DISSERTATION REPORT

ON
A STUDY ON PERFORMANCE AND EFFICIENCY OF
MERGER AND ACQUISITION IN RETAIL SECTOR
By
Reema Jain
A0101911257
MBA General Class of 2013

Under the Supervision of
Ms. Bhavna Ranjan

In Partial Fulfillment of Requirements for the degree of
Master of Business Administration-General
At
AMITY BUSINESS SCHOOL
AMITY UNIVERSITY UTTAR PRADESH
SECTOR 125, NOIDA - 201303, UTTAR PRADESH, INDIA
CHAPTER 1: INTRODUCTION

The process of mergers and acquisitions has gained substantial importance in today's corporate
world. It has become a routine affair to hear about the immense numbers of corporate
restructurings taking place these days. Several companies have been taken over and several have
undergone internal restructuring, whereas certain companies in the same field of business have
found it beneficial to merge together into one company.
The process of mergers and acquisitions is extensively used for restructuring the business
organizations. In India, the concept of mergers and acquisitions was initiated by the government
bodies. Some well known financial organizations also took the necessary initiatives to restructure
the corporate sector of India by adopting the mergers and acquisitions policies. The Indian
economic reforms since 1991 have opened up a whole lot of challenges both in the domestic and
international spheres. The increased competition in the global market has prompted the Indian
companies to go for mergers and acquisitions as an important strategic choice. The trends of
mergers and acquisitions in India have changed over the years. The immediate effects of the
mergers and acquisitions have also been diverse across the various sectors of the Indian
economy.
All our daily newspapers are filled with cases of mergers, acquisitions, spin-offs, tender offers, &
other forms of corporate restructuring. Thus important issues both for business decision and
public policy formulation have been raised. No firm is regarded safe from a takeover possibility.
On the more positive side, Mergers & Acquisitions may be critical for the healthy expansion and
growth of the firm. Successful entry into new product and geographical markets may require
Mergers & Acquisitions at some stage in the firm's development. Successful competition in
international markets may depend on capabilities obtained in a timely and efficient fashion
through Mergers & Acquisitions. Many have argued that mergers increase value and efficiency
and move resources to their highest and best uses, thereby increasing shareholder value.
To opt for a merger or not is a complex affair, especially in terms of the technicalities involved.
In this research, I have discussed almost all factors that the management may have to look into in
a merger deal.

1.1 OBJECTIVE AND SCOPE
The objective of this project report is to understand the concept of mergers and acquisitions. The
phenomenon of M&A has gained substantial importance and has become a prominent aspect of
running corporate firms in the 21
st
century and the report tries to study this concept as
comprehensively as possible.
The project report examines the mergers and acquisitions (M&A) in India as well as
International, different types of mergers, the pros and cons of M&A for the various stakeholders.
The research also focuses on the critical issues of financing and valuation of companies during
M&A. Further, the study also examines the procedure followed in a typical M&A deal.
All this information is supplemented by a critical analysis of the real life deal in India and
abroad.
1.2 SIGNIFICANCE OF THE STUDY
This research could be further used for:
Any sort of assistance for the research on the similar topic.
To find out the effect of FDI investment in retail sector in India.
It will help equity investors in finding out the value of their investment.
A properly prepared business valuation provides management with insightful
information, which will help them to identify company strengths and weaknesses that
affect value. A periodically prepared valuation can serve as a measurement tool to assess
managements effectiveness and business success.
The purpose of valuing a company is to determine a representation of the overall worth of
a business entity. The valuation of the business based on some selected valuation
techniques. The use of these methods can affect the value as well as the information
gained from the valuation process.
To find out the pre merger and post merger value of the company.

1.3 MERGERS AND AQUISITIONS

Merger
Merger is a financial tool that is used for enhancing long-term profitability by expanding their
operations. Mergers occur when the merging companies have their mutual consent as different
from acquisitions, which can take the form of a hostile takeover.

Acquisitions
Acquisitions or takeovers occur between the bidding and the target company. There may be
either hostile or friendly takeovers. Reverse takeover occurs when the target firm is larger than
the bidding firm. In the course of acquisitions the bidder may purchase the share or the assets of
the target company.

