non performing Assets , Current Account & Saving Account per Branch However, Exclusive use of Rule of Thumb is not recommended 28/11/2013 Business Leadership Program – SCHOOL of INSPIRED LEADERSHIP
  23. 23. WHEN & WHO
  24. 24. Valuation in Indian Regulatory Environment
  25. 25. SNAPSHOT OF REGULATORY VALUATIONS IN INDIA Transactions Prescribed Methodologies Mandate to be done by DFCF CA / MB Valuer Discretion >5Mn$ - MB, otherwise CA/MB Gift of Unquoted Equity Shares (Min) NAV - Gift of Unquoted Equity Shares from Resident (Max) Reserve Bank of India DCF (Valuation Based on Assets, Business & Intangibles is also acceptable) FCA / MB Price it would fetch if sold in open market MB Valuer Discretion MB Inbound Investment Outbound Investment Income Tax Gift of Unquoted Shares other than Equity Shares ESOP Tax ESOP Accounting Option – Pricing Model - Takeover Code/ Delisting Infrequently Traded Only Parameters Prescribed – Return on Net Worth, EPS, NAV vis-a vis Industry Average CA/MB Takeover Code/ Delisting Frequently Traded Based on Market Price - Preferential Allotment to Others Based on 26 weeks / 2 weeks Market Price - Preferential Allotment to promoters / their relatives for consideration other than cash Valuer Discretion CA / MB Companies Act, 1956 Sweat Equity Valuer Discretion - Companies Act, 2013 any property, stock, shares, debentures, securities or goodwill or any other assets or the net worth of the Company or its liabilities SEBI Stock Exchanges To be prescribed REGISTERED VALUER
  26. 26. Some Specific Tricky Issues
  27. 27. Tricky issues in DFCF  Pre Money or Post Money: If the effect of the money coming in Company is taken in Projections, the Expanded capital base should be considered or else the Equity Value should be reduced by the inflow amount to reconcile with the existing capital base.  Terminal growth rate: Since it is tough to estimate the perpetual growth rate of a company, it is preferred to take the perpetuity growth rate factoring in long term estimated GDP of the Country and Historical/Projection Inflation of the Country.  Projection Validation via-a-vis Industry: Need to have Sanity check of the projections with the trend of the industry.  Beta of Unlisted Company: It is calculated on relative basis by adjusting the average beta of its comparable companies for differences in Capital Structure of the unlisted company with the listed peers.  Risk Free Rate: Yield of a Zero Coupon Bond or Long Term government Bond yield should be taken as the risk free rate since it does not have any reinvestment risk . 28/11/2013 Business Leadership Program – SCHOOL of INSPIRED LEADERSHIP
  28. 28. Tricky issues in DFCF (Cont.)  Adjustment of Company Specific Risk Premium or Small Company Risk Premium: Small Companies are generally more risky than big companies. CAPM model does not take into consideration the size risk and specific company risk as Beta measures only systematic risk and Market Risk Premium (generally pertaining to Sensex Companies). These risks should also be taken into account while computing the cost of equity.  Length of Projections: The Projected Cash Flows should factor in the entire Business Cycle of a Company.  Notional/Actual Tax: Actual Tax Liability may be worked out and replaced for the Notional Tax Liability  Investments: Investments should be valued separately based on their Independent Cash Flows  Surplus Assets: The Value of Surplus Assets (not being utilized for Business purposes) should be added separately and their cash flows should be ignored while computing the Free Cash Flows. 28/11/2013 Business Leadership Program – SCHOOL of INSPIRED LEADERSHIP
