Financial management ppt

1. CORPORATE RESTRUCTURING, MERGERS AND
ACQUISITIONS
CHAPTE
R 32

2. LEARNING
OBJECTIVES
 Discuss the form of mergers and acquisitions
 Highlight the real motives of mergers and acquisitions
 Show how mergers and acquisitions could help in creating value
 Illustrate the methodology for valuing mergers and acquisitions
 Focus on the considerations that are important in the mergers and
acquisitions negotiations
 Consider the issues involved in post-merger integration
 Understand the implications and valuation of the leveraged buyouts
and disinvestment
 Explain the legal framework for mergers and acquisition in India
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3. INTRODUCTION
Corporate restructuring includes mergers and
acquisitions (M&As), amalgamation, takeovers,
spin-offs, leveraged buy-outs, buyback of shares,
capital reorganisation etc.
M&As are the most popular means of corporate
restructuring or business combinations.
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4. CORPORATE
RESTRUCTURING AND
BUSINESS COMBINATION
Corporate restructuring refers to the changes in
ownership, business mix, assets mix and alliances
with a view to enhance the shareholder value.
Hence, corporate restructuring may involve
ownership restructuring, business restructuring and
assets restructuring.
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5. TYPES OF BUSINESS
COMBINATIONS
Merger or Amalgamation
 Merger or amalgamation may take two forms:
• Absorption
• Consolidation
 In merger, there is complete amalgamation of the assets and
liabilities as well as shareholders’ interests and businesses of
the merging companies.
 There is yet another mode of merger. Here one company
may purchase another company without giving
proportionate ownership to the shareholders’ of the acquired
company or without continuing the business of the acquired
company.
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6. TYPES OF BUSINESS
COMBINATION
Forms of Merger:
 Horizontal merger
 Vertical merger
 Conglomerate merger
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7. Acquisition may be defined as an act of acquiring
effective control over assets or management of a
company by another company without any
combination of businesses or companies.
A substantial acquisition occurs when an
acquiring firm acquires substantial quantity of
shares or voting rights of the target company.
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TYPES OF BUSINESS
COMBINATION

8.  Takeover – The term takeover is understood to connote hostility.
When an acquisition is a ‘forced’ or ‘unwilling’ acquisition, it is
called a takeover.
 A holding company is a company that holds more than half of the
nominal value of the equity capital of another company, called a
subsidiary company, or controls the composition of its Board of
Directors. Both holding and subsidiary companies retain their
separate legal entities and maintain their separate books of
accounts.
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TYPES OF BUSINESS
COMBINATION

9. Largest M&A Deals in India
1. Tata Steel-Corus, $12.2 billion
2. Vodafone-Hutchison Essar, $11.1 billion
3. Hindalco-Novelis, $6 billion
4. Ranbaxy-Daiichi Sankyo, $4.5 billion
5. ONGC-Imperial Energy, $2.8 billion
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10. MOTIVES AND BENEFITS OF
MERGERS AND
ACQUISITIONS
Mergers and Acquisition are intended to:
 Limit competition.
 Utilise under-utilised market power.
 Overcome the problem of slow growth and profitability in
one’s own industry.
 Achieve diversification.
 Gain economies of scale and increase income with
proportionately less investment.
 Establish a transnational bridgehead without excessive
start-up costs to gain access to a foreign market.
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11. Cont…
 Utilise under-utilised resources–human and physical and
managerial skills.
 Displace existing management.
 Circumvent government regulations.
 Reap speculative gains attendant upon new security issue
or change in P/E ratio.
 Create an image of aggressiveness and strategic
opportunism, empire building and to amass vast economic
powers of the company.
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12. Benefits of Mergers and
Acquisitions
The most common advantages of M&A are:
 Accelerated Growth
 Enhanced Profitability
• Economies of scale
• Operating economies
• Synergy
 Diversification of Risk
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13. Benefits of Mergers and
Acquisitions
 Reduction in Tax Liability
 Financial Benefits
• Financing constraint
• Surplus cash
• Debt capacity
• Financing cost
 Increased Market Power
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14. Value Creation Through Mergers
and Acquisitions
Merger will create an economic advantage (EA)
when the combined present value of the merged
firms is greater than the sum of their individual
present values as separate entities.
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Net economic advantage = Economic advantage – Cost of merger/acquisition
NEA [ ( )] – (cash paid )
PQ P Q Q
V V V V
   

15. Valuation under Mergers and
Acquisitions: DCF Approach
In order to apply DCF technique, the following
information is required:
• Estimating Free Cash Flows
 Revenues and expenses
 Capex and depreciation:
 Working capital changes
• Estimating the Cost of Capital
• Terminal Value
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16. FINANCING A MERGER
 Cash Offer:
 A cash offer is a straightforward means of financing a merger. It does
not cause any dilution in the earnings per share and the ownership of
the existing shareholders of the acquiring company.
 Share Exchange:
 A share exchange offer will result into the sharing of ownership of the
acquiring company between its existing shareholders and new
shareholders (that is, shareholders of the acquired company). The
earnings and benefits would also be shared between these two groups
of shareholders. The precise extent of net benefits that accrue to each
group depends on the exchange ratio in terms of the market prices of
the shares of the acquiring and the acquired companies.
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17. Merger Negotiations:
Significance of P/E Ratio and
EPS Analysis
 The mergers and acquisitions decisions are also evaluated in
terms of EPS, P/E ratio, book value etc.
 Share Exchange Ratio
 The share exchange ratio (SER) would be as follows:
 The exchange ratio in terms of the market value of shares
will keep the position of the shareholders in value terms
unchanged after the merger since their proportionate wealth
would remain at the pre-merger level.
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Share price of the acquired firm
Share exchange ratio
Share price of the acquiring firm
b
a
P
P
 

18. Merger Negotiations:
Significance of P/E Ratio and
EPS Analysis
 Post-merger weighted P/E ratio:
 (Pre-merger P/E ratio of the acquiring firm)  (Acquiring
firm’s pre-merger earnings  Post-merger combined
earnings) + (Pre-merger P/E ratio of the acquired firm) 
(Acquired firm’s pre-merger earnings  Post-merger
combined earnings)
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No. of shares exchanged SER Pre-merger number of shares of the acquired firm
( / ) 0.25 4,000 1,000
b a b
P P N
 
   
PAT PAT
Post-merger combined PAT
Post-merger combined EPS =
Post-merger combined shares (SER)
a b
a b
N N



P/E (P/E ) (PAT / PAT ) (P/E ) (PAT / PAT )
w a a c b b c
  

19. Merger Negotiations:
Significance of P/E Ratio and
EPS Analysis
Earnings Growth
The formula for weighted growth in EPS can be
expressed as follows:
Weighted Growth in EPS = Acquiring firm’s
growth × (Acquiring firm’s pre-merger
PAT/combined firm’s PAT) + Acquired firm’s
growth × (Acquired firm’s pre-merger
PAT/combined firm’s PAT).
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PAT PAT
PAT PAT
a b
w a b
c c
g g g
   