Mergers & Acquisition

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Mergers & Acquisition

  1. 1. Mergers & Acquisition
  2. 2. <ul><li>Most of M&A fail ? </li></ul><ul><li>Pursue them when they make sense </li></ul><ul><li>Deals should be above average </li></ul><ul><li>Easier said than done‼ </li></ul><ul><li>Why pursued by cos? </li></ul><ul><li>Maximum value is given by Market to acquisition deals as compared to alliances/sale </li></ul>
  3. 4. <ul><li>Market prefers deals that are part of an “expansionist program”, </li></ul><ul><li>consolidation, new geographic regions, adding new distribution channels, for existing products & services </li></ul><ul><li>Market less tolerant of “transformative deals” that move cos into </li></ul><ul><li>new lines of business, </li></ul><ul><li>remove a chunk of an otherwise healthy business portfolio’ </li></ul>
  4. 5. MARKET PREFERS DEALS CONSOLIDATING NEW GEOGRAPHIC REGION ADD NEW DISTRIBUTION CHANNEL EXPANSION PROGRAM TRANSFORMATIVE NATURE
  5. 6. Heineken 1999-00, increase in net turnover: new acquisitions 8%, increased sales 2%, higher sales price/mix 2%, improved exch rates 2% 2003:04 Europe :BBAG: Brau Union: Largest Brewer In Central Europe China: Fraser & Neave: Heineken Asia Pacific Breweries China, Acquired Interest Guangdong Brewery Holdings Australia: JV Lion Nathan Australia: Heineken Lion Nathan MARKET VALUES ACQUISITION OTHERS
  6. 7. SABMILLER African brewer : Int. conglomerate International acquisitions US, central Europe , Africa, Asia 2000: Narang Breweries : Lucknow 2001: Mysore Breweries Ltd, Rochees Breweries Ltd 2003: Shaw Wallace: Beer Division (Strong Brand Haywards) 2006: Foster’s India: Maharashtra Mohan Meakin’s Acquisition Attempt
  7. 9. <ul><li>Cash deals received more favorable market reaction than stock deals </li></ul><ul><li>(trading & signaling effect ) </li></ul><ul><li>Overpayment in the deals has reduced </li></ul>
  8. 10. Positive correlation announcement effects & long run value creation <ul><li>Record level in announced M&A </li></ul><ul><li>DVA- total value deals create </li></ul><ul><li>POP- proportion of cos overpaying </li></ul>
  9. 11. DVA <ul><li>Measures aggregate value change at time of announcement (both cos) </li></ul><ul><li>as a % of transaction’s value </li></ul><ul><li>Market’s assessment of value to be created </li></ul>
  10. 12. POP <ul><li>Proportion of transactions in which the initial share price reaction negative </li></ul><ul><li>Acquirer overpaid </li></ul>
  11. 13. <ul><li>Millman and Grey show that “…83% of mergers produce no benefit whatsoever to shareholders” </li></ul><ul><li>2) Sirower finds 60-70% of acquisitions failing to produce positive returns. </li></ul>
  12. 14. TREND LOWER DEAL PREMIUM CASH DEAL PREFERRED SECTORAL STUDY YET TO BE DONE DVA POP 2006: 6.1% Av 1996-06: 3.4% 57% 2006 65% (97-00) Pure cash deal: 13.7% PC deal: 49% of Acq overpay Pure stock deal: -3.3% PS deal: 69% of Acq overpay
  13. 15. POPULAR TERMINOLOGIES <ul><li>Hostile take over </li></ul><ul><li>Dawn raid – UK </li></ul><ul><li>Saturday night special – US </li></ul><ul><li>White knight </li></ul>
  14. 16. Shark repellent <ul><li>Golden parachute </li></ul><ul><li>Greenmail/ goodbye kiss </li></ul><ul><li>Macaroni defense </li></ul><ul><li>Bank check preferred stock </li></ul><ul><li>Poison pill (flip in PP, flip over PP) </li></ul><ul><li>Lady macbeth </li></ul><ul><li>Bankmail </li></ul>
  15. 17. Types of M&A <ul><li>Merger </li></ul><ul><li>A transaction where two firms agree to integrate their operations on a relatively coequal basis because they have resources and capabilities that together may create a stronger competitive advantage </li></ul>
  16. 18. <ul><li>the 2 firms combine all assets & liabilities </li></ul><ul><li>Acquirer = target </li></ul><ul><li>Usually take a new name </li></ul><ul><li>JP Morgan/Chase Manhattan becomes JP Morgan Chase </li></ul><ul><li>Exxon and Mobil becomes Exxon-Mobil </li></ul>
  17. 19. <ul><li>Target firm shares disappear </li></ul><ul><li>Target shareholders get either </li></ul><ul><ul><li>Shares in new firm </li></ul></ul><ul><ul><li>Cash </li></ul></ul><ul><li>Exchange Ratio = # shares in new firm given for each share of Target firm </li></ul><ul><li>Ex) # target = 250 million & ER = 1.25 </li></ul><ul><li># New = 1.25 x 250 M = 312.5 M </li></ul><ul><li>Buyer firm shares are kept as shares in new firm ( in effect their ER = 1). </li></ul>
