DFM08 Mergers and Acquisitions

Assignment I
Assignment Code :2012DFM08A1 Last Date of Submission : 15th April 2012 (for old PhD) Maximum Marks : 100 CASE STUDY Attempt all questions given at the end of the Case. All questions carry equal marks

Introduction In May, 1998, Daimler-Benz1 and Chrysler Corporation, two of the world's leading car manufacturers, agreed to combine their businesses in what they claimed to be a "merger of equals." The DaimlerChrysler (DCX) merger took approximately one year to finalize. The process began when Jurgen Schrempp and Robert Eaton met to discuss the possible merger on January 18, 1998. After receiving approval from a number of groups, (Refer Exhibit I), the merger was completed on November 12, 1998. The merger resulted in a large automobile company, ranked third in the world in terms of revenues, market capitalization and earnings, and fifth in the number of units (passenger-cars and commercial vehicles combined) sold. DCX generated revenues of $155.3 billion and sold 4 million cars and trucks in 1998. Schrempp and Eaton jointly led the merged entity, as co-chairmen and co-CEOs. DCX sources were confident that the new company was well poised to exploit the growth opportunities offered by the global automotive market in terms of geographical and product segment coverage. (Refer Exhibit II for Daimler Benz and Chrysler's product ranges) However, analysts felt that to make the merger a success, several important issues needed to be addressed. The most significant of these was organizational culture. German and American styles of management differed sharply. A cultural clash would be a major hurdle to the realization of the synergies identified before the merger. To minimize this clash of cultures, Schrempp decided to allow both groups to maintain their existing cultures. The former Chrysler group was given autonomy to manufacture mass-market cars and trucks, while the Germans continued to build luxury Mercedes. However, analysts felt that this strategy wouldn't last long. When Chrysler performed badly in 2000, its American president, James P Holden, was replaced with Dieter Zetsche from Germany. Analysts felt that Zetsche would impose Daimlers culture on its American counterpart. A few senior Chrysler executives had already left and more German executives were joining Chrysler at senior positions.

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In an interview to the Financial Times in early 1999, Schrempp admitted that the DCX deal was never really intended to be a merger of equals and claimed that Daimler-Benz had acquired Chrysler. Analysts felt that this statement probably wouldn't help the merger process. Clash of Cultures DCX's success depended on integrating two starkly different corporate cultures. "If they can't create a climate of learning from each other," warned Ulrich Steger, a management professor at IMD, the Lausanne business school, "they could be heading for an unbelievable catastrophe." Daimler-Benz was characterized by methodical decision-making while Chrysler encouraged creativity. Chrysler was the very symbol of American adaptability and resilience. Chrysler valued efficiency, empowerment, and fairly egalitarian relations among staff; whereas Daimler-Benz seemed to value respect for authority, bureaucratic precision, and centralized decision-making. These cultural differences soon became manifest in the daily activities of the company.For example, Chrysler executives quickly became frustrated with the attention Daimler-Benz executives gave to trivial matters, such as the shape of a pamphlet sent to employees. Daimler-Benz executives were equally perplexed when Eaton showed his emotions with tears in a speech to other executives. Chrysler was one of the leanest and nimblest car companies in the world; while Daimler-Benz had long represented the epitome of German industrial might (its Mercedes cars were arguably the best example of German quality and engineering). Another key issue at DCX was the differences in pay structures between the two pre-merger entities. Germans disliked huge pay disparities and were unlikely to accept any steep revision of top management salaries. But American CEOs were rewarded handsomely: Eaton earned a total compensation of $10.9 million in 1997. Complications would arise if an American manager posted at Stuttgart ended up reporting to a German Manager who was earning half this salary. Chrysler could cut part only at the risk of losing its talented managers. Schrempp mooted the idea of overcoming the problem through a low basic salary and high performance based bonus, unlike anything seen in Europe. Base pay would be lower than what Germans were used to , but the pay structure would have more variables such as stock options (an American feature) Germans and Americans also had different working styles. The Germans were used to lengthy reports and extrended discussions. On the other hand, the American performed little paperwork and liked to keep their meeting short. Americans favoured fast-paced trail-and-error experimentation, whereas Germans drew up painstakingly detailed plans and implemented them precisely. In general, the Germans perceived the Americans as chaotic while the Americans felt that the Germans were stubborn militarists Chrysler managers believed in spotting opportunities and going for them. However, post merger, they were trapped in the German style of planning, constantly being told what to do. Sleve Harris, Chryslers former communications chief (who detected to General Motors) commented The Germans played literally by the book- theirs, Youd go into a meeting and have to turn to Volume 7, Section 42, page 597. The Germans prided themselves on analytical research that produced a plan, while the Americans reached for the impossible and kept coming up with ideas to achieve these impossible goals.