Reasons for M&A
SIZE: Size is a great advantage in relation to costs. It assists in enhancing profitability
through cost reduction resulting from economies of scale, operating efficiency and
synergy. These savings could be in various areas e.g. finance, administration, capital
expenditure, production and warehousing.
RISKS: A company with good profit record and strong position in its existing line of
business, may wish to reduce risks. Through business combination the risks is diversified,
particularly when it acquires businesses whose income streams are not correlated.
COMPETITION: It helps to limit the severity of competition by increasing the company's
market power where a company takes over the business of its competitor. Thus, the
company, conscious of its monopolistic position, may, for instance, raise prices to earn
more profit.
REDUCE LOSS: In a number of countries, a company is allowed to carry forward its
accumulated loss to set-off against its future earnings for calculating its tax liability. A
loss-making or sick company may not be in a position to earn sufficient profits in future
to take advantage of the carry forward provision. If it combines with a profitable
company, the combined company can utilize the carry forward loss and saves taxes
SYNERGY: There are many ways in which business combination can result into financial
synergy and benefits. This helps in eliminating the financial constraint, deploying surplus
cash, enhancing debt capacity and lowering the financial costs.
GROWTH: Growth is essential for sustaining the viability, dynamism and value-
enhancing capability of a company. A company can achieve its growth objectives by
expanding its existing markets or by entering in new markets. For instance, if the
company cannot grow internally due to lack of physical and managerial resources, it can
grow externally by combining its operations with other companies through mergers and
acquisitions.
RETURN: A business with good potential may be poorly managed and the assets
underutilized, thus resulting in a low return being achieved. Such a business is likely to
attract a takeover bid from a more successful company, which hopes to earn higher
returns.


Types of mergers and acquisitions
From the perspective of business structures, there is a whole host of different mergers. Types of
mergers distinguished by the relationship between the two companies that are merging:
Horizontal merger - two companies that are in direct competition and share the same
product lines and markets.
Vertical merger - a customer and company or a supplier and company.
Market-extension merger - two companies that sell the same products in different
markets.
Product-extension merger - two companies selling different but related products in the
same market.
Conglomeration - two companies that have no common business areas.



Aim of mergers and acquisitions
One plus one makes three: this equation is the special alchemy of a merger or an acquisition. The
key principle behind buying a company is to create shareholder value over and above that of the
sum of the two companies. Two companies together are more valuable than two separate
companies - at least, that's the reason behind M&A.
Strong companies will act to buy other companies to create a more competitive, cost-efficient
company. The companies will come together hoping to gain a greater market share or to achieve
greater efficiency. Because of these potential benefits, target companies will often agree to be
purchased when they know they cannot survive alone. Except the obvious synergy effect, the
other important motives for M&A are:
operating synergy
financial synergy
diversification
economic motives
horizontal integration
vertical integration
tax motives

Steps in valuation
Analyzing Historical Performance
Forecast Performance
Evaluate the companys strategic position, companys competitive advantages and
disadvantages in the industry. This will help to understand the growth potential and
ability to earn returns over WACC.
Develop performance scenarios for the company and the industry and critical events that
are likely to impact the performance.
Forecast income statement and balance sheet line items based on the scenarios.
Check the forecast for reasonableness.
Estimating The Cost Of Capital

Estimating the Cost Of Equity Financing
CAPM
The Arbitrage Pricing Model (APM)
Estimating The Continuing Value

Calculating and Interpreting Results
Calculating And Testing The Results
Interpreting The Results Within The Decision Context

1.4Valuation Methodologies
Property (including land and real estate assets) is an essential element of many businesses. It is
often used as collateral for borrowing by the owners and is one of the key factors of production
in most businesses. The value of holding property to the business needs to be measured against
the return that the equity could achieve both within the business and elsewhere. Usually, in
business decisions including mergers and acquisitions, investors will usually want to review
financial statements:
balance sheet,
profit and loss account,
auditors' and directors reports - for the current status and a report on recent history
business plan

1.5MERGERS UNDERTAKEN
Following mergers will be considered for the study:
Wallmart and Dollar General
Welspun India and Welspun Global brands Ltd.

WAL-MART STORES INC-AQUIRING COMPANY
Walmart Stores Inc operates retail stores in various formats around the world. The company
earns the trust of its customers everyday by provideing an assortment of merchandise and
services at every day lower prices (EDLP), by fostering a culture that rewards and embraces
mutual respect integrity and diversity. Walmart's operations comprise 3 business segments:
Walmart Stores, Sam's CLub and International. Walmart Stores segment is the largest segment
of the company's business, accounting for 64% of its net sales during the fiscal year ended Jan
31, 2011, and operates stores in 3 different formats in US, as well as walmarts online retail
operations, walmart.com. Sam's Club consists of membership warehouse clubs. It accounted for
11.8% of company's net sales during FY 2011.

DOLLAR GENERAL-TARGET COMPANY
Dollar General is the largest discount retailer in the United States by number of stores with over
10,000 neighborhood stores in 40 states. Dollar General helps shoppers Save time and Save
money. Every day by offering quality private and national branded items that are frequently used
and replenished, such as food, snacks, health and beauty aids, cleaning supplies, basic apparel,
house wares and seasonal items at everyday low prices in convenient neighborhood stores.
Dollar General is among the largest retailers of top-quality products made by America's most
trusted manufacturers such as Procter & Gamble, Kimberly Clark, Unilever, Kellogg's, General
Mills, Nabisco, PepsiCo and Coca-Cola.

