Mergers & Acquisitions http://www.ranjanblog.com

Corporate Strategies in M&A Why? Gain market share Economies of scale Enter new markets Acquire technologies Strategic Benefit Complementary resource Tax shields Utilisation of surplus funds Managerial Effectiveness Integrate vertically

Why?

Gain market share

Economies of scale

Enter new markets

Acquire technologies

Strategic Benefit

Complementary resource

Tax shields

Utilisation of surplus funds

Managerial Effectiveness

Integrate vertically

Why not? Grasping for a company simply because it’s on the market, or because a competitor wants to buy it . Overpayment or misguided purchase Reduce cost of debt. Diverse Business; Unmanageable Leaping without looking at the value; Win-Win or no deal Inability to integrate well.

Grasping for a company simply because it’s on the market, or because a competitor wants to buy it .

Overpayment or misguided purchase

Reduce cost of debt.

Diverse Business; Unmanageable

Leaping without looking at the value; Win-Win or no deal

Inability to integrate well.

Corporate Strategies in M&A Exploit market power, economies of scale & scope, and market inefficiencies Same industry/ Same market Consolidation Related industries Horizontal Jet-Sahara Same industry/ Different market (Conglomerate) LIC-UTI Bank Suppliers Vertical ITC

Exploit market power, economies of scale & scope,

and market inefficiencies

Same industry/

Same market

Consolidation

Related industries

Horizontal

Jet-Sahara

Same industry/

Different market

(Conglomerate)

LIC-UTI Bank

Suppliers

Vertical

ITC

Mechanics of a Merger Legal Procedure The MOA to be scrutinised Intimation to Stock Exchanges Approval of draft amalgamation proposal Application to the Court Notice to shareholders and creditors Filing the order Transfer of assets and liabilities Issue of shares and debentures

Legal Procedure

The MOA to be scrutinised

Intimation to Stock Exchanges

Approval of draft amalgamation proposal

Application to the Court

Notice to shareholders and creditors

Filing the order

Transfer of assets and liabilities

Issue of shares and debentures

Mechanics of Merger (Cont’d) Tax Aspects Section 2(a) of the Income Tax Act defines amalgamation Depreciation for tax purposes Accumulated losses Unabsorbed Depreciation Capital Gains Tax Accounting for Amalgamation is done according to Accounting Standard 14 (AS-14) issued by the Institute of Chartered Accountants of India

Tax Aspects

Section 2(a) of the Income Tax Act defines amalgamation

Depreciation for tax purposes

Accumulated losses

Unabsorbed Depreciation

Capital Gains Tax

Accounting for Amalgamation is done according to Accounting Standard 14 (AS-14) issued by the Institute of Chartered Accountants of India

Costs & Benefits When firm A acquires firm B, A is making a capital investment while B is making capital divestment based on NPV method Benefit = PV(AB) – {PV(A) + PV(B)} Cost = Cash – PV(B) NPV to A= Benefit – Cost NPV to B= Cash – PV(B)

When firm A acquires firm B, A is making a capital investment while B is making capital divestment based on NPV method

Benefit = PV(AB) – {PV(A) + PV(B)}

Cost = Cash – PV(B)

NPV to A= Benefit – Cost

NPV to B= Cash – PV(B)

Screening Potential Deals Never stop looking Constantly scanning marketplace Be diligent and disciplined Look at various potentials in the market, not just the deal at hand Don’t cast strategy aside in the face of an exciting opportunity Can’t make a good stew unless you have good ingredients shop around to find the best ingredients

Never stop looking

Constantly scanning marketplace

Be diligent and disciplined

Look at various potentials in the market, not just the deal at hand

Don’t cast strategy aside in the face of an exciting opportunity

Can’t make a good stew unless you have good ingredients

shop around to find the best ingredients

Due Diligence Look for the devil in the details A 360 approach – external-internal ………. peel the onion! past-present-future scenario modeling on synergy assumptions Link due diligence with business planning

Look for the devil in the details

A 360 approach –

external-internal ………. peel the onion!

past-present-future

scenario modeling on synergy assumptions

Link due diligence with business planning

Look for the devils in the details! Industry / Markets Customers / Partners Competition People Suppliers Customer & Vendor Contracts Operations & Support Pricing and discounts Finance, Accounting & Taxes

Industry / Markets

Customers / Partners

Competition

People

Suppliers

Customer & Vendor Contracts

Operations & Support

Pricing and discounts

Finance, Accounting & Taxes

Look for the devils in the details! Contingent Liabilities Corporate Controls Intellectual Properties Human Resources Legal IT – infrastructure & applications Insurance Synergy – Assumption Testing!!