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Before the merger, Daimler-Benz was known for its top-down management approach. Chrysler, by contrast, seemed to be a humble collection of colorful consensus managers, DCX claimed that the manager process would be complete in twelve months. However, analysts felt that the authoritarian German management methods would prove foreign to the non-hierarchial style at Chrysler making the integration of the two cultures difficult. From the start, the cultural differences made DCXs post-marriage period of adjustment difficult. No sooner was the merger announced, Schrempp started issuing reams of organizational flow charts to the employees. Every phase was given titles like synergy tracking and every group had its weekly meeting schedule. DCX also set up a post-merger integration (PMI) structure in which 12 issue-resolution teams were assigned to push and cajole their counterparts into combining everything from supplies to research. Every time there was disagreement, the integration process for that group was halted until a solution was found. Attempts to Bridge the Chasm DCX took several initiatives to bring the two cultures closer. Press reports indicated that in Stuttgart, the more formal Germans were experimenting with casual dress. The Germans were also taking classes on cultural awareness. The Americans at DCX were encouraged to make more specific plans, while the Germans were urged to experiment more freely. Analysts felt that there were many indications that the Americans and the Germans might come closer. The Americans were impressed by their German counterparts' skill with the English language (though they tried to cut down on slang to simplify speech when the Germans were in town). To reciprocate, many Americans were taking lessons in German. When the DCX stock began trading on November 17, 1998, German workers celebrated with American-style cheerleaders, a country-western band called The Hillbillies, doughnuts and corn on the cob. At a Detroit piano bar, the Americans were taken by surprise when they came to know that the Germans knew the lyrics of old rock-and-roll songs. Daimler's Hegemony In 2000, there was a management exodus at Chrysler headquarters in Detroit: two successive Chrysler presidents, James Holden (Holden) and Thomas Stallkamp (Stallkamp), both American, were fired. Holden was fired after only seven months in the position. Stallkamp replaced Holden and was forced to resign after only twelve months as CEO. Unreal as it might seem, two highly regarded Chrysler executives were fired from their CEO positions in the space of 19 months. Zatsche, the newly appointed CEO of Chrysler USA, was a Daimler executive and a close confidant of Schrempp. He, in turn, appointed Wolfgang Bernhard, another Daimler executive, as COO. Neither had any real exposure to the US marketplace. This turn of events demoralized Chrysler's workers. According to an employee, most of the workers were disgusted and frustrated because they felt they were being punished. The employees were expecting big layoffs, and were worried that the company would be sold out. Analysts felt that after the merger Chrysler would no longer exist as an entity. In fact Chrysler was reduced to a mere operating division of DCX. The Daimler-Benz management presence permeated every important function

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at Chrysler USA. There was no Chrysler presence on the DCX supervisory board or the board of management. By the end of 2000, there were only 128,000 Chrysler employees still working in the US operations, all anxious and demoralized. Ex-Chrysler managers felt that Daimler-benz was steadily leading Chrysler into a state of Chaos. Schrempp himself said that the never intended the merger be one of the equals. He openly acknowledged that if Daimler-Benzs real intentions were publicly known before the merger, there would have been no deal. However, in a press interview, Schrempp largely retracted his statements by saying that if the strategy were to take over Chrysler, Daimler would never have included them in the name of the new corporate entity. Analysts felt that these contradictory statements had severly tarnished Schrempps image, both in Germany and the US. Given these chaotic circumstances, Chrysler reported a third quarter loss of $512 million for the period ending September, 30, 2000; and its share value slipped below $40 from a high of $108 in January, 1999. DCX in Trouble Analysts were of the opinion that DCX should eliminate between 20,000 and 40,000 jobs at its North American Chrysler division and permanently close at least one of its 13 plants in the US and Canada because of huge financial losses in 2000. After third quarter losses of more than half a billion dollars, and projections of even higher losses in the fourth quarter and into 2001, Schrempp told employees that Chrysler had only 13.5% of the US market, but it was staffed as if it had a 20% share. In early 2001, DCX announced that it would slash 26,000 jobs at its ailing Chrysler division. "No one wants this to happen. I personally wish it didn't have to happen," said Zetsche. He called the moves painful but necessary in the face of "brutal" competition and low US sales. Zetsche said a large part of the job cutting would be through retirement programs, layoffs, attrition and other programs. About three-quarters of the job cuts would be made in 2001, he said. In addition, production would be curbed at factories in Canada and four states in the US by slowing assembly lines and trimming the number of shifts. However, analysts interpreted this move as a failure of the German and American automakers to live up to their promise. One of them said instead of making the billions of dollars in cost savings and synergies at the time of the merger, theyre making desperate cuts to get Chrysler back in the black Why the Merger Failed to Realize the Synergies Analysts felt that strategically, the merger made good business sense. But opposing cultures and management styles proved to be a hindrance to the realization of the synergies. Daimler-Benz attempted to run Chrysler USA operations in the same way as it would run its German operations. This approach was doomed to failure. In September, 2001, Business Week wrote, "The merger has so far fallen disastrously short of the goal. Distrust between Auburn Hills and Stuttgart has made cooperation on even the simplest of matters difficult.

Coming to terms with issues like which parts Mercedes-Benz would share with Chrysler was almost impossible.

