strategic approaches to Merger & Aquisition

MERGERS &
ACQUISITIONS
Strategic perspective

Strategic approaches to M&A
 Buyers are primarily driven by commercial
considerations rather than financial
considerations
 Financial acquisitions are often opportunistic
deals that do not fit into any broad plan for
developing business
 Combined resources and capabilities should
create a stronger competitive advantage

Reliance 5 G dreams……
https://www.financialexpress.com/industry/mukesh-ambani-digs-into-modis-make-in-india-reliance-to-make-electronics-in-jv-with-sanmina-of-us/2449578/

 The joint venture will create a world-class
electronic manufacturing hub in India
 The companies will manufacture electronics
hardware with a priority on high technology
infrastructure hardware
 The JV will also manufacture goods across
industries such cloud infrastructure, medical and
healthcare systems, and defense and
aerospace

 The announcement of a new JV comes at the
backdrop of Narendra Modi government’s flagship
PLI (Production-Linked incentive)
 Scheme encouraging domestic as well as foreign
companies to manufacture in India by offering
incentives
 Electronics manufacturing, one of the 14 listed
industries under the PLI scheme, forms a
substantial chunk

 In February, the government said it expects
investment of Rs 34,090 crore under the PLI
scheme for large-scale electronics manufacturing
by 2025
 Reliance was listed as one of the beneficiaries in
the government’s PLI scheme for solar panel
manufacturing
 RIL’s unit Reliance New Energy Solar is expected
to get PLI benefits worth Rs 1,190 crore

 For both growth and security, it is essential for
India to be more self-reliant in electronics
manufacturing in Telecom, IT, Data Centers,
Cloud, 5G, New Energy and other industries as
we chart our path in the new digital economy.
 Through this partnership we plan to boost
innovation and talent in India, meeting both Indian
and global demand,” Akash Ambani, Director,
Reliance Jio

Strategic approaches to M&A
 Reckitt & Sons started in 1840
 The Reckitt & Coleman, UK
in 1938
 Benckiser, Netherlands
 Joined hands to form ‘Reckitt-Benckiser’ in 1999
 To get complementary products and geographical
penetration

Strategy?
 Strategies define the vision, mission, plan,
objectives, and policies of a firm
 Long-term horizon strategies carve out the
design and structure of the company
 It enables firm to achieve its vision
 Strategic approach gained importance in
1960s

Strategy?
 Necessitated by the change happening to the
economies, industries, financial markets,
corporations and consumers
 Emerging new businesses
 Role of factors of production and knowledge
economy
 Strategic function emerged as “must for survival”

Strategy?
 Strategy refers to plans made and actions taken
for making companies realize their intended
objectives
 Strategy help in dealing with uncertainty
 Strategies are not static and are reassessed and
reevaluate continuously
 Strategy is aimed at cost leadership,
differentiation and focus – Michael Porter

Strategic planning
 Strategic planning process evolve with
 Organizational culture
 Structure
 Value system
 It creates the future of the firm and generally
taken by care by the top management

To be right for M&A……
 Vision
 Core ideology
 Envisioned future
 Mission
 What is our basic
purpose?
 What is unique to
our organization?
 What are principal
goods/services,
present and future?

Mission-vision-strategy…..
Why do
we exist?
For whom
do we
exist?
How do
we
perform
better
than
competitio
n?
How to
energize
and
motivate to
stakeholde
rs ?
Strategy
formulation
Vision
statement
Mission
statement
“To do”
Short
crisp
Differentiation
for competitive
advantage
Creating value
“To be”
Aspirational
Inspirational
Measurable
Strategy
implementati
on
Annual plans
Monitoring,
control &
corrective action
Balance score
card
Leadership

 Purpose: an articulation of functions through which a company intends to
fulfill its business
 Value: a set cherished notions and beliefs that guides every move that a
company makes
 Goals: the business targets into which a company’s vision, mission, and
purpose are translated
 Strategy: a unified, comprehensive and integrated plan that relates the
strategic advantages of firm to the environmental challenge
 Strategic management: it is a stream of decisions and actions, led to
development of effective strategy to help achieving corporate objective
To be right for M&A……

Successful strategies (Robert Shirley)
 Basic purpose or mission
 Customer mix
 Product mix
 Service areas
 Goals and objectives
 Competitive advantage
 Outside relationships

Strategic analysis for M&A
 External analysis
 Industry or competitors analysis
 Internal analysis

SA: External analysis
 Economic factors
 Political and legal factors
 Social trend and demographics
 Technology
 Geography

External analysis framework
 SWOT
 Strength
 Weakness
 Opportunities
 Threats
 PEST
 Political
 Economical
 Social
 Technological
 PESTLE
 Legal
 Environmental

SA: Competitor analysis
framework
https://strategyforexecs.com/porters-five-forces-model/

