Mergers and acquisitions are used as instruments of momentous growth and are increasingly getting accepted by Indian businesses as critical tool of business strategy. They are widely used in a diverse array of fields such as information technology, telecommunications, and business process outsourcing as well as in traditional business to gain strength, expand the customer base, cut competition or enter into a new market or product segment. Mergers and acquisitions may be undertaken to access the market through an established brand, to get a market share, to eliminate competition, to reduce tax liabilities or to acquire competence or to set off accumulated losses of one entity against the profits of other entity. The project stands to demystify the mysteries regarding the various strategies of the subject, the mysteries relating to select notations like valuation and different restructuring activities, the mysteries of the process of Merger and Acquisition.

1. DEMYSTIFYING
MERGERS &
ACQUISITIONS
presented by :
SIDDHANT BAHAL
B. COM (M), 3RD YEAR,
ROLL NO. – 58, ROOM NO. – 06
SESSION – 2011-2014
SPECIALIZATION IN FINANCE
ST. XAVIER’S COLLEGE, KOLKATA
Under the Mentorship & Tutelage of :
PROFESSOR SUBIR SRIMANI
HEAD OF DEPARTMENT
ACCOUNTING & FINANCE
DEPARTMENT OF COMMERCE
ST. XAVIER’S COLLEGE, KOLKATA

2. OBJECTIVE OF THE
STUDY –
> To unearth the hidden facets of the
topic
> To depict the impact of strategies on
the decision making
EXPLORATION
TECHNIQUE -
> Primary Data Collection
> Secondary Data Collection
> Case Studies emphasizing on
different strategies
REASON FOR
RESEARCH –
> To be an expert in this branch of
investing banking
> Demystify for self future planning
> Lack of reference material from the
point of view of “STRATEGIES” &
“PHASES”
LIMITATIONS –
> Many topics still left to be covered
> Cases are explained from a
strategic point of view, valuations
are not covered
> Taxation is ignored due to limited
purview of the topic
> Detailed analysis of EU is not
brought out

3. Mergers and acquisitions are manifestations of growth process
through an inorganic route. While mergers can be defined to mean
unification of two players into a single entity, acquisitions are
situations where one player buys out the other to combine the
bought entity with itself.
The techniques of growth through an inorganic route :
INTRODUCTION

4. THE PROCESS IN BRIEF -
COMPETITIVE
ANALYSIS
SEARCH & SCREEN
STRATEGY
DEVELOPMENT
FINANCIAL
EVALUATION
NEGOTIATION

5. M&A TRANSACTION
= SHAREHOLDER’S
VALUE ENHANCER
HOW?
VALUE
CREATION
VALUE
CAPTURE

6. • A long term phenomenon which
results from the synergy generated
from a transaction.
• It may be achieved by way of
functional skill or management skill
transfers.
VALUE
CREATION
• It is a one-time phenomenon.
• The shareholders of the acquiring
company gain the value of the
existing shareholders of the
acquired company.
VALUE
CAPTURE

7. STRATEGY
STRATEGIES
GROWTH
SYNERGY
OPERATING
SYNERGY
FINANCIAL
SYNERGY
DIVERSIFICATION
OTHER
ECONOMIC
MOTIVES
HUBRIS
HYPOTHESIS
OTHER
MOTIVES

8. GROWTH
OPTIONS OF
GROWTH
INTERNAL
GROWTH
ALSO KNOWN
AS ORGANIC
GROWTH
EXTERNAL
GROWTH
ALSO KNOWN
AS INORGANIC
GROWTH

9. SYNERGY
THE SYNERGY EQUATION
NAV = VAB – [ VA + VB ] – P – E
where:
VAB = the combined value of the two firms
VA = the value of A
VB = the value of B
P = premium paid for B
E = expenses of the acquisition process

10. SYNERGY
GAINS DUE
TO FUSION
SYNERGY
GAINS DUE
TO FISSION
REVERSE
SYNERGY
TYPES OF
SYNERGY
OPERATING
SYNERGY
FINANCIAL
SYNERGY

11. DIVERSIFICATION
Diversification means growing
outside a company’s current
industry category.

12. “Portfolio” Management of Business
Units -
Expansion through the acquisition of a
number of firms, is an attempt to
achieve some of the benefits that
investors receive by diversifying their
portfolio of assets. However, when this
strategy is applied to capital assets and
whole corporations, it loses some of its
appeal.
Having a diverse
corporation that spans a
number of different
business areas may help
facilitate dividend stability.
DIVERSIFICATION
Putting All One’s Eggs in One Basket.

