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Presentation on Mergers & Acquisitions including a case study on Tata Corus.

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Tgif Sunny Goel

  1. 1. Mergers & Acquisitions (Case Study) June 11, 2010 11 ♣ Sunny Goel II Research Associate II Corporate Catalyst India & ASA & Associates chartered accountants
  2. 2. Contents C t t 1) Introduction a) Wh t i merger? ) What is ? b) What is acquisition? 2) Distinction between Mergers & Acquisitions 3) Case study – TATA CORUS a) LBOs b) The Deal c) Negotiations d) Synergies ) y g 4) Snapshot – Bharti Zain 5) Causes for failure of M&A 6) Conclusion
  3. 3. Introduction I t d ti Important tools of corporate growth Alternative way to achieve growth is resort to external arrangements like M&A (inorganic growth) Restructuring the corporation to meet global competition Main idea – one plus one makes three Economies of scale Acquiring new technology Improved market reach Staff reduction 85% are using M&A as a core growth strategy strategy.
  4. 4. What i M Wh t is Merger? ? A true merger in the legal sense occurs when both business dissolves and fold their assets and liabilities i t a newly created di l d f ld th i t d li biliti into l t d third entity. This entails the creation of a new corporation. A transaction where two firms agree to integrate their operations on a relatively coequal basis because they have resources and capabilities that together may create a stronger competitive advantage advantage.
  5. 5. Classifications of Mergers Cl ifi ti fM Similar kind of business e g TATA and Jaguar & e.g. Combination of firms Land Roover. related to each other in Horizontal terms of customer Merger groups, customer functions or alternative technologies. Concent Vertical i ric Merger Mergers Combination of firms Conglomerate involved in different stages Engaged in unrelated line Mergers of production/operation as of business activities. forward or backward integration e g cone e.g. supplier with an ice cream maker.
  6. 6. Reasons of Merger R fM Economies of Scale Economic Marketing and Necessity Management Eliminations Growth and of Diversification Competition Technology Utilization of Sharing Sh i Tax Shields T Shi ld
  7. 7. What i A Wh t is Acquisition? i iti ? An acquisition, also known as a takeover or a buyout, is the buying of one company (the ‘target’) by another. An acquisition may be friendly or hostile. In the former case, case the companies cooperate in negotiations; in the latter case, the takeover target is unwilling to be bought or the target's board has no prior knowledge of the offer. Acquisition usually refers to a purchase of a smaller firm by a larger one.
  8. 8. Reasons for A R f Acquisitions i iti Increased market power Learning and Developing new capabilities Overcoming entry barriers Cost of new product development p p Increase speed to market Lower risk than developing new products
  9. 9. Distinction between Merger and A M d Acquisition i iti When one company takes over another and clearly establishes itself as the new owner, the purchase is called an acquisition. From a legal point of view, the target company ceases to exist, the buyer "swallows" swallows the business and the buyer's stock continues to be traded. In the pure sense of the term, 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. This kind of action is more precisely referred to as a "merger of equals". Both companies' stocks are surrendered and new company stock is issued in its place place.
  10. 10. TATA - CORUS A Case St d C Study
  11. 11. Brief B k B i f Background d Acquirer Name: Tata Steel Former Name: Tata Iron and Steel company Limited Founded: 1907 Founder: J F d Jamshedji N h dji Nusserwanji T t ji Tata Headquarters: Jamshedpur, Jharkhand Chairman: Ratan Tata Type: Public Industry: Steel Parent: TATA Group
  12. 12. Brief B k B i f Background d Target Name: Corus Founded: 1999 Formation: Merger of British Steel Corporation and Koninklijke Hoogovens N V K i klijk H N.V. Headquarters: London, England, UK CEO: Kirby Adams Type: Subsidiary Industry: Steel Parent: Tata Steel
  13. 13. The D l Th Deal Official Announcement: April 02, 2007 Price of Deal: 608 pence per ordinary share in cash Total value of Deal: Pound 6.2 billion (USD $12 billion) 62 Deal Competitor: Companhia Siderurgica Nacional (CSN) Competitor’s Bid: 603 pence per share C tit ’ Bid h Deal process commencement: September 20, 2006 Deal process completion: July 02, 2007
  14. 14. Combined Ambition C bi d A biti Become a global player with a balanced presence in developed European and fast growing Asian markets Acquire strong position in construction, automotive and packaging market sectors Significant raw material security and greenfield / b Si ifi t t i l it d fi ld brownfield fi ld developments Lowest cost position in Europe and South-East Asia Own development plans By 2012: EBITDA of 25%; 40 Current: million EBITDA of tonnes :# 2 13%; 25 million Double the tonnes :# 6 size and profitability
  15. 15. Deal: I D l Investment Vehicle t t V hi l A holding company was set up by Tata Steel in Singapore to g p y p y g p acquire Corus. Idea was to have all the foreign acquisitions under one holding company. Singapore has favorable tax jurisdiction and gave Tata Steel an easy avenue for raising global resources / funds. Tata Steel Corus Tata Steel Asia Tata Steel Group Ltd. India Holdings U.K. U.K. (Singapore)
  16. 16. Negotiations N ti ti September 20, 2006: Corus steel has decided to acquire a strategic partnership with a company that is a low cost producer October 05, 2006: The Indian steel giant, Tata Steel wants to fulfill its ambition to expand its further October 06 2006: The initial offer from Tata Steel is considered 06, to be too low both by Corus and analysts October 17, 2006: Tata Steel has kept its offer to 455 p per share October 20 2006: Corus accepts terms of Pound 4.3 billion 20, 43 takeover bid from Tata Steel October 23, 2006: The Brazilian Steel Group CSN recruits a leading investment bank to offer advice on possible counter offer to Tata Steel s bid Steel’s October 27, 2006: Corus was criticized by the chairman of JCB, Sir Anthony Bamford, for its decision to accept an offer from Tata.
