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Mergers & takeovers


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Mergers & takeovers

  1. 1. HINDALCO’S ACQUISITION OF INDAL<br />PRESENTED BY<br />KAMRAN KHAN<br />On 26th April 2011<br />Shri Ramdeobaba College Of Engineering & Management , Nagpur<br />
  2. 2. Background Of Indal<br /><ul><li>Kolkata-based Indal was incorporated in 1938.
  3. 3. The company is the third largest producer of aluminium in India , after Hindalco industries.
  4. 4. The company has vertically integrated the aluminium operation from buaxite mining ,aluminium refining ,power generation and aluminium smelting ,to semi-fabricated product of sheet, foil and extrusions, as well as aluminium scrap recycling .
  5. 5. The group, via Hindalco industries – the largest manufacturer of primary aluminium ,acquired a 74.5% stake in Indal for Rs. 1008 crore . </li></li></ul><li>BackgroundOfHindalco<br /><ul><li>Hindalco industries is India’s largest aluminium manufacturing company .
  6. 6. It is a vertically integrated the aluminium producer from buaxite mining ,aluminium refining ,power generation and aluminium smelting ,to downstream aluminum product.
  7. 7. The group currently holds a 74.5% stake in the Indal. On 21july 2002,the board of hindalco industries approved the acquisition of the balance 25.5% stake in Indal. </li></li></ul><li>Q.1) Why Hindalco Merge With Indal ?<br /><ul><li>To increase additional metal volumes.
  8. 8. The foils and sheets business of Indal will go a long way in adding value to Hindalco’s portfolio.
  9. 9. The deal has also boosted Hindalco’s export prospects.
  10. 10. Hindalco has a surplus metal capacity but insufficient alumina and downstream capacity.</li></li></ul><li>Contd…<br /><ul><li>Hindalco would leverage on the collective competitive strength of Hindalco and Indal through a slew of activities ranging from homogenizing and product rationalization and marketing/manufacturing strategies.
  11. 11. Indal recorded a decent 16.7% rise in the turnover to Rs.941crore.
  12. 12. Merger with Hindalco industries would create a powerhouse with revenues of nearly Rs.6000crore & PBIT of over Rs.1500crore </li></li></ul><li>Q.2)Why Contemplating Merger What Should Be The Bases For Identify The Target Firm?<br /><ul><li>Current stock market price of the shares .
  13. 13. Profits earned and dividend paid over the years.
  14. 14. Availability of reserves and future prospects of the company.
  15. 15. Realizable value of the net assets of the company.
  16. 16. Current and deferred liabilities for the company .
  17. 17. Age and status of plant and machinery of the company.
  18. 18. Net worth of the company.</li></li></ul><li>Contd….<br /><ul><li>Quality of top and management of the company and their professional competence.
  19. 19. Record of performance of the company in financial terms . </li></li></ul><li>Q.3) Difference between Greenfield and Brownfield expansions. Which of the two should be preferred ?<br /><ul><li>Brownfield Expansion :
  20. 20. "Use of new technology in an existing operation".
  21. 21. A Brownfield project is the rehabilitation of an existing or older property or project to customize it to the new requirements.
  22. 22. A "Brownfield" project is a project to convert a no longer used "industrial asset", such as a parcel of land or a building, into something new and useful, there by rejuvenating the area.</li></li></ul><li>Contd…<br /><ul><li>Greenfield Expansion :
  23. 23. "Total use of only new technology for the whole site from the ground up".
  24. 24. New projects where the latest new technology is incorporated only from the foundations up.
  25. 25. Greenfield Expansion refers to developing new properties similar to a Greenfield venture beginning from the ground-up. </li></li></ul><li>Difference between Greenfield and Brownfield expansion<br />Greenfield is a new project whereas Brownfield is remodeling an old house.<br />Greenfields are undeveloped properties whereas Brownfield generally includes real properties.<br />Greenfield expansion is more expensive as compared to Brownfield.<br />Greenfield expansion will take more time to set up a new venture as compared to Brownfield expansion.<br />
  26. 26. <ul><li>Brownfield expansion should be preferred because:
  27. 27. Low investment
  28. 28. Increased capacity
  29. 29. To save time on setting up
  30. 30. Increase the geographical reach
  31. 31. Enlarge the consumer base
  32. 32. Less expensive</li></li></ul><li>Q.4)What is the rational of acquisitions from Hindalco perspective? Justify in the light of major synergies expected to be available to Hindalco from the merger.<br /><ul><li>Hindalco, Indian aluminum industry has two major cost component comprising of
  33. 33. Alumina
  34. 34. Cost of power generation
  35. 35. Indal’s alumina reserves will lead to reduce the supply deficit of Hindalco.