WELSPUN INDIA LTD.-AQUIRING COMPANY
Welspun India Ltd, part of US$ 3.5 billion Welspun Group is one of the top three home textile
manufacturers in the world and the largest home textile company is Asia. With a distribution
network in 32 countries and manufacturing facilities in India, it is the largest exporters of home
textile products from India. Supplier to 14 of Top 30 global retailers, the company has marquee
clients like Wal-Mart, J C Penny, and Macys to name a few.



WELSPUN GLOBAL BRANDS LTD.-TARGET COMPANY
Welspun Global Brands Ltd. (WGBL) was formed after the demerger of Welspun India Ltd. into
two separate companies. The demerger was announced in September 2008 and WGBL was
formally launched in March 2009. WGBL is solely responsible for the sales and marketing
division of the Home Textile business of Welspun. With the demerger, WGBL allows focus on
its own business vertical thereby enabling better business control, flexibility on business
operations and leveraging international focus of the group.

WGBL is today the most preferred supplier to 14 out of 30 retailers in the World. It has some of
the most prestigious brands under its banner and is second to none in product innovation and
design. With a strong management and team of talented workforce spread across United
Kingdom, United States,Europe and India, WGBL is on its way to be the largest and the most
valued Home Textile Company in the World.


1.6 RETAIL SECTOR IN INDIA
It is one of the pillars of its economy and accounts for 14 to15% of its GDP. The Indian retail
market is estimated to be US$ 450 billion and one of the top five retail markets in the world by
economic value. India is one of the fastest growing retail markets in the world, with 1.2 billion
people.
In November 2011, India's central government announced retail reforms for both multi-brand
stores and single-brand stores. These market reforms paved the way for retail innovation and
competition with multi-brand retailers such as Walmart, Carrefour and Tesco, as well single
brand majors such as IKEA, Nike, and Apple.
The announcement sparked intense activism, both in opposition and in support of the reforms. In
December 2011, under pressure from the opposition, Indian government placed the retail reforms
on hold till it reaches a consensus.
In January 2012, India approved reforms for single-brand stores welcoming anyone in the world
to innovate in Indian retail market with 100% ownership, but imposed the requirement that the
single brand retailer source 30% of its goods from India. Indian government continues the hold
on retail reforms for multi-brand stores. IKEA announced in January that it is putting on hold its
plan to open stores in India because of the 30% requirement. Fitch believes that the 30%
requirement is likely to significantly delay if not prevent most single brand majors from Europe,
USA and Japan from opening stores and creating associated jobs in India.

Entry Options For Foreign Players prior to FDI Policy
Although prior to Jan 24, 2006, FDI was not authorised in retailing, most general players had
been operating in the country. Some of entrance routes used have been discussed below:-

1. Franchise Agreements
It is an easiest track to come in the Indian market. In franchising and commission agents
services, FDI (unless otherwise prohibited) is allowed with the approval of the Reserve Bank of
India (RBI) under the Foreign Exchange Management Act. This is a most usual mode for
entrance of quick food bondage opposite a world. Apart from quick food bondage identical to
Pizza Hut, players such as Lacoste, Mango, Nike as good as Marks as good as Spencer, have
entered Indian marketplace by this route.

2. Cash And Carry Wholesale Trading
100% FDI is allowed in wholesale trading which involves building of a large distribution
infrastructure to assist local manufacturers. The wholesaler deals only with smaller retailers and
not Consumers. Metro AG of Germany was the first significant global player to enter India
through this route.

3. Strategic Licensing Agreements
Some foreign brands give exclusive licences and distribution rights to Indian companies.
Through these rights, Indian companies can either sell it through their own stores, or enter into
shop-in-shop arrangements or distribute the brands to franchisees. Mango, the Spanish apparel
brand has entered India through this route with an agreement with Piramyd, Mumbai, SPAR
entered into a similar agreement with Radhakrishna Foodlands Pvt. Ltd



4. Manufacturing and Wholly Owned Subsidiaries.
The foreign brands such as Nike, Reebok, Adidas, etc. that have wholly-owned subsidiaries in
manufacturing are treated as Indian companies and are, therefore, allowed to do retail. These
companies have been authorised to sell products to Indian consumers by franchising, internal
distributors, existent Indian retailers, own outlets, etc. For instance, Nike entered through an
exclusive licensing agreement with Sierra Enterprises but now has a wholly owned subsidiary,
Nike India Private Limited.


