Merger Demerger Acquisiiton and Transaction Advisory

Mergers, Demergers, Acquisition and Transaction Advisory

By By

Ramakrishnan.S

PKF S&S

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Overview of modes of M&A in India

M&A

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Acquisition

Business Purchase

Slump sale Itemised sale

Share Purchase

Combinations

Merger Demerger

Restructuring

Capital Reduction

Buyback

Merger

Consolidation of two or more entities Involves transfer of assets and

liabilities from transferor companies to

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liabilities from transferor companies to the transferee company and in consideration, transferee company issues shares

Lengthy process under the Companies Act 2013

Largely, tax neutral Generally, losses can be carried

forward and set-off by the transferee company

Demerger

Transfer of identified business from one company to another

As a consideration, such acquiring

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As a consideration, such acquiring company issues shares to the shareholders of the selling company

Lengthy process under the Companies Act 2013

Largely, tax neutral Generally, losses can be carried

forward and set-off by the transferee company

Slump Sale / Hive-off

Involves transfer of business undertaking on a comprehensive basis from one company to another. Values are not ascribed

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another. Values are not ascribed to each item of asset / liability

Consideration is lump sum and most often is by way of cash settlement between the companies

Simpler process compared to merger / demerger

Capital gains arises in the normal course

Stamp duty implications are an area to watch out

Itemised Sale

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Involves transfer of business where consideration is measured against each asset

Transfer may be selective and some assets / liabilities may not be transferred

Consideration, is largely, by way of cash settlement Process could be simpler compared to merger / demerger Capital gains arise in the normal course Stamp duty implications arise Indirect Tax implications are to be keenly considered

Share Purchase

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Legal Impact on Transactions

Companies Act

Companies Act

Income Tax Act

Income Tax Act

Industry Governing

Body

Industry Governing

Body

SEBISEBI

FEMAFEMA

Indirect Tax Laws

Indirect Tax Laws

Accounting StandardsAccounting Standards

Stamp DutyStamp Duty

Competition Law

Competition Law

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Changes in Companies act 2013-1

Good and welcome changes

Fast track restructuring of Holding and WOS and small cos- NO NCLT, no auditor certificate , only small cos- NO NCLT, no auditor certificate , only prior notice to ROC, OL quick and easy

More time bound hence faster (for instance: even Govt authorities have to respond within 30 days else it is presumed they have no objection!)

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Good and welcome changes ( contd.)

Yearly reporting on progress of implementation till completed will ensure proper follow upcompleted will ensure proper follow up

Amalgamation/demerger of Indian co into foreign co made easier in NFJ (Notified foreign jurisdiction)

More disclosures in notices to shareholders/creditors more transparency

Postal ballot mandatory and combined results of postal ballot and in person meeting will decide

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Good and welcome changes (contd.)

Person wanting to object should have at least 10% of shareholding or 5% debt- so one cannot 10% of shareholding or 5% debt- so one cannot just scuttle the scheme for the sake of it-create trouble

Auditor certificate stating the scheme is as per AS is required for all cos (as against listed cos only now)

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Good and welcome changes (contd.)

Possible back door delisting possible? As new law says when transferor listed co amalgamates law says when transferor listed co amalgamates into unlisted transferee co , unlisted co can continue to remain unlisted in both Merger and Demerger (SEBI may still object to this)

Purchase of minority shareholders by persons holding 90% or more of equity at price determined by registered valuers

Even purchase offer by minority to purchase majority possible12


Issues and problems:

Restructuring will require more approvals

Amalgamation/demerger from foreign co into Amalgamation/demerger from foreign co into Indian co more restrictive

Uncertainty as to transitional provisions

If buy back of shares or variation of rights involved in scheme the specific provisions to be complied with

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Issues and problems (contd.)

Problems arising out of share capital definition including preference shares including preference shares

In view of Free reserves definition which says it would not include changes in carrying amount of asset or liability recognised in equity amalgamation reserves created on fair valuing assets and liabilities would not be available for issue of bonus shares, buy back and dividend payment etc

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Issues and problems (contd.)

Cross holdings treasury shares to be canceled and no shares can be issued against these; (what and no shares can be issued against these; (what about existing ones?)

