FINANCIAL FINANCIAL MANAGEMENTMANAGEMENT

Presented By:

Pratima Tiwari 51

Shweta Seth 57

Reena Kamble 68

Devisha Nayak 74

Nidhi Shetty 77

Priyanka Singhal 78

MERGERMERGER

What Is Mergers?What Is Mergers?A mergers is a

combination of two or more corporations in which only one corporation survives and the merged corporations go out of business.

Types of MergersTypes of Mergers Horizontal

mergers.– Eg:Arcelor

declares merger with Mittal Steel

Vertical Mergers .

Conglomerate mergers.

A Mergers can take place in A Mergers can take place in following waysfollowing ways

Mergers through absorption

Mergers through consolidation

Mergers Procedure Mergers Procedure 1. Examination of object clauses2. Intimation to stock exchanges:3. Approval of the draft amalgamation proposal by

the respective boards:4. Application to the National Company Law Tribunal

(NCLT): 5. Dispatch of notice to shareholders and creditors6. Holding of Meetings of shareholders and creditors:7. Petition to the NCLT for confirmation and passing of

NCLT orders8. Filing the order with the registrar9. Transfer of assets and liabilities10.Issue of shares and debentures:

ACQUISITIONSACQUISITIONS

What is Acquisitions?What is Acquisitions? A transaction

where one firm buys another firm with the intent of more effectively using a core competence by making the acquired firm a subsidiary within its portfolio of business.

Types Of AcquisitionTypes Of Acquisition Straight takeover

Ownership of company is captured

Takeover of a sick company

Bail-out takeover

Management BuyoutsManagement Buyouts

Create a win-win situation for shareholders

To avoid lawsuits

Target may make itself less attractive

Leveraged BuyoutLeveraged Buyout The term leveraged buyout (LBO) describes an

acquisition or purchase of a company financed through substantial use of borrowed funds or debt

Usually a ratio of 90% debt to 10% equity

Purchase price.

The tangible assets of the company

Investors in LBOs

Common features of LBO Common features of LBO and MBOand MBO

One-time disgorgement of cash value

Dramatic leveraging

Restructuring is accompanied

Operational control

Restructuring operation

Important difference Important difference between LBO and MBObetween LBO and MBO

MBO leads to private companies MBO, the company saves on public reporting costs MBO, control of the firm changes LBO leaves the company publically traded with

shareholders receiving”stub”equity LBO preserves equity liquidity but exploits no

savings on reporting. LBO, control may not necessarily changes

Reasons for acquisitionsReasons for acquisitions Business model.  Cyclicality reduction.  Defensive Executive compensation.  Intellectual property.  Internal development alternative.  Local market expertise. 

Reasons for acquisitionsReasons for acquisitions Market growth. 

Market share. 

Production capacity. 

Products. 

Regulatory environment. 

Sales channels. 

Vertical integration

Problems with acquisitionsProblems with acquisitions Integration Difficulties

Differing financial and control systems can make integration of firms difficult

Inadequate Evaluation of Target“Winners Curse” bid causes acquirer to overpay for firm

Large or extraordinary Debt

Costly debt can create onerous burden on cash outflows

Problems with acquisitionsProblems with acquisitions Inability to Achieve Synergy

Justifying acquisitions can increase estimate of expected benefits

Overly DiversifiedAcquirer doesn’t have expertise required to manage unrelated businesses

Too largeLarge bureaucracy reduces innovation and

flexibility

Managers overly focused on axquisitionsManagers may fail to objectively assess the value of outcomes achieved through the firm’s acquisition strategy

Takeover BidTakeover Bid

Is a technique for affecting either a takeover or an amalgamation.

It may be defined as an offer to acquire shares of a company, whose shares are not closely held, addressed to the general body of shareholders with a view to obtaining at least sufficient shares to give the offer or, voting control of the company.

Takeover Bid is thus adopted by company for taking over the control and management affairs of listed company by acquiring its controlling interest.

Types of Takeover Bid Types of Takeover Bid

Negotiated bid

Tender offer

Hostile takeover bid

Valuation MattersValuation Matters

Comparative Ratios– Price-Earnings Ratio– Enterprise-Value-to-Sales Ratio

Replacement Cost

Discounted Cash Flow

Accounting for Accounting for Mergers and Mergers and AcquisitionsAcquisitions

Purchase Purchase Consideration(PC)Consideration(PC)

PC means price payable by buyer of business to the seller of the business.

Price has to paid either to owner of business or to the equity and preference share holder of the selling company.

Modes Of PC: Buying company can discharge PC by issue of

securities in the new company formed.

Calculation of PCCalculation of PC Lump sum Method

Total PC is pre determined. Business is transfer at a fixed rate. Break up price is not available.

Payment Method PC is the total of all payment made by buyer

company to the equity and preference holder of the seller company

Net Asset Method Value of asset is considered which is taken over by

the buyer company at revalued figure.