1.7FDI Policy in India
FDI as defined in Dictionary of Economics (Graham Bannock et.al) is investment in a foreign
country through the acquisition of a local company or the establishment there of an operation on
a new (Greenfield) site. To put in simple words, FDI refers to capital inflows from abroad that is
invested in or to enhance the production capacity of the economy.
Foreign Investment in India is governed by the FDI policy announced by the Government of
India and the provision of the Foreign Exchange Management Act (FEMA) 1999. The Reserve
Bank of India in this regard had issued a notification,which contains the Foreign Exchange
Management (Transfer or issue of security by a person resident outside India) Regulations, 2000.
This notification has been amended from time to time. The Ministry of Commerce and Industry,
Government of India is the nodal agency for motoring and reviewing the FDI policy on
continued basis and changes in sectoral policy/ sectoral equity cap. The FDI policy is notified
through Press Notes by the Secretariat for Industrial Assistance (SIA), Department of Industrial
Policy and Promotion (DIPP).
The foreign investors are free to invest in India, except few sectors/activities, where prior
approval from the RBI or Foreign Investment Promotion Board (FIPB) would be required.

1.8FDI Policy with Regard to Retailing in India
It will be prudent to look into Press Note 4 of 2006 issued by DIPP and consolidated FDI Policy
issued in October 2010 which provide the sector specific guidelines for FDI with regard to the
conduct of trading activities.
a) FDI up to 100% for cash and carry wholesale trading and export trading allowed under the
automatic route.
b) FDI up to 51 % with prior Government approval (i.e. FIPB) for retail trade of Single Brand
products.
c) FDI is not permitted in Multi Brand Retailing in India.


















CHAPTER 2: LITERATURE REVIEW
Review of work already done on the subject:
Michael Lubatkin(1987) has explained the relationship between stockholder gains and the
relatedness of merging firms. It is tested by classifying mergers into four relatedness categories
and by using measures of stockholder value as developed in the literature on capital markets. In
all, stock returns of 439 acquiring firms in 1031 large mergers are examined, as are stock returns
of 340 large acquired firms. The results show that mergers lead to permanent gains in
stockholder value for both acquiring and acquired firms' stockholders.
James walsh(1988) has explained the employment status of target companies top managers for 5
years from the date of acquisition. Results indicate that turnover rates in acquired top
management teams are significantly higher than 'normal' turnover rates, and that visible, very
senior executives are likely to turn over sooner than their less-visible colleagues. Variations in
top management turnover rates, however, are not accounted for by type of acquisition (i.e.
related or unrelated).
Steven J. Pilloff and Anthony M. Santomero (1996) has focused on retail industry that has
experienced an unprecedented level of consolidation on a belief that gains can accrue through
expense reduction, increased market power, reduced earnings volatility, and scale and scope
economies. It suggests that the value gains that are alleged have not been verified. It also talks
about the traditional view of value of mergers. The paper then addresses alternative explanations
and reconcile the data with continued merger activity.
Andrei Schleifer, Robert.W Vishny(1997) presented a model of mergers and acquisitions
based on stock market misvaluations of the combining firms. The key ingredients of the model
are the relative valuations of the merging firms and the market's perception of the synergies from
the combination. The model explains who acquires whom, the choice of the medium of payment,
the valuation consequences of mergers,and merger waves. The model is consistent with available
empirical findings about characteristics and returns of merging firms, and yields new predictions
as well.
Raghuram Rajan(1997) undertakes an in-depth analysis of the tire industry over the period
1970-1990. It attempted to uncover the causes and the consequences of the acquisition activity in
the industry in the 1980s, which resulted in all but one large U.S. tire manufacturer being sold to
foreign companies.
Bradshaw (1998) provided two things: First, he provided more detail about the particular
valuation models that analysts use. Second, and crucially, he advances and test specific
hypotheses about the valuation model choices of analysts. In particular he tested hypotheses
about how valuation methodologies vary across industrial sectors.
Chatterjee R and Kuenzi A (2001) has tested two alternative hypotheses for explaining
acquiring companies stock return: The Investment Opportunity Hypothesis and the Risk Sharing
Hypothesis . The first hypothesis states that firms with excellent future investment opportunities
should not pay in cash for acquisitions. The second hypothesis states that, particularly for high-
risk transactions, it could be advantageous to pay in stock because in this case, the target
company will have an incentive to make a success of the takeover transaction.
Angelika Kdzierska-Szczepaniak,(2002) has focused on world market economy which is
currently characterized by the tendency to globalization, which means that companies have to
cooperate and tighten their relations. Companies working on the local market do not have many
possibilities for development, so mergers and acquisitions (M&A) can be a chance for them to
cooperate with companies from all over the world. The main goal of this paper is to present the
most important risk factors for M&A transactions.

