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Merger & Acquisitions


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Merger & Acquisitions , TATA Steel & Corus, Tata Motors & JLR, Land Rover , Jaguar , Mittal & Arcelor

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Merger & Acquisitions

  1. 1. MERGERS ANDACQUISITIONSGMCS December ‘2012 BatchVasai RoadVasai Branch of WIRCThe Institute of Chartered Accountants of India
  2. 2. IntroductionAll our daily newspapers are filled with cases of mergers, acquisitions, spin-offs, tender offers & other forms of corporate restructuring. In this context,it would be essential for us to understand what corporate restructuring andmergers and acquisitions are all about.With recession taking toll of many Indian businesses and the feeling ofinsecurity surging over our businessmen, it is not surprising when we hearabout the immense numbers of corporate restructurings taking place,especially in the last couple of years. Several companies have been takenover and several have undergone internal restructuring, whereas certaincompanies in the same field of business have found it beneficial to mergetogether into one company. Your company slogan
  3. 3. What is Merger & Acquisitions?MERGER ACQUISITIONMerger is defined as combination of two or more Acquisition in general sense is acquiring thecompanies into a single company where one survives ownership in the property. In the context of businessand the others lose their corporate existence. The combinations, an acquisition is the purchase by onesurvivor acquires all the assets as well as liabilities of company of a controlling interest in the share capitalthe merged company or companies. Generally, the of another existing company.surviving company is the buyer, which retains itsidentity, and the extinguished company is the Methods of Acquisition:seller. An acquisition may be affected by:Merger is also defined as amalgamation. Merger is the a) Agreement with the persons holding majorityfusion of two or more existing companies. All assets, interest in the company management like members ofliabilities and the stock of one company stand the board or major shareholders commandingtransferred to Transferee Company in consideration majority of voting power;of payment in the form of: b) Purchase of shares in open market; c) To make takeover offer to the general body of•Equity shares in the transferee company, shareholders;•Debentures in the transferee company, d) Purchase of new shares by private treaty;•Cash, or e) Acquisition of share capital through the following•A mix of the above modes. forms of considerations viz. Means of cash, issuance of loan capital, or insurance of share capital. Your company slogan
  4. 4. A MERGER happens when two firms, often about same size, agree to go forward as a new single company rather than remain separately owned & operated by pooling all their resources together, to create a sustainable competitive advantage. For example, both Daimler-Benz & Chrysler ceased to exist when two firms merged, and a new company ’Daimler-Chrysler’ was created. When a Company takes over another one & clearly becomes the new owner ,the purchase is called ‘ACQUISITION’. Unlike mergers, acquisitions can sometimes be unfriendly. i.e., when a firm tries to takeover another by adopting hostile measures. STRUCTURE 1 STRUCTURE 2 A, B and C = Amalgamating Companies: Cease to exist A B A A D = Amalgamated Company: may or may not have existed before Merger A Transfer assets and liabilities B All assets and liabilities of A, B and C transferred to D Shareholders in A,B and C get shares in D. A = Amalgamating Company: Ceases to Exist B = Amalgamated Company B receives all of A’s assets and liabilities B B D D Shareholders of A receive shares in B and maybe other benefits like debentures, cash STRUCTURE 3 C C Company A Transfers undertaking Y X Y X Y Y Y Company B Shareholders ofof A Issues shares Shareholders A Your company slogan
  5. 5. Mergers & Acquisitions –An Overview(RECAP) Mergers and Acquisitions M&A ,have become very popular strategy all over the world in last 3 decades. The value M &A WORLDWIDE increased from $464 Billion in 1990 to $3.4 trillion in 1999-2000, followed by sharp decline during 2001 & 2002.It has again shown improvement from 2003 onwards & has crossed $320 trillions till 2011-12. India born Laxmi Nivas Mittal has taken over Arcelor in Europe , to form a largest Steel making Company in Europe-”Arcelor-Mittal.”(117 Mtons/Year-Global) . Tata Steel-Corus(UK) Acquisition by Tata Steel for $12 Billion is very significant and a landmark for the Indian Corporate World. (28 Mtons/Annum-2006) M&A means and includes M&A means and includes Acquisitions Org. Restruct. Own, Restruct. Mergers Divestitures Redesign Going Private Purchase Of Unit Sell Offs Performance Leveraged Take Overs Demergers Enhancement Buy Outs Alliances Programmes M&A is all about….. Your company slogan
