Intro_to M&A

8/6/2019 Intro_to M&A

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INTRODUCTION TO MERGERS,ACQUISITIONS AND RESTRUCTURING

CORPORATE RESTRUCTURING

Broad array of activities thatexpand or contract a firms operationssubstantially modify its financial structurechange its organizational structure and

internal functioning

Includes different activities such as:MergersPurchases of business units

Takeovers

Slump salesDemergersLeveraged buyoutsOrganizational restructuring

MEANING AND TYPES OF MERGERS

A combination of two or more companiesinto one companyAbsorption: one company acquires anothercompany


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Consolidation: two or more companiescombine to form a new companyHorizontal: merger of firms engaged insame line of businessVertical: merger of firms engaged atdifferent stages of production in anindustryConglomerate: merger of firms engaged inunrelated lines of business

Congeneric: merger of firms engaged inrelated lines of business

REASONS FOR MERGERS(A) Plausible Reasons

1) Strategic benefit

2) Economies of Scale3) Economies of Scope4) Economies of Vertical Integration5) Complementary Resources6) Tax Shields7) Utilization of Surplus Funds8) Managerial Effectiveness

(B) Dubious Reasons1) Diversification2) Lower financing costs


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3) Earnings growthMECHANICS OF A MERGERAccording to Sec 391 to 394 of Indian

Companies Act 1956, the procedure foramalgamation involves:

1) Examining the object clauses of bothcompanies

2) Intimating stock exchanges where the

amalgamated and amalgamating companiesare listed3) Getting draft amalgamation proposal

approved by respective boards of directors4) Applying to National Company Law Tribunal5) Dispatching notice to shareholders and

creditors6) Holding meetings of shareholders and

creditors7) Presenting petition to NCLT for confirming

and passing order of amalgamation8) Filing NCLT order with ROC9) Transferring assets and liabilities of

amalgamating company to amalgamatedcompany

10) Issuing shares and/ordebentures of the amalgamated company


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TAXATION ASPECTS

For obtaining tax concessions, theamalgamated company should satisfy thefollowing conditions:a) all the properties and liabilities of the

amalgamating company should becomethe properties and liabilities of theamalgamated company by virtue of theamalgamation

b) at least 90% of the shareholders of theamalgamating company (by value of shares) should become the shareholdersof the amalgamated company

If the amalgamating company is anIndian company, certain tax concessionsare available

Unabsorbed or unfulfilled deductionsof the amalgamating company that areavailable to the amalgamated companyafter the amalgamation:1) capital expenditure on scientific

research


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2) expenditure on patents, copyrights,know-how

3) expenditure on license for operating

telecommunication services4) amortization of preliminary expenses5) carry forward of losses6) unabsorbed depreciation

PURCHASE OF A DIVISION/PLANTFor company purchasing: purchaseFor company selling: divestitureValue of such purchase: future

benefits (free cash flow plus horizon value)discounted at opportunity cost of capital

Horizon value: value of the purchaseon the horizon dateHorizon date: last date of the horizon

period used for defining free cash flowHorizon period: period beyond which

growth rate of free cash flow is constantFree cash flow (FCF): cash flow from

the purchase net of investments neededfor its operation

FCF = NOPAT Net Investment


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Approaches for Horizon Valuea) Value of purchase on horizon date

discounted to the present

b) Market value NOPAT ratio approach:multiply NOPAT in year H+1 by m (marketvalue-NOPAT ratio)

c) Market value book value approach:multiply book value of assets in year H byMBR (market value book value ratio)

TAKEOVERSAcquisition of a certain block of

equity capital of a company enabling theacquirer to exercise control over the affairsof the company

Theoretically, more than 50% of equity needed for complete control

Practically, 20-40% sufficient forexercising control

Various methods for takeovers:a) Open market purchase: buying shares of

the listed company in the stock market;usually hostile takeovers

b) Negotiated acquisition: buying shares of target company from one/more existingshareholders (mostly promoters) in anegotiated transaction


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Provision of suitable fiscal incentivesfor takeovers of ailing units

4. No undue concentration of market power

Acquirer should not enjoy undueconcentration of market power whichmay be used to detriment of customersor others


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ROLE OF FINANCIAL INSTITUTIONS

Competent persons should be able toparticipate in takeovers irrespective of financial resourcesFinancial institutions/investors shouldprovide funds to capablemanagers/entrepreneurs to support theirtakeover proposals

SEBI TAKEOVER CODESalient points of SEBIs takeover code:1) Disclosure

Any acquirer who acquires holdings(shares/voting rights) which alongwithexisting holdings add up to 5%, 10% and14% of the total, should announce at eachstage to the company and concerned stockexchange about such holdings

Stock exchanges shall put up suchinformation on public display

2) Trigger Point

No acquirer can acquire holdings whichalongwith his existing holdings becomeequal to or more than 15% of the total


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An acquirer can do so only if he makes apublic announcement to acquire sharesthrough a public offer to the extent of 20%

3) Offer Price The offer price to the public should beatleast the highest of the following:

a) negotiated priceb) average price paid by acquirerc) preferential offer price (if made in

last 12 months)d) average of weekly high and low for

last 26 months

4) Contents of Public Announcement

The public announcement should providethe following information:a) number of shared proposed to be

acquiredb) minimum offer price

c) object of acquisitiond) date by which offer letter will be postede) dates of opening and closing of offer


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An acquirer can do so only if he makes apublic announcement to acquire sharesthrough a public offer to the extent of 20%

5) Creeping Acquisition

No acquirer can acquire more than 5% of holdings in any financial year withoutcomplying with open offer requirements if his existing holdings are between 15% and75% of the totalAn acquirer can do creeping acquisition of up to 5% per year without triggering off theopen offer requirements