Valente (2003) has presented in this paper, a general model of strategic behavior of (regulated
and non-regulated) firms in M&A was presented. For non-regulated firms, the model indicated
that targeted firms issue new debt strategically. In this case, the firms capital structure is chosen
so that it maximizes the (ex-ante) market value of the firm. However, the focus of the paper was
on regulated firms (mostly monopolies).
Kropf and Viswanathan (2004) investigated whether acquisitions occurring during booming
markets are fundamentally different from those occurring during depressed markets. He found
out that acquirers buying during high-valuation markets have significantly higher announcement
returns but lower long-run abnormal stock and operating performance than those buying during
low-valuation markets. He investigated possible explanations for the long-run underperformance
and conclude it is consistent with managerial herding.
Schoenberg (2006) has explained complex phenomenon that mergers and acquisitions (M&As)
represent has attracted substantial interest from a variety of management disciplines over the past
30 years. Three primary streams of enquiry can be identified within the strategic and behavioural
literature which focus on the issues of strategic fit, organizational fit and the acquisition process
itself.
McDonald J, Coulthard M and Lange De P (2006) used semi-structured interviews to: identify
the link between corporate strategic planning and M&A strategy; examine the due diligence
process in screening a merger or acquisition; and evaluate previous experience in successful
M&As. The study found that there was a clear alignment between corporate and M&A strategic
objectives but that each organisation had a different emphasis on individual criterion. Due
diligence was also critical to success; its particular value was removing managerial ego and
justifying the business case. Finally, there was mixed evidence on the value of experience, with
improved results from using a flexible framework of assessment.
Jens Hagendorff, Michael Collins and Kevin Kease(2007) has explained how changes in the
regulatory regime of the USA, Italy and Germany have spurred bank merger activities. For each
country, future polices that bank supervisors may adopt in order to benet from a more
integrated nancial sector are also critically discussed.
Miyajima (2007) has shown spotlight on Japans M&A activity, which has surged since the end
of 1999, and takes a look at the factors that have contributed to the surge, and its various
economic dimensions. The paper places Japans M&As in an international context, and identify
the causes of the wave and its structural characteristics. It also examines the economic role of
M&A and its pros and cons. We contend that M&As contribute to raising the efficiency of
resource allocation and organizations. Lastly it addresses policy implications and contains
concluding remarks.
Pramod Mantravadi(2008) has explained the impact of mergers on the operating performance
of acquiring corporates in different industries, by examining some pre- merger and post-merger
financial ratios, with the sample of firms chosen.
Sidharth Saboo( 2009) aimed to study the impact of mergers on the operating performance of
acquiring firms by examining some pre- merger and post-merger financial ratios of these firms
and to see the differences in the pre merger and post merger ratios of the firms that go for
domestic acquisitions and the firms that go for the international/cross-border acquisitions.
Dr Neena Sinha(2010) has examined the impact of mergers and acquisitions on the financial
efficiency of the selected companies in India. The analysis consists of two stages. Firstly, by
using the ratio analysis approach, he calculated the change in the position of the companies
during the period 2000-2008. Secondly, he examined changes in the efficiency of the companies
during the pre and post merger periods by using nonparametric Wilcoxon signed rank test value.
Siegel S. D and Simons L. K (2010) has focused on mergers and acquisitions typically of firm-level
financial performance. In contrast, they have used human capital theory to model these events as
transactions that simultaneously have cross-level, real effects on workers, plants, and firms. Their
empirical analysis is based on longitudinal, linked employer-employee data for virtually all
Swedish manufacturing firms and employees. They found that mergers and acquisitions enhance
plant productivity, although they also result in the downsizing of establishments and firms. Firm
performance does not decline in the aftermath of these ownership changes. It has been concluded
that such transactions constitute a mechanism for improving the sorting and matching of plants
and workers to more efficient uses.
Saraswathy(2010) has presented the nature, extent and structure of M&A deals in India. In this
paper he argued that the current surge in cross-border deals should be viewed in a multi-factor
dimension, which involves the push factors from home country such as market constraint, need
for low priced factors of production, increasing global competition as well as the pull factors
from foreign firms such as the wider market, technology and efficient operation.
Burksaitiene D (2010) has said that in 2008, the value of cross-border mergers and acquisitions
(M&A) sales of developed country companies fell by 39 %, approximately their 2006 level, and
the number of such M&A deals fell by 13 % as the financial and economic crisis made a
dampening effect on cross-border M&A activity.Data for 2009 show a continuing downward
trend,the number of high value M&A deals fell sharply, as banks avoided financing such
transactions in the prevailing landscape of high and rising risk. In addition to lack of finance, the
decline in the value of M&A transactions has been driven by sharp falling stock prices on
developed countries stock markets where stock market indices plunged. The decrease in total
cross-border M&As has had a significant impact on FDI flows, as they are strongly correlated
with the value of cross-border M&A transactions. One outcome of the crisis is that a number of
large privatization projects have had to be cancelled.



