  17. 17. Negotiations N ti ti November 03, 2006: The Russian steel giant Severstal announces officially that it will not make a bid for Corus ffi i ll th t ill t k f C November 18, 2006: the battle over Corus intensifies when Brazilian group CSN approached the board of the company with a bid of 475p per share December 18, 2006: Within hours of Tata Steel increasing its original bid to 500p per share, Brazil’s CSN made its formal counter bid at 515p p share in cash, 3% more than Tata Steel’s p per , offer January 31, 2007: Britain’s Takeover Panel announces in an e- mailed statement that after an auction Tata Steel had agreed to offer Corus investors 608 pence per share in cash April 02, 2007: Tata Steel manages to win the acquisition to CSN and has the full voting support from Corus’ shareholders.
  18. 18. Financing Fi i TATA – Corus Deal - $12 billion Equity contribution from Tata Steel - $3.38 billion Credit Suisse leaded, joined by ABN AMRO and Deutsche Bank in the consortium Of the $8.12 billion of financing, Credit Suisse provided 45% and ABN AMRO and Deutsche provided 27.5% each.
  19. 19. Cultural Integration C lt lI t ti Tata Steel Corus Continuous Improvement Continuous Improvement Program – “ASPIRE” Program – “The Corus Way” Core Values Core Values – Code of Ethics Trusteeship Integrity Integrity Creating value in steel Respect for the individual Customer focus Credibility y Selective growth g Excellence Respect for our people World class governance World class governance
  20. 20. Synergies S i Tata is a low cost steel producer whereas Corus was a high value product manufacturer Tata was a major supplier to the Indian auto industry and the demand for value added steel products was growing in this market Hence there would be a powerful combination of high quality developed and low cost high growth markets Technology transfer and cross-fertilization of R&D capabilities Capturing global market
  21. 21. A Access t Global M k t to Gl b l Market TATA CORUS 9% 8% 3% 49% 23% 10% Europe India UK Asia ex India N. America ROW Asia 69% 29% ROW COMBINED ENTITY 9% 37% 8% Europe UK Asia N. America ROW 24% 22%
  22. 22. Conclusion C l i Tata Steel can target becoming one of the top-3 steel makers globally by 2015. The company would have an aggregate capacity of close to 56 million tones per annum. The company can plan for Greenfield capacities too. Post deal for smooth functioning Tata Corus defined Group g p Strategy Function: Strategy / Business Development Group – corporate development Strategic Modeling Group – strategic models and benchmarking Industry Group – industry monitoring, market intelligence and issuing assumptions for other two groups
  23. 23. BHARTI - ZAIN A Snapshot S h t
  24. 24. Bharti Zain Bh ti - Z i Bharti acquired Zain for USD 10.7 bn Bharti acquired Zain Telecom’s operation in 15 countries Manoj Kohli, CEO & Joint Managing Director is the key person behind the deal Deal completed in 45 days Execution of deal: Financing team Accounting team Regulatory team Legal team Country visits team Future: Bharti Airtel plan to have 100 million customers, USD 5 billion revenue and USD 2 billion EBITDA by 2013.
  25. 25. Causes f C for F il Failures Payment of higher price: can dilute shareholders’ earnings ( y g p g (Overstated / overestimated synergies) Cultural Clash: conflicting management styles, differing expectations, communication channels, formal/ participative….. Failure to integrate operations Poor business fit: product/service of acquired company does not fit into acquirer’s sales, distribution systems or geographic requirements Inadequate due diligence: some of the financial and business risks of seller may go undetected Over leverage/ inappropriate financing structure: may create liquidity/ servicing problems Boardroom split: lack of compatibility amongst directors of two companies merged Regulatory/ unexpected d l R l t / t d delays i i in implementation of merger: can lead l t ti f l d to loss of valuable employees, customer, supplier relationships Hence proper planning and execution of M&A transaction is a must for it to succeed and not backfire
  26. 26. Thank You