Mergers & Acquisitions Arpita  Amarnani
Mergers and Acquisitions <ul><li>Mergers – two or more corporate entities coming together to form one entity </li></ul><ul...
Types of M&A Activity <ul><li>Horizontal Mergers – two or more companies engaged in the same businesses (Reliance – IPCL, ...
M&A: Plausible Reasons <ul><li>Strategic Benefits </li></ul><ul><ul><li>Enhance ‘Market Power’ (Sterlite – Hindustan Zinc,...
contd…. M&A: Plausible Reasons <ul><li>Complementary Resources </li></ul><ul><ul><li>Mahindra & Mahindra and Jiangling Mot...
&…. The Dubious Ones <ul><li>Diversification </li></ul><ul><ul><li>Let the shareholder decide…… </li></ul></ul><ul><li>Low...
Mechanics of a Merger <ul><li>Legal Procedure </li></ul><ul><ul><li>Considerations – Companies Act, 1956, Stock Exchanges,...
Costs and Benefits of a Merger <ul><li>Net Benefit of the merger (From POV of A, given that it is acuiring B) </li></ul><u...
Terms of a Merger <ul><li>Usually arrived at in a manner to meet minimum price expectation of acquired company and maximum...
Takeovers <ul><li>Acquisition of controlling rights in a company </li></ul><ul><li>Usually done through </li></ul><ul><ul>...
Regulation of Takeovers <ul><li>Takeover regulations should ensure </li></ul><ul><ul><li>Transparency of process </li></ul...
Anti-takeover Defences <ul><li>Pre-offer Defences </li></ul><ul><ul><li>Staggered Board </li></ul></ul><ul><ul><li>Super m...
Anti-takeover Defences in India <ul><li>Make preferential allotment </li></ul><ul><li>Effect creeping acquisition </li></u...
<ul><li>Thank You !!! </li></ul>
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Mergers and acquisitions

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Mergers and acquisitions

  1. 1. Mergers & Acquisitions Arpita Amarnani
  2. 2. Mergers and Acquisitions <ul><li>Mergers – two or more corporate entities coming together to form one entity </li></ul><ul><ul><li>Absorption – one company acquiring another company </li></ul></ul><ul><ul><li>Consolidation – two or more companies combining to form new company </li></ul></ul><ul><ul><li>Amalgamation – the legal name for mergers in India </li></ul></ul><ul><li>Acquisitions – Purchase of a company / unit / plant / assets </li></ul><ul><ul><li>Sometimes results in mergers </li></ul></ul>
  3. 3. Types of M&A Activity <ul><li>Horizontal Mergers – two or more companies engaged in the same businesses (Reliance – IPCL, Daimler-Chrysler) </li></ul><ul><li>Vertical mergers – two or more companies linked by value chain (AOL – Times Warner) </li></ul><ul><li>Concentric mergers – two or more companies in related, though not the same businesses (P&G - Gillette) </li></ul><ul><li>Conglomerate mergers – two or more companies in unrelated fields (Tata Sons – VSNL) </li></ul>
  4. 4. M&A: Plausible Reasons <ul><li>Strategic Benefits </li></ul><ul><ul><li>Enhance ‘Market Power’ (Sterlite – Hindustan Zinc, Reliance – IPCL, Grasim – Ultratech Cements) </li></ul></ul><ul><ul><li>Pre-empt competition (eg. Indial Oil – IBP Ltd.) </li></ul></ul><ul><ul><li>Timing advantage (ICICI Ltd. – Anagram Securities) </li></ul></ul><ul><li>Economies of Scale </li></ul><ul><ul><li>Better utilisation of mfg capacity (eg. JISCO – SISCO ), distribution networks (P&G – Gillette), other facilities, services </li></ul></ul><ul><ul><li>Usually observed in horizontal mergers </li></ul></ul><ul><li>Economies of scope </li></ul>
  5. 5. contd…. M&A: Plausible Reasons <ul><li>Complementary Resources </li></ul><ul><ul><li>Mahindra & Mahindra and Jiangling Motors, China </li></ul></ul><ul><ul><li>Star TV – Balaji Telefilms </li></ul></ul><ul><li>Tax Shields </li></ul><ul><ul><li>Savings on direct, indirect taxes (eg. NOCIL – Polyleofins Industries, RIL – Reliance Petrochemicals) </li></ul></ul><ul><li>Utilisation of surplus funds </li></ul><ul><ul><li>Reliance Capital – Adlabs </li></ul></ul><ul><li>Managerial Effectiveness </li></ul><ul><ul><li>The Mittal Steel story? </li></ul></ul>