  6. 6. The Synergy Matrix Managerial Synergy Financial Synergy Improve management or replace inefficient one Redeploy capital Increase ROI Operating SynergyCompany-specific Risk Scale EconomiesCost-of-capital reduction Improve margins Market Valuation Release “value” Your company slogan
  7. 7. Types of Mergers Horizontal mergers:  A horizontal merger involves two firms operating and competing in the same kind of business activity.  Textiles firm merges raw materials firm. - Example: Exxon - Mobil Vertical mergers:  Vertical mergers occur between firms in different stages of production operation. - Example: Helene Curtis and Unilever Conglomerate Mergers: - Conglomerate mergers involve firms engaged in unrelated types of business activity - Example: General Electric buying NBC television Concentric Mergers - Based on specific management functions where as the conglomerate mergers are based on general management functions - Example: Citigroup (principally a bank) buying Salomon Smith Barney (an investment banker/stock brokerage operation Your company slogan
  8. 8. Purpose of Mergers & AcquisitionsPurpose of Mergers & AcquisitionsThe purpose for an offeror company for acquiring another company shall be reflected in the corporateobjectives. It has to decide the specific objectives to be achieved through acquisition. The basic purpose ofmerger or business combination is to achieve faster growth of the corporate business. Faster growth maybe had through product improvement and competitive position. Other possible purposes for acquisition areshort listed below: -(1) Procurement of supplies: 1. To safeguard the source of supplies of raw materials or intermediary product; 2. To obtain economies of purchase in the form of discount, savings in transportation costs, overhead costs in buying department, etc.; 3. To share the benefits of suppliers economies by standardizing the materials.(2) Revamping production facilities: 1. To achieve economies of scale by amalgamating production facilities through more intensive utilization of plant and resources; 2. To standardize product specifications, improvement of quality of product, expanding 3. Market and aiming at consumers satisfaction through strengthening after sale Services; 4. To obtain improved production technology and know-how from the offered company 5. To reduce cost, improve quality and produce competitive products to retain and Improve market share.(3) Market expansion and strategy: 1. To eliminate competition and protect existing market; 2. To obtain a new market outlets in possession of the offeree; 3. To obtain new product for diversification or substitution of existing products and to enhance the product range; 4. Strengthening retain outlets and sale the goods to rationalize distribution; 5. To reduce advertising cost and improve public image of the offeree company; 6. Strategic control of patents and copyrights. Your company slogan
  9. 9. Continue….(4) Financial strength:1. To improve liquidity and have direct access to cash resource;2. To dispose of surplus and outdated assets for cash out of combined enterprise;3. To enhance gearing capacity, borrow on better strength and the greater assets backing;4. To avail tax benefits;5. To improve EPS (Earning Per Share).(5) General gains:1. To improve its own image and attract superior managerial talents to manage its affairs;2. To offer better satisfaction to consumers or users of the product.(6) Own developmental plans:The purpose of acquisition is backed by the offeror company’s own developmental plans. A company thinks in terms ofacquiring the other company onlywhen it has arrived at its own development plan to expand its operation having examined its own internal strength where itmight not have any problem of taxation, accounting, valuation, etc. But might feel resource constraints with limitations offunds and lack of skill managerial personnel’s. It has to aim at suitable combination where it could have opportunities tosupplement its funds by issuance of securities, secure additional financial facilities, eliminate competition and strengthen itsmarket position.