13. DIVERSIFICATION
Diversification to Enter More Profitable Industries
A major reason for management to opt for diversified expansion is its desire
to enter industries that are more profitable.

14. DIVERSIFICATION Financial Benefits of Diversification
One possible area of benefits of diversification that has been cited is the
coinsurance effect. This occurs when firms with imperfectly correlated
earnings combine and derive a combined earnings stream that is less
volatile than either of the individual firms’ earnings stream. If the
covariance between earnings of two potential merger candidates is
negative, there might be an opportunity to derive coinsurance benefits
from a combination of such firms. What the merger partners have to
determine is if these coinsurance ”benefits” truly provide benefits to
shareholders beyond what they can achieve on their own.

15. OTHERECONOMICMOTIVES
• Horizontal integration refers to the
increase in market share and
market power that results from
acquisitions and mergers of rivals.
HORIZONTAL
INTEGRATION
• Vertical integration involves the
acquisition of firms that are closer
to the source of supply or to the
ultimate consumer. The vertical
combination is motivated by a
movement toward the consumer.
VERTICAL
INTEGRATION

16. HUBRISHYPOTHESISOFTAKEOVERS
Investopedia explains 'Hubris' as characteristic which may be
developed after a person encounters a period of success. A
manager might start making business decisions without fully
thinking through the consequences, or a trader may begin
taking on excessive risk which may bring about their own
downfall.
The hubris hypothesis implies that managers seek to acquire
firms for their own personal motives and that the pure
economic gains to the acquiring firm are not the sole motivation
or even the primary motivation in the acquisition.
Winner’s Curse Hypothesis of Takeovers
The winner’s curse of takeovers is the ironic hypothesis that states
that bidders who overestimate the value of a target will most
likely win a contest.

17. OTHER
MOTIVES
Improved
Management
Improved
R&D
Improved
Distribution
Tax Motives
OTHERMOTIVES

18. KEY NOTATIONS
EXPLAINED
 Leverage Buyouts and related
terminology
 Value v/s Valuation
 Valuation of a Privately held Companies
 Merger Arbitrage
 Short Form Merger
 Freeze out and the Treatment of Minority
Shareholders
 Reverse Merger

19. LEVERAGEDBUYOUTS A leveraged buyout is a financing technique, i.e., it is
the use of debt to purchase the stock of a
corporation, and it frequently involves taking a public
company private.
The incentive to go private is greatest when
management and the board believe the firm is
undervalued. Moreover, public companies are more
likely to go private if the cost of governance is high,
the need for liquidity is low, and the potential loss of
control is high.

20. LEVERAGEDBUYOUTS
•An MBO is a type of LBO that occurs when the
management of a company decides it wants to take
its publicly held company, or a division of the
company, private.
Management
Buyouts
•Secured debt, which is sometimes called asset-
based lending, may contain two subcategories of
debt: senior debt and intermediate-term debt.
•Unsecured debt, which is sometimes known as
subordinated debt and junior subordinated debt,
lacks the protection of secured debt, but generally
carries a higher return to offset this additional
risk.
Financing for
Leverage Buyouts
•Post completion of the deal, the capital structure
of a company taken private in an LBO is usually
different from its structure before the buyout.
•After the buyout, the firm is very highly leveraged.
Capital Structures
of LBOs
Types of LBO Risk
Reverse LBOs
•Business risk
•Interest rate risk
•A reverse LBO occurs when a company goes private in an
LBO only to be taken public again at a later date.