Purchase MethodPurchase Method Under the purchase method, the assets and

liabilities of the acquiring firm after the acquisition of the target firm may be stated at their exiting carrying amounts or at the amounts adjusted for the purchase price paid to the target company.

ExampleExample

Liabilities Amt Assets AmtAuthorised and Issued Capital

Goodwill 100000

8000 , equity shares of Rs.50 each fully paid

400000 Sundry assets 250000

3000, 13% preference shares of Rs.25 each , fully paid

75000 Cash 10000

12% debentures 50000 Profit and loss A/c 190000

Creditors 25000

Total 550000 Total 550000

On 1 july , 2005 the balance sheet of Amrit limited was as under

A new company to be formed, called Amrit(2005) limited with an authorized capital of Rs. 500000 all in equity shares of Rs.100 each.

One equity share of Rs.100 each fully paid in the new company to be issued in exchange of 3 preference shares in the old company.

Debenture holders to receive 500 equity shares in the new company as fully paid.

Creditors to be taken over by the new company and immediately paid off.

The new company to issue remaining euity shares for public subscription.

The new company to take over old company’s assets, subject to revaluation of “sundry assets” at Rs.265000

SolutionsSolutionsPC by Payment method

To whom Amt Mode of Payment

1) Preference share holder of old company

100000 1000 equity shares in new company of Rs.100 3 old 1 new 3000 ?

2) Equity shareholder of old company

200000 2000 equity shares in new company of Rs.1004 old 1 new8000 ?

Total 300000

Entries recorded in the books of Amrit(2005) Limited

Sundry Assets A/c Dr 265000Cash A/c Dr 10000Goodwill A/c Dr 100000 To 12% debentures of old company

50000 To Creditors 25000 To business purchase 300000

Pooling of Interests Method Pooling of Interests Method or Mergersor Mergers

If following conditions are satisfying: All assets and all liabilities except share capital is

taken over. Assets and liabilities are taken over at book value. 90% of share holder should agree for merger Business of selling company must be continued by

the buying company. Ascending share holder must be paid only by equity

shares Descending share holder and preference share

holder can be given equity , preference , debentures and cash.

ExampleExample On 31st march, 2006 Thin ltd was absorbed by

Thick ltdd, the latter taking over all the assets and liabilities of the former at book values. The consideration for the business was fixed at Rs.400000 to be discharged by the transferee company in the form of its equity shares of Rs.10 each, to be distributed among the shareholders of the transferor company, each.

The balancesheet of the two companies are as follows:

Liabilities Thick ltd

Thin ltd Assets Thick ltd Thin ltd

Authorised and Issued Capital

Goodwill 200000 60000

Equity shares of Rs.10 each fully paid

900000 200000 Plant and machinery

412000 100000

General Reserve

180000 50000 Furniture 80000 30000

Profit and loss A//c

20502 12900 Stock in trade 265500 60000

Workers compensation fund

12000 9000 Debtors 221200 46000

Creditors 58567 30456 Prepaid insurance

- 700

Staff provident fund

10200 4000 Income tax refund claim

- 6000

Provison for taxation

12300 5000 Cash in hand 869 356

Cash at bank 14000 8300

Total 1193569

311356 Total 1193569 311356

SolutiSolutionon

PC by lumpsum method Rs.400000 Profit or Loss on Mergers:

Particulars AmtPC 400000

Less Share capital of old company (200000)

Excess paid 200000

Adjusted against

General reserve of old company 50000

150000

General reserve of new company 150000

Loss on mergers Nil

Journal entries in the book of Thick ltd:Goodwill A/c DR 60000Plant and machinery A/c DR 100000Furniture A/c DR 30000Stock in trade A/c DR 60000Debtors A/c DR 46000Prepaid insurance A/c DR 700Income tax refund claim A/c DR 6000Cash in hand A/c DR 8300Cash at bank A/c DR 356General reserve DR 150000 To Creditors 30456

To Profit and loss a/c 12900 To Workers compensation fund 9000 To Staff Provident Fund 40000

To Provision for tax 50000 To Business purchase 4000000

Company profileCompany profile British company started by john cadbury in

1824 Started as a shop selling chocolates His son took the business It began making milk chocolates in 1897 and

diary milk in 1905 Company made its first major in 1921 by buying

rival fry

Company profile Company profile It started in 1903 with capital $65 Started as a wholesale cheese business in

chicago In 1920, kraft entered the canadian market

by purchasing MacLaren’s Imperial Cheese Co Ltd

In 1945, the company changed the name to KRAFT FOODS

2007, Kraft Foods Inc. became a fully independent company

Kraft and Cadbury: How Kraft and Cadbury: How they compare they compare

Although second only to Mars in the confectionery world, Cadbury is dwarfed by Kraft, which brings in nearly five times more in revenues and employees twice as many people worldwide.

