M&a Presentation-28 JAN 2

8/14/2019 M&a Presentation-28 JAN 2

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Mergers and

Acquisitions


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Mergers and acquisitions are a means ofcorporate expansion and growth.

They are not the only means of corporategrowth, but are an alternative to growth byinternal or organic capital investment. From timeto time companies have the external means of

growth through acquisitions to internal growth.


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Mergers and Acquisitions

Are they same or convey some differentmeanings ?


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Mergers and Acquisitions

The term merger, acquisition ,absorption, leveraged buyout ,andtakeover are all part of the mergers andacquisitions parlance.


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In a merger, the corporations

comes together to combineand share their resources to

achieve common objectives.The shareholders of the combining firms

often remain as joint owners of thecombined entity.


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Example of Merger

Merger of RIL and RPL is a example ofmerger


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Absorption

Absorption is a combination of two ormore companies into an existing

company. All companies except one losetheir identity in a merger throughabsorption.


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Example of Absorption

Absorption of Tata Fertilisers Ltd.( TFL) byTata Chemicals Ltd.( TCL). TCL anacquiring company (a buyer), survived

after merger while TFL, an acquiredcompany (a seller) ceased to exist.


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Consolidation

Consolidation is a combination of two or morecompanies into a new company. In this form ofmerger all the companies are legally dissolvedand a new entity is created.


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Example of Consolidation

Merger or amalgamation of HindustanComputers Ltd., Hindustan InstrumentsLtd., Indian software Company Ltd., andIndian Reprographics Ltd. In 1986 to anentirely new company called HCL Ltd.


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Acquisition

An acquisition may be defined as an act ofacquiring effective control by one

company over assets or management ofanother company without any combinationof companies.

Thus in an acquisition two or more companies may remainindependent, separate legal entity, but there may bechange in control of companies.


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Example of Acquisition

VSNL has been taken over by Tata Group.

Mittal Steel takes over Arcelor


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Leveraged Buyout ( LBO)

An acquisition financed primarily by debt; usually

involves acquisition of public firm by closely-heldentity


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Example of LBO

Kohlberg Kravis Roberts, the New Yorkprivate equity firm, has agreed to payabout $900 million to acquire 85 percent ofthe Indian software maker FlextronicsSoftware Systems in what would be the

largest leveraged buyout in India.


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Why are M&As so common?

Rapid means of corporate growth Creation of new synergies-economies of

scale/scope

Increased market share and market power Internalization of crucial upstream or

downstream activities

Transfer of assets to more effectivemanagement

Means of gaining newcompetencies/knowledge


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Alternative explanations forM&As

A more pessimistic view of M&As: Hubris (over-confidence)

Agency problems: Empire-building executives

Over-zealous investment bankers

Path to unrelated diversification

M&A transactions as act of desperation Opens the door to unethical behavior

Alternatives may be better (alliances,greenfield)


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Warren Buffett, in a humorous explanationof managers fits of acquisition-relatedanimal spirits despite the

overwhelming evidence of the folly of suchacquisitiveness noted the following inBerkshire Hathaways 1981 annual report:


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Many managements apparently were overexposed inimpressionable childhood years to the story in which theimprisoned handsome prince is released from a toads body by

a kiss from a beautiful princess. Consequently, they are certaintheir managerial kiss will do wonders for the profitability ofCompany T(arget). Such optimism is essential. Absent that rosyview, why else should the shareholders of CompanyA(cquisitor) want to own an interest in T at the 2x takeover cost

rather than at the X market price they would pay if they madedirect purchases on their own? In other words, investors canalways buy toads at the going price for toads. If investorsinstead bankroll princesses who wish to pay double for the rightto kiss the toad, those kisses had better pack some real

dynamite. Weve observed many kisses but very few miracles.Nevertheless, many managerial princesses remain serenelyconfident about the future potency of their kisses even aftertheir corporate backyards are knee-deep in unresponsivetoads.


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Do M&As make sense?

Strong evidence that at least half of allM&As fail, and only a small fraction are

truly successful. A bad gamble: most M&A transactions

involve a premium of 35-50%

Synergies often fail to materialize Integration is rarely as smooth as

expected


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When do M&As make sense?

Friendly transactions fair better than hostiletakeovers

Resourcecomplementarity is crucial

M&As make sense when other modes ofentry do not (e.g., alliances, Greenfield)

M&As between private firms may be moreresistant to agency problems

M&As make sense when you are the target

A form of foreign direct investment where a parent company starts a newventure in a foreign country by constructing new operational facilities from theground up. In addition to building new facilities, most parent companies alsocreate new long-term jobs in the foreign country by hiring new employees.

This is opposite to a brown field investment.

Green field investments occur whenmultinational corporations enter intodeveloping countries to build new factoriesand/or stores.

Developing countries often offer prospectivecompanies tax-breaks, subsidies and othertypes of incentives to set up green fieldinvestments. Governments often see thatlosing corporate tax revenue is a small priceto pay if jobs are created and knowledge and

technology is gained to boost the country'shuman capital.


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What does it take to makeM&As succeed?

Demonstrate a clear fit with your firms overallcorporate strategy

Be cautious and thorough in due diligence

Guilty until proven innocent, not innocent until provenguilty.

Begin thinking about integration before thinking aboutvaluation.

M&As are a poor substitute for innovation


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M&As are critical to the healthy

expansion of business firms

M & As may be critical to the healthy

expansion of business firms as they

evolve through successive stages of

growth and development. Both internaland external growth may be

complementary in the long-range

evolution of firm.Weston et al. (1990) explains Successful entry intonew product market and into new geographical marketsby a firm may requisite M&As at some stage in thefirms development.


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Leads towards shareholderswealth maximisation

Jensen (1984), mergers increase valueand efficiency and move resources to theirhighest and best uses, thereby increasingshareholder value.


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Empire building tendencies fuelsM&As

Ravenscraft and Scherer( 1987), in their

work on US acquisitions and sell offs, findthat empire building through conglomerateacquisitions may have been an important

motive behind the original acquisitions.


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M&As are aimed at building

synergies

According to Brealey and Myers (2000) motives

for M&As is that two firm together worth morethan apart. Same view is supported by Shrimaliand Saxena (2004), who cited host of economicadvantage which motivates companies to merge

like the synergy it, brings which refers to greatercombined value of merged firms than the sum ofvalues of individual units.

Synergies: Economies of Scale

Declining per unit costs as output rises

M&a Presentation-28 JAN 2

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