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  1. 1. AProject SynopsisOn“Valuation of Merger &Acquisition”ByMs.Satpute Archana Jyotiling [Roll No: 31]Specialization: FinanceAruna Manharlal Shah Institute ofManagement and ResearchGhatkopar [W], Mumbai-862012-13
  2. 2. RATIONALEThere are several reasons for M&A. M&A has been widely used indeveloped economies as a growth strategy of business strategy. Itis increasingly becoming the order of the dayin businessesespecially in rapidlyevolving businesses like informationtechnology, telecommunications, business process outsourcing aswell as in traditional businesses.Indian businesses are also rapidlyusing M&A to grow internationally. Results of theInternationalBusiness Owners Survey recentlycarried out by GrantThorntonthrough 6,900 interviews conducted in 26 countries inEurope, Africa, Asia-Pacific and theAmericas, say that 34% ofbusinesses will use M&A as a methodto maintain or improveprofitability. Businesses are acquired to gainstrengths, expandcustomer base,cut competition or enter into a new market orproduct segment (European media groups such as Bertelsmann,Pearson, etc. have driven their growth by expanding into theUnited States throughM&A). When HLL acquiredLakme, it got anentry into the cosmetics market through an established brand.Similarly, whenGlaxo and SmithKline Beechammerged, they notonly gained market share, but eliminated competition betweeneach other. IBMDaksh is a case in point for acquiring acompetence (detailed casestudy later in this section). Tata Tea’sacquisition of Tetley wasmade to leverage Tetley’s internationalmarketing strengths (Tetleyhas a strong market network in35countries across the world whileTata Tea’s strengths lie in teaproduction). Ashok LeylandInformation Technology (ALIT)wasacquired by Hinduja Finance, agroup company, so that it could setoff the accumulated losses inALIT’s books against its profits.In
  3. 3. order to maximise value creation it is important to focus onone’score competencies. It is therefore equally important to planforselling a business as it is to acquirea business. GrantThornton’sInternational Business Owners’ survey results showthat 56% of businesses will eliminate non-coreservices activitiesto maintain or improve profitability. Hence, a key reason fordivesting a business could be to focus oncore activities (HLL istrying toprune non-core brands to concentrate on power brandsthrough saleof brands like Dalda, Glucovita,etc.). The otherreasons could bedeclining profitability or as an exit opportunityfor promoters. The table shows the key rationale forsome of thewell known transactions based on public knowledge.Typicallyfinancial investors orventure capitalists look for exitopportunitiesthrough a trade sale to astrategic investor at some stage. Withtheventure capital industry maturinginternationally and in India,currently
  4. 4. OBJECTIVES  To find out the change in the value of the Acquirer firm due to Merger & Acquisition activity bydoing Pre and Post-valuation of the acquirer firm  To understand valuation process
  5. 5. RESEARCH METHODOLOGY After considering all the valuation approaches the income approach & the comparable method will be used as all the information is available. There is no point in using the depreciated cost approaches and due to current market situation and the needs that the client is looking for. For the second part of Pre and Post-Valuation of the Acquirer Firm will be done by using Discounted Cash Flow Model. Help of various engines on internet, mainly and for referencearticles on the subject.
  6. 6. LIMITATION  Data collection for the project is done from secondary sources. The source of data isassumed to be authentic and will be disclosed properly in the report.  Valuation done in this research is based on financials upto year 2012 and variousassumptions are taken as per the macroeconomic factors prevailing at the time of theentering of the deal. Since economic factors are dynamic and keep changing, so valuationdifferent times can also vary. Valuation depends on the various estimates taken by different analyst. Hence, subjectivitycreeps in the valuation and comes up with different figure.
  7. 7. BENEFITS The number as well as the average size of merger and acquisition deals is increasing in India. During post liberalization, increase in domestic competition and competition against cheaper imports have made organizations merge themselves to reap the benefits of a large-sized company. The merger and acquisition valuation is the building block of a proposed deal. It is a technical concept that needs to be estimated carefully. M&A valuation involves determining the maximum price that a buyer is willing to pay to buy the target company. From the sellers point of view, it means estimating the minimum price he wants to take against his business. If there are many buyers, then each one bids a purchase price based on his valuation. Finally, the seller will give the business to the highest bidder. The use of different valuation techniques and principles has made valuation a subjective process. A conflict in the choice of technique is the main reason for the failure of many mergers. For instance, the asset value can be determined both at the market price and the cost price. Therefore, it is important that the merging parties should first discuss and agree upon the methods of valuation. Calculating the swap ratio is at the core of the valuation process. It is the ratio at which the shares of the acquiring company will be exchanged with the shares of the acquired company. For instance, a swap ratio of 1:2 means that the acquiring company will provide its one share for every two shares of the other company.Worlds market changes very fast. Each day a lot of companies are launched and closed at thesame time. They supply thousands of different types of product and services. During thelifecycle of each company they have to improve their quality, fight with their 27
  8. 8. competitors and, of course, get high profit. Nowadays companies are connecting with eachother, to be bigger, to be able to achieve new goals. There is description of mergers andacquisitions as a possibilities of connection between two or more companies or organizationsin article above. These can be done on national or international area. It is easier to survive onthe market when the company has more resources and capital than other company. To makean M&A successfully it should be fulfilled long list of different criteria. This paper summarizes information on how corporate business entity can be valued for mergers and acquisitions. It shows what business valuations really is, and how it is used while mergers and acquisitions. There are shown steps for M&A and for valuating businesses before doing M&A. After analyze of several method of valuation it is now more explicit that knowledge of valuer is important and has to be wide and up to date, to achieve the concrete goal.