SA: Internal analysis framework
https://www.business-to-you.com/value-chain/

Need to create competitive
advantage?
 To remain
 Contextually relevant
 Competitive
 Culturally relevant
 Companies need to invent sources of sustainable
competitive advantage

Contextually relevant
 It means providing your customer, and
prospect for that matter, with content that is
relevant to them.“
 Relevance is a table stake across the entire
lifecycle of a seller-buyer relationship
 As buyers move through on their journey, what
is relevant to them changes
https://blogs.oracle.com/marketingcloud/post/why-contextual-relevance-is-everything-marketers
https://www.forbes.com/sites/christinecrandell/2014/02/11/being-contextually-relevant-increasing-customer-loyalty/?sh=2b05e6c742fd

 Relevance is defined by the situation,
pressures and feelings the buyer has at each
step; in other words it’s contextual
 Understanding what is contextually relevant for
each buyer at any point in time is a major
challenge for vendors.
 It’s not like you can constantly ask them.

 There is a rise of software vendors that capture
and analyze buyers’ digital actions and turn them
into actionable behavioral patterns.
 Coupling these behavioral patterns with in-depth
buyers’ journeys, vendors can decipher each
buyer’s context.
 The result is actionable data to more effectively
personalize content, landing pages, search
results, emails, social communications, and sales
and support calls, as well as products to meet
evolving customer expectations

If not ready for competitive
advantage
 Thomas and cook
 Atlas cycles
 Ramington Rand global leader for typewriters
 Kodak camera

Strategy to create competitive
advantage
 Generic/business level strategy
 Cooperative strategies
 Corporate level strategies

Generic/business level
strategies
 Differentiation strategy
 Low cost strategy
 Focus
 Quick response
 Enough focus on cost and differentiation strategies since
1970. Japanese started referring to this term as “atarimae
hinshitsu” which means “value is taken for granted”

Cooperative strategies
 Collusion
 Airtel and Escotel shared their towers
 Maruti Suzuki and Toyota joined hands to cross
sell
 Strategic alliance
 Value chain partnerships
 Licensing agreement
 Joint venture
 Mutual service consortia

Corporate level strategies
 Firm’s directional strategy
 Firm’s portfolio strategy
 Firm’s parenting strategy

Firm’s directional strategy
 Growth strategies
 Concentration
 Vertical growth
 Horizontal growth
 Diversification
 Concentric (related) diversification
 Conglomerate diversification

Firm’s directional strategy
 Stability strategies
 Retrenchment strategies
 Turnaround strategy
 Contraction
 Consolidation
 Captive company strategy
 Divestment/sell out strategy
 Liquidation strategy

Captive strategy
https://economictimes.indiatimes.com/tech/ites/indian-it-eyes-captives-as-global-companies-rejig-operations/articleshow/76085011.cms

Axis bank and Citi bank
https://www.moneycontrol.com/news/business/companies/axis-bank-to-acquire-citibanks-india-consumer-business-for-1-6-billion-8295561.html

 Axis Bank Ltd., India's third largest private sector
lender, has purchased Citi India's consumer
business for Rs 12,325 crore or roughly $1.6 billion
 Axis Bank will also purchase the consumer
business of Citicorp Finance (India) Ltd., a non-
bank financial company under Citi
 The acquisition will give Axis Bank access to the
best affluent customers in India
https://www.bloombergquint.com/business/axis-bank-buys-citibanks-india-retail-portfolio-for-16-billion

 The transaction will also include approximately
3,600 Citi employees supporting the consumer
businesses in India, who will transfer to Axis
upon completion of the proposed transaction

What deal includes?
 An interest earning advances portfolio of Rs 27,400
crore. This includes credit cards, mortgage,
personal loans, asset backed finance, small
business banking.
 A credit card portfolio of 25 lakh cards.
 Deposits of Rs 50,200 crore.
 Wealth management assets worth Rs 1.1 lakh
crore.

 "If you look at the AUM-wise growth in the wealth
management sector that we get, under Burgundy, it
is a clear 40-45% uptick that we get.
 There is a clear substantial chunk of the business
which is coming from the very well developed Citi
franchise,"
 Ravi Narayanan, group executive- branch banking,
retail liabilities and products at Axis Bank.

