VOLUME II ISSUE

SYMBIONT
12

28th October 2010

Value creation in Mergers & Acquisitions

By Andrea Rosario

Value creation in mergers and acquisi-  Demonstrating “success without

tions is necessary since the ultimate heavy hand”
objective is to enhance the business,
profits and growth of the acquiring Post-Merger Integration
company wherein the acquirer should
INSIDE THIS ISSUE have some advantage after merging or Re-establishing the Governing Ob-
acquiring a target firm. Without such jective
(Click on the value created for the acquirer such a
article title) Value creation motives for merg-
strategy will be rendered useless Fol-
ers are the following:
Wellstream 5 lowing must be kept in mind while
walks away out going for an Mergers and Acquisitions  Synergies
strategy such that it creates value to
Alberto funds 6
the company. Synergy value is created from
Unilever‟s
growth plan, caps
economies of integrating a target
Strategic Fit and acquiring a company; the
JSW Steel seeks 7
investment in amount by which the value of the
Japan‟s JFE Don‟t let acquisition determine the combined firm exceeds the sum
Tata Motors 8 strategy value of the two individual firms.
fishes on Trilix
Pre-Conditions for Success ∆V = VA-T – (VA+VT)
Fortis Healthcare 9
VT = the pre-merger value of the
to buy Quality  A ready meeting of minds on what target firm
business is about.
Indian Pharma- 11
ceutical Industry  A model to improve both parties‟ VA-T = value of the post merger
competitive position firm
Quiz 13
VA = value of the pre-merger ac-
Pre-Merger Discussions
quiring firm

 Focusing on how the model will Operating Synergies

work
 Agreeing a price where both benefit
1. Economies of Scale
SYMBIONT OCT 2010
Page 3

Financing Synergies

 Reduced cash flow variability

 Increase in debt capacity- ability to carry more

debt by the combined firm

 Reduction in average issuing costs- able to

cover fixed costs more comfortably

 Fewer information problems

Tax Benefits

Make better use of tax deductions and credits can

be made by the combined firm however these
 Reducing capacity -consolidation in the num- have to be used before they lapse or expire (loss
ber of firms in the industry. carry-back, carry-forward provisions)

 Spreading fixed costs -increase size of firm so  Use of deduction in a higher tax bracket to
fixed costs per unit are decreased. obtain a large tax shield

 Geographic synergies -consolidation in re-  Use of deductions to offset taxable income

gional disparate operations to operate on a na- (non-operating capital losses offsetting taxable
tional or international basis. capital gains that the target firm was unable to
use)
2. Economies of Scope
 New firm will have operating income to make
 Combination of two activities reduces costs
full use of available CCA.
 Complementary Strengths- Combining the dif-
Strategic Realignments
ferent relative strengths of the two firms creates
a firm with both strengths that are complemen- Permits new strategies that were not feasible for
tary to one another. prior to the acquisition because of the acquisition
of new management skills, connections to mar-
3. Efficiency Increases
kets or people, and new products/services.
 New management team will be more efficient
and add more value than what the target now
has.

 The combined firm can make use of unused

production/sales/marketing channel capacity

“In the business world, everyone is paid in two coins: cash and experience. Take the experience first;
the cash will come later” - Harold Geneen
 VOLUME II ISSUE 12
Page 4

Cut, Slice and Win!

