CAIIB Super Notes: Corporate Banking: Module B: Investment Banking: Mergers and Acquisitions
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Transcript of CAIIB Super Notes: Corporate Banking: Module B: Investment Banking: Mergers and Acquisitions
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Mergers and Acquisitions
Module B: Investment Banking
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
CAIIB – SUPER NOTES
Corporate Banking: Mergers and Acquisitions
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Contents
Coverage:
1. Mergers
2. Types of Mergers
3. Acquisitions
4. Strategic Approach to Acquisitions
5. Acquisition and Organic Growth
6. Financing M &A
7. Corporate Restructuring
8. Types of Demerger, Divestitures
9. Merger Procedure
10. Valuation of a Merger: Determination of Share
Exchange Ratio
11. Mergers and Takeovers: Indian Scene
12. The changing international M&A landscape
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
MERGERS
1.
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Merger
• Coming together of two companies of roughly equal size, pooling
their resources into a single business
• Stockholders of both pre-merger companies have a share in
ownership of the merged entity and top management of both
companies continues to hold senior management positions after
the merger
• Control is the key test of distinction between a merger and an
acquisition
• There is nil/negligible exchange of cash
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
TYPES OF MERGERS
2.
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Types of Mergers
• Merger of two or more companies that compete in the same industry
• Result in economies of scale and reduction in number of competitors
Horizontal Merger Horizontal Merger
• Merger of two or more companies in the same industry but different stages of production
• May be forward integration(Integration with consumers) or backward integration(Integration with suppliers of raw material)
Vertical Merger Vertical Merger
• The two companies are related through basic technologies, production processes or markets
• Movement of a company from current set of business to adjoining business
• Provide opportunity to diversify around a common case of strategic resources
Co-generic Merger Co-generic Merger
• The two companies are in unrelated types of business activities and strategic resources
Conglomerate Merger Conglomerate Merger
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
ACQUISITIONS
3.
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Acquisitions
• An acquisition or takeover occurs when one company acquires
from another either:
– A controlling interest in the company’s stocks
– A controlling interest in the business operation and its assets
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Joint Venture
• A business partnership in which two or more companies agree
to invest cash or other assets in a particular project or
business activity
• Partners establish a separate company in which they hold
stocks in proportion to their investment
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
STRATEGIC APPROACH TO ACQUISITIONS
4.
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Strategic Approach to Acquisitions
Identify corporate objectives Identify corporate objectives
Develop strategies to achieve those objectives Develop strategies to achieve those objectives
Select candidates for acquisition Select candidates for acquisition
Decide value of acquisition and make a bid Decide value of acquisition and make a bid
Make the acquisition Make the acquisition
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Corporate Objectives
Market Leadership Market Leadership Technological
Leadership Technological
Leadership
Social Welfare (By providing quality
services and products)
Social Welfare (By providing quality
services and products)
Innovation Innovation Being the lowest
cost producer Being the lowest
cost producer
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
ACQUISITION AND ORGANIC GROWTH
5.
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Factors and Strategies
Factor\Strategy Acquisition Based Strategy Organic Growth Strategy
Time Scale Short Term Results Long Term
Cost Expensive. Costs difficult to quantify.
Much lower than inorganic growth
Barriers to Entry Appropriate where existing competition is strong
Appropriate where legislation and regulation prevent buying market share
Business Risks Usually known High Risk. However, costs can be limited by pulling out in time
Stage of Market Development
Mature Market or to buy in expertise/know-how in a young market
Young market. Grow with the market
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Aggressive and Defensive Strategies
Aggressive Strategy Aggressive Strategy
• To improve market position
Defensive Strategy Defensive Strategy
• To survive in a changing industry
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Techniques to avoid Hostile Takeover Bid
• The unfriendly bidder
Black Knight Black Knight
• Friendly investor
• May also be the investor in a struggling entity to prevent it from falling
White Knight White Knight
• Enters hostile takeover bid, however, more favourable than the Black Knight
Grey Knight Grey Knight
• Similar to a White Knight. However, only exercises a significant minority stake
White Squire White Squire
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Hostile Firm’s Counter-strategies
• Make an offer more lucrative than the White Knight’s offer.
• NL Strategy:
– Wait for the white knight to complete the takeover process
– Take over the white knight
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
FINANCING M &A
6.
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Financing M &A
Cash Cash Bank
Financing Bank
Financing
Hybrids (Cash & Debt)
Hybrids (Cash & Debt)
Factoring Factoring
Recent years have seen the rise of specialist M&A firms which only provide consultancy services and do not provide financing
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
CORPORATE RESTRUCTURING
7.