  29. 29. Discounts Discounts & Premiums come into picture when there exist difference between the subject being valued and the Methodologies applied. As this can translate control value to non-control and vise versa , so these should be judiciously applied. – Impact on entity as a whole • Discount for Entity Level  Key Person Discount Global Studies over the years on diversified  Discount for Contingent Liability companies and holding companies has shown  Discount for diversified company that companies trade at a discount in the range  Discount for Holding Company of 20%. to 40% each.  Tax Payout • Discount for Shareholders Level – Impact on specific ownership interest  Discount Lack of Control (DLOC)  Discount Lack of Marketability (DLOM) DLOM: As per CCI Guidelines, 15% • % stake & special rights discount has been prescribed; however • Size of distribution or dividends practically DLOM and DLOC depends upon • Dispute following factors: • Revenue / Earning – Growth / Stability • Private Company 28/11/2013 • Shareholders Agreement caveats Business Leadership Program – SCHOOL of INSPIRED LEADERSHIP
  30. 30. Premium “Beauty lies in the eyes of the beholder; valuation in those of the buyer” Financial Year No. of Transactio ns Median Premium • An investor seeking to acquire control of a company is the company. Control premium is an amount that a buyer is 2006 25 37% 2007 29 20% 2008 38 26% 2009 44 29% 2010 22 31% 2011 42 32% Total typically willing to pay more than the current market price of 228 30% usually willing to pay over the fair market value of a publicly traded company to acquire controlling stake in a company. • Control can be direct (shareholding or Authority to appoint Board) or indirect (veto power, casting vote etc) • Research has shown that the control premium in India has ranged from 20% to 37% in the past few years having median of 30%. 28/11/2013 Business Leadership Program – SCHOOL of INSPIRED LEADERSHIP
  31. 31. Excess Cash and Non Operating Assets Excess cash is defined as ‘total cash (in balance sheet) – operating cash (i.e. minimum required cash) to sustain operations (working capital) and manage contingencies Key Issue: Estimation of Excess Cash ? One of the solutions is to estimate average cash/sales or total balance sheet size of the company’s relevant Industry and then estimate if the company being valued has cash in excess of the industry’s average. Non operating Assets are the Surplus assets which are not used in operations of the business and does not reflect its value in the operating earnings of the company. Therefore the fair market value of such Assets should be separately added to the value derived through valuation methodologies to arrive at the value of the company. What is an asset is not yielding adequate returns ? 28/11/2013 Business Leadership Program – SCHOOL of INSPIRED LEADERSHIP
  32. 32. Cross Holding and Investments Holdings in other firms can be categorized into: Types of Cross Holding Minority, Passive Investments Meaning If the securities or assets owned in another firm represent less than 20% of the overall ownership of that firm Minority, Active Investments If the securities or assets owned in another firm represent between 20% and 50% of the overall ownership of that firm Majority, Active Investments If the securities or assets owned in another firm represent more than 50% of the overall ownership of that firm Ways to value Cross Holding and Investments: Investment Value By way of Dividend Yield Capitalization or DCF based on expected dividends Agreement holding Separate Valuation (Preferred) 28/11/2013 even may control value Business Leadership Program – SCHOOL of INSPIRED LEADERSHIP Shareholders less % command
  33. 33. Accounting Practices and Tax issues Most of the information that is used in valuation comes from financial statements. which in turn Accounting are practices appropriate. • Cash Accounting v/s Accrual Accounting • Operating Lease v/s Financial Lease • Capitalization of Expenses • Notional Tax vs. Actual Tax • Treatment of Intangible Assets • Companies Paying MAT • Treatment of Tax benefits and Losses 28/11/2013 Business Leadership Program – SCHOOL of INSPIRED LEADERSHIP made on certain considered
  34. 34. Valuation Methodologies and Value Impact Major Valuation Methodologies Ideal for Result Net Asset Value Net Asset Value (Book Value) Minority Value Equity Value Net Asset Value (Fair Value) Control Value Comparable Companies Multiples (CCM) Method Price to Earning , Book Value Multiple EBIT , EBITDA Multiple Minority Value Equity Value Enterprise Value Comparable Transaction Multiples (CTM) Method Price to Earning , Book Value Multiple Equity Value Control Value EBIT , EBITDA Multiple Enterprise Value Discounted Cash Flow (DCF) Equity Control Value Firm 28/11/2013 Equity Value Enterprise Value Business Leadership Program – SCHOOL of INSPIRED LEADERSHIP