(7) Strategic purpose:The Acquirer Company view the merger to achieve strategicobjectives through alternative type of combinations which maybe horizontal, vertical, product expansion, market extensional or otherspecified unrelated objectives depending upon thecorporate strategies. Thus, various types of combinations distinct with each other in nature are adopted to pursue thisobjective like vertical or horizontal combination.(8) Corporate friendliness:Although it is rare but it is true that business houses exhibit degrees of cooperative spirit despite competitiveness inproviding rescues to each other from hostile takeovers and cultivate situations of collaborations sharing goodwill of eachother to achieve performance heights through business combinations. The combining corporate aim at circular combinationsby pursuing this objective. Your company slogan
  10. 10. The M & A Process1) Develop a strategic plan for the business.(Business Plan)2) Develop an acquisition plan related to the strategic plan.( Acquisition Plan)3) Search companies for acquisitions.(Search)4) Screen and prioritize potential companies.(Screen)5) Initiate contact with target.6) Refine valuation, structure the deal and develop financial plan.( Negotiation)7) Develop plan for integrating the acquired business. (Integration Plan)8) Obtain all necessary approvals and implement closing.9) Implement post closing integration.10) Conduct a post closing evaluation. The M&A Process Start here Start here to Maximize to Maximize …… And not here. And not here. Merger benefits. Merger benefits. The Getting Ready Process Your company slogan
  11. 11. Acquisitions overcometo reduce the competitive integration of firms Differing financial and controlbarriers to entry costly Acquisition intendedBarriers systems can make Costly debtmayway fail move into toeconomically outflows.outcomes Firms mayrelated“start-ups” to assess allows of Closely create onerous businesses when firm Quick to to Entry, Managers maylacks experience restrict cash value of which can use acquisitionsburden on its risk Buying establishedobjectively reduces make to businesses Reasons for balance entry in a more dependence the difficult of the industry timely fashion in market on a single or a few products or of small seed currently acquisition depth and of dozens Example: AgriBioTech’sfirm’s acquisition strategy unattractive British Petroleum’s DEC’s semiconductor division Example:venturesacquisition of acquisition of start-up achieved through the Food’s acquisition of Example:Intel’s Problems in Example: Kraft industry M&A “Winners Curse” bidhave expertise required Example: Ford and JaguarFortis’ acquisition firm Acquirer doesn’t causes acquirer to overpay for firms Example: Watson Pharmaceuticals’to manage unrelated markets Example: Belgian-Dutch Example:Amoco Banker’s Insurance of mySimon U.S. Marks CNET’s increase estimate of of Brooks Brothers Boca Burger can acquisition Example: businesses General Spencer’s acquisition of NBC acquisition and Electric’s Justifying acquisitionsTheraTech acquisition expected benefits Example: of American of Group Achieving Success Example: Quaker Oats to selling businesses and refocusing Example: GE--prior and Snapple Increased Integration market power difficulties Overcome Inadequate entry barriers evaluation of target Cost of new Large or product development extraordinary debt Increased speed Inability to to market M&A achieve synergy Lower risk Too muchcompared to developing new diversification products Increased Managers overly diversification focused on acquisitions Avoid excessive competition Too large Your company slogan
  12. 12. Strategic approach To Mergers and AcquisitionsPresent Situation Strategy• Growing steadily but in a mature market with limited Acquire a company in a younger market with higher growth growth rate• Operating at maximum productive capacity Acquire a company making similar products operating substantially below capacity• Under-utilizing management resources Acquire a company into which the talents can be extended• Marketing an incomplete product range , or having the Acquire a company with product range which is potential to sell other products or services to your complementary existing customers• Lacking key clients in a targeted sector Acquire a company with right customer profile• Need to increase market share Acquire an important competitor• Need to widen capability Acquire a company with key talents and/or technology• Need more control of suppliers or customers Acquire a company which is, or which gives access to a significant customer or supplier• Preparing for floatation but need to improve balance Acquire a company with the right customer profile sheet Your company slogan