Demergers and the „negative‟ concept of wealth creation
By Akash Sablok
Demerger is the separation of companies or busi- was languishing. But his focus on the segment after
ness units that are currently under one corporate the demerger has seen fortunes of the company in-
umbrella. When one company, say X Ltd. having crease dramatically. In many cases, as with this
10 undertakings, transfers one or more of its un- one, shareholders have benefited from the exercise.
dertakings to a new company, say Y Ltd., it is a
While some demergers have been a voluntary divi-
case of demerger. X Ltd. is the demerged com-
sion of assets among family members, others are a
pany and Y Ltd. is the resulting company.
result of a split in the family itself. The biggest ex-
Division of a company takes place when ample of this in India is the division of Reliance
1. Part of its undertaking is transferred to a newly Industries, in 2005, between brothers Mukesh and
formed company or an existing company and the Anil Ambani.
remainder of the first company‟s division/
It appears that a lot of value can be unlocked by
undertaking continues to be vested in it; and
restructuring a parent company. And, in an uncer-
2. Shares are allotted to certain of the first com-
tain economic environment, taking advantage of
pany‟s shareholders.
the sum of the parts being greater than the whole is
Unitech, Mahindra & Mahindra and Pantaloon gaining ground the world over.
Retail are some of the large companies to have
recently announced demerger plans. In fact, in the Unlike earlier when family splits dominated,
first four months of 2010, 15 companies with demergers in 2009 and 2010 have been character-
market capitalisation of over Rs 1,000 crore have ised by restructuring. Business splits have been an
announced intentions to separate businesses. avenue to open up strategic and financial options,
Compare this to the 30 companies that used the and raising capital. Videocon Industries, which has
strategy in 2008. diversified into capital-intensive businesses such as
Not all demergers, however, are done for busi- power, telecom, oil and gas, has already indicated
ness reasons. Many family-run businesses take that it will separate a few of its businesses.
this route to split segments among family mem-
bers. Bajaj Auto is an example, although Chair- Whether the reasons are family feuds, company
man Rahul Bajaj had dismissed that disagreement expansion, product line extensions or partner
between his sons Rajiv and Sanjiv was the cause search, the scope of demerger doesn‟t resort itself
for the company to split. to the bindings of failure or value dip. If this chop-
ping and slicing is done effectively, investors can
Before the restructuring, Sanjiv Bajaj‟s focus was
laugh their way to the bank.
on exports; this was when Bajaj Auto Finance
 SYMBIONT OCT 2010
Page 5

Wellstream walks away out of GE’s

$1.2 billion bid
The same day GE announced a purchase of Dresser Inc
DATE October 6th, 2010
ACQUIRER GE Corporation
ACQUIREE Wellstream Holdings Inc
DEAL VALUE $ 1.2 Billion
DEAL NATURE „Failed‟ Acquisition
PURPOSE To diversify the company‟s business
apart from the financial operations.

General Electric Co was spurned in increasingly move to deeper water

one of its largest recent efforts to to search for oil and gas
build up its industrial businesses,
when British oilfield services Well- National Oilwell Varco and Aker
stream Holdings Plc rejected a $1.2 Solutions were also potential acquir-
billion takeover approach. ers. Wellstream‟s manufacturing
facility in Brazil, keen for locally
The same day GE announced its pur- produced materials to be used in ex-
chase of Dresser Inc, a maker of gas tracting its billions of barrels of oil
TRIVIA
engines used to power oil and natural reserves, is seen as a key attraction
men's Net-
The GE Wo gas production equipment, for $3 bil- for potential buyers.
luntary or-
work is a vo lion.This follows a period when GE
rmed to
ganization fo l was more active in selling operations,
Wellstream was founded in 1983 in
professiona
support the including its NBC Universal media Panama City, Florida USA. In the
t of women
developmen business and parts of its finance op-
period prior to the company‟s acqui-
y, GE
at GE. Toda eration. sition by Dresser Industries in 1995,
etwork is a
Women's N
ng group of Wellstream established itself as
20,000 stro
loyees The board named National Oilwell niche market manufacturer supply-
women emp
world. Varco and Saipem as potential ac- ing products to a broad range of off-
around the
quirers of Wellstream which shore developments worldwide.
makes flexible pipes used by oil
companies in deep water, a product Wellstream has emerged as a sig-
for which there is expected to be nificant market player, securing the
growing demand as oil companies largest flexible pipe contract ever.

“I don't pay good wages because I have a lot of money; I have a lot of money because I pay good
wages” - Robert Bosch
 VOLUME II ISSUE 12
Page 6

Alberto funds Unilever’s growth plan, caps

in $ 3.7 billion
It is Unilever‟s biggest acquisition in a decade.