Kraft and Cadbury: Why Kraft and Cadbury: Why Merger Merger

After the Second World War, Cadbury joined with US drinks giant Schweppes in the 1960s as it looked to expand overseas, but the firms split in 2008

Kraft has been touted as a possible buyer for Cadbury ever since it demerged its US soft drinks business in May last year, leaving it vulnerable to a takeover.

A month earlier, Cadbury lost its status as global confectionery leader after Mars paid $23bn for Wrigley's global business

Kraft and Cadbury: Kraft and Cadbury: BidingBiding

First Bid of £10.2bn ($16.7bn) on 7th Sep was rejected by Cadbury

Initial offer seems undervalues to Cadbury

This leads Kraft to go public with the bid in order to “encourage and further” the process. Shares of Cadbury soared 35 per cent at the start of London trading on the news

Second Bid of £11.5bn ($19.5bn)

Kraft's sold its North American pizza business for $3.7bn to help raise the funds to pay for the Cadbury deal

Kraft and Cadbury: Kraft and Cadbury: BidingBiding

Kraft Foods sealed a friendly deal to buy British candy maker Cadbury for about $19.6 billion (11.5 billion pounds) after frantic last-minute talks broke an impasse over price.

Cadbury board has agreed to Kraft's improved offer of 840 pence ($13.78) per Cadbury share

As per the revised offer Kraft would offer 2,000 pence in cash and 0.7496 new shares for each Cadbury ADS (American Depository Shares).

Kraft and Cadbury: Kraft and Cadbury: BidingBiding

Cadbury board has agreed to Kraft's improved offer of 840 pence ($13.78) per Cadbury share

As per the revised offer Kraft would offer 2,000 pence in cash and 0.7496 new shares for each Cadbury ADS (American Depository Shares).

A Kraft-Cadbury combination will create a portfolio with more than 40 confectionery brands,each with annual sales in excess of $100 million

Kraft and Cadbury: Kraft and Cadbury: BidingBiding

US food major Kraft Foods today said it required only 50 per cent support from Cadbury shareholders to take over the British confectioner.

British Prime Minister Gordon Brown pledged to "do everything we can" to secure jobs at chocolate maker Cadbury, the day after it accepted a takeover bid from US giant Kraft Foods

TATA- CORUS TATA- CORUS AcquisitionAcquisition

Tata Steel – An overviewTata Steel – An overview Formerly known as TISCO (Tata Iron and Steel

Company Limited

Established by Indian Parsi Businessman Jamsetji Tata in 1907– 100 years back

Asia first and India's largest private sector steel company

Annual revenues of US$ 5 billion and crude steel production of 5.3 million tonnes across India and South-East Asia.

Corus – an overviewCorus – an overview Formed on 6th October 1999 through the

merger of British Steel and Koninklijke Hoogovens

Operates as an international company, fulfilling the demand of many steel customers worldwide.

Europe's second largest steel producer, annual revenues of over £11 billion and crude steel production 20 million tonnes

Negotiation By TATANegotiation By TATA September 20, 2006: Corus decides to acquire a

strategic partnership with a low cost producer

October 17, 2006: Keeps Offer at 455p per share

November 18, 2006: The Brazilian Steel Group CSN makes counter offer of 475p per share

December 18, 2006: Within hours of Tata Steel increasing its original bid for Corus to 500 pence per share, CSN made counter bid for Corus at 515 pence per share in cash

Contd……Contd…… January 31, 2007: Tata Steel agrees to offer

Corus investors 608 pence per share in cash

April 2, 2007: Tata Steel won the acquisition to CSN

The DealThe Deal April 2, 2007: Tata Steel completed its US$12

billion acquisition of Corus Group plc

Value 100% acquisition:

Corus, four times larger than TATA’s size, largest steel producer in the U.K.

Deal creates world’s fifth largest steel maker

India’s largest ever foreign takeover , follows Mittal Steel’s $31 billion acquisition of rival Arcelor

Financing of Corus Financing of Corus Acquisition Acquisition

TATA-CORUS deal - $12 billion Equity contribution from TATA Steel- $3.88

billion Credit Suisse leaded, joined by ABN AMRO &

Deutsche Bank in the consortium Of the $8.12 billion of financing Credit Suisse

provided 45% and ABN AMRO & Deutsche provided 27.5% each

Synergies Synergies

Tata, lowest cost steel producer, self sufficiency in raw material.

Corus was fighting to keep its productions costs under control and was on the look out for sources of iron ore.

Rich iron, chromium and manganese mining assets in India & abroad.

Strong retail and distribution network in India and SE Asia.

In-road for Corus into the emerging Asian markets.

Contd…….Contd……. Tata Steel, leapfrog from the fifty-sixth largest

steel producer in the world to the fifth position.

Technology transfer of R&D capabilities between the companies

TATA- Domestic player to global player

Conclusion Conclusion

If the acquisitions well planned, executed and necessary precautions taken for the deal a company can achieve its

strategic objectives and thus ensure its growth through a deal.