  35. 35. Financial Re-organization
  36. 36. Capital Market Valuation Particulars Surplus Assets [including Cash] Excess Debt in Capital Structure Excess Trading Business in Manufacturing Sector Diversified Business Model Excess Business in Subsidiary Company Company Performance [Operating Profits; Net Profits; New Products; Capacity Expansion] Increasing Cash Flows of Business Better Corporate Governance Better Disclosures [Investor, Analysts & Stakeholders Communication] Regular Dividends / Bonus / Buyback Corporate Re-organisation / M&A Joint Ventures / Acquisitions Market Perception 28/11/2013 Business Leadership Program – SCHOOL of INSPIRED LEADERSHIP Effect Market Cap
  37. 37. Reorganization Tools Tools Business objectives Merger Consolidation of businesses / entities De-merger/ hive - off Divest non-core business Acquisitions Acquiring interest in new business/ entity Internal Reorganization Restructuring within the Company Reorganization of BUSINESS 28/11/2013 Business Leadership Program – SCHOOL of INSPIRED LEADERSHIP
  38. 38. Key Drivers for Re-organization Unlocking of Value and its Sustainability Restatement of Balance Sheet Business clarity to Investors and Analysts Improving Governance Processes Positioning the businesses to be more competitive Making Businesswise Fund raising possible Business Risk Management Stock & Credit Rerating Investor Relations
  39. 39. Points to ensure while implementing the restructuring exercise The transaction should be Tax efficient It should be easy to Implement with least possible regulatory hassles Scheme should be acceptable to all Stakeholders Ensure that there is least possible Stamp Duty/Transfer Charges Cost Effectiveness
  40. 40. M&A objectives – What it means? Synergies & Economies of Scale Gain access to new markets, customers, products Diversification of Risks Access to New Technology and Knowledge Ability to limit competition / gain market share M&A is primarily driven with motive of achieving Inorganic growth and Synergy i.e. the potential additional value gain from combining two firms, either from operational or financial sources. However, certain studies have shown that most – but not all – M&A fail to deliver value and bridge the price-value gap One of the reasons is that the aggressive promoters in consultation with eager advisors may result in pushing up the acquisition price; Resultantly, the value often get transferred from acquirer’s shareholders to target company’s shareholders; 28/11/2013 Business Leadership Program – SCHOOL of INSPIRED LEADERSHIP
  41. 41. Why is there a Mismatch between Buyer & Seller expectations? 1. Differences in Risk Assessment arising from  Company Specific Risk • Management capability • Future Cash Flows  Industry Risk - Business Cycles, Industry Outlook 2. Intangible Asset Valuations 3. Unproductive, high value fixed assets housed in target company 4. Cash and Stock Payout ratio 5. Ability to raise funding on buyer’s or target company’s b/s 6. Estimation of synergies (cost and revenue) 28/11/2013 Business Leadership Program – SCHOOL of INSPIRED LEADERSHIP
  42. 42. Swap Ratio Valuation • In case of a merger valuation, the emphasis is on arriving at the relative values of the shares of the merging companies to facilitate determination of the swap ratio – Hence, the purpose is not to arrive at absolute values of the shares of the companies • The key issue to be addressed is that of fairness to all shareholders – This is particularly important where the shareholding pattern and shareholders vary between the two companies • There are established legal precedence for merger valuation methodologies – Valuer’s role is to incorporate case specific factors and use appropriate methodologies so as to determine a fair ratio – Usually, best to give weight ages to valuation by all methods – Market price method and Earnings methods dominate. 28/11/2013 Business Leadership Program – SCHOOL of INSPIRED LEADERSHIP