  18. 20. <ul><li>Combination of 2 firms- only one firm's identity survives </li></ul><ul><li>Statutory merger- in accordance with statutes of state in which it is incorpt. </li></ul><ul><li>Subsidiary merger- target becomes subsidiary of parent like GM & EDS </li></ul><ul><li>Horizontal merger </li></ul><ul><li>Vertical merger </li></ul>
  19. 21. Acquisition <ul><li>A transaction where one firm buys another firm with the intent of more effectively using a core competence by making the acquired firm a subsidiary within its portfolio of businesses </li></ul>
  20. 22. Takeover <ul><li>An acquisition where the target firm did not solicit the bid of the acquiring firm </li></ul><ul><li>IBM’s acquisition of Lotus in 1995; </li></ul><ul><li>Oracle’s bid for PeopleSoft in 2003 </li></ul>
  21. 23. M&A Jargons <ul><li>Corporate restructuring (asset/ financial) </li></ul><ul><li>Types </li></ul><ul><li>Operational - downsizing/downscoping </li></ul><ul><li>Financial – debt/equity (leverage effect ) </li></ul>
  22. 24. Amalgamation <ul><li>Section 2(1B) </li></ul><ul><li>“ Amalgamation”, in relation to companies, means the merger of one or more companies with another company or the merger of two or more companies to form one company…….” </li></ul><ul><ul><li>Mergers – Not defined under the Income-tax Act, 1961. However, in common parlance, merger means combination of two or more commercial organizations into one </li></ul></ul>
  23. 25. <ul><li>Conditions </li></ul><ul><ul><li>All properties to be transferred to the amalgamated company </li></ul></ul><ul><ul><li>All liabilities to be transferred to the amalgamated company </li></ul></ul><ul><ul><li>Shareholders holding at least 3/4th in value of shares of the amalgamating company should become shareholders of the amalgamated company </li></ul></ul>
  24. 26. <ul><li>Types of mergers </li></ul>
  25. 27. Horizontal Merger <ul><li>Results in the consolidation of firms that are direct rivals- i.e. sell substitutable products within overlapping geographical markets </li></ul><ul><li>Increase mkt power </li></ul><ul><li>Increase eff gain (economies of scale, rationalization) </li></ul>
  26. 28. Contd…. <ul><li>Two firm same industry </li></ul><ul><li>Seek economies of scale </li></ul><ul><li>(BP & Amoco expected to save $2 bn p.a. from operations) </li></ul><ul><li>huge challenge of integration </li></ul><ul><li>(Exxon & mobil, Helene-Curtis and unilever) </li></ul>
  27. 29. Kuhn & motto (1999) <ul><li>Increases prices, decreases consumer surplus </li></ul><ul><li>Always benefits the merging firm </li></ul><ul><li>Increases outsider’s profits </li></ul><ul><li>Increases producer surplus </li></ul><ul><li>Reduces net welfare </li></ul>
  28. 30. Vertical mergers <ul><li>Two firms participate at difft stages of production or value chain </li></ul><ul><li>cos do not own operations in major segment of value chain </li></ul><ul><li>Forward integration- Merck-medco </li></ul><ul><li>Backward integration- Chevron’s oil- gulf oil, America online- mapquest </li></ul>
  29. 31. Conglomerate merger <ul><li>Consolidated firms may sell related products, share marketing & distribution channels & production processes, or they may be wholly unrelated </li></ul><ul><li>Ciba-Geigy (contact lens, Ritalin, Maalox) & Sandoz(Gerber Baby Food, Ovaltine) - Novartis </li></ul><ul><li>US steel- marathon oil = USX </li></ul><ul><li>AOL- time Warner </li></ul><ul><li>PepsiCo- pizza hut </li></ul><ul><li>Citicorp- travelers insurance </li></ul><ul><li>P&G & clorox </li></ul><ul><li>Cardinal healthcare - allegiance </li></ul>
  30. 32. Product extension in conglomerate <ul><li>Involve firms that sell non competing products use related marketing channels of production processes </li></ul><ul><li>Citicorp – travelers insurance </li></ul><ul><li>Pepsico – pizza hut </li></ul>
  31. 33. Market extension <ul><li>Join together firms that sell competing products in separate geographical markets </li></ul><ul><li>Time warner- TCI </li></ul><ul><li>SBC communications- pacific telesis </li></ul>
  32. 34. Pure conglomerate <ul><li>Such merger unites firms that have no obvious relationship of any kind </li></ul><ul><li>AT&T – hartford insurance </li></ul><ul><li>Bankcorp of America- Hughes electronics </li></ul><ul><li>R J Reynolds- burmah oil & gas </li></ul>
  33. 35. Participants <ul><li>Investment bankers – </li></ul><ul><li>strategic & tactical advice </li></ul><ul><li>Screen potential buyers & sellers </li></ul><ul><li>Contact & negotiate </li></ul><ul><li>Valuation </li></ul><ul><li>Deal structuring </li></ul><ul><li>Goldman Sachs (40%), Morgan Stanley (26%), Merill Lynch (22%) </li></ul>
