The key principle behind buying a company is to create shareholder value over and above that of the sum of the two companies. Two companies together are more valuable than two separate companies - at least, that's the reasoning behind M&A.

1. M&A Introduction
Level 1 Module 1 Session 1
IFAP
Reshma Krishnan

2. Why are you here?
• To understand what an Analyst does in the context of Corporate
finance and Investment Banking
• To acquire skills critical to being a good analyst
• To go beyond corporate finance theory

3. Logistics
• Programme Manager & M&A track faculty- Reshma Krishnan
– Email: re.krishnan@gmail.com
• Programme Administrator & soft skill faculty – Pradeep
Khanapure
– Pradeep.khanapure@imarticus.org
• Faculty- Harish Menon
• Faculty – Hemal Lotia
• Walk-in hours – Saturday 9-10 (Before Class) on notified days

4. Financial Analysis Landscape
INVESTMENT
BANKING
• Capital Raising
• Debt
• Equity
• Advisory Services
• M&A
• Restructuring
EQUITY &
CREDIT
RESEARCH
PROJECT
FINANCE
CONSULTING
• Corporate
Finance Advisory
• Forensic and
Dispute Services
• M & A
Transaction
Services
• Reorganisation
Services
• Project
Structuring
• Portfolio
Monitoring and
Collections
• Risk Analysis
• Debt, Sub-debt,
Quasi-Equity
Funding, Equity
Investments
• Analysis of stock
markets
worldwide
• Economic,
Strategy and
Commodities
Research
Analysis
• Corporate Debt
FINANCIAL ANALYSIS

5. Two guiding Principles
How do I
become bigger?
Increase my
sales faster and
in a sustained
manner?
How do I make
more money?
Increase my
profitability in a
faster and
Top Line
Bottom
Line

6. Financing
IPO
Debt
Project
Finance
Private
Equity
Vehicles of Growth
Organic-
Greenfield
• Time
• Resources
Inorganic
M&A
• Options
• Market
• Price
Equity Capital
Markets
Analyst Buy-sideSell-side
Hedge Funds
Mutual Funds
Insurance
Companies
HNI
Wealth
Management
Brokerage
Firms
IPO Equity
Research
Analysts
Make or
Buy?

7. Why should you buy? - Strategic Rationale
For M&A
Start-up Growt
h
Maturity Transformation
TIME
REVENUE
Start-up
• Acquire
established
market access
and track
record
• Acquire a
platform for
growth
Growth
• Fill strategic gaps
• Geographic
expansion
• Bulk-up of
revenues and
client base
• Capability
augmentation
• Land grab
Maturity
• Market share
consolidation
• Introduction of new
business lines
• Block & Tackle
Transformation
• Acquire a platform in
order to reorient
business model
around that

8. What is M&A and how does it create value?
• 1+1=3
• The key principle behind buying a company is to create shareholder
value over and above that of the sum of the two companies. Two
companies together are more valuable than two separate
companies - at least, that's the reasoning behind M&A.

9. M&A is not one word
• Mergers- Merger of equals. A merger happens when two firms, often
of about the same size, agree to go forward as a single new company
rather than remain separately owned and operated.
– Rare
– Exchange of Stock
– Daimler- Benz & Chrysler merged to become Daimler Chrysler
• Acquisition-When one company takes over another and clearly
established itself as the new owner, the purchase is called an
acquisition
– More often the case
– Will buy the entire stock of the company
– Tata buying Jaguar

10. The concept of ‘Synergy’- the Holy Grail of M&A
• The magic behind the M&A; the holy grail
– Staff Reductions
– Competition elimination
– Economies of Scale
– Acquiring new technology
– Improved Market Reach and Industry Visibility

11. Types of M&A
Mergers
Horizontal
Two companies that are
in direct competition and
share the same product
lines and markets.
Vertical
A customer and company
or a supplier and
company. Think of a cone
supplier merging with an
ice cream maker.
Conglomerate A garment manufacturer
buying a confectionary

12. Understanding the value chain of an
industry
Rough Production
and mining
Preparing Rough
and reselling
Value Add:
Sorting roughs as
per colour, clarity
and size
Cutting and
Polishing
Value Add:
Sizing the
diamond into shapes
that maximise
yield and
refraction of light
Jewellery
Manufacturing
Value Add:
Setting
Cut & Polished
diamonds
into jewellery
Retail Sales of
Diamond Jewellery
Brokers &
Distributors
Distributor
s
Distributor
s
Glitter’s presence across the value chain allows it to bypass the costs of middle men and also control
quality of raw material at each stage thereby leading to higher margins.
Diamond company expertise across the value
chain
 Changing Industry structure: The disappearance of middle man is advantageous to players such as Glitter who do not depend on them for raw
materials and now have the opportunity to cater to major customers like jewellery manufacturers and retailers on their own leading to a significant
expansion in margins.
 Inorganic Growth Opportunities: Glitter can focus its inorganic growth efforts across the value chain enabling it to spur its growth exponentially over
the coming years as the fragmented industry starts to consolidate.