Positive confirmation by shareholders and creditors having 90% value required

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Professional Opportunities

Advisory on inorganic growth strategy / business diversification

Dilution advisory to sell side customers

Scouting for potential targetsScouting for potential targets

Preliminary evaluation of targets

Pre-deal evaluations

Negotiation support

Commercial term sheet finalisation

Structuring the deal

Financial, Commercial, Business and Legal Due Diligences

Transaction documentation support

Funding options and structures16

Professional Opportunities

Valuation for Making proposals

Consummating the deal

Fairness opinion on valuation Fairness opinion on valuation

FEMA regulatory purposes

Purchase price Allocation

Closing computations and settlement computations

Post deal integration support

Business synergy and management strategies

Accounting advisory on merger / amalgamation

Post deal, effectiveness evaluation

Advisory services to investor protection groups17

Expertise to mitigate the top ten reasons for M&A failures

1. Unrealistic price

2. Poor Due Diligence

3. Over-rated synergies3. Over-rated synergies

4. Poor business fit

5. Inconsistent Strategy

6. Integration difficulties

7. Cultural Integration issues

8. High leverage

9. Boardroom mis-fit

10. Regulatory hurdles18

OVERVIEW OF M&A

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Overview of Global M&A

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Overview of Indian M&A

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Lets look at some actual deals

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Facebook - whatsapp

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Lets look at Whatsapp acquisition!

Whatsapp has been acquired at a whooping $ 19 Billion!!!

$15 Billion in Facebook stocks and $4 Billion in $15 Billion in Facebook stocks and $4 Billion in cash

Existing user base ~ 450 Million

~70% are active daily on this platform

It charges 99 cents per year for each subscriber, after the initial first year

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Whatsapp Investor / Value view

Valuation of $ 19 Billion at Implied return on equity (at higher risk) 10%

US Market - Risk free rate 3% + Equity Risk Premium 5% + Additional Risk 2%

Valuation for the deal - $19 Billion Waiting period of 5 years to reach steady state Waiting period of 5 years to reach steady state

Translates to a pre tax income of $4.37 Billion!! This really means that

At say even a 50% pre-tax cost outflow from gross revenue And $0.99 per annum revenue changed to $5 per annum It requires 1.75 Bn users for Whatsapp to generate this kind of a revenue

stream! A near 4 fold increase in current number of users

Source: Ashwath Damodaran

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Whatsapp Traders view

EV / EBIDTA though correlated, ranges from 23 to +2000 meaning a return at EBIDTA level of less than 5% - which is below even the risk free rate!

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Number of users is a dominant driver in this industry Measure of depth of engagement has an effect on the valuation Predictable revenue models are higher priced Making bottomline money seems to be secondary at least as at present

free rate! Market seems to be banking

heavily on the future of users!!

If the Whatsapp acquisition drives Facebook users up by even 1/3rd of its users

At $ 130 per user for Facebook Value of Facebook is up by the price paid and more! Source: Ashwath

Damodaran

Point Counter-Point

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Deal is too large by all comparisons in this field Lack of revenue model to justify the returns in due course

What it means to Facebook

Not a very big risk!!

For Facebook, this is a big deal, but not a killerkiller

Its own market cap is $ 180 Billion!!

As of Dec 2013, had $11 B in liquid funds

Had $4 Billion cash from operations in 2013

Also, deal is structured at best to pay

Only $ 4 Bn by cash

Rest is by way of Facebook Stocks!!28

Possible insight into Whatsapp revenue model

Fastest growing

By the time of deal, Whatsapp had 450 Mn Whatsapp had 450 Mn users

Over 11 Billion messages each day

Provides a goldmine to extract likes, dislikes, trends

Huge possibilities for big firms to use data to tailor their offerings29

Fundamentals of Valuation

Accountants valuation sans business knowledge

Mere arithmetical exercise

Business valuation sans accountants knowledge

Lead to investment oblivion!

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Who can forget the Indiaworld Deal

In 1999 - 2000, Sify bought Indiaworld at Rs.499 crores It had a revenue of about INR 1.3 crores and a

bottom-line of about INR 25 lacs at that time!!bottom-line of about INR 25 lacs at that time!!

This was justified only if revenue could double year after year for one full decade!!

Five years later Revenue was only Rs.10 Crores

Required to justify the valuation Rs.42 crores Revenue was 4 times less!!

Valuation without in-depth Business understanding linked with Financial Knowledge??31

Sify Indiaworld vs Facebook - Whatsapp

Facebook SIFY

Market Cap $ 170 Bn $ 1.48 Bn(Dropped to $ 178 Mn

by Q4 2000)by Q4 2000)

Year 2014 1999

Liquid assets $ 11 Bn $ 0.2 Mn

Latest year cash from operations

$ 4 Bn -ve $ 4 Mn

Target Price $ 19 Bn $ 115 Mn #

- Cash Component $ 4 Bn $ 90 Mn #

- Equity component $ 15 Bn $ 25 Mn #

IPO happened in 2013 1999

# - Estimated amounts in $ terms32

Sun pharma ranbaxy

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Sun Pharma Ranbaxy Deal

All stock deal

Every 5 shares of Ranbaxy will fetch 4 shares of Sun Pharmashares of Sun Pharma

What is in it for each of the parties involved lets try and make some educated guess

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For Daiichi Sankyo

Since it bought over Ranbaxy, as a parent has been faced withbeen faced with Criticism of continuing FDA related issues

Even, when this deal was made, there has been a subpoena received (relating to Toansa facility) for which it has provided indemnity to Sun Pharma!