21. VALUEVERSUSVALUATION VALUE GAINS FROM MERGER
Combined value > (Value of acquirer + Standalone value of target)
The difference between the combined value and the sum of the values of
individual companies is usually attributed to synergy.
Combined Value =
Value of acquirer + Stand alone value of target + Value of synergy
VA = Rs 100
VB = Rs 50
VAB = Rs175
Synergy = VAB – (VA + VB) = 25

22. VALUEVERSUSVALUATION
VALUATION TECHNIQUE
EARNING BASED VALUATION
MARKET BASED VALUATION
ASSET BASED VALUATION
DISCOUNTED CASH FLOW /
FREE CASH FLOW
COST TO CREATE APPROACH
CAPITALIZED EARNING
METHOD
CHOP – SHOP METHOD
MARKET CAPITALIZATION OF
LISTED COMPANIES
MARKET MULTIPLES OF
COMPARABLE COMPANIES
FOR UNLISTED COMPANIES
NET ADJUSTED ASSET VALUE
OR ECONOMIC BOOK VALUE
INTANGIBLE ASSET VALUATION
LIQUIDATION VALUE

23. VALUEVERSUSVALUATION
Case Study – Valuation Analysis
X & Y, software companies, former listed and latter unlisted; decided to merge to
benefit from marketing. X was merging for the high growth potential of Y, and Y was
for the experience of X, a listed entity. SWAP RATIO was fixed at 1:1.
•Valuation based on book value net asset value would not be appropriate for X and Y
since they are in the knowledge business.
• X and Y were valued on the basis of expected earnings & market multiple.
•While arriving at a valuation based on expected earnings, a higher growth rate was
considered for Y, it being on the growth stage of the business life cycle while a lower
rate was considered for X, it being in the mature stage and considering past growth.
•Different discount factors were considered for X and Y, based on their cost of capital,
fund raising capabilities and debt-equity ratios.
•While arriving at a market based valuation, the market capitalization was used for X.
Since X had a significant stake in Z, another listed company, the market capitalization of
Z had to be removed.
•Several comparable companies for Y had to be identified, and a composite of their
market multiples had to be estimated as a surrogate measure to arrive at Y’s likely
market capitalization, as if it were listed. This value had to be discounted to remove the
listing premium since the surrogate measure was estimated from listed companies.
•A weighted average value was calculated after allotting a higher weight for market
based method for X & a higher weight for earnings based method for Y. The final values
for X and Y were almost equal and hence the 1:1 ratio was decided.

24. MERGERARBITRAGE
With respect to M&A, arbitragers purchase stock of
companies that may be taken over in the hope of getting a
takeover premium when the deal closes. This is referred to
as risk arbitrage, as purchasers of shares of targets cannot
be certain the deal will be completed. They have evaluated
the probability of completion and pursue deals with a
sufficiently high probability.
ARBITRAGE REFERS TO THE BUYING OF AN ASSET IN ONE
MARKET AND SELLING IT IN ANOTHER.

25. SHORT-FORM
MERGER
FREEZEOUTS
•Stockholder approval process is not necessary
•Stockholder approval may be bypassed, by the
management who is advocating the merger.
•Board of directors simply approves the merger
by a resolution
•Minority Shareholders are “FROZEN OUT”
when the majority have approved the deal.
•A holdout problem needs to be prevented,
which may occur when a minority attempts to
hold up the completion of a transaction unless
they receive a satisfactory compensation.

26. REVERSEMERGERS A reverse merger is a merger in which a private company may go public
by merging with an already public company that often is inactive or a
corporate shell. The combined company may then choose to issue
securities and may not have to incur all of the costs and scrutiny that
normally would be associated with an initial public offering. The private-
turned-public company then has greatly enhanced liquidity for its equity.
A REVERSE MERGER SAVES TIME
Volume of Reverse Mergers

27. ACQUISITIONS PROCESS

28. Phase 1 –
Building the
business plan
Phase 2 – Building
the Merger-
Acquisition
Implementation
Plan
Phase 3 – The
Search Process
Phase 4 -
Screening the
Initial Search
Results
Phase 5 – First
Contact
Phase 6 –
Negotiation
Phase 7 –
Developing the
Integration
Plan
Phase 8 –
Closing
Phase 9 -
Implementing
Post-closing
Integration
Phase 10 - Conducting a
Post-closing Evaluation
THE 10 PHASES TO MERGE & ACQUIRE ARE -

29. CASE STUDIES
EMAMI’s Acquisition of ZANDU in 2008
• HEIGHTS OF HOSTILITY
GRASIM-ULTRATECH Renovation
• NEW IS ALWAYS BETTER
HDFC BANKS’ Appetite for CENTURION
BANK OF PUNJAB
• ALL’S WELL THAT ENDS WELL

