Corporate FinanceMERGER and ACQUISITIONCase Study :PHILIP MORRIS – SAMPOERNAJakarta, June 2013Presented by Group 6
COMPANY PROFILE - SAMPOERNAPT Hanjaya Mandala Sampoerna (IDX: HMSP)• PT HM Sampoerna Tbk. formally established in 1963• Sampoerna is the second-largest cigarette maker in Indonesia with 19.91%of market share (year 2004)• Popular product : A Mild, Dji Sam Soe• During Q1 2004, Sampoerna booked Rp 568 billion of net income• Implementation of sophisticated technology (fo daily operational activities,testing product quality, blending machine)• Brand Positioning: low nicotin and TAR• Creativity on media advertising
COMPANY PROFILE – SAMPOERNASampoerna Performance 2001-2004RASIO LIKUIDITASRasio Lancar 2.28Rasio Hutang Terhadap Ekuitas 0.71Rasio Jumlah Kewajiban Terhadap Jumlah AsetRASIO OPERASILaba Kotor Dibagi Penjualan Bersih 32.90%Laba Kotor Dibagi Penjualan (Rokok Domestik) 33.50%Laba Operasi Dibagi Penjualan Bersih 18.00%Laba Operasi Dibagi Penjualan (Rokok Domestik) 20.70%Laba Bersih Dibagi Penjualan Bersih 11.30%Laba Bersih Dibagi Penjualan (Rokok Domestik) 13.20%
COMPANY PROFILE – PHILIP MORRISPhilip Morris International Inc• Collect US$ 40 billion of earnings (40 times of Sampoerna’s)• Owned 14.5% of World Cigarette Market Share• Popular Products : Marlboro, L&M, Virginia Slim
THE ISSUE: ACQUISITIONFactors that lead acquisitionGlobal Factors:• Philip Morris are expanding in countries such as China and Indonesia as rising taxesand health concerns cut the number of smokers in the U.S. and Western Europe• Less negative perception of cigarette in Indonesia than US/Europe• Tobacco companies in US face increased litigation and a shrinking market• More than 69 percent of Indonesian men older than 20 smoke regularlySampoerna Competitive Advantages:• Cigarette brand as sponsor for many events• IT system in Sampoerna (accounting, manufacturing, supply chain management,others data management)• Had their biggest one-day gain in more than six years
PROBLEMS IDENTIFICATION1. What are the business goals to be achieved by PhilipMorris, take the strategic step to acquire Sampoerna?2. Why do Philip Morris pick Sampoerna to be acquired,not the other cigarette companies?3. In terms of Sampoerna, what are the underlyingSampoerna to take a policy decision to merge withPhilip Morris?4. What are the impacts of this acquisition on theperformance of Sampoerna own?
THE THEORYThere are three basic legal procedures that one firm can use to acquireanother firm:1) Merger or Consolidationo Acquiring firm retains name and acquired firm ceases to existo Advantage : legally simpleo Disadvantage : must be approved by stockholders of both firms2) Acquisition of Stocko Entirely new firm is created from combination of existing firms3) Acquisition of Assetso One firm can acquire another by buying all of its assetso Advantage : reduce problem caused by minority shareholderso Disadvantage : transferring could be costly
THE THEORYWhy firms do acquisition?a. A combined firm may generate greater revenues than two separate firms.Increased revenues can come from marketing gains, strategic benefits, andmarket powerb. Due to improved marketing, mergers and acquisitions can increaseoperating revenuesc. Some acquisitions promise a strategic benefitd. One firm may acquire another to reduce competitione. To reach the economic of scalef. Economies of Vertical Integrationg. Technology Transfer by a firm to anotherh. Some firms acquire others to improve usage of existing resourcesi. Elimination of Inefficient Managementj. Tax reduction may be a powerful incentive for some acquisitionsk. A merger leads to risk reduction, generating greater debt capacity and alarger tax shieldl. Surplus Fund
THE THEORYWhat are the side effects?Earnings GrowthIf there are no synergies or other benefits to the merger, then the growth in EPSis just an artifact of a larger firm and is not true growth (i.e., an accountingillusion).DiversificationShareholders who wish to diversify can accomplish this at much lower cost withone phone call to their broker than can management with a takeover.