Firm’s portfolio strategy
 BCG growth share matrix
 The growth
share matrix is
a portfolio
framework
 It helps
companies to
decide to
prioritize their
different
businesses by
their degree of
profitability

Firm’s portfolio strategy
https://corporatefinanceinstitute.com/resources/knowledge/strategy/ansoff-matrix/
Ansoff matrix

Strategy implementation
 Programs to implement strategy
 Roles assignment to people
 Setting priorities and time table
 Mechanism to evaluate the effectiveness

framework
 Mckinsey and company developed 7-s model in
1970s
https://corporatefinanceinstitute.com/resources/knowledge/strategy/mckinsey-7s-model/

framework
 Balance
score card
https://www.professionalacademy.com/blogs/marketing-theories-balanced-scorecard/

Strategic fit
 Why M&A
 Explores the basic tenets of whether the merge is
required
 When M&A
 Answers the possible reason for doing the merger

If not ‘strategic fit’
 America Online and Time Warner (2001): US$65
billion
 A year after the deal, the company reported a
write-down of US$99 billion - the largest annual
net loss ever reported.
 Daiichi and Ranbaxy in 2008
 After 6 years in 2014 company has sold off to sun
pharma

4 Cs model and resources
 Resources
 Complimentary
 Supplementary
 4 Cs
 Capability
 Compatibility
 Commitment
 Control

Strategic fit and synergy gain
 Assets, both tangible and intangible
 Firm processes
 Firm attributes
 Knowledge and information a company has
and controls

Strategic fit and synergy gain
Sales revenue – variable cost = contribution = fixed cost +
profit
DOL = EBIT/ Sales

Synergy gain and added value
 Where Vt is the value of target,
 Vb is the value of buyer, SG is synergy gain
 SG is added value minus cost of M&A
Value of new company = Vt + Vb + SG
Net NPV value of buyer = - C + Vt + SG
 Where C is consideration paid
 and is equal to Vt + AP (acquisition premium). Hence
Net NPV value of buyer = SG + AP

Operating synergy
 Revenue enhancement
 Cost reductions also termed as efficiency
gains
 Both
 Efficiency gains are evident and possible in
vertical and horizontal mergers

Financial synergy
 Reduction in COC
 Lowering tax payments
 Enhancement of cash surplus
 Reduce the dependence on debt financing
 Help in improving the credit ratings of the firm

M&A tool for corporate growth strategy
 Market expansion
 Enhancing product/service or brand offerings
 Vertical integration to fill gaps or strengthen
the existing value chain

HDFC and HDFC Bank Merger
https://indianexpress.com/article/business/banking-and-finance/india-incs-biggest-merger-hdfc-bank-hdfc-ltd-will-be-one-7853114/

https://timesofindia.indiatimes.com/business/india-business/explained-why-did-hdfc-merge-with-hdfc-bank-and-what-this-deal-means-for-investors/articleshow/90635301.cms
 Mortgage lender HDFC will merge with HDFC Bank to
create India’s third-biggest financial entity in terms of
market capitalization
 The proposed merger will enable HDFC Bank to build its
housing loan portfolio and enhance its existing customer
base
 Post the merger, HDFC Bank will be 100 per cent owned
by public shareholders and existing shareholders of HDFC
will own 41 percent of HDFC bank

 HDFC said that its shareholders will get 42 shares
of HDFC Bank for every 25 shares of the non-
banking lender held by them
 The proposed transaction would create meaningful
value for various stakeholders including respective
shareholders, customers, employees, as the
combined business would benefit from
 increased scale,

 Comprehensive product offering
 Balance sheet resiliency
 Ability to drive synergies across revenue
opportunities

What it means for HDFC?
 Brings many cross-selling opportunities
 70% HDFC’s customers do not bank with HDFC bank
 Nearly 70% HDFC bank customers are without
mortgage products
 HDFC Bank has a large customer base of 6.8 crore
 Help to leverage their distribution across urban, semi-
urban and rural geographies

What it means for HDFC?
 Access to low-cost funding franchise of HDFC
bank
 Bank’s loan book is expected to be up by 40% to
Rs. 18 trillion after the merger
 The mix of mortgage portfolios from 11% to more
than 30%
 Room for foreign shareholding as it is now 65 to
70%

Some other strategic
perspective…
 Over the last few years, regulatory developments and reforms
including
 Higher regulatory standards for the non-banking financial
companies (NBFCs) narrowing the gap with the banking regulatory
framework,
 Reduction in SLR rates,
 Deepening of affordable housing bond market
 Creation and deepening of Priority Sector Lending certificates
market
https://indianexpress.com/article/business/banking-and-finance/india-incs-biggest-merger-hdfc-bank-hdfc-ltd-will-be-one-7853114/

Some other strategic
perspective…
 Earlier non-banking financial corporations
used to enjoy regulatory arbitrage vis-à-vis
banks,
 but the regulatory authorities have harmonized
the same
 thus making this merger necessary and
creating a competitive advantage over its
peers

Why consolidation???
 Private sector banks in India need scale to
cater to the latent demand for credit in the
economy, in the coming decade
 In some cases it maybe the merger of banks
with NBFCs having complimentary credit
profile
 The merger of HDFC and HDFC Bank was
long expected as it gives the entities access to
cheaper funds and franchise repectively

strategic approaches to Merger & Aquisition

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