CHAPTER 3: RESEARCH METHODOLOGY

3.1 Primary Objectives
The research aimed at finding out the
To analyze pre and post merger financial position
To study the theoretical analysis of the synergy created in post merger scenario
Conceptual framework of Mergers and Acquisitions
To do the valuation of an Indian company and an International company in retail sector
using valuation methods.
To find out the effect of FDI investment in retail sector in India.

3.2 Research Design
For this purpose conclusive research was undertaken. Conclusive research is used to provide
information that is used in reaching decisions or make appropriate decisions. It is quantitative in
nature i.e. in the form of numbers that can be quantified and summarized. Conclusive research
relies on both secondary data, particularly existing database that are reanalyzed to shed light on
different problem than the original and primary data specifically gathered for current study.

3.3 Data Collection and Analyzing instrument
Keeping in mind the nature of requirements of the study to gather all the applicable information
regarding my topic, data which was collected was secondary. Research is totally based on
secondary data. Some of the common sources of collecting secondary data are with the help of
journals, magazines, newspaper articles, books, periodicals, annual reports, company circulars,
government publications, government websites, industry association, libraries, e-libraries,
university database and search engines Various required documents are:

Financial reports of the company: These are published both quarterly and annually.
Financial reports are an important tool for analyzing the credit worthiness of a company.
It contains balance sheet of the company, income statement and cash flow statement.
Transcripts: These are management discussion and analysis report in which the
management reveals its past performance and future predictions about its revenues and
growth. It also gives better understanding of what the company does and usually points
out some key areas where it performed well.
Research papers: These are the reports on what opinion research firms have about the
company and what it predicts in future.
.

3.4 Data Analysis
Once the data is collected it needs to be analyzed. Data Analysis is a very important step in the
entire research process. The entire research process can be a failure if the data analysis is not
done properly so as to reach the objectives framed for the research. The process for analyzing
starts with data editing, coding and data entry and lastly data analysis. The researcher would
collect all secondary information regarding mergers of the company involved in the research and
edit the data. Only those financial information and details which are important to lead the
objectives would be picked up. Secondly the researcher would input all the relevant data in the
excel sheet. Data entry would be done in all the parameters which are chosen to be analyzed for
the acquiring firm. The main place of the data entry would be in Excel Spreadsheet where the
data would be entered, stored and analyzed for further use. This data can be analyzed at the
users convenience by various forms like bars, charts and diagrams.

3.5 Methodology

SYNERGY EQUATION
For any M&A deal, Synergy can be represented by the following equation:

Where,

NAV = PVab ( PVa + PVb ) P E

NAV = Value of synergy or net asset value of purchase
PVab = Present value of the combined entity ab (either through merger or acquisition)
PVa = Present value of the standalone firm a
PVb = Present value of the standalone firm b
P = Premium paid by acquirer a to the target b (in case of acquisition)
E = sum of all expenses incurred on merger/acquisition


VALUATION
Every asset, whether financial or real, has value. Value is an expression of an assets worth. In
finance, valuation is the process of estimating the market value of a financial asset or liability.
Valuations can be done on assets (for example, investments in marketable securities such as
stocks, options, business enterprises, or intangible assets such as patents and trademarks) or on
liabilities (e.g., Bonds issued by a company). Accurate business valuation is one of the most
important aspects of M&A as valuations like these will have a major impact on the price that a
business will be sold for. Most often this information is expressed in a Letter of Opinion of
Value (LOV) when the business is being valuated for interest's sake.
Investors in a company that is aiming to take over another one must determine whether the
purchase will be beneficial to them. In order to do so, they must ask themselves how much the
company being acquired is really worth. Naturally, both sides of an M&A deal will have
different ideas about the worth of a target company: its seller will tend to value the company at
as high of a price as possible, while the buyer will try to get the lowest price that he can.
There are, however, many legitimate ways to value companies. The most common method is to
look at comparable companies in an industry, but deal makers employ a variety of other methods
and tools when assessing a Target Company. Here are just a few of them:

Comparative Ratios - The following are two examples of the many comparative metrics
on which acquiring companies may base their offers:

Price Earning Ratio (P/E Ratio) - With the use of this ratio, an acquiring company makes an
offer that is a multiple of the earnings of the Target Company. Looking at the P/E for all the
stocks within the same industry group will give the acquiring company good guidance for what
the target's P/E multiple should be.
Enterprise Value-To-Sales (Ev/Sales) - With this ratio, the acquiring company makes an offer
as a multiple of the revenues, again, while being aware of the price to sales ratio of other
companies in the industry.