30. EMAMI’s Acquisition of ZANDU in 2008
29 June 2008:
>Emami bought 23.6% stake in Zandu
>Deal value : Rs 130crores
>Paid Rs 6900 per share through off
market deals with the Vadiyas , one of the
promoter groups of Zandu
>Emami Already having 3.7% stake
>Total holding in Zandu 27.5%
2 June 2008
>Open offer was made by emami to acquire upto 20 %
stake in Zandu
>Open offer price : Rs 7315 per share
>Dispute initiated with Girish Parikh , one of the promoter
who holds 22 % in the Zandu
>Zandu’s allegation “The purchase of shares from the
Vaidya family in two tranches, indicated that Emami had
already decided to acquire more than 15 per cent, hence
violating the SEBI Takeover Regulations (1997)
>Matter moved to SEBI who transferred it to CLB
>CLB held back open offer by emami till further decision
12 Sept 2008
>SEBI clears open offer for Zandu
>Emami doubled open offer price for
Zandu pharma from Rs 7,315 to Rs 15,000
>Open offer commenced on September 26
, 2008 and closed on October 15, 2008
16 Oct 2008
>Parikh gives in , Emami wins Zandu
>Sold 18.8 pc stake at Rs 16,500 a share
>Emami got controlling stake
>Deal value : Rs 242crores
>Deal includes non competing fee of Rs 1500 per share
>Bought Rs 54 crore worth of Zandu shares from the open market
>Post the open offer Emami controls 66 % stake in company
>Emami payed close to Rs 700croresfor Zandu
>Zandu became Emami’s fully owned subsidiary
1 Dec 2008
>Made Zandu pharma its subsidiary
>Emami plans to merge Zandu surfaced
>Planning to raise $50m through private equity funding by selling 15% of equity
>Planning to hive off Zandu chemicals as it is making loss

31. GRASIM-ULTRATECH Renovation
:TrustlineResearch;16/11/2009
Why did the restructuring take place? Because it was a WIN-WIN Proposition.
Preserves the essential strengths and benefits of the current structure
oContinuation of Grasim’s parentage
oEconomic interest of shareholders remains the same
oGrasim will continue to consolidate the cement business results in its accounts
Enhances financial flexibility in both of the key businesses of Grasim - VSF
and Cement – to undertake significant growth plans
Creates a pure-play cement entity
oGrasim shareholders given additional shares to participate directly
If the consolidation of cement businesses materializes, it will align interests
of all stakeholders

32. HDFC BANKS’ Appetite for CENTURION BANK OF PUNJAB
Increase in scale of
operations
Increase in geography
Management bandwidth
Potential of Business
synergy and cultural fit
HDFC’s Brand leverage
and increased utilization
of CBOP Branches
CBOP’s SME focus
complement HDFC’s
Corporate focus
REASONS
FOR
MERGER
SEPTEMBER,
2007
SWAP
RATIO
SWAP
VALUE
APRIL,
2010
VALUE
APPRECIATION
HDFC 1433 1 1433 1984 38.45%
CBOP 41 29 1189 1984 66.86%
INDEX 5001 1 5001 5250 4.98%
Gains to Shareholders –

33. EUROPEAN UNION -
AN INSIGHT
SUCCESS
OF
EUROPEAN
UNION
GROWTH
SYNERGY
OPERATING
SYNERGY
FINANCIAL
SYNERGY
BETTER
GOVERNED/
MANAGED

34. CONCLUSION
The report is brisk in its approach and does not go beyond what is absolutely
relevant. Mergers and acquisitions have always been around, forever changing with
eternally new dynamics. The strategies are critically explained. We should also
recognize some cold hard facts about mergers and acquisitions:
•Synergies projected for M & A's are not achieved in 70% of cases.
•Just 23% of all M & A's will earn their cost of capital.
•In the first six months of a merger, productivity may fall by as much as 50%.
•The average financial performance of a newly merged company is graded as C -
by the respective Managers.
•In acquired companies, 47% of the executives will leave the first year and 75%
will leave within the first three years of the merger.