  43. 43. Impact of Swap Ratio Valuation • If the exchange ratio is set too high, there will be a transfer of wealth from the bidding firm’s stockholders to the target firm’s stockholders. • If the exchange ratio is set too low, there will be transfer of wealth from the target firm to the bidding firm’s stockholders. 28/11/2013 Business Leadership Program – SCHOOL of INSPIRED LEADERSHIP 43
  44. 44. CASE STUDY Calculation of Exchange Ratio in M&A and Independent Buyer-Seller perspective
  45. 45. Merger of a Unlisted Power Company into Listed Steel Manufacturing Company Features of Steel Company* o Frequently Traded Listed Company o Low Profit Margin, due to high Power Cost o Running in Low Capacity Utilization due to poor supply of Power Features of Power Company* o Unlisted Company o Company is implementing the Power Plant of 9.5 MW , The Production is expected to start with in Year Acquisition Rationale o Location Advantage, both companies have their unit in same Location o Synergistic benefits- (Captive Power Plant will reduce the Operating cost, because Steel Industry is energy consuming) o Tax benefit from the unabsorbed losses of Power Company o Up the value chain o Capacity utilization will increase in existing steel business, due easy availability of Power 28/11/2013 Business Leadership Program – SCHOOL of INSPIRED LEADERSHIP *Common Promoter Group
  46. 46. Merger of a Unlisted Power Company into Listed Steel Manufacturing Company EXCHANGE RATIO & VALUATION –MERGER • Valuation on Steel Company Valuation Method Rs Crores Weights Value of Company Weighted Value Market Cap 2 100 200 Income Method 2 95 190 NAV 1 150 150 Fair Value of Company 108 • Valuation on Power Company Valuation Method Rs Crores Weights Value of Company Weighted Value Market Cap 2 NA NA Income Method^ 2 90 180 NAV 1 50 50 Fair Value of Company ^ considering 3 years forward earnings and 80-90% Capacity utilization basis 28/11/2013 76.67
  47. 47. Pre and Post Shareholding Pre Merger Shareholding of Steel Company Category Promoter No of shares Independent Perspective % Holding 5,000,000 50% Public 5,000,000 50% Total 10,000,000 100% Pre Merger Shareholding of Power Company Category Promoter No of shares % Holding 5,000,000 100% - - 5,000,000 100% Public Total Post Merger Shareholding of Steel Company Category Promoter No of shares % Holding 12,099,074 5,000,000 29% Total 17,099,074 100% Valuation of Power business on as is basis – Rs.55 crores Assets Method Earnings Method (Includes premium for the license) Valuation of Power business taking into account synergies – Rs. 70 crores An independent Buyer would bid an amount in excess of valuation on standalone basis (Rs. 55 crores) and below Synergy valuation (Rs.70 crores). 71% Public Buyer-Seller 28/11/2013 Acquisition Price would finally depend on negotiations. Business Leadership Program – SCHOOL of INSPIRED LEADERSHIP
  48. 48. De Mystify Merger Industry Outlook
  49. 49. Pros and Cons of Diversified Business in one Entity - Availability of Inter division Cash Flows for - Markets perceive lack of servicing of debt; - Management focus - Security for debt providers; - Business Clarity - Cushioning impact of business down turns; - Transparency - Better size in terms of revenues - Difficulty in Business wise Fund Raising - Diversified Business Discount resulting in sub-optimal Businesswise Valuations 28/11/2013 Business Leadership Program – SCHOOL of INSPIRED LEADERSHIP
  50. 50. However, there are other reasons as well, likeSettling family agreements – Reliance Industries Unlocking shareholders value – Cadila Healthcare Focus on core competencies – Bajaj Auto Facilitate strategic investment – Volvo & Eicher Motors Regulatory Reasons – Zee Telefilms Divestment - Piramal Healthcare Limited De-risking the business model – Sun Pharmaceutical Demerger of Research & Development division 28/11/2013 Business Leadership Program – SCHOOL of INSPIRED LEADERSHIP