DATE

October 23rd, 2010

Paul Polman, CEO of Unilever said:
“We are delighted to be acquiring Al- ACQUIRER
berto Culver. Their people have done an
Unilever Plc
excellent job of building an impressive
range of brands such as TRESemmé, ACQUIREE
VO5, Nexxus, St. Ives and Simple.”
Alberto Culver
Consumer goods group Unilever will The acquisition follows a yet-to-be
buy US hair and skin care company completed deal to buy Sara Lee‟s DEAL VALUE
Alberto Culver for $3.7 billion in the body care division for $1.3 billion
latest move to rebalance its portfolio and will also mark Unilever‟s biggest $ 3.7 Billion
towards higher growth lines. acquisition since its massive Best
foods deal in 2000. DEAL
Unilever‟s biggest acquisition in a NATURE
decade will add brands such as V05, Its brands will complement Unile-
TRE Semme and Nexxus to Unile- ver‟s existing brands like Dove, Acquisition
ver‟s existing Dove and Sunsilk, and Clear and Sunsilk in hair care, and PURPOSE
make it the world‟s leading company Pond‟s and Vaseline in skincare, and
in hair conditioning and the second enhance Unilever‟s presence in To strengthen the
largest in shampoo. emerging markets such as Mexico company brand um-
and also in the more mature markets brella in order to in-
The price of the deal looked high but of the U.S., Canada, Britain, and crease market share
could be justified by as-yet unspeci- Australasia.
fied cost savings and by skewing
Unilever‟s business to more high Unilever‟s proposed acquisition of
growth, high margin categories com- Sara Lee Sanex deodorant and Radox
pared to its other food and detergent body care business, first announced
businesses. the acquisition plans last September.

“People that pay for things never complain. It's the guy you give
something to that you can't please” - Will Rogers
 SYMBIONT OCT 2010
Page 7

JSW Steel seeks investment in Japan’s JFE

The target is the technological assistance that JFE will provide

DATE October 4th, 2010

ACQUIRER JSW Steel
ACQUIREE JFE
DEAL VALUE Undisclosed
DEAL NATURE Acquisition
PURPOSE To gain the technological advantage and
technical assistance from JFE

India‟s third largest steel maker Jin-
dal South West Steel Ltd (JSW) is in
talks with JFE Steel Corp to take a
stake in the Japanese firm in a bid to
strengthen their ties. Talks are also
TRIVIA
covering technological assistance in
Vidyanagar Township such fields as steel sheets used in
was recommended for electrical equipment, Jindal said,
certification of ISO- adding that JSW may boost its pro-
14001:2004 for envi- duction capacity by forming a joint
ronmental manage- venture with JFE.
ment practices, on 23-
09-2009, by TUV
The firms formed an alliance in No-
Rheinland Group.
vember 2009, with JFE spending
around $1.1 million to buy a stake of
just fewer than 15% of JSW and
agreeing to provide technology for
auto steel sheets and steel mills.
Through the capital investment, JFE
plans to boost ties with JSW and ex-
pand businesses in India, where de-
mand for crude steel is expanding
rapidly. JSW currently has a crude
steel output capacity of 7.8 million
tonnes a year, but plans to more than
quadruple this to 32 million tonnes
by 2020 through the expansion of
current facilities and by building
new mills in the states of West Ben-
gal and Jharkhand. The Indian steel-
maker will spend $4 billion to fire
up the West Bengal mill by 2014
with annual production capacity of
five million tonnes.
JSW Steel, the flagship company of
the JSW Group, is the largest inte-
grated private steel manufacturer in
India in terms of installed capacity.
JSW‟s history can be traced back to
1982, when the Jindal Group ac-
quired Piramal Steel Limited, which
operated a mini steel mill at Tarapur
in Maharashtra and renamed it as
Jindal Iron and Steel Company
(JISCO).

“To be successful, you have to have your heart in your business, and your
business in your heart” -Thomas Watson, Sr.
 VOLUME II ISSUE 12
Page 8

Tata Motors fishes on Trilix, enhances

styling and design capabilities
It‟s a long relationship that has led to mutual development for
the future projects
DATE

October 4th, 2010

In 2010, Tata Motors surpassed ACQUIRER

Reliance to win the coveted title of
Tata Motors
'India's most valuable brand' in an
annual survey conducted by Brand ACQUIREE
Finance and The Economic Times.
Trilix Group
Tata Motors Ltd has acquired an 80% sector.
stake in Trilix Srl, an Italian design
DEAL VALUE
and engineering firm for Rs. 11.29 About Trilix
crore. The acquisition is in line with Trilix offers design and engineering Rs. 11.29 Crores
the company‟s objective to enhance its services in the automotive sector,
styling and design capabilities to specifically styling, architecture, DEAL
global standards. packaging, surfacing, macro and mi-
cro feasibility, detailed engineering NATURE
Both companies have worked together development. Trilix is a strategic Acquisition
in the past on several projects. Trilix marketing consultation firm located
has developed a strong understanding in Johnston, IA, offering online, tra- PURPOSE
of the Tata brand and excellent work- ditional and social media services. To enhance its styl-
ing relationships with the company in
ing and design capa-
several projects over the years. Other services include physical mod-
bilities to global
els (styling, surface sign-off, etc.),
standards
The remaining stake in Trilix is held CAE and manufacturing process fea-
by its promoters Federico Muzio and sibility. Trilix has over the years de-
Justyn Norek. With a turnover of €4 veloped a strong understanding of the
million and net profit of Euros 2, Tata brand and excellent working
50,000, the company offers design and relationships with the company in
engineering services in the automotive several projects.