The transaction would make it a 9% owner of Sun Pharma, which it could offload at a later date

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For Ranbaxys other Shareholders

The subpoena having been received, though was a material issue, was not in public domain until a material issue, was not in public domain until recently

The other shareholders are likely to have benefited, as this subpoena information could have subdued the valuation

This may be the end of the road for Ranbaxy as it was but, maybe its for the best to company and its shareholders, given the circumstances

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For Sun Pharma

A significant challenge to the MD of Sun Pharma, who has earned a reputation for acquiring who has earned a reputation for acquiring companies in trouble at a good price and then turning around operations

The merged numbers show a challenge in the near term due to pressure on bottomline returns

However, Sun Pharma is looking at ~Rs.1,500 crores of merger related synergies by three years

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For Sun Pharma

In the Indian market, the combined entitys portfolio becomes much larger, covering more portfolio becomes much larger, covering more therapeutic areas

Margins on Ranbaxy products are low, but Sun plans to work on improving them

In the US market, the priority will be to resolve all of Ranbaxys FDA-related troubles to ensure that every major generic product in Ranbaxys pipeline makes it to market

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FLIPKART - MYNTRA

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About Flipkart

Has raised ~ $2.5 Billion in capital till date

Current valuation is about 2.5 2.7 times annual Gross Merchandise

Structuring advisory

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times annual Gross Merchandise Value (in the likes of the valuation of Amazon)

No one is even thinking of EBIDTA / Profits as the basis

The company is looking to become the first $100 billion value company from India

Rs. Crs 2011-12 2012-13 2013-14

GMV 205 1,180 6,000

Flipkart essence of e-tailing growth

Focus on delivery and prompt service

In Flipkart 7,000 out of total 12,000 work on last mile delivery

Cash on Delivery a big hit

Business modeling

Liberal return policies / low pricing by discounts / free delivery

FDI hurdles for retail giants whilst free FDI into ecommerce companies is also helping

Increased penetration of smart phones is also adding to e-tailing in a big way

Moving towards market place model from inventory and delivery control model

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E-commerce Industry - expectations

China has been ahead by 6-7 years on ecom

From $ 4 billion in 2003, have grown to $ 230 billion now

Valuation advisory

billion now

Applying similar template to India

Just listed companies market cap could be $40 billion by 2017 and $ 90 Billion by 2020

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Flipkart flipping the cart

Flipkart Online Services Limited, an Indian entity was the apex company in Flipkart until a few years back

Cross Border

advisory

Cross Border Structuring advisory

a few years back

Three rounds of funding were received by this entity only until 2011

In 2012, to avoid regulatory complications and for better structuring

FOSL sold its whole business operations to FIPL

FIPL is owned by Flipkart Private Limited (of Singapore)44

Flipkart fund raise

Flipkart has become one in the top tier of privately held internet ventures in the likes of Uber, Airbnb and Dropbox

Valuation and

services

Valuation and PE funding

services

and Dropbox

Just in Jul 2014, the company did a fund raise at a $7 Billion valuation

Which was a doubling of the valaution post acquisition of Myntra!!

In Nov 2014, again another round of fund raise has happened at a valuation of $11 Billion!!

A further jump!!

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Flipkart Myntra Deal

Business case for the deal

Flipkarts technology and marketplace model

Myntras significant grasp of fashion and

1 + 1 = 3

Myntras significant grasp of fashion and consequent market leadership in fashion e-tailing

Potential to exploit mutual synergies

Promoters

Sanjay and Binny Bansal (not related) of Flipkart

Mukesh Bansal (again not related) of Myntra

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Flipkart saw

Future of 30% GMV coming from fashion

Flipkart was weak in this area

1 + 1 = 3

Flipkart was weak in this area

Had a well established technology backbone for the e-tailing

Saw Myntra, as a great threat to its growth

Myntra saw

Opportunity to grow faster

Retain its leadership in fashions with more investments instead of competition47


PE investors were broadly the same set

Tiger Global and Accel Partners (key investors) in both the entities

Integration

solutions

Integration issues and solutions

both the entities

Stated to be a 100% buy out deal

But, expected to continue to operate under two brands and websites etc.,

Collective decision on moving forward with the backend and integrating the same

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Merger Demerger Acquisiiton and Transaction Advisory

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