  36. 36. Indal’s global presence an expertise will help to expand Hindalco globally.
  37. 37. Consolidation would increase the bargaining power and competitive strength.</li></li></ul><li>Q.5) What Kind Of Integration Is It – Vertical Or Horizontal ?<br /><ul><li>It Is A Horizontal Merger As Both The Companies Hindalco & Indal Are At The Same Level Of Business Activity & Same Sector i.e. Aluminum Manufacture.
  38. 38. Both The Firms Are Already Vertically Integrated Aluminum Producer – From Bauxite Mining, Alumina Refining , Power Generation & Aluminum smelting To Downstream Aluminum Products Like Sheet , Foil , & Extrusions As well As Aluminum Scrap Recycling. </li></li></ul><li>Q.6)How Deal Is Expected To Benefit Indal ?<br /><ul><li>Cost Optimization:</li></ul> Indal Has Been Resorting Duty Free Imports & Convert It Into Down Stream Product, Which Leads To Higher Cost. As Hindalco Has A Surplus Metal Capacity , Because Of Merger Indal Will Be Able To Reduce Its Cost By Reducing Its Logistics Cost.<br /><ul><li> Increase In Value Of Share :</li></ul> As It Is Going To Merge With Largest Player Of Its Sector, There Will Be An Increase In Value Of Share Of Indal, Because Of Cost Optimization It Would Increase Its Profit Margin & Which Would Be reflected In Higher Earnings & Increase In Dividend Pay Out Ratio.<br /><ul><li>Better Manufacturing Strategies :</li></ul> Because Of Better Manufacturing & Marketing Strategies Of Hindalco ,It Would Increase Indal’s Stock Turnover Which Will Leads To Increase Its Income.<br />
  39. 39. Q.7)What Is The Minimum Ratio Based On LG Model ?<br /><ul><li>Larsen & Gonedes Model:
  40. 40. The LG Model Asserts The Exchange Ratio From Premium Value (MP) Rather Than Using Only Assets Or Earning.
  41. 41. Exchange Ratio Will Be Determined By
  42. 42. Each Firm (Acquirer & Acquired) Assessment Of The Post Merger Evaluation Of Combined Firm, As Reflected In The PE Ratio Multiple.
  43. 43. Each Firm Sustaining At least Its Price Per Share Or Equivalent During The Period Of Merger. </li></li></ul><li>Contd…<br /><ul><li> Determination Of Exchange Ratios:</li></li></ul><li>Contd…<br /><ul><li> Calculation Of Exchange Ratio (ER) Of HindalCo:
  44. 44. ER Hindalco= PHindalcoXSindal </li></ul>[(PE Comb Firm)(E indal + E hindalco) – (P indal X S hindalco)]<br /><ul><li> ER Hindalco=522.60 X 7.11</li></ul> [(1 X (117.1 + 686) - 522.6 X 7.45 ]<br /><ul><li> ER Hindalco = - 1.20 Shares</li></li></ul><li>Contd…<br /><ul><li>Exchange Ratio Of Hindalco Using LG Model:</li></ul> (For Various Level Of PE Ratio.)<br /><ul><li> ER Calculated Using LG Model.
  45. 45. Mean (average) = 2.148shares</li></li></ul><li>Contd…<br /><ul><li> Calculation Of Exchange Ratio (ER) Of “IndalCo :
  46. 46. ER Indalco = [E indal + E hindalco ) PE Comb Firm]-(S indal/S hindalco)</li></ul> ( P indal XS hindalco )<br /><ul><li> ER indalco = [(117.10 + 686) X 1 ] - ( 7.11 / 7.45 ) </li></ul> ( 117.05 X 7.45 )<br /><ul><li> ER indalco = -0.03 Shares</li></li></ul><li>Contd…<br /><ul><li>Exchange Ratio Of Indalco Using LG Model:</li></ul> (For Various Level Of PE Ratio.)<br /><ul><li> ER Calculated Using LG Model.
  47. 47. Mean (Average) = 6.416Shares</li></li></ul><li>Contd…<br /><ul><li>Interpretation :
  48. 48. In The Process Of Mergers & Acquisition Negotiation Hindalco would Like To Keep “ER As Low As Possible” To Reduce The Dilution Of Control In Firm.
  49. 49. While Indal Would Want To Keep “ER As High Possible” To Get More Equity Ratio In A Firm.
  50. 50. Thus ER Would Be Trade-off Between Maximum & Minimum Exchange Ratio By Using Graphical Analysis Or Simply Calculating Mean Of Each Firm.
  51. 51. Nearer PE Ratio To Mean OF Each Firm...
  52. 52. Trade-Off ER = 2.148 + 6.146 = 4.282Shares</li></ul>2<br /><ul><li>Trade-Off PE Ratio = 6 Times</li>