Modes of growth.pptx
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Modes of growth
Basically, there can be three ways it:
(i) the formation of a new company;
(ii) The acquisition of an existing company;
(iii) Merger with an existing company.
Decision ---companys assessment of variousfactors including in particular:
(i) the cost that it is prepared to incur;
(ii) the likelihood of success that is expected; (iii) the degree of managerial control that it
requires to retain.
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Joint Venture
JV-Marriage of convenience-concept of
complementary capabilities
Need for international technology (Mahindra &
Renault)
Sharing of costs
When assets are difficult to separate (differentdivisions-saddled with the assets not needed)
Has lesser regulatory constraints
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Joint venture
Reduced financial risks-spreading the riskbetween partners(ONGC and Chinese oilcompanies)
Easier to enter new markets with an existingpartners presence
JV-Real Options-scale up if industry goes up or
exit if it is other way.Best quality with least cost: NEC(Japan) with
HCL Technologies
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Joint Venture
Protection of sensitive business information:
Enter into NDA
JV susceptible to: misappropriation of
knowledge, hold up by the partner
Prisoners dilemma: lack of trust , cultural
differences
Godrej-P & G, JM Financial -Morgan Stanley
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Merger
Merger is a fusion between two or moreenterprises, whereby the identity of one ormore is lost and the result is a single
enterprise.Merger is restricted to a case where the assets
and liabilities of the companies get vested inanother company, the company which ismerged losing its identity and its shareholdersbecoming shareholders of the other company.
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Acquisition
An acquisition, also known as a takeover, is the buyingof one company (the target) by another.
An acquisition may be friendly or hostile.
In the former case, the companies cooperate in
negotiations; in the latter case, the takeover target isunwilling to be bought or the target's boardhas noprior knowledge of the offer.
Acquisition usually refers to a purchase of a smaller firm
by a larger one. Sometimes, however, a smaller firmwill acquire management control of a larger or longerestablished company and keep its name for thecombined entity. This is known as a reverse takeover.
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Why to merge
Mergers take place to:
diversify the areas of activities;
achieve optimum size of business;
remove certain key factors and otherbottlenecks of input supplies;
improve the profitability;
serve the customer better;
achieve economies of scale and size, internaland external;
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Why to merge
acquire assets at lower than the market price;
bring separate enterprises under single
control; grow without any gestation period;
and nurse a sick unit and get tax advantages
by acquiring a running concern
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Decision on Merger
For a firm desiring immediate growth and quickreturns, mergers can offer an attractive opportunity asthey obviate the need to start from scratch andreduce the cost of entry into an existing business.
However, this will need to be weighed against the factthat part of the ownership of the existing businessremains with the former owners.
Merger with an existing company will, generally, havethe same features as an acquisition of an existing
company. However, identifying the right candidate for amerger or acquisition is an art, which requiressufficient care and caliber.
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Types of mergers
Horizontal mergers
Vertical mergers
Conglomerate mergers Reverse mergers
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Takeover Terminologies
Friendly Takeover:
Friendly take over, the acquirer first approaches
the promoters/ management of the target
company for negotiating and acquiring the
Shares. Friendly takeover is for the mutual
advantages of acquirer and acquired
companies.
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Hostile takeover
Hostile Takeover is against the wishes of the
target companys management. Acquirer
makes a direct offer to the shareholders of the
target company, without the prior consent of
the existing promoter / management.
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Black Knight
Black Knight: It is the company which makes a
hostile takeover bid on the target company.
White Knight:
It is the potential acquirer which is sought out
by a target companys management to take
over the company to avoid a hostile takeover
by an undesirable black knight.
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Grey knight:
A 'grey knight'is a third firm that is not welcomed by
the 'victim', seeking to exploit the situation totheir own advantage.
Yellow Knight
A'yellow knight'is a firm who originally seeks tolaunch a hostile takeover bid but then moderates
its stance and negotiates on the basis of a merger
-the 'yellow' being used to imply some element of
'cowardice' in the behaviour of the bidding firmwho may begin to appreciate that it will not be
able to 'bully' its 'victim' into submission.
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White Squire
Such a firm may not be big enough to be able to takecontrol of another firm but may well seek to buy intothe 'victim' firm to prevent the 'black knight' frombeing able to achieve its takeover plans.
Crown Jewels
The precious assets in the Company are called as CrownJewelsto depict the greed of the acquirer under thetakeover bid. These precious assets attract the raider tobid for the Companys control.
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Defensive Mechanism
Poison Pill: It is the strategy to make the companyunattractive to the acquirer. One of the strategies is toincrease the debt component in the capital structure ofthe Company i.e increasing the Debt Equity Ratio.
Shark Repellent:The Companies change and amend theirbyelaws and regulations to be less attractive for thecorporate raider company which strategy is called sharkrepellent Strategy. e g. shareholders.