ANALYSISAcquisition Type Philip Morris – Sampoerna is ACQUISITION OF STOCK type, whichhas the following characteristics:a. Meeting with candidate investors and all shareholders is not held and there is novoting mechanism to express the consent or not to takeover candidate investors.b. Candidate investors can make an offer directly to shareholders. Directors andManagement data is not involved in the acquisition process.c. If the board of directors and management companies in acquired side rejected,then the cost of acquisition by prospective investors is higher than the mergerprocess.d. Typically, the minority shareholders are not involved in the bidding process bypotential investors so that not all shares of the company can be helde. The takover will end up with merger process
ANALYSISType classification of the takeover process Philip MorrisInternational Inc. on HM Sampoerna Tbk. is following theacquisition horizontal type, where the two sides, PMI and HMS isengaged in the same industry.Acquisition of Philip Morris International Inc. over 97% shares of PTHM Sampoerna Tbk have a positive impact. The existence ofbusiness support experts, and financial management of the parentcompany Altria Groups Philip Morris Indonesia.
THE ACQUISITIONThe Acquisition ProcessJan, 2005Appoint Panamas asexclusif distributorMarlboro and L&M inIndonesiaMarch 12, 2005Acquisition of 42,09% Sampoerna Share, worthRp 18 trillion with price Rp 10.600 per share(18% at premium price) consist of :a. Shares owned by:Dubuis Holding Limited (32.41%)PT Lancar Sampoerna Bestari (7.73%)Boedi Sampoerna (1.95%)b. Shares owned by family (5%)c. Shares owned by public (52.91%)May 18, 2005Philip Morris increase its holdings to 97%stake in Sampoerna at US$ 4.9 billion orRp 45,066 trillion to buy 4.251.510.000shares at price Rp 10,600 per shareAugust 28, 2009Philip Morris Indonesia increased itsstake in PT Hanjaya MandalaSampoerna Tbk (HMSP), purchased 6.1million shares at a price of Rp 8,575per share. Ownership increases to98.18%
Keterangan Setelah Sebelum2010 2009 2008 2007 2006 2005 2004 2003 2002 2001MARKET VALUE RATIOSPrice per Share8,575 10,600Earning per Share 1,465 1,161 889 827 805 544 454 321 374 208Price-earning ratio (price pershare/earning per share) 7.39 19.49Impacts of Acquisition for PT HM SampoernaTHE ANALYSIS
Summary of Operations: (inmillions of dollars, except pershare data)2008 2007 2006 2005 2004Common dividends declared topublic shareholders as a % ofDiluted EPS46.40% — — — —Book value per common shareoutstanding3.74 7.39 6.85 4.98 6.27Market price per commonshare—high/low56.26-33.30 — — — —Closing price of common shareat year end43.51 — — — —Price/earnings ratio at yearend—Diluted13 — — — —Number of common sharesoutstanding at year end(millions)2,007 2,109 2,109 2,109 2,109Number of employees 75,600 75,500 74,200 94,700 45,500Cigarette Shipment Volume Asia(Billion Units) 224.00 212.00
THE ANALYSISAnswering Problem Identifications: What are the businessgoals to be achieved by Philip Morris, take the strategicstep to acquire Sampoerna?Answer :a. PMI has a strategic alliance with HMSb. PMI to Expand Business “kretek” cigarette in Indonesiac. Acquisition is a tool for companies to increase globalreach and competitiveness
THE ANALYSISAnswering Problem Identifications: Why do Philip Morrispick Sampoerna to be acquired, not the other cigarettecompanies?Answer :a. Difficulty in orbiting new brand because increasing of marketsegmentb. Acquisition assessed as a cheaper and effective wayc. HMS has had brand equity, financially healthy in the sense of notbeing in debt, has a good corporate culture, employees arecompetent, well-integrated information systems, and so forth
THE ANALYSISAnswering Problem Identifications: In terms of Sampoerna,what are the underlying Sampoerna to take a policydecision to merge with Philip Morris?Answer :a. Putera sell HMS because the tobacco industry is predicted to beginsetting. In the last three years revenue growth of tobaccocompanies in Jakarta Stock Exchange (JSE) under the 10% levelb. PMI offered shares at premium price. Logically it is so hard to resist
THE ANALYSISGrowth of Share Price, ROE, Asset, Sales
CONCLUSIONa. Local culture + international management team synergyb. Acquisition is strategic business decision and appropriate for PMI +HMSP deal at that timec. Growth of sales, value of company, high ROE was achieved afteracquisition