Welcome to Mergers and Acquisitions[1]

8/3/2019 Welcome to Mergers and Acquisitions[1]

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WELCOME TO MERGERS

AND ACQUISITIONS


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1st

2nd

3rd

4th

5th

Started Peaked Ended

1981 1989

U.S

Globalbut most

pronounced

in U.S.

1916 1921

1965 1969

1897 1898-1902 1904

1992

FIVEWAVES


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1st Wave: 1897-1904

1. Primary metals 6. Transportation

2. Bituminous coal Equipment

3. Food products 7. Petroleum

4. Chemicals 8. Fabricated metal

5. Machinery products

Impact on 8 specific industries (2/3 of the total mergers)


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1stWAVE

Merging for Monopoly

Horizontal Merger


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1stWave

Create monopoly

US Steel

by J P Morgan

Carnegie Steel

by Andrew Carnegie

US Steel

Smaller Steel Cos

75% of mkt.


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1stWave

Creation of trusts

Put their stock in a voting trust and agreed

not to compete against each other.

e.g : Sugar trusts

Copper trusts

Shipping trusts etc.


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1stWave

Products:

GE

Dupont

Eastman Kodak

Navistar International etc.


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1stWave.End

Due to financial factors:

stock market crash-1904panic in banking1907

The Application of anti-trust legislations.


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2nd Wave: 1916-1929

Merging For Oligopoly

Consolidation

Fueled by first world warThe anti-trust became more stricter

thru Clayton Act,1914

Resulted vertical merger.


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2ndWave

E.g. Ford Motor

vertically integrated co.

Mfg. own tyres from rubber produced

from its own plantation in Brazil.

Mfg. Own steel for body of car which in

turn got iron from its own mines andshipped on its own railroad.


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2ndWave

Conglomerates non related fields

Industries 1. Food products

2. Chemical

3. Primary metals

4. Petroleum

5. Transportation equipments.


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2ndWaveEnd

Stock mkt crash1929

Black Thursday 29thOct1929.


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3rd Wave: 1965 - 1969

A historically high level of merger activity.

Fueled by booming American Economy.

Acquisition of larger cos by smaller cos.

Conglomerate transaction - Non related,

Highly diversified,Unrelated industries.


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1960s Bull mkt.

Eq. Sh - P/E multiple of certain cos.

ATEq. Sh A

Eq. Sh T

Stock Swaps

3rdWave


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4th Wave: 1981 - 1989

Hostile take over.

Fortune 500 became the target of acquirers.

Professional corporate raider.

Leveraged buyouts.

Role of investment Bankers.

Active among European and Japanese firms.


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5th Wave: 1992

Mega mergers.

Cross border mergers.

Drivers :- Deregulations, Globalization & Technology.


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Business CombinationsReasons:

Growth

Economies of Scale

Synergy

NAV = PVab( PVa + PVb )PE Managerial efficiency

Market entry

Acquire Technology Diversification

Tax shields

Strategic


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Business Combinations

Some unstated reasons for acquisitions

Megalomania

Hubris spirit


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Why not?

Grasping for a company simply because its

on the market or because a competitor

wants to buy itIt is available for sale

It seems very attractive

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Forms of Business Combinations

Consolidation

result: a new firm

e.g. Sandoz + Ciba Geigy = NovartisMerger

result: only one survive

e.g. HDFC BK + TIMES BK = HDFC


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Takeovers

control over mgmt thru substantial

portion of its equity .e.g. Credit Swiss Group controlled

First Bostons Mgmt thru Equity

acquisition.Both remained in existence.


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Asset purchases

A buyout a division or assets of T

e.g. Coca-Cola paid Rs 170Cr to Parle for

its Soft drinks brands like Thumps up,

Limca, Gold Spot, etc.


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Types of Mergers

Horizontal Merger

Vertical Merger

Conglomeration

Market Extension Merger

Product Extension Merger

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Major Acquisitions: Big DealsTARGET BUYER VALUE ($Bn) YEAR

ARCELOR MITTAL STEEL 31.00 2006

NKK CORP KAWASAKI STEEL 14.10 2001

LNM HOLDINGS ISPAT INTL 13.30 2004

CORUS TATA STEEL 12.00 2006

KRUPP AG THYSSEN 8.00 1997

DOFASCO ARCELOR 5.20 2005

INTL STEEL MITTAL STEEL 4.80 2005

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Merger: Nokia-Siemens

A new 50-50 JV company Nokia-Siemens

Network (3rd largest communications

equipment provider in the world after

Ericsson and Alcatel/Lucent)

Annual revenue : Euro 16bn

Workforce : 60000 (expected job cuts 10-

15% in next 4yrs mainly in Germany)

Cost reduction of Euro1.5bn per year by 2010

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Theories of Mergers

Differential efficiency

Inefficient management

Financial synergy

Operating synergy

Strategic realignment

Undervaluation Short term results Vs Long term investment

Market below replacement cost

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Theories of Mergers

Information and signaling

Agency problems and Managerialism

Protect or build the empire

Free cash flow theory

Market power

Tax consideration

Redistribution

Winners curse - Hubris

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The Acquisition Process

Acquisition Search

Approaching the Target

Passive Strategy

Active Strategy


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The Acquisition Process

Valuation

Discounted Cash Flow Method

Comparable Companies Method Book Value Method

Market Value Method

Negotiation

Due Diligence

Acquisition Finance


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Valuation

Acquirers perspective

Sellers perspective

Lenders perspective

Investors perspective

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Increase the synergy / Decrease the premium

Managerial synergy HLL & TOMCO

Exchange inefficiency: Vertical integration

will circumvent mkt transactions cost Tata Tea took over Consolidated Coffee Ltd

Operating synergy: Economies of scale

ICICI acquired ITC classic India Cement acquired Visaka cement, Raasi cement, CCI

plant at Yerraguntla

Tax advantages: acquiring sick companies

e.g. Voltas acquired AllwynKumar Bijoy 31


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Regulatory considerations: to bypass the law of

fully owned subsidiaries by foreign co. e.g.