Contingent Liabilities

Corporate Controls

Intellectual Properties

Human Resources

Legal

IT – infrastructure & applications

Insurance

Synergy – Assumption Testing!!

Valuation No magic formula Future cash flow Earnings estimates Assumption modeling Due diligence findings Synergy Set limits and stick to financial discipline Maintain reasonable and realistic expectations X Rationalization: “This deal is strategic – don’t worry, it’s all going to work out in the end no matter what price we pay.”  Wisdom: “If you stumble across too many red flags while evaluating a business, walk away!”

No magic formula

Future cash flow

Earnings estimates

Assumption modeling

Due diligence findings

Synergy

Set limits and stick to financial discipline

Maintain reasonable and realistic expectations

X Rationalization: “This deal is strategic – don’t worry, it’s all going to work out in the end no matter what price we pay.”

 Wisdom: “If you stumble across too many red flags while evaluating a business, walk away!”

Making the Deal Happen Identify the details critical to the deal’s success Use early negotiations to foster a sense of trust with the target’s top executives Know who have influence on the deal – target company and your company Don’t focus on the price yet Keeping a foot on the brakes

Identify the details critical to the deal’s success

Use early negotiations to foster a sense of trust with the target’s top executives

Know who have influence on the deal – target company and your company

Don’t focus on the price yet

Keeping a foot on the brakes

Making the Deal Good Negotiate on several fronts simultaneously Make sure you have alternatives to this deal Anticipate the competition Close quickly after setting final terms

Negotiate on several fronts simultaneously

Make sure you have alternatives to this deal

Anticipate the competition

Close quickly after setting final terms

Making the Deal Good PR: External & internal Integration – Realizing the synergy dream Talent Culture Structure Technology Discovering and leveraging the unknown and unexpected treasures

PR: External & internal

Integration – Realizing the synergy dream

Talent

Culture

Structure

Technology

Discovering and leveraging the unknown and unexpected treasures

Are You the Strongest Acquirer? Ability to realize synergies Financing capacity Ability to make quick decisions Attractiveness of currency Reputation Negotiations People treatment Integration Post-acquisition performance record

Ability to realize synergies

Financing capacity

Ability to make quick decisions

Attractiveness of currency

Reputation

Negotiations

People treatment

Integration

Post-acquisition performance record

Jargons to understand Net Present Value Exchange Ratio Price per share Price Earning multiple Earnings Number of Shares/ Debentures Free Cash Flow Market price to Book Value ratio

Net Present Value

Exchange Ratio

Price per share

Price Earning multiple

Earnings

Number of Shares/ Debentures

Free Cash Flow

Market price to Book Value ratio

SEBI Guidelines Notification Trigger point for public offer Offer price Contents of Public announcement To ensure transparency, greater disclosures and protect the interests of small shareholders .

Notification

Trigger point for public offer

Offer price

Contents of Public announcement

To ensure transparency, greater disclosures and protect the interests of small shareholders .

HOT DEALS Mittal- Arcelor SBI- GE ICICI- Sangli Bank United Breweries- Shaw Wallace Tata- Corus Jet- Sahara LIC may buy UTI Bank ( FE, 13.04.2007)

Mittal- Arcelor

SBI- GE

ICICI- Sangli Bank

United Breweries- Shaw Wallace

Tata- Corus

Jet- Sahara

LIC may buy UTI Bank ( FE, 13.04.2007)

Air Sahara in Jet Air Fold Deal for Rs 1450 crore, 40% less than the deal in Jan’ 2006. NPV of Price is Rs 1200 crore. Rs 200 crore debt of Air Sahara will increase the acquisition cost. The merged entity will have a market share of 42% (largest domestic private ) Buyout helps Jet Air to go International. Source: Financial Dailies

Deal for Rs 1450 crore, 40% less than the deal in Jan’ 2006.

NPV of Price is Rs 1200 crore.

Rs 200 crore debt of Air Sahara will increase the acquisition cost.

The merged entity will have a market share of 42% (largest domestic private )

Buyout helps Jet Air to go International.

छपतेछपते M & A Valuations to come under lens Institute of Independent Valuers to be set up to standardize techniques and procedures. Sources: Financial Express, dated 16.04.2007 Financial Management by Prasanna Chandra http://www.ranjanblog.com

M & A Valuations to come under lens

Institute of Independent Valuers to be set up to standardize techniques and procedures.