Green Mail:This is where a large block of shares is held byan unfriendly company, which forces the target companyto repurchase the stock at a substantial premium toprevent the takeover. In a takeover bid this could prove tobe an expensive defense mechanism.
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Others
Window ShopperLikes to look, but rarely buys
Bottom Fisher-Constantly hunting for bargains.Active buyer.
Market Share/Product Line Extender-Mostcommon buyer category, because feweroperating risks are involved.
Strategic Buyer-seeking to diversify andredeploy assets.
Leveraged BuyoutVery active sector. Financiallyoriented buyers.
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Strategy
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Meanings of Strategy
Five meanings of strategy
Plan,consciously elaborated direction of actions
Pattern,clear basic line in the operation of an
Organization
Position, certain place or location in the markets or/
And environment
Perspective, point of view or certain way to examine
the organization or its environment
Plot, sequence of conducted activities which aim to
Improve the competitive advance
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Corporate Strategic Planning
Define Corporate Mission
Analyze, Evaluate Current Business Portfolio Identify New Business Arenas to
Enter/Business to exit.
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BCG Approach
Build -Objective is to increase the market
share
Hold Objective is to preserve market share
Harvest Objective is to increase short term
cash flow regardless of long term effect
Divest Objective is to sell/liquidate the
business
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General Electric Approach
The Industry attractiveness index is made up of such factors as
market size, market growth
industry profit margin
amount of competition
seasonally and cyclically of demand
industry cost structure
Business strength is an index of factors like
relative market share
price, competitiveness
product quality customer and market knowledge
sales effectiveness
geographic advantages
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SWOT
SWOT ANALYSIS
HOLD SELL ACQUISITIONS
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History
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M & A
Merger Waves
Wave I (1897-1904)
Consisted mainly of horizontal mergers-
monopolistic market structure
Major changes in economic infrastructure andproduction technologies
Financial factors led to the end of the wave
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M & A
Wave II (1916-1929)
Consolidation of industries-oligopolistic
industry
Banking and public utilities were most active
industries
Formation of many prominent companies
General Motors, IBM etc.,
Wave ended due to stock market crash
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Wave III (1965-1969)
Conglomerate merger
Diversification into business activities outside
traditional areas.
Did not result in increased industrialconcentration
Acquisitions followed poor financialperformance-lack of knowledge aboutdifferent industries
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Wave IV (1981-1989)
Hostile takeover played significant role
Value greater than numbers
A period of mega mergers
Oil & gas, drug & medical equipment industries
Role of investment bankers and law firms
Emergence of leveraged buy outs, innovativeacquisition techniques
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M & A
Licensing era-indulge in unrelated diversifications
Could surviverestriction on industry capacity
Hostile takeovers
Liberalization in 1991-opening up of the economy
Greater competition, deregulation, freer imports, -newareas of concern
Hence, restructuring of India Inc became a majortheme
Consolidation in core competent areas Mergers and acquisitions emerging as key corporate
strategy
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Theories of Mergers
Efficiency Theory-asset redeployment haspotential for social benefits
Information Theory Signaling Theory
Agency & Managerial
Market Power HUBRIS HYPOTHESIS( mergers happen even if the
current market value reflects true value)
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Targets
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Identification
Cold Calling-
discrete findings -research,customers,bankers,
common forum,
Social Gatherings
Investment Bankers
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Due Diligence
What is & Why DD?
Process by which information is gathered about targetcompany, its business and the environment in which itoperates
Objective: to ensure that an informed decision istaken
Determine the advisability of the transaction
Formulate a proposal for the transaction Minimize risk exposure
Identify weak areas and commercially resolve them
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Approach
Sign Non Disclosure Agreement/Letter of
Intent
TimingNeed to understand the issues
Materiality threshold for Risk Assessment
Background research
Verification of the documents Executive Summary & final Report
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EFFECTIVE DUE DILIGENCE
The Effective Due Diligence Process will
address:
Strategy Assumptions
Identify operational, legal, financial and other
significant issues
Assessment of Risks
Effect of assessment on valuation (e.g. Fair
Price for the Target Company)
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MATERIAL CONTRACTS AND
AGREEMENTS
Issues under each Agreement:
Onerous obligations/ covenants
Payment of ongoing fee/ royalty
Restriction on activities Rights of first refusal/put/call option
Penal provisions/ any liability which flows through
Exclusivity provisions
Confidentiality
Assignability/ change of control/ consent of thecounter party for transactions
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Term Sheet
Condensed version of the transaction
Binding/non-binding
Termination and its effects
No shop clause and binding confidentiality
Signing of detailed agreements within a
specified period
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TO CONCLUDE
DueDiligenceplaysanimportantroleinidentifyin
g,quantifyingandreducingtherisksofanacquisition.