Whirlpool (Indian Wing) merged with Expo

Machinery & Kelvinator India = Whirlpool India

Size: e.g. Merger of SCICI & ICICI

Financial synergy: channeling of cash/resources

Diversifying risk: e.g. Torrent group acquired

Ahmadabad electricity Co and Surat electricity

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Sellers perspective

Good price: Godrejs offer of Rs 100cr to

Transelectra more attractive than Unilever

Better business relationship: SRF Ltd soldSRF finance to G E Caps at lower price

Better mgmt and employee care: JRD Tata

had imposed a condition on S M Datta ofHLL that after merger, not a single

employee of TOMCO would be retrenched

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Lenders perspective

Creating shareholders value: e.g. APIDC

the lending institution sold its 2.3% stake of

Raasi cements to India cementsBetter corporate governance

Better portfolio

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Investors perspective

Addition to their wealth

Potential growth: e.g. shareholders of Raasi

have positively responded to the open offerof India Cements (Rs 300ps)

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Valuation of Target companiesFinancial valuation: calculation of P/E ratio,

Intrinsic value (true MPS)

P/E depends on

Goodwill of the business

Proven abilities Character of the business

Tangible assets & Intangible assets: valued

either at fair value or at the open market value

Free cash flows: DCF method (discounted at

WACC or higher)

The substitution cost is calculated and

compared with acquisition costKumar Bijoy 36


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Financial evaluationIndian context

Look at 5Ps

Personnel:

Nicholas lab acquired Roche for its well trained sales force

Product:

HLL acquired BBLIL for its 17brands in Tea segment

Plant:

India cement acquired Raasi cement and Visaka cements

Potential: Whirlpool acquired Kelvinator

Profit:

SRF finance selected GE Cap as buyerKumar Bijoy 37


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Pricing the Bid

1.Divide the cos Net Asset Value by its total noof shares i.e. NAV per share

2a.Make a projection of the target cos turnover

and profit for the next five years

2b. Discount the profit of 5th yr at expected RoR

2c. Divide the discounted figure by the no. of sh

3. Calculate the average price of the target cos

share over the last one yearThese three values indicate the range within which initial negotiating

price must be quoted.Kumar Bijoy 38


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Valuations.Practical e.g.

Coca cola has offered the price to Parle soft drinks

equal to its turnover

Khaitans of Williamson Major have paid a price of

Rs290cr to the Union Carbide (Rs 150cr for theirfuture earnings, Rs 100 for the brand value

(Eveready) and Rs40cr for giving mgmt stake in co.

Whirlpool Corporation paid Rs 300cr for its 51%

stake in Kelvinator India. The share price was fixedat Rs 197.16ps (total 1.52cr shares) which is the

average share price over the previous six months.

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Lazard Capital applies a thumb rule in valuing a

FMCG co i.e. 1 to 1.5 times of its turnover

SRF paid a sum of Rs 325cr for acquiring the Ceats

Nylon tyre cord plant. A new plant of same capacitywould have cost Rs 450cr with a gestation period of

18 months.

Bayer India has offered Rs 80ps of ABS. Independentvaluers like C C Choksi & co, ICICI securities and SR

Batliboi & co had suggested the Rs 65 -70 per share

for the offer

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Issues in empirical studies

If value is increased by mergers or tender offer is

it maintained?

Is value maintained in the short term only for a

period of six months or less?

Do value increases represent social gains or

merely redistribution?

How the gains are divided b/w bidders and

targets?

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What will be the effects on other firms in

the same industry?

Whether the return to the common stock ofindividual firm or group of firms is greater

or less than that predicted by general market

relationship b/w return and riskWhat is the reasonable time frame for

testing merger success?

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Sell-offs

Opportunistic

Forced

Planned


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Forms of Corporate Downsizing

Spin-Off

A new legal entity is created to takeover the

operations of an existing division.The Shares of

the new unit is distributed pro rata among the

existing share holders.


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Split-Off

A new legal entity is created to takeover the

operations of an existing division.The Shares of parent

co are exchanged for the shares of the new co. Hence

the share-holding of the new entity does not reflect the

share holding of the parent firm.


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Split-Up

A complete break up of a company into two

or more and parent firm ceases to exist.


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Equity Carveouts

Conversion of existing division or unit into a

wholly owned subsidiary.Result in positive cash

flow.

Divestitures


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Divestitures

Outright sale of a portion of the firm to

outsiders. The firm receives purchase

consideration in the form of cash or

securities or both.


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The Divestitures Process

Developing Sale Strategy

Negotiated sale

Auction sale

Valuation


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The Divestitures Process

Drafting offer memorandum

Executive Summary

Sale procedure

Background

Operations

Marketing Human resources

Financial


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The Divestitures ProcessEnd

Identify potential buyers

Negotiation & Closing the deal


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Takeover Defenses

Share Repurchases

White Knights

Poison Pills


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Takeover Defenses

Corporate Charter Amendments

Golden Parachutes

Greenmail

Standstill Agreements


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Takeover Defenses

Poison Puts

White Squire

Pacman Strategy

Crown Jewels


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Corporate Restructuring

Going Public

Going Private

Joint Venture

Welcome to Mergers and Acquisitions[1]

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