  13. 13. Takeover Strategies and Defenses Kinds of takeovers:  Negotiated or Friendly Takeover The existing management of a company decides to give away the control of the company to another group on terms and conditions mutually agreed upon by both the parties.  Open market or Hostile Takeover A group acquires shares of a company from the open market in order to take control of the company Eg: Autoriders’ Hostile Takeover Bid for Saurashtra Cement  Bail-out Takeover When a financially sick company is taken over by a profit earning company in order to bail out the former ,it is called a bail-out takeover.• Hostile Takeover Strategies- Tender Offer General offer made publicly and directly to a firm’s shareholders to buy their stock at a price well above the current market price.- Street Sweep The acquirer accumulates large amounts of the stocks in the target company before making the open offer- Bear Hug The acquirer tries to put pressure on the management of the target firm by threatening to make an open offer- Strategic Alliance An acquirer offers a partnership rather than a buyout of the target firm.- Brand Power The acquiring firm enters into an alliance with other powerful brands to displace the competitor’s brand. Your company slogan
  14. 14. Effects of Takeovers Effects on the Acquirer Company Effects on the Target company Effects on the Shareholders of the Target Company Effects on the Shareholders of Acquiring CompanyDefenses against Takeovers Golden Parachutes Poison Put Anti-takeover Amendments Super majority amendments Fair price amendments Classified boards Authorization of preferred stock Poison Pill Defense Targeted Share Repurchase and Standstill Agreements Other Takeover Defences Your company slogan
  15. 15. What is an Acquisition? A fundamental characteristic of merger is that the acquiring company takes over the ownership of other companies and combines their operations with its own operations. An acquisition may be defined as an act of acquiring effective control by one company over the assets or management of another company without any combination of companies. • Attributes of Effective Acquisitions + Friendly deals make integration go more smoothly Your company slogan
  16. 16. M&A REGULATORY FRAMEWORKTRANSACTION STRUCTURE•Companies Act•Income Tax Act•Stamp Act•Competition ActLISTED COMPANIES•SEBI Regulations•Stock Exchange – Listing AgreementTRANS-BORDER TRANSACTIONS•Foreign Exchange Management Act Your company slogan
  17. 17. Legal Procedure Sec 391 – 394 of Indian Companies Act covers M & A. Examination of object clause Approval from the Board Intimation to share holders and creditors. Approval from share holders and creditors.- 75% of SH and creditors to approve. Application to National Company Law Tribunal (NCLJ) Intimation to SEs Petition to NCLT for approval Filing order with ROC Transfer of assets and Liabilities Issuance of shares/cash Your company slogan
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  19. 19. ABOUT THE DEAL TATA Acquired CORUS on 2nd April 2007 which is 4 times larger than its size. The deal price was $ 12 Billion. TATA Steel,the winner of the auction for CORUS declares a bid of 608 Pence per share. In 2005 when the deal was started the price per share was 455 pence. TATA Surpassed the final bid from Brazilian steel maker ‘COMPANHIA SIDERURGICA NACIONAL’ (CSN) of 603 pence per share. The combined entity has become the world’s fifth largest steelmaker after the deal. For this deal TATA has finance only 4 Billion $ from internal company resources. TATA Have secured funding commitments from its advisors. These advisors were Deutshe bank, ABN Amro and Standard Chartered. IMPORTANCE OF DEAL FOR TATA FOR CORUS  The initial motive behind the deal was not CORUS  To extend its Global reach through TATA. revenue size but rather its market value.  To get access to Indian Ore reserves, as well as virgin  To compete on global scale because then TATA was just market for steel. at 56th rank in steel production.  To get access to low cost materials.  CORUS holds a number of Patents and R & D facility.  Total Debt of Corus was GBP 1.6bn  Acquiring Corus will give Tata access to European  Saturated market of Europe. customers of steel.  Better facilities and lower cost of production  Acquisition cost will be lower then setting up new green  Employee cost was 15 % (TATA- 9%) field plants and marketing channel.  Profit margin was 3.4% (TATA- 17%) Your company slogan