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Forms of Corporate Restructuring
Corporate Restructuring
Corporate Restructuring
Expansion Expansion
Amalgamation Amalgamation
Absorption Absorption
Tender Offer Tender Offer
Asset Acquisition
Asset Acquisition
Joint Venture Joint Venture
Contraction Contraction
Demerger Demerger
Spin Off Spin Off
Equity Carve out
Equity Carve out
Split Off Split Off
Split Up Split Up
Divestitures Divestitures
Asset Value Asset Value
Corporate Control
Corporate Control
Going Private Going Private
Equity buyback Equity
buyback
Anti Takeover Anti Takeover
Leveraged Buyouts
Leveraged Buyouts
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
TYPES OF DEMERGER, DIVESTITURES
8.
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Types of Demerger, Divestitures
•Division of company into wholly owned subsidiary of the parent company
•Shares of subsidiary are distributed amongst the shareholders of the parent company on pro-rata basis
•Split off: The shareholders are given shares of the spun off company in lieu of the parent company’s shares
•Equity Carve Out: Only difference from Spin Off being that some part of equity is offered to the public
Spin Off Spin Off
•Company is split into various companies such that parent company ceases to exist
Split Up Split Up
•Sale of segment of a company for cash or for securities to an outside party. Based on principle of ‘antergy’.
Divestiture Divestiture
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Motives behind Divestitures
Dismantling Conglomerates
Dismantling Conglomerates
Abandoning Core Business
Abandoning Core Business
Changing Strategies Changing Strategies
Adding value by selling into a
better fit
Adding value by selling into a
better fit
Large additional investment
required
Large additional investment
required
Harvest past successes
Harvest past successes
Discard unwanted business from
prior acquisitions
Discard unwanted business from
prior acquisitions
Finance prior acquisitions done
before LBO
Finance prior acquisitions done
before LBO
Ward Off Takeover Ward Off Takeover
Meeting Regulatory
Requirements
Meeting Regulatory
Requirements
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Divestitures
Benefits
• Shedding Excess Flab
• Effective Market Regulation
• Financial Support
Issues
• Market Reactions
• Government Interventions
Asset Sale: Sale of tangible assets of a company to generate cash. Slump Sale: A partial sell off involving the sale of a business unit or plant of one firm to another.
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Corporate Controls
•Listed company is converted to private by buying back all unlisted shares
Going Private Going Private
•Reduction in equity capital by buying back some portion of the outstanding shares of the company
•Increases promoter’s percentage share
Equity Buyback Equity Buyback
•Various measures resorted to by companies to prevent hostile takeovers
Anti-Takeover Defenses Anti-Takeover Defenses
•Raising of capital from the market or institutions by the management to acquire a company on the strength of its assets
Leveraged Buyouts Leveraged Buyouts
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Amalgamation
• A legal process by which two or more companies are to be
absorbed or blended with another.
• The amalgamating companies lose their existence and a new
entity is formed
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Takeover
• A series of transactions whereby a person, individual, group of
individuals or a company acquires control over the assets of a
company, either directly by becoming owner of those assets
or indirectly by obtaining control of management of the
company
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Takeover Bid
• An offer to acquire enough shares of a company to gain voting control of the
company
• For taking over the control and management affairs of a listed company by
acquiring its controlling interest
Typ
es
Typ
es
Negotiated Bid Negotiated Bid
•Also called Friendly Merger
•Management/Owners of both firms sit together and negotiate the deal
Tender Offer Tender Offer
•Acquiring firm approaches the shareholders of the target firm directly to sell their shareholding to the acquiring firm at a fixed price
Hostile Takeover Bid Hostile Takeover Bid
•Also called Raid
•Acquiring firm without the knowledge and consent of the management of the target firm, may unilaterally pursue the efforts to gain a controlling interest in the target firm
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
MERGER PROCEDURE
9.
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Merger Procedure
Examination of Object Clauses Examination of Object Clauses
Intimation to Stock Exchanges
Intimation to Stock Exchanges
Approval of the draft amalgamation
proposal by the respective boards
Approval of the draft amalgamation
proposal by the respective boards
Application to the National Company
Law Tribunal (NCLT)
Application to the National Company
Law Tribunal (NCLT)
Dispatch of notice to shareholders and
creditors
Dispatch of notice to shareholders and
creditors
Holding of meeting of Shareholders and
creditors
Holding of meeting of Shareholders and
creditors
Petition to the NCLT for confirmation and
passing of NCLT orders
Petition to the NCLT for confirmation and
passing of NCLT orders
Filing the order with the Registrar
Filing the order with the Registrar
Transfer of Assets and Liabilities
Transfer of Assets and Liabilities
Issue of Shares and Debentures
Issue of Shares and Debentures
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
VALUATION OF A MERGER: DETERMINATION OF SHARE EXCHANGE RATIO
10.