Any purchase/sale of holding amounting to2% of the total should be reported withintwo days of the transaction

ANTI-TAKEOVER DEFENCES IN THE US

(A) Pre-offer Defenses1) Staggered Board: electing one group of

directors out of three every year2) Super majority clause: high percentage

of votes (around 80%) required toapprove a merger


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5) Liability restructuring: repurchasingown shares at premium or issuingshares to friendly third party

ANTI-TAKEOVER DEFENCES IN INDIA1) Preferential allotment: allotting equity

shares or convertible securitiespreferentially to promoters to enhancetheir equity stake

2) Creeping enhancement: raising equity

holding by creeping enhancement3) Amalgamate group companies:

amalgamating two or more groupcompanies to form a larger companyless vulnerable to takeover

4) Selling crown jewels: selling the assets

which are attractive to bidder5) Searching for white knight: soliciting

support from a friendly third party


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BUSINESS ALLIANCES

Viable alternatives to mergers andacquisitions

Most commonly used forms:

Joint ventures: independent legal entityin which two or more separate legalorganizations participate preservingtheir own corporate identity andautonomy

Strategic alliances: co-operativerelationship without creation of separate legal entity

Equity partnership: co-operativerelationship in which one party takes aminority equity stake in the other

Licensing: licensing of technology/product/process ortrademark/copyright

Franchising alliance: right to sell goodsand services to multiple licensees indifferent geographical locations

Network alliance: web of inter-connecting alliances for collaborationsbetween companies


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RATIONALE FOR BUSINESS ALLIANCES

Sharing risks and resources

Access to new markets

Cost reduction through sharing orcombining of facilities

Favorable regulatory treatment

Preclude to acquisition or exit

SUCCESS FACTORS FOR BUSINESS ALLIANCES

Complementary strengths of partners

Sharing of exorbitant cost of developingnew product

Ability of partners to cooperate with eachother

Clarity of purpose, roles andresponsibilities

Perception of equitable division of risks and

rewards among partnersSimilar time horizons and financialexpectations of partners


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MANAGING AN ACQUISITION

DISCIPLINED ACQUISITION PROGRAMME

1. Manage the Pre-acquisition Phase Thorough evaluation of itself

Brainstorming for acquisition ideas2. Screen Candidates3. Evaluate Remaining Candidates4. Determine the Mode of Acquisition

5. Negotiate and Consummate theDeal6. Manage the Post-acquisitionIntegration

PITFALLS/SINS OF ACQUISITION1. Straying into very unrelated areas2. Striving for large size3. Failure to investigate thoroughly before

acquisition4. Overpaying

5. Failing in post-acquisition integration


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DIVESTITURES

a) Partial Sell-off b) Demergerc) Equity Carveout

A) PARTIAL SELL-OFF

Sale of business unit/plant of one

company to anotherAlso called slump sale

Motives for Sell-off

Raising capital

Curtailing losses

Strategic realignment

Efficiency gain

Financial Evaluation of Sell-off

Estimating divisional post-tax cash flows

Establishing discount rate for the divisiontaking as base cost of capital of some firmof almost the same size engaged solely inthe same line of business


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Calculating PV of division by using discountrate

Finding market value of division specificliabilities i.e. PV of obligations arising fromthe divisions liabilities

Deducing parent firms value of ownershipposition (VOP)VOP = PV of divisions CF MV of division-

specific liabilities

Comparing VOP with divestiture proceeds(DP)

Taking decision about sell-off

B) DEMERGER

Transfer of one or more undertaking by acompany to another company

Demerged company: whose undertakingis transferred

Resulting company: to which undertakingis transferred

May take form of spin-off or split-upSpin-off: undertaking/division of company

is spun off into an independent company;


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parent and spun off company are separatecorporate entities

Split-up: company is split up into two ormore independent companies; parentcompany disappears and new corporateentities emerge

Spin-offs and split-ups enable sharperbusiness focus

Strengthens managerial incentives andincreases accountability

C) EQUITY CARVEOUT

Parent company sells a portion of itsequity in a wholly owned subsidiary

Sale may be made to general public or astrategic investor

Brings cash infusion to the company

Helps induct strategic investor in asubsidiary

OWNERSHIP RESTRUCTURINGa) Going Privateb) Leveraged Buyoutc) Holding Company


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A) GOING PRIVATE

Converting publicly held company intoprivate company

Stock of private company usually held bysmall group of investors with incumbentmanagement having substantial stake

Typically done by buying out shares heldby public

Factors prompting management:

Cost savings

Focus on long-term value creation

B) LEVERAGED BUYOUT

Transfer of ownership consummatedmainly with debt

Mostly involve a business unit of acompany

Often buyout is by management (MBO)

After LBO/MBO, unit becomes privatecompany


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C) HOLDING COMPANY

Company holding stocks of othercompanies to exercise control over them

Advantages:

Control with fractional ownership

Isolation of risk

Enormous financial leverage

Disadvantages:

Partial multiple taxationParental responsibility

PRIVATIZATION

Transfer of partial or total ownership(represented by equity shares) of publicenterprise from the government toindividuals and non-government institutions

Rationale behind privatization:

Improving efficiency

Generating resources

Promoting popular capitalism

ORGANISATIONAL RESTRUCTURING

Elements in organizational restructuringprogrammes:


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Regrouping of businesses

Decentralization

Downsizing

Outsourcing

Business process re-engineering (BPR)

Enterprise resource planning (ERP)

Total quality management (TQM)

Intro_to M&A

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