13. Valuation in M&A- How much will you pay?
• DCF determines a
company's current value
according to its
estimated future cash
flows. Forecasted free
cash flows (operating
profit + depreciation +
amortization of goodwill
– capital expenditures –
cash taxes - change in
working capital) are
discounted to a present
value using the
company's weighted
average costs of capital
(WACC).
•What have similar
transactions been valued at
in terms of P/E and
Revenue Multiples
• Make or buy• Price to Earning Ratio:
Multiple of Earnings of
company
• Enterprise Value to Sales
Ratio-Multiple of revenues
versus Industry
Comparative
Ratios/Comp
arables
Replacement
Cost
Discounted
Cash Flow
(DCF)
Transaction
Comparables

14. Control Premium
• For the most part, acquiring companies nearly always pay a
substantial premium on the stock market value of the companies
they buy. The justification for doing so nearly always boils down to
the notion of synergy; a merger benefits shareholders when a
company's post-merger share price increases by the value of
potential synergy.
• Pre Merger value of both firms +Synergy = Pre Merger Stock
Price Post Merger Number of Shares

15. Indian M&A Market –An Overview
M&A in India has grown at a significant rate between 2003 and 2007 at a
CAGR of almost 58% with focus being on IT & ITES, Telecom, Energy &
Life sciences sectors. A majority of the M&A transactions had been cross-
border in nature.
Source: Grant Thornton
Indian M&A Market
• Domestic
• Cross border
• Inbound- No mega deals
• Outbound- Decline in the
last few years because of
the Global Crisis.
Global M&A
• Down 2% to 2.78 Trillion
• Oil & Gas Led the Global
Sector
• 42,455 deals
• The $54.5bn pending bid for
TNK-BP by Rosneftegaz,
announced on 22nd October, was
the largest deal of the year and
accounted for 14% of total Oil &
Gas volume

16. M&A Pitfalls- why over half of them fail to
create any value…
• Overestimate Savings and imagine
the synergies don’t exist.
• Underestimate integration and
deal costs.
February 20, 2007, Bear Sterns ordered
by a U. S. Bankruptcy Judge in New York
to repay $159 million to the Trustee of
Manhattan Investment Fund Ltd. for
providing services to the fund from 1996
to 2000 provides a stark example of the
huge risk-to-reward gulf if your
company’s due diligence procedures are
not what they should be.
The 2002 merger of HP and Compaq is a
good example of culture clash. Significant
differences were: Compaq tended was
market-oriented and aggressive, while the
traditional HP emphasized teamwork,
consensus and long-term view. Consulting
firms helped HP conduct 144 focus groups
and 150 interviews in 22 countries. These
firms discovered that the situation was
ready-made for massive culture clash.
Evaluation Diligence Implementation
• Cultural Clash: Companies are
like people and have their own
personalities. Merging two
extremely different cultures
often results in a failed merger.
• Inadequate Due Diligence: This often
happens in the auction process when speed
is of the essence and buyers are expected to
finish due diligence quickly to ensure
Closure of transaction.
Merger of AOL-Time Warner’s
synergies ascribed to the deal were
over sold. The shareholders of AOL
owned 55% of the new company
while Time Warner shareholders
owned only 45%, wall street worry
was that the smaller AOL had in
fact bought out the far larger Time
Warner.
Deal Heat/ winners Curse: Bidders get caught up in a deal and lose sight of value and
strategic fit and focus on winning thereby losing synergies.

17. Tata Corus- An analysis of why this time is
different
• Corus, the merger between British Steel and Hoogovens in 1999, underestimated the integration valuing the
companies market cap at US$ 6 billion, but in 2005 the company was worth US$ 250 million.
 Corus was an attempt to revive the ailing British Steel which had incurred a net loss of £81 million in the
March 1999.
Corus’s Failure:
 Chief among them being the cultural mismatch between the merged entities and the lack of HR involvement
when integrating the two entities.
 Large scale labour unrest due to the downsizing and rationalization of various operations seriously impacted
the normal functioning of the new organization.
 The high valuation of the British pound and stagnation in demand for steel was gradually undermining the
competitiveness of British Steel in the European market.
CORUS FAILURE
Wishful Thinking!

18. Wishful Thinking!
Tata Corus- An analysis of why this time is
different
TATA CORUS DEAL
 Tata Steel acquired Britain’s Corus for £5.75 billion ($11.3 billion now 12.1) in 2007.
 Tata-Corus combine will become the fifth largest steelmaker in the world.
The New TATA-Corus
 Access to low-cost slabs:
 The ability to export surplus slabs either from Tata Steel's facilities or through acquisitions in low-
cost regions over the next few years will be the key driver of this deal.
 Restructuring of Corus' existing units:
 It is likely that over the next few years, Tata Steel will put through an extensive restructuring of its
underperforming units at Port Talbot and Scunthorpe in the UK, though it has ruled out any job
cuts. It may also prune down high-cost slab facility at Teesside.
 Better Implementation and management of Cultural issues:
 The ruling out of job cuts creates a better environment post integration unlike the one seen in the
earlier transaction.
 Quantified Potential synergies:
 For the first time since this deal surfaced, Tata Steel has quantified that it will benefit to the tune
of $300-350 million every year. However, the benefits from the deal may be lower than this
amount spelt out in the first two years and attain this level from the third year onwards.

19. Winners Curse!
• A tendency for the winning bid in an auction to exceed the intrinsic
value of the item purchased.
• Tata Corus had quantified synergies but many reckon that they
might have bid almost
– The acquisition by Tata amounted to a total of 608 pence per ordinary
share or ₤6.2 billion (US $12 billion) which was paid in cash. First of all,
the general assumption is that the acquisition was not cheap for Tata.
The price that they paid represents a very high 49% premium over the
closing mid market share price of Corus on 4 October, 2006 and a
premium of over 68% over the average closing market share price over
the twelve month period. Moreover, since the deal was paid for in cash
automatically makes it more expensive, implying a cash outflow from
Tata Steel in the amount of £1.84 billion.

20. Thank you
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