Mergers and Acquisitions

General Instructions:

Code: 553A

The Student should submit this assignment in the handwritten form (not in the typed format) The Student should submit this assignment within the time specified by the exam dept The student should only use the Rule sheet papers for answering the questions. The student should attach this assignment paper with the answered papers.

Failure to comply with the above Four instructions would lead to rejection of assignment. Specific Instructions:
There are four Questions in this assignment. The student should answer all the four questions. Marks allotted 100. Each Question carries equal marks (25 marks) unless specified explicitly

Question No1 : Funtime Ltd. a toy manufacturing company, has aggressive plans for expanding its market share. To get faster market access the management of the company has decided in favour of take over. The research wing og Funtime Ltd. has undertaken a detailed study of prospective takeover targets and finally identified Giggle Ltd., a company based in Baroda. Funtime Ltd. has already collected the following relevant information about Gigle Ltd. it is now to access the value of Giggles to start negotiation for the take over. Balance sheet of Giggle Ltd as on 31st March,2002 Liabilities Share capital Reserves Term loan: IDBI Other Current Liabilities Amount Assets Amount 4 40 100 6 150 64 86 16 102 120 160 124 506

80 Land 6 Buildings Plant and machinery 100 Other fixed assets 20 Gross fixed assets 300 Less: Accumulated depreciation Add: capital WIP Total fixed assets Inventories Receivables Other 506

Capital expenditure of Rs.86 lakhs will be incurred in 2003 and Rs.280 lakhs in 2004.

Other Information: Particulars Net sales Raw materials cost Power Employee related cost Administrative expenses Depreciation 2002 1,100 480 20 56 21 10 2003 1,160 500 23 61 24 14 2004 1,600 660 32 80 32 41 2005 2,100 880 43 88 37 42

The tax rate for the company is 30%. There is no charge on deferred taxes. The stock is currently trading at Rs.25 per share. Bank finance carries an interest rate of 20%. Based on the information given use the discounted cash flow approach to value Giggle. Note: Additional capital (issued at par) Term loan Rs.260 lakhs Rs.220 lakhs

Question No 2: a) What factors are considered for selecting a target in a business acquisition strategy?

b) XYZ Ltd. is considering merger with ABC Ltd. XYZ Ltd.'s share are currently traded at Rs. 25. It has 2,00,000 shares outstanding and its earning after taxes (EAT) amount to Rs. 4,00,000. ABC Ltd., has 1,00,000 shares outstanding its current market price is Rs. 12.50 and its EAT is Rs. 1,00,000. The merger will be effected by means of a Stock Swap (exchange). ABC Ltd. has agreed to plan under which XYZ Ltd., will offer the current market value of ABC Ltd.'s shares. What is the pre-merger earnings per share (EPS) and P/E ratios of both the companies? If ABC Ltd.'s P/E ratio is 8, what is its current market price? What is the exchange ratio? What will XYZ Ltd.'s post merger EPS be? What must the exchange ratio be for XYZ Ltd.'s pre-merger and post-merger EPS to be the same?

Question No 3.
A) Read the following case and answer the questions given at the end:
Mittal Steel, owned by L N Mittal & family, has its headquarters in London and Rotterdam. It has plants in 14 countries spread across Europe, Asia, North America and Africa. Its first acquisition took place in 1989. Arcelor was founded in 2002 by merger of Abred of Luxembourg, Arcelia of Spain and Usinor of France. Its turnover is valued at 33 billion. Its plants, joint ventures and subsidiaries are spread across 60 countries. In the year 2006, Mittal Steel made an offer to acquire Arcelor. Its original

offer to Arcelor was for 17.5 billion. In May it increased the offer to 24 billion and the final offer was 26.9 billion. Mittals final offer was accepted. Mittal paid 40.37 a share for Arcelor nearly double the price, it was trading before the first bid was made. When Mittal made first bid, Arcelor rejected it with vengeance. It recommended to shareholders not to sell shares to Mittal as the two companies did not share the same strategic vision, business model and values. A couple of European governments did not like the idea of an Indian taking over an European company. The French foreign minister felt it would affect 28,000 jobs and that the bid was ill-prepared and hostile. However, Mittal Steel said jobs would be safeguarded. Arcelor took the matter to regulators to thwart the takeover. But the regulators did not find any anti-trust provisions being violated and asked Arcelor not to issue shares to anyone without investors explicit consent. To begin with Arcelor refused to meet Mittal until a string of demands were met and simultaneously orchestrated a 13 billion deal with Severstal of Russia to keep Mittal away. As shareholders wrath grew over the Severstal agreement and pressures from other quarters increased, Arcelor accepted Mittals final bid. Arcelor had to pay 130 million as a fine to Servestal for breaching the contract. Ultimately, L N Mittal succeeded in acquiring Arcelor. The combined capacity of Arcelor Mittal is 109.7 million tonnes.

Questions :
(i) Was this takeover hostile or friendly ? Distinguish between hostile takeover and friendly takeover. Why did the executives of Arcelor defend Mittals bid to takeover ? What normally happens once a hostile takeover is completed ?

(ii) (iii)

(iv)
(v)

Do you think that the executives of Arcelor created defences against the Mittal keeping the best interest of stockholders in mind? Antitakeover strategies can be of two types, viz. preventive and reactive. Explain them Evaluate defense strategies adopted by target firms to hostile takeover.

(vi)

A) How can the post merger efficiency be measured? Enumerate the main parameters involved in it.

Question No 4.
A) The IDBI Bank Ltd. (IDBI) has finally walked away with United Western Bank (UWB), the Satara-based
private sector bank. There were 17 commercial banks including public sector banks, private sector banks and foreign banks, who had bid for UWB. There was also one restructuring proposal from UWB, which envisaged the help of the Maharashtra Government in association with SICOM, HDFC and its subsidiaries and associates and IDFC. These investors together had offered to pump in around Rs.350 crore into the bank. IDBI has offered Rs.28 per share to all UWB shareholders. The major institutional shareholders in UWB are SICOM, which holds around 10%. IDBIs offer of Rs.28 per share was marginally lower than SICOMs acquisition price. The IDBIs offer price works out to 1.8 times of the book value. This is higher

than the average of 1.25 times for public sector banks but lower than the average of three for the top 4
new private sector banks

IDBI No.ofbranches Deposits Advances NPAs (in %) 195 (Rs.incrores) 26,000 (Rs.incrores) 52,518 1.01

UWB 230 6,480 4,006 5.66

It is a win-win situation for IDBI, as they will be able to acquire a branch network of around 230 and around 3,000 employees of UWB. The employee acquisition, according to analysts, is equally important for IDBI as it has a high attrition rate and this acquisition will give it access to around 3,000 professional bankers at one go. In the light of above details and other factors, answer the following questions: (i) case? (ii) (iii) (iv) Why were there so many suitors despite UWB being in a poor health? Can IDBI Bank handle post-merger cultural issues How does this merger fits into IDBI Banks strategic management
B ) Distinguish between the following : (i)Corporate level strategy and business unit strategy (ii) Management buy-out and management buy-in

What is the meaning of amalgamation according to Accounting Standard 14 and explain with the above