  6. 6. &…. The Dubious Ones <ul><li>Diversification </li></ul><ul><ul><li>Let the shareholder decide…… </li></ul></ul><ul><li>Lower financing cost </li></ul><ul><ul><li>At the expense of the better rated company….. </li></ul></ul><ul><li>Earnings growth </li></ul>
  7. 7. Mechanics of a Merger <ul><li>Legal Procedure </li></ul><ul><ul><li>Considerations – Companies Act, 1956, Stock Exchanges, SEBI Takeover code </li></ul></ul><ul><li>Tax Aspects </li></ul><ul><ul><li>Exemption in capital gains, subject to conditions </li></ul></ul><ul><ul><li>Allowance of set-off of carried forward depreciation and losses, subject to conditions to the amalgamating company </li></ul></ul><ul><li>Accounting for amalgamations </li></ul><ul><ul><li>Two methods – Pooling of interest, Purchase method </li></ul></ul>
  8. 8. Costs and Benefits of a Merger <ul><li>Net Benefit of the merger (From POV of A, given that it is acuiring B) </li></ul><ul><ul><li>Benefit = PV AB – (PV A + PV B ) </li></ul></ul><ul><ul><li>For Cash pmt; Cost = Cash – PV B </li></ul></ul><ul><ul><li>Hence, NPV to A = Benefit – Cash </li></ul></ul><ul><ul><li>= [PV AB – (PV A + PV B )] – [Cash – PV B ] </li></ul></ul><ul><ul><li>= PV AB – PV A – Cash </li></ul></ul><ul><ul><li>& NPV to B = Cash – PV B </li></ul></ul>
  9. 9. Terms of a Merger <ul><li>Usually arrived at in a manner to meet minimum price expectation of acquired company and maximum permissible price acceptable to shareholders of acquiring company </li></ul><ul><li>Commonly used bases for deciding Exchange ratio </li></ul><ul><ul><li>Earnings per share </li></ul></ul><ul><ul><li>Market price per share </li></ul></ul><ul><ul><li>Book value per share </li></ul></ul><ul><ul><li>Discounted cash flow value per share </li></ul></ul>
  10. 10. Takeovers <ul><li>Acquisition of controlling rights in a company </li></ul><ul><li>Usually done through </li></ul><ul><ul><li>Open market purchase </li></ul></ul><ul><ul><li>Negotiated acquisition </li></ul></ul><ul><ul><li>Preferential allotment </li></ul></ul><ul><li>Takeovers usually generate controversy </li></ul><ul><ul><li>Have both supporters and detractors among management and finance experts </li></ul></ul>
  11. 11. Regulation of Takeovers <ul><li>Takeover regulations should ensure </li></ul><ul><ul><li>Transparency of process </li></ul></ul><ul><ul><li>Interest of small shareholders </li></ul></ul><ul><ul><li>Realisation of economic gains </li></ul></ul><ul><ul><li>No undue concentration of market power </li></ul></ul><ul><li>SEBI Takeover Code </li></ul><ul><ul><li>Disclosure </li></ul></ul><ul><ul><li>Trigger Point </li></ul></ul><ul><ul><li>Offer Price </li></ul></ul><ul><ul><li>Public Announcement </li></ul></ul><ul><ul><li>Creeping Acquisition </li></ul></ul>
  12. 12. Anti-takeover Defences <ul><li>Pre-offer Defences </li></ul><ul><ul><li>Staggered Board </li></ul></ul><ul><ul><li>Super majority clause </li></ul></ul><ul><ul><li>Poison pills – flip in / flip over </li></ul></ul><ul><ul><li>Dual class recapitalisation </li></ul></ul><ul><ul><li>Golden parachute </li></ul></ul><ul><li>Post-offer Defences </li></ul><ul><ul><li>Greenmail </li></ul></ul><ul><ul><li>Pacman defence </li></ul></ul><ul><ul><li>Litigation </li></ul></ul><ul><ul><li>Asset restructuring </li></ul></ul><ul><ul><li>Liability restructuring </li></ul></ul><ul><ul><li>Scorched earth policy </li></ul></ul>
  13. 13. Anti-takeover Defences in India <ul><li>Make preferential allotment </li></ul><ul><li>Effect creeping acquisition </li></ul><ul><li>Amalgamate group companies </li></ul><ul><li>Sell the crown jewels </li></ul><ul><li>Search for a White Knight </li></ul>
  14. 14. <ul><li>Thank You !!! </li></ul>
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