Althoughduediligencefocusesonnegativeinformation,theaimisnottoraiseobstaclestotransactions,butrathertofacilitatetransactionsbyidentifyingproblemsandrisksandbydevisingsolutionst
oproblemsordevicestoreduceormanagetherisksvolvedincorporateacquisitions
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Interest of stakeholders
Shareholders
Creditors
Employees
Suppliers & Customers
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Dos & Donts-
Golden Rules for success
Why M & A fails?
Make the buyer comfortable with what they
are buying
Conditions precedent should be minimal
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Six golden rules for successful
acquisitions
Transaction
Pick the right target
Strategic fit Capabilities fit Ease of execution,relative to experience
Negotiate the right price, don't overpay Apply high-definition valuation Multiples within
comparable ranges Reasonable synergyexpectations Friendly, not hostile
Lay the groundwork for swift approval No major regulatory delays No unexpected
regulatory givebacks
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IntegrationManage the integration well
Maintain core business growth
Maintain momentum in target business
Achieve synergies above announced levels
Manage organizational change effectively
Communication
Retention of employees
Cross-pollination
Cultural assimilation
Do your homework : avoid disruptions
Technology
Government
Competitors
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Measuring success
Increase in
Stock Price
Revenue
Profits
dividend
customer base
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Measuring success
Actual realization of the synergy contemplated
Reduction in the attrition rate
Recognition by the new customers
Trend setter for emulation by others
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Time Frame for completion
Nature of Transaction (including bid/auction)
Regulatory compliance
Transaction structure
Give & Take
Cultural issues
Trade Union
Economy-MTN-Bharti/RComm
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Financing M&A
Various methods of financing an M&A deal exist: Payment by cash. Such transactions are usually
termed acquisitions rather than mergers because theshareholders of the target company are removed from
the picture and the target comes under the (indirect)control of the bidder's shareholders alone.
A cash deal would make more sense during adownward trend in the interest rates.Anotheradvantage of using cash for an acquisition is that there
tends to lesser chances of EPSdilution for the acquiringcompany. But a caveat in using cash is that it placesconstraints on the cash flow of the company.
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Financing M&A
Financing capital may be borrowed from a bank, orraised by an issue of bonds. Alternatively, theacquirer's stock may be offered as consideration.Acquisitions financed through debt are known asleveraged buyoutsif they take the target private, andthe debt will often be moved down onto the balancesheetof the acquired company.
An acquisition can involve a combination of cash anddebt, or a combination of cash and stock of the
purchasing entity. Factoringcan provide the necessary extra to make a
merger or sale work.
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Underlying Principle for M&A Transactions
1 + 1 2
Additional Value of Synergy
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Why M&A fail
dominant reason ----not failing in doing the deal orstructuring the deal or negotiating. -----,,what does ordoesn't happen post-agreement and post-closing andthe failure to manage the combined entity in a superiorway.
'culture.-failure of
leadership, failure of integration, communicationfailures, failure to populate the new organization withsufficient talent.
poor strategic moves such as overpayment, tounanticipated events, (a particular technologybecoming obsolete)
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Why M&A fail
"Culture integration is certainly important," "but it'salways the excuse when something doesn't work out.
Negative outcomes --such as employee layoffs for thetarget company --are "invariable" and "must be handledhumanely." (For example, companies can help these
individuals to find other jobs and provide acceptableseverance.)
Immediate and clear communication on the part ofmanagement with regard to any problematic issues. "Youneed to create a good impression," he says. "Goodemployees will quit if they feel their fellow workers aretreated poorly."
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Safeguards
The customer should perhaps be viewed as the biggeststakeholder and treated as such. ("If the customer is a largeone, they should hold hands with top executives throughthe transition, At the end of the day, that's the cash." ) Amerger between two tech firms in Silicon Valley, both of
whom had IBM as a leading customer. When the mergerwas announced, they both lost IBM's business. "IBMwanted to know why they were not told of the change," hesays.
Using sales forces to keep customers informed and havingcommunications ready for all customers, with a keymessage that answers the question, "What is this mergergoing to do for you?"
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PRE-DEAL
During the pre-deal phase, growth objectives and anacquisition strategy are defined. Target companies areidentified and assessed for potential fit and duediligence is conducted.
Due diligence should consider commonalties anddifferences in areas such as
company culture, leadership models, organisationstructure, performance management systems andworkforce development approaches.
will indicate the potential cost of realising deal value,particularly where a high degree of cultural integrationis required
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Deal
In the emotion and momentum of the
negotiate phase of the deal, obvious areas
of risk identified through due diligence are
often ignored by deal makers.
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Post Deal
This is often the stage at which a deal fails--excessive focuson the financial aspects at the expense of integratingpeople from the two organizations.
Disciplined enterprise-wide integration coordinatedsimultaneously and speedily across all functional
departments and business units will ensure bothorganizations are integrated smoothly into a single cohesiveentity.
A single infrastructure should be used to coordinate allintegration efforts and communications across the
combined companies and rigorous project management,process consulting and tactical problem solving will beessential to your success.