  51. 51. Demerger resulted in increased shareholders value Reliance Group Market prices (In Rs) Pre demerger Post demerger Reliance Industries 702 698 Reliance Capital Ventures - 23 Reliance Communication Ventures - 292 Reliance Energy Ventures - 43 Reliance Natural “That is what Resource learning is, you suddenly - understand 18 something you have understood all your life, but in a new TOTAL 702 1074 way” …………………………….. Doris Lessing 28/11/2013 Business Leadership Program – SCHOOL of INSPIRED LEADERSHIP
  52. 52. Offering varied legal & financial services, 'Corporate Professionals' has emerged as an innovative leader in delivering corporate advisory & solutions. Aiming to become a one-stop-shop offering integrated legal and financial solutions, the Group has successfully completed a high number of corporate transactions in the last couple of years. We have successfully engaged in and executed over 3000 assignments of more than 1200 corporate houses, domestic as well as international, across several Industries. The Group has distinctively positioned itself as Merchant Banker (SEBI Cat-I license) with Boutique Investment Banking & Transaction Advisory services and as Legal Advisors with high quality comprehensive Corporate Laws, Tax & Regulatory services. With an endeavor to satisfy our clients' stated as well as unstated needs, we adopt the most feasible and legally viable approach to execute assignments in a seamless, cost effective and time bound manner. High Integrity and Confidentiality in dealing with clients and assignments undertaken is deeply inculcated in our team. The Group prestigiously owns a strong skill set that comes from its research oriented, multi-disciplinary, young and dynamic team. With right blend of legal and financial skills, continuous focus on research and effective use of Information Technology, Corporate Professionals is creating customized products, for different class of clients. Innovative flair of executing assignments with problem solving zeal and use of Technology has enabled us to offer path breaking solutions. Not just for executing Clients' Assignments but also in internal management, the Group adheres to a system driven approach. The Group dedicates around 30% working time of its professional team on continuous research in the dynamic legal and financial fields, with an object of creating a knowledge hub, extensive knowledge dissemination and to develop skills of its team to deliver high quality services. “Corporate Professionals” refers to one or more of group companies and its network of firms and other entities, each of which is a separate legal, independent entity. For more details, please visit www.corporateprofessionals.com. About Corporate Professionals
  53. 53. Our Valuation Team Mr. Chander Sawhney Vice President M: +91 9810557353 D: +91 11 40622252 E: chander@indiacp.com Mr. Maneesh Srivastava Senior Manager M: +91 9871026040 D: +91 11 40622255 E: maneesh@indiacp.com Mr. Gaurav Kumar Barick Assistant Manager M: +91 8130141874 D: +91 11 40622241 E: gaurav@indiacp.com Mr. Sameer Verma Assistant Manager M: +91 9911945607 D: +91 11 40622216 E: sameer@indiacp.com
  54. 54. As Close As You Need As Far As You Go…… Mumbai Office Delhi Office Indian Offices D-28, South Ex., Part-I, New Delhi-110049, D-38, South Ex., Part-I, New Delhi-110049, T: +91 11 40622255 M:+ 91 9871026040, E: info@indiacp.com 520, Mastermind- I, Royal Palms Estate, Aarey Colony, Goregaon East, Mumbai -400065 T: +91 2267109044 M:+ 91 9820079664 E: mahipal@indiacp.com Bedford Office (United Kingdom) 2-4 Mill Street, MK40 3HD, Bedford Switchboard: +44 (0) 2030063240, E: ukoffice@indiacp.com Overseas Offices India Ahmedabad, Allahabad, Bangalore, Bhopal, Bhubaneshwar, Chandigarh, Chennai, Coimbatore, Goa, Guwahati, Gwalior, Hyderabad, Indore, Jaipur, Jammu, Kanpur, Kochi, Kolkata, Lucknow, Ludhiana, Patna, Pune. Our Associates Overseas Bulgaria, Belgium, British Virgin Islands, Canada, China, Costa Rica, Cyprus, European Union, Germany, Hongkong, Ireland, Japan, Kenya, Malaysia, Mauritius, Singapore, Sri Lanka, Switzerland, The Netherlands, Turkey, United Arab Emirates, United Kingdom, United States.

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