“The superior man understands what is right; the inferior man

understands what will sell” - Confucius
SYMBIONT OCT 2010
Page 9

Fortis Healthcare to buy Quality

HealthCare, embraces Parkway’s footprint
The Hong Kong based business is a part of Parkway Holdings Inc
DATE October 10th, 2010
ACQUIRER Fortis HealthCare
ACQUIREE Quality HealthCare Asia
DEAL VALUE $ 195 Million
DEAL NATURE Acquisition
PURPOSE To diversify the company‟s business
apart from the financial operations.

Indian hospital chain Fortis Health- working capital.

FACT
care has agreed to buy the healthcare
dia‟s
Fortis has In assets of Hong Kong-based Quality About Quality HealthCare Asia
sive
most exten HealthCare Asia Ltd for Hong Kong Quality HealthCare Asia Limited is
ith hospi-
hospitals w $1.52 billion i.e.$195 million. a physician led provider group of-
A++ ac-
tals getting fering an integrated range of health-
the only
creditation, New Delhi-based Fortis Healthcare, care services including facilities
ones. controlled by billionaire brothers management, third party plan ad-
Malvinder and Shivinder Singh, fell ministration and paramedical sup-
short in its bid earlier this year to port. The Group provides care for
take control of Singapore-based hos- private and corporate contract pa-
pital chain Parkway Holdings as part tients through a network of more
of an effort to build an international than 580 Western and Chinese
TRIVIA
business. medical centres.
After the Leh flash
flood, a Fortis The Quality HealthCare acquisition In 2009, their network recorded
foundation was cre- is being made by the Singh‟s Fortis more than 2.7 million healthcare
ated in that favour Global Healthcare Holdings Pte Ltd visits. They operate seven elderly
which has around 10, unit, which it said is the family‟s ve- care homes and Hong Kong‟s long-
000 volunteers in its hicle to build a pan-Asian healthcare est-established international nursing
name. business. In addition to the $1.52 bil- agency. One of their medical prac-
lion in cash, Fortis Global Healthcare tices has been serving Hong Kong
will provide $20 million in base people for over 140 years.

“It is unfortunate we can't buy many business executives for what they are worth and sell them for what
they think they are worth” - Malcolm Forbes
CROSSWORD
THE WORD POWER
Across
2. The Electric car Reva is now under the
product portfolio of which company?
4. Which leading Indian corporate giant hiked
its stake to 15.77% in Fame Cinemas?
5. This healthcare firm recently acquired
women's cosmetic maker Fem Care.
8. Twilight Litaka has increased its sharehold-
ing to 26% in which South African firm?
10. Uttam Galva is held by this world's leading
steel output firm?
12. Which controversial real estate firm in-
creased stake in SBG Projects?
13. Transgene Biotek has acquired shareholding
in which US based firm?
Down
1. Tata Motors recently gained holding from
which of its leading shareholder?
3. Air India and Indian Airlines merged enter-
prise is now known as?
5. Which world's leading chemical firm was
bought out by United Phosphorus?
6. Which leading newspaper was recently ac-
quired by the media group Jagran?
7. Which PSU held opposition to the Vedanta-
Cairn deal?
9. Leading technical consultants GMP has
been acquired by?
11. Ashok Leyland has acquired 26% stake in
this UK based bus manufacturer
 CASE STUDY
Industry Special Reference: Mergers and Acquisitions in the

Indian Pharmaceutical Industry

By Puneet Singh

Mergers and acquisitions have always been a favourite of the pharma industry. With the easy avail-
ability of capital, increased global interest in India's research and development capability, the coun-
try's pharmaceutical industry offers a good climate for mergers and acquisitions. India‟s strong
manufacturing base will stand some global companies in good stead as well.

The Indian Pharmaceutical Sector is currently the largest amongst the developing nations. Given its
current momentum of growth the Indian pharmaceuticals market is expected to expand to US$ 25
billion by 2010. There is a worldwide structural trend evolving in pharmaceuticals and Indian com-
panies play a key role in this framework, driven by their superior biotech and drug synthesis skills,
high quality and vertically integrated manufacturing assets, differentiated business models and sig-
nificant cost advantages.