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  21. 21. Overview Ford, a leading automaker and one of the largest MNC in the global automobile industry. Ford acquired Jaguar from British Leyland Limited in 1989 for US$ 2.5 billion Ford bought Land Rover in 2000 for US$ 2.7 billion from BMW Over the years, the operations of both Jaguar and Land Rover were fully integrated Ford reported losses of US$ 12.7 billion in the year 2006 Ford conducted strategic reviews on the two brands and in June 2007 announced that it was considering selling JLR Ford was concerned more about the interest of the workers employed with JLR than the price JLR’s labour union were against selling to private equity firms to be assure of job security On January 03,2008,Ford announced that it had chosen Tata Motors for the JLR deal and had entered into focused negotiations with the company. On March 26,2008, Tata Motors agreed to pay US$ 2.3 billion in cash for a 100% acquisition of the businesses of JLR.Tata Motors-Rationale Of Acquiring JLR Your company slogan
  22. 22. Problems & Issues of Tata-JLR MergerProblems with deal Financial Issues Sales of JLR declined by 11.4% during the 2nd  Tata Motors raised a bridge loan of US S$ 3 quarter ending Sep.2008 billion through a syndicate of banks Tata motors had to pump in funds to keep JLR on  The loan was raised through Tata Motors UK, a the move special purpose vehicle and a 100% subsidiary By the end of Nov.2008,198 employees opted for of Tata Motors voluntary retirement and 400 more decide to  The interest on the bridge loan was linked to leave by Jan 2009 LIBOR(London Inter Bank Offer Rate) With not much of cash generation internally,  Tata also proposed to raise around US 500 to additional investments of funds would only add 600 million through an international issue to the debt and interest burden of the company In early Jan 2009,JLR announced 450 jobs cut Announced that managers would not receive any bonuses in 2009 while salary raises would be deferred till Oct 2009 For the quarter ending Dec2008,the sales volumes of JLR decreased by 35.2% to 49,186 Total car sales in the UK in the year 2009 would be at 1.78 million as against 2.4 million in 2008 By the end of 2008,retail vehicle sales were reported at 10.8 million-around 2 million lower than the sales reported in 2007 Consumers were delaying the purchase of new vehicles due to lack of consumer loans Your company slogan
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  24. 24. Overview  Biggest merger in the history of Consumer goods  P&G acquired Gillette for $57b to become the world’s largest consumer goods company  Annual Sales of the combined entity:$60.7b  After purchase of Gillette P&G will have $21b brands with market cap of $200b  P&G paid .975$/share(20% premium),later buyback of shares worth $18-22b over 12-18 months  Merging companies: similarity in Corporate history  Merger based on a different model where innovation was the focus rather than the scale  Regulatory concerns: Product overlaps  Consumer goods after 1980s Why Gillette? P&G strength: Women’s personal care products Gillette strength: Men’s grooming category Complementary in strength cultures and vision to create potential for superior sustainable growth Gillette stock climbed 50% since 2003,profits jumped on premium products Acquisition added about 20% to P&G sales, long term sales growth estimate to 5-7% a year Operating margin expected to grow by 25 % by 2015 from 19% in 2003 The companies expected cost savings of $14-16 bn from combining back-room operations and new growth opportunities. more resources to enable intensive collaborative supply chain initiatives in a more cost- effective way. merger would also bring down the advertising and media costs owing to greater bargaining power Opportunities in developing markets: Gillette would give exposure to P&G in emerging economies like India and Brazil, while P&G would distribute Gillette products in China Your company slogan
  25. 25. Integration issues The merger would result in around 6,000 job cuts, equivalent to 4% of the two companies combined workforce of 140,000. Most of the downsizing will take place to eliminate management overlaps and consolidation of business support functions. Cultural problems absence because of geographical proximity P&G is considered a promote-from-within company, and already had a lot of executive talent at the top. Therefore, absorbing Gillettes management to their satisfaction could be difficult P&Gs ability to handle this massive cultural assimilation would decide the success or failure of this acquisition. Overlaps of some brandsFuture Outlook Pressure for competitors in the industry competitors could launch new products or strengthen their supply chain relationships during this time to gain an edge P&G-Gillette combination could be a transformative deal for the industry because of Gillettes growth potential. Analyst forecasted that this deal could lead to further consolidation in the industry Your company slogan