Replacement Cost - In a few cases, acquisitions are based on the cost of replacing the
target company. For simplicity's sake, suppose the value of a company is simply the sum
of all its equipment and staffing costs. The acquiring company can literally order the
target to sell at that price, or it will create a competitor for the same cost. Naturally, it
takes a long time to assemble good management, acquire property and get the right
equipment. This method of establishing a price certainly wouldn't make much sense in a
service industry where the key assets - people and ideas - are hard to value and develop.

Discounted Cash Flow (DCF) - A key valuation tool in M&A, discounted cash flow
analysis determines a company's current value according to its estimated future cash
flows. Forecasted free cash flows (operating profit + depreciation + amortization of
goodwill capital expenditures cash taxes - change in working capital) are discounted
to a present value using the company's weighted average costs of capital (WACC).

Professionals who valuate businesses generally do not use just one of these methods but a
combination of some of them, as well as possibly others that are not mentioned above, in order to
obtain a more accurate value. These values are determined for the most part by looking at a
company's balance sheet and/or income statement and withdrawing the appropriate information.

Valuation is a highly specialized process. It requires the knowledge and experience of
professionals. Valuation of firm as a going concern is the basis of any investment exercise. The
determination of the right value of the business is essential to maintain a long-term success of
investment. There are various methods available for the valuation of a company. Some of the
very common methods to valuation are discounted cash flow method , market value method,
turnover method, and book value method.

BOOK VALUE METHOD
Some companies which are under performing usually generate no cash flows and therefore have
no general intangible value. The value of such firms can be obtained from the hypothetical sale
of their assets. This would be the case for some businesses that are losing money or paying the
ownerless in total than a fair market compensation. Selling such a business is often a matter of
getting the best possible price for the equipment, inventory, and other assets of the business.
When the valuation is done based on the going concern assumption it is called the adjusted book
value approach and when it is conducted based on the liquidation principle it is termed as the
liquidation value approach.

METHODS OF VALUATION:

TANGIBLE ASSETS

1. CURRENT ASSETS

Cash: It doesnt generally require any adjustment.
Accounts Receivable: Debtors and the book receivables are valued at their book value,
after allowing all the allowances for the doubtful debts. The uncollectible debts should be
removed.
Inventory: The inventory is valued depending on its nature.
Raw Material: It can be valued at LIFO, FIFO, or the average cost method.
Work-in-Progress: The work in progress can be valued at the cost price of the sales price.
Finished Goods: Finished goods are valued at the current realizable sale value after
deducting all sales related expenses.
Other Assets: Some of the assets which usually require adjustment are marketable
securities, other non operating assets, B/R etc. If they are not used in the operations of the
company they should be removed from the balance sheet.


2. FIXED ASSETS
Fixed assets constitute a substantial portion of the asset side of the balance sheet of a capital
intensive company. Land is valued at its current market price. Buildings are generally valued at
the replacement costs. However, proper allowances are to be made for depreciation. Similarly
plant and machinery, capital equipments, furniture and fixtures etc. are to be valued at the fixed
costs net of depreciation.


INTANGIBLE ASSETS
The valuation of the intangible assets like brands, goodwill, patents, trademark and copyrights
etc. is a controversial area of valuation. As the intangibles have significant financial value, their
absence from the valuation distorts the true financial position of the company. Hence to ensure
that the valuation of the company represents the true intrinsic worth it has become necessary for
companies to determine the value of the intangibles.

Two Popular methods for the valuation of the intangibles:
a. Earning Valuation Method: The value of an intangible like any other asset is equal to the
present value of the future earnings attributable to it. The main drawback of this approach may
that the future projections may be too optimistic.

b. Cost Method: This method involves stating the value of the intangible asset as its cost to the
company. This is relatively easy when the intangible asset is acquired.


LIABILITIES
The valuation of the liabilities is relatively simple. The valuation doesnt include share capital,
and reserves & surplus. Only the liabilities owed to the outsiders is considered. All long-term
debts like loans, bonds, etc. are to be valued at their present value. All the current liabilities and
provisions are to be taken at the book value.
When assessing the value of the firm non-operating assets are usually added to the operating
value of the firm to arrive at the total value.

OFF BALANCE SHEET ASSETS
The liabilities relating to the assets require adjustment. If the interest charged on the bills payable
is a fixed rate that is significantly different from the market rate on the valuation date, the debt
should be adjusted.

OFF BALANCE SHEET LIABILITIES
There may be unrecorded liabilities like the guarantees, warranty obligations, pending litigation
other disputes like taxes etc. Such liabilities should be quantified and deducted from the value of
the firm.