The total Indian Pharmaceutical Market is valued at US$ 8790 million with a growth rate of 8%. The
market is predominantly a branded generic market with more 20,000 domestic manufacturers of end-
use pharmaceuticals, making the industry highly fragmented. In the organized sector of the Indian
Pharmaceutical industry there are about 250-300 companies, controlling about 70% of the total out-
put in value terms, with top 10 players accounting for one third of the total market.

Today, there is a global trend towards consolidation and going forward, as pressures on the pharma-
ceutical industry increase, this trend will continue. The lack of research and development (R&D)
productivity, expiring patents, generic competition and high profile product recalls are driving the
mergers and acquisition (M&A) activity in the global pharmaceutical and biotech sector.

This sector is unique in the sense that it traverses across geographies, as health has no boundaries,
and this very boundary-less nature supports consolidation in this Industry. With the easy availability
of capital and increased global interest in the pharmaceutical and biotech industry, the sector has be-
come quite a `mergers-and-acquisitions' favourite.

There are three levels of mergers and acquisitions that are currently being sought in the pharmaceuti-
cal industry

 Back-end manufacturing capability

 Product integration

 Marketing and Introduction

Acquisitions are the quickest way to front end access. What is interesting is the fact that apart from
market access – i.e. marketing and distribution infrastructure, the acquiring company
also gets an established customer base as well as some amount of product integration without the ac-
companying regulatory hurdles.
The New Business Model in the Pharma Industry

An Example: Wockhardt Ltd

Wockhardt is a global, pharmaceutical and biotechnology company that has grown by leveraging two
powerful trends in the world healthcare market - globalization and biotechnology.

The acquisitions in Europe and the subsequent integration of their operations have strengthened
Wockhardt‟s position in the high-potential markets of UK and Germany, and have expanded the
global reach of the organization.

The growth drivers for Wockhardt‟s European business include exports, new product launches, pene-
tration in the European Union through mutual recognition, and strategic acquisitions.

The key to Wockhardt‟s successful acquisition management is the management‟s ability to turn-
around the acquired company in record time and thus create value out of the acquisition.

The consolidation trend will continue with Indian pharmaceutical players playing a major role. In-
dian pharmaceutical companies have spent close to $1.4 bn in acquiring companies globally in the
past 18 months. With access to capital, higher staying power because of low costs, and managements
willing to globalize, this trend will continue.
 1. In line with the company‟s objective to enhance its styling and design capa-
bilities to global standards, Tata Motors acquired which Italian design company?

2. Which Malaysian based network will acquire 49% stake for $40 million
CATECHIZE THE QUESTION MARKS (about Rs.182 crore) in its lifestyle subsidiary NDTV Lifestyle?

3. Reliance Industries Ltd (RIL) has acquired 14.12 per cent stake for an esti-
mated Rs 1,021 crore in which leading hotel chain?

4. United Spirits has entered into an agreement to buy a majority stake in which
distilleries for about Rs 74 crore which will help it raise its distillation capacity?

5. Axe,Dove, Lifebuoy, Lux are under the brand name of which conglomerate?
QUIZ

6. Which is the only sector where the commerce ministry holds shareholding in
every listed firm and also is one of the confirmed partners in every M&A deal?

7. Scooters India is being acquired by Tata Motors and which auto company?

8. When RNRL-R Power merger happened, the swap ratio was negative in fa-
vour of RNRL. True or False?

CROSSWORD QUIZ
ANSWERS ANSWERS

this issue)
8. True (First listed firm to face

7. Piaggio

and Development
6. Pharmaceutical Manufacturing

5. Unilever PLC

4. Pioneer Distilleries

3. Oberoi Hotels

2. Astro All Asia

1. Trilix Srl
 INSPIRED BY

Prof. Anirban Ghatak

Christ University Institute of Management, Kengeri

Sincere acknowledgment of the efforts of all the contributors for

their knowledge filled articles, crossword and quiz

ABOUT SYMBIONT

Symbionts are organisms which mutually exist and interact with each other to
derive benefits.
Symbiont- A newsletter on Mergers and Acquisitions pedestals itself on the same
theme of companies coming together. Its aim is to enlighten the readers about the
current happenings in the M&A circuit along with interesting add ons like cross-
words, terminologies, brain teasers and many more.

For any suggestions, reviews or queries, kindly drop in at symbiont.newsletter@gmail.com