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  27. 27. • January 2006 : Mittal Steel offers the shareholders of Arcelor to create the worlds first 100 million tonne plus steel producer.• The deal valued at $22.7 billion offer to Arcelor’s shareholders• The deal was split between Mittal Shares (75 percent) and cash (25 percent)• But soon the deal landed into controversy• An Attractive Target:  Arcelor had 71% pre merger revenue share from Europe while Mittal had only 34%  While in North America The revenue share for Arcelor was only 9% but Mittal had 42%  So they had complementary industrial and market footprint Arcelor Management – • The management was extremely hostile to Mittal Steel’s bid • The CEO of Arcelor dismissed Mittal Steel as a “company of Indians” European governments – •The French, Spanish and the government of Luxembourg was against the deal • The French opposition was initially very fierce • But It was criticized in the British, American and Indian media as double standards and economic nationalism in Europe Deal finally clinched when the shareholders of Arcelor agreed to Mittal Steel’s offer – In June 2006 Mittal raised its valuation of Arcelor to $32.9 billion. The Mittal family holds 43 percent of the combined group. The combined company holds 10 percent of the global market for steel. Your company slogan
  28. 28. Major AcquisitionsYear Target Buyer Value ($ bn)2006 Arcelor Mittal Steel 312001 NKK Corp Kawasaki Steel 14.12004 LMM Holdings Ispat Intl 13.32006 Corus TATA 12.01997 Krupp AG Thyssen 8.02005 Dofasco Arcelor 5.22005 Intl Steel Mittal Steel 4.82010 S ($4.26 mn, up from 32.5% to Agro Dutch Industries Penta Homes 57.7%)2010 Encore Cement and Addictive ACC A2010 Orissa Cement Dalmia Cement S ($37.66mn, 45.4%)2010 Brook Crompton Greaves Crompton Greaves M2010 Havells India DPSC A ($25.53mn)2010 Srei-led Consortium 20.25 MW hydro power assets S ($36.6mn, 57%)2010 Malanpur Captive Power (subsidiary of Greenko Group Plc A ($32.98mn, 57%) crompton greaves)2010 Avantha Power and Infrastructure Almondz Insurance Brokers S ($10.94mn, 59%)2010 Almondz Global Securities IDFC – SSKI Securities S (51%)2010 Infrastructure Development Finance Indian Infoline Investment services S (from 80% to 100%) Company(IDFC)2010 Indian Infoline (Orient Global Tamarind Anagram Capital S ($72mn, 22%) Fund)2010 Edelweiss Capital Mathew Easow Research Securities A ($34.89mn)2010 Vista Vyapaar Solvex, General Foods, Param Industriess S ($0.84mn,69.2%) Your company slogan
  29. 29. CHECKLIST - MERGERS AND CORPORATE CULTURE Develop a strategy for cultural integration Analyse existing cultures - identify cultural barriers, differences in communication and other potential problems. Decide which role the new culture shall play in the merged organization. Establish ‘bridges’ between both companies. Establish a basis and mechanisms for the new culture. Be patient People take time to be acquainted to a new cultural reality. Conclusion Mergers and Acquisitions plays important role in corporate restructuring and development of country. In India it is also playing same role. But some times it represent market and financial power. And after liberalization it increased due to liberal government policies Mergers & Acquisitions are a significant form of business strategy today for Corporates. The two main objectives behind any M&A Transaction, for corporates today is : • to improve Revenues and Profitability • Faster growth in scale and quicker access to market • Competition in Globalized Market The most important factors according to corporate India that contribute to the success of an M&A Transaction are :  Timing  Intrinsic Fit  Personnel  Advisors on legal, policy and financial strategies Your company slogan
  30. 30. Presented By: Mahendra MM Soni Mahendra Soni Mahavir MM Kothari Mahavir Kothari Mahavir CC Jain Mahavir Jain WRO 0310760 WRO 0310760 WRO 0278768 WRO 0278768 WRO 0312210 WRO 0312210Mahendra.K.Soni@Icai.Org Mahendra.K.Soni@Icai.Org Poonam P P Chaturvedi Poonam Chaturvedi Divya RR Anchan Divya Anchan Beena SS Thomas Beena Thomas WRO 0279480 WRO 0279480 WRO 0314688 WRO 0314688 WRO 0261274 WRO Your company slogan
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