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Valuation Methods
Net Asset Value (NAV) Method
Net Asset Value (NAV) Method
• NAV is sum total of value of assets after removing liabilities other than preference shares
• NAV is divided by fully diluted equity to get NAV per share
Yield Value Method Yield Value Method
• Also called profit earning capacity method
• Assessment of future maintainable profits of the business
• The above divided by appropriate capitalisation rates give the true value of business
• The above divided by equity value gives value per share
Market Value Method Market Value Method
• For listed companies
• The average of high or low values and closing prices over a specified period is taken as the representative value per share
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Supreme Court Guidelines
• Regard should be had to price of shares prevailing in the stock market
• Profit earning capacity (yield method) or dividend declared by the
company (dividend method) should be considered. Golden mean may be
found in case of differing values
• In computing yields, abnormal expenses will be added back to calculate
‘yield’
• If lower dividend or profits are due to temporary reasons, then estimate of
share value before the setback and proportionate fall in price of quoted
shares of companies which have suffered similar reverses should be
considered
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Reverse Merger
• When a healthy company merges with a small or a sick company
• Reasons:
– Transferor company gets advantage of carry forward of losses without any
conditions
– If transferee company is listed the transferor company gets advantages of
listed company without following strict norms of listing
• Transfer of assets under the amalgamation scheme is exempt from
Capital Gains Tax
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
MERGERS AND TAKEOVERS: INDIAN SCENE
11.
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Mergers and Takeovers: Indian Scene
• The concept was not popular and kept a low profile till 1990
due to regulatory and prohibitory provisions of the MRTP Act,
1969
• Most of the provisions of the Act have been repealed which
has resulted in a spate of mergers and acquisitions in the
country
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Motives of Merger
Synergies through
consolidation
Synergies through
consolidation
Operating Synergy
Operating Synergy
Financial Synergy Financial Synergy
Managerial Synergy
Managerial Synergy
Sales Synergy Sales Synergy
Diversification Diversification
Accelerated Growth
Accelerated Growth
Increased Market Power
Increased Market Power
Purchase of Assets at Bargain
Price
Purchase of Assets at Bargain
Price
Reduction in Tax Liability
Reduction in Tax Liability
Economies of Scale
Economies of Scale
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Choosing Target Firm
• Choice depends on the motive:
– If motive is undervaluation, the target firm must be undervalued
– If motive is diversification, the target firm will be unrelated business
Etc.
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Valuing Target Firm
• Status Quo Valuation: Firm’s value with existing investing, financing and
dividend policies
• Value of Corporate Control = Value of firm optimally managed – Value of firm
with current management
• Value of Operational Synergy:
– What form is the synergy expected to take?
– When will the synergy start affecting cash flows?
• Value of Financial Synergy:
– Tax Benefit
– Increase in debt capacity
– Better use for excess cash or cash slack
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Structuring the Acquisition
How much to pay?
•Based on:
•Market Price of the target firm, if publically traded
•Relative scarcity of the specialised resources
•Presence of other bidders for the target firm
How much to pay?
•Based on:
•Market Price of the target firm, if publically traded
•Relative scarcity of the specialised resources
•Presence of other bidders for the target firm
How to pay?
•Debt vs. Equity
•Cash vs. Stock
•Availability of Cash on hand
•Perceived value of the stock
•Tax Factors
How to pay?
•Debt vs. Equity
•Cash vs. Stock
•Availability of Cash on hand
•Perceived value of the stock
•Tax Factors
Accounting Treatment of the Deal Accounting Treatment of the Deal
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Exogenous factors affecting Mergers
Anti Trust Anti Trust Arbitrage Arbitrage Currencies Currencies Deregulation Deregulation
Experts Experts Hostile Bids Hostile Bids Labour Labour LBO funds LBO funds
Markets Markets Taxes Taxes
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
THE CHANGING INTERNATIONAL M&A LANDSCAPE
12.
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Cross Border Mergers
How should the transaction be
financed?
How should the transaction be
financed?
How are the customs and the cultures of the
parties different?
How are the customs and the cultures of the
parties different?
How do the applicable laws
govern the transaction?
How do the applicable laws
govern the transaction?
What level of due diligence is
appropriate?
What level of due diligence is
appropriate?
Are there any significant anti-trust or non-competition
issues?
Are there any significant anti-trust or non-competition
issues?
Are there any significant tax or currency issues?
Are there any significant tax or currency issues?
Management Management Customers Customers
Vendors Vendors Problems involving
places Problems involving
places Legal Issues Legal Issues
Fact
ors
to
be
con
sid
ered
Fa
cto
rs t
o b
e co
nsi
der
ed
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Post Merger Task Force
• Composed of a representative group from both sides of the
transaction. The members should be credible and respected
by people belonging to both sides
• Formed after the due diligence process
• Purpose is to uncover, evaluate, and resolve post-merger
problems
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
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M S Ahluwalia, amongst other things, is a visual artist, blogger,
blog designer and of course an MBA and Banker from New
Delhi, India.
To know more about him you may visit his blog-site: Estudiante De La Vida