  34. 36. <ul><li>LAWYERS </li></ul><ul><li>Thomson financial securities data corporation </li></ul><ul><li>Sherman & sterling, </li></ul><ul><li>meagher & flom </li></ul><ul><li>Skadden </li></ul><ul><li>Simpson thatcher & barlet </li></ul><ul><li>Nishith Desai Associates </li></ul>
  35. 37. Accountants <ul><li>Tax structure </li></ul><ul><li>Due diligence </li></ul><ul><li>Proxy solicitors </li></ul><ul><li>Georgeson & co </li></ul><ul><li>D F king & co </li></ul>
  36. 38. Reasons for Acquisitions Increased Market Power Acquisition intended to reduce the competitive balance of the industry Overcome Barriers to Entry Acquisitions overcome costly barriers to entry which may make “start-ups” economically unattractive
  37. 39. Increased Speed to Market Closely related to Barriers to Entry, allows market entry in a more timely fashion Diversification Quick way to move into businesses when firm currently lacks experience and depth in industry Reshaping Competitive Scope Firms may use acquisitions to restrict its dependence on a single or a few products or markets
  38. 40. Buying established businesses reduces risk of start-up ventures Lower Cost and Risk of New Product Development
  39. 41. Problems with M&A <ul><li>Only financial team (organizational team) </li></ul><ul><li>Integration problem </li></ul><ul><li>Inadequate evaluation of target </li></ul><ul><li>Large amt debt </li></ul><ul><li>Fail to achieve synergy </li></ul><ul><li>Overly diversified </li></ul>
  40. 42. <ul><li>CASE EXAMPLE </li></ul><ul><li>Trend Indian Pharma sector </li></ul><ul><li>The key feature of M&A activity has been consolidation of indigenous drug manufacturers </li></ul>
  41. 43. <ul><li>The Indian Pharmaceutical Sector - largest amongst the developing nations. </li></ul><ul><li>In the organized sector of the Indian Pharmaceutical industry there are about 250-300 companies, controlling about 70% of the total output in value terms </li></ul><ul><li>The top 10 players accounting for one third of the total market. </li></ul>
  42. 44. <ul><li>Indian pharmaceuticals market is expected to expand to US$ 25 billion by 2010. </li></ul><ul><li>The domestic industry is fragmented with over 4,000 manufacturing units. </li></ul><ul><li>In such a scenario, consolidation is the only answer to survive in the post patent regime </li></ul>
  43. 45. <ul><li>The Indian pharma industry is known for </li></ul><ul><li>superior biotech and drug synthesis skills </li></ul><ul><li>generics, </li></ul><ul><li>cost-effectiveness and </li></ul><ul><li>competitiveness </li></ul><ul><li>high quality </li></ul><ul><li>vertically integrated manufacturing assets, </li></ul><ul><li>differentiated business models </li></ul><ul><li>that give it an edge </li></ul>
  44. 46.                                                                                                                                                                                                                                                            
  45. 47. Reasons for M&A <ul><li>The lack of (R&D) productivity, </li></ul><ul><li>expiring patents, </li></ul><ul><li>generic competition and </li></ul><ul><li>high profile product recalls </li></ul><ul><li>easy availability of capital and </li></ul><ul><li>increased global interest in the pharmaceutical and biotech industry </li></ul>
  46. 48. Reasons for Indian M&A <ul><li>Build critical mass in terms of marketing, manufacturing and research infrastructure </li></ul><ul><li>Establish front end presence </li></ul><ul><li>Diversification into new areas: Tap other geographies / therapeutic segments / customers to enhance product life cycle and build synergies for new products </li></ul><ul><li>Enhance product, technology and intellectual property portfolio </li></ul><ul><li>Catapulting market share </li></ul>
  47. 49. <ul><li>The total Indian Pharmaceutical Market is valued at US$ 8790 million with a growth rate of 8%. </li></ul><ul><li>The market is predominantly a branded generic market </li></ul>
  48. 50. Na Na 11% 307 Aurobindo pharma Na Na 25% 231 Cadila ph. Na Na 48% 263 Lupin 50% combined 60% 269 Wockhardt ltd Na Na 13% 270 Sun pharma Na Na 13% 276 Nicholas piramal 15 22 65% 422 Dr reddy’s lab 9 15 45% 539 Cipla 16% 36% 79% 1174 Ranbaxy Europe North America All Foreign % foreign sales Rev Company

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