VALUATION OF THE FIRM
The ownership value of a company is the difference between the value of the assets and the value
of the liabilities. Normally no premium is added for control as assets and liabilities are taken at
their economic values. On the other hand, a discount may be necessary to factor in the
marketability element. The market for some of the assets may be illiquid or may fetch a slightly
lesser price if the buyer does not perceive as much value of the asset to his business. Hence a
discount factor may be applied.

Ownership Value = Total Assets Total Liabilities

TURNOVER METHOD
Sales multiple is the most widely used business valuation methods benchmark used in valuing a
business. The information needed is annual sales and an industry multiplier, which is usually a
range of .25 to 1 or higher. The industry multiplier can be found in various financial
publications, as well as analyzing sales of comparable businesses. This method is easy to
understand and use. The industry multiplier, which is based on the average sales figures within
the industry, is multiplied by companys gross sales.




MARKET VALUE METHOD
The market value or market capitalization approach is applicable for quoted companies only.
Market capitalization represents the public consensus on the value of a company. In this method
the market value of a company is determined by multiplying the quoted share price of the
company by the number of issued shares. This valuation reflects the price that the market at a
point in time is prepared to pay for the shares of the company. The market valuation method
broadly takes into account the investors perceptions about the performance of the company and
the managements capabilities to deliver a return on their investments.
This approach involves valuation methods that use transactional data to help determine a
companys value. These methods might involve private company transactions, public company
transactions, as well as public company valuation measures using current stock market data. The
theory behind this approach is that valuation measures of similar companies that have been sold
in arms-length transactions should represent a good proxy for the specific company being valued.


CALCULATING RATIOS
Financial ratios are useful indicators of firms performance and financial situation. It give
relative magnitude of two selected numerical values taken from organisations financial
statements. They are used to compare trend and to compare organisations financials with those
of others.

Following ratios are calculated for the purpose of current research project:
I. Overall profitability parameters (Return to Equity Shareholders)
In the present study Return to Equity for shareholders is measured with the help of two ratios:
Return on Net Worth and Earning Per Share. The use of both these ratios presents a broad picture
of a company's efficiency, financial viability and its ability to earn returns on shareholders' funds
and capital employed.

Return on Net Worth (RONW)
RONW measures the rate of return on the shareholders equity of the owners. It measures the
companys efficiency of using the capital (shareholders funds) entrusted to it and generating
profits.
Earning Per Share (EPS)
In order to get true idea of return on investment owner should evaluate his investment returns not
on the basis of the dividend received, but on the basis of the EPS i.e. earnings per share. The
more the EPS better are the performance and prospects of the company.

Return on Assets (ROA) = Net Profit/Total Assets
We can analyze the efficiency and effectiveness of management . It clears that the managers are
efficient in allocation assets for NP. Positive ROA shows the better efficiency of the financial
instructions.

Return on Equity (ROE) = Net Profit/Equity.
This ratio measures the rate of return on the bases of capital and equity capital.

II. Liquidity parameters
Liquidity ratios measure the short term solvency i.e. the firms ability to pay off current dues. In
the present study current ratio is used to check the liquidity of the firm.

Current Ratio
In a sound business, a current ratio of 2:1 is considered an ideal one. A very high ratio will result
in idleness of funds and therefore, is not a good sign. On the contrary, a low ratio would mean
inadequacy of working capital.



III. Solvency parameters
Solvency parameters indicate the ability of an enterprise to meet its long term indebtedness
(obligations). In this study debt-equity ratio is used to measure the solvency position.

Debt-Equity ratio
The debt to equity ratio is worked out to ascertain soundness of the long term financial policies
of the firm. A higher ratio indicates a risky financial position while a lower ratio indicates safer
financial position.


IV. Overall efficiency parameters
The main objective of business is to earn profit. Therefore, efficiency in business is measured by
profitability. Thus, a measure of profitability is the overall measure of efficiency. To check the
overall efficiency of the merging cases, profit before tax, profit after tax and profit before tax to
total income are calculated.

Profit before tax (PBT)
Profit before tax, or PBT, measures the profits of the companies before paying corporate taxes.

Profit before tax to Total income
Profit before tax (PBT) to total income is the relationship between profit before tax and total
income incurred by the business.

3.6 Scope of the study
Firstly the research will be problem solving and systematic.
Secondly it will have a logic and flow so that others can easily understand the main
theme of the research
It will be based on facts, so that decision making and conclusions can be derived from
the information collected.
Lastly it will be replicable so that others test it or carry out further analysis.

3.7 Limitation
In this paper the researcher proposed to employ non-participant observation method especially
by analyzing qualitative information from journals, books, magazines and many more reliable
resources. However, the method does not involve direct interviews, which will slightly reduce
objectivity and the accuracy of information.