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The Germans and the Americans had been out of sync from the start. The two proud management teams resisted working together, were wary of change and weren't willing to compromise. Daimler-Chrysler have combined nothing beyond some administrative departments, such as finance and public relations Questions 1. Mergers and acquisitions take place to realize the synergies between the two or more companies. Why do you think the Daimler-Chrysler merger failed to realize the synergies that were expected from the merger? 2. Many a cross-cultural merger has failed because proper attention was not given to the difference in cultures between the two companies. What issues should be addressed to make cross-cultural merger a success? 3. Very often companies involved in a merger claim it to be a merger of equals but this is not the case always. The Daimler-Chrysle deal was never expected to be a merger of equals. Comment.

Exhibit - I Sifys Websites Walletwatch.com : Walletwatch.com is a finance website that provides users with the facility of online portfolio management. It allows users to manage their different portfolios by providing them with updated stock prices and the percentage gains or losses. Like other financial websites, it provides charts that allow investors to track various stock prices daily, monthly and annually. The website divided into different sections such as equity, fixed income, forex, mutual funds, bullion and insurance. This type of design allows the users to make focused searches. Carnaticmusic.com : This website caters to a niche segment of music lovers. It provides comprehensive information on carnatic music to Indian carnatic music lovers in different parts of the world. The website also allows visitors to interact with each other as well as various famous musicians. It provides visitors with an online audio and concert gallery that allows them to review various recordings. The site attracts both the serious carnatic music enthusiast as well as those with a passing interest in music. Carstreet.com : The website provides visitors with information on the different cars driven in India. The site has numerous sections covering New Cars, Used Cars, Maintenance, Car Finance etc. The website also allows visitors to post complaints and write their own columns. In addition to the above features, the site has a photo gallery. The site provides news from the world of motor sport for Formula 1 and Rally enthusiasts.

Exhibit II India worlds Financial Statements (Profit and Loss Account)

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Particulars Income Service Income Other Income Total Income Expenditure Cost of Service Operating and General expenses Finance Charges Marketing and Promotion Expenses Employee Remuneration Benefits Depreciation Total Expenditure Profit/Loss before Tax

(In Rs. Million) 1999-2000 32.86 1.61 34.47 10.18 15.81 0.30 2.55 0.97 29.81 4.66

(Balance Sheet) Particulars Shareholders Equity Reserves and Surplus Loans Net Fixed Assets Investments Current Assets Current Liabilities Provisions Net Current Assets (In Rs. Million) 1999-2000 2.00 4.35 1.04 3.16 9.82 10.96 16.74 (5.78)

Particulars Income Sales & Services Other Income Total Income Expenditure Cost of S/W and H/W Operating and Administration Personnel Expenses Financial Expenses Selling and Marketing Depreciation Provision for Doubtful Debts Provision for Investments Acquisition Costs

Sifys Financial Statements (Profit and Loss Account) (In Rs. Million) 1999-2000 653.4 122.22 775.67 67.66 379.35 171.48 32.22 243.75 155.36 1.91 -

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Misc. Expenditure Provision for Accumulated Loss of subsidiary Total Expenditure Profit /Loss before Tax

6.42 1058.15 (282.48)

(Balance Sheet) Particulars Shareholders Equity Reserves and Surplus Loans Net Fixed Assets Investments Current Assets Current Liabilities Net Current Assets (In Rs. Million) 1999-2000 222.49 10380.03 214.50 804.46 1228.61 8577.96 469.04 8107.96

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DFM08 Mergers and Acquisitions

Assignment II
Assignment Code :2012DFM08A2 Last Date of Submission : 15th May 2012 Maximum Marks : 100 CASE STUDY Attempt all questions given at the end of the Case. All questions carry equal marks Landmark Acquisition Established in December 1998 in Secunderabad (Andhra Pradesh, India), Satyam Infoway Limited (Sify) was one of the first private Internet service providers2 (ISP) in India. On November 29, 1999, the company announced that it would acquire the entire equity stake of IndiaWorld Communications Private Limited at a huge amount of Rs. 4.99 billion. This was one of the first and the largest dotcom acquisition3 in terms of deal amount in India. The acquisition was done through an all cash deal, which had to be executed in two phases. In the first phase, Sify had to acquire a 24.5% stake (49000 shares) in IndiaWorld for Rs 1.22 billion after the deal was announced in November 1999. In the second phase Sify had to purchase the remaining 75.5% stake (151000 shares) at Rs. 3.25 billion in cash before September 30, 2000. Sify also had to pay a non-refundable deposit of Rs. 513 million, which would forfeit, if Sify did not complete the second phase of the deal. The deal surprised stock market analysts and merger and acquisition gurus both in India and abroad. According to an employee at Rediff.com, "People didn't believe that the value of the deal could be Rs 4.99 billion. Some of us felt it was a wire agency mistake." Financial analysts too were taken aback. The question on everybody's mind - Whether Sify took a right decision to invest Rs. 4.99 billion in IndiaWorld which had reported a paltry net profit of Rs. 2.7 million on revenues of Rs. 13 million in the financial year 1998-1999. How had Sify arrived at that Rs. 4.99 billion figure while valuing the acquisition deal? What were the strategic and financial benefits to Sify from this acquisition? Does it really make sense for Sify to invest Rs. 4.99 billion for IndiaWorld's 0.2 million shares which effectively worked out to paying of a whooping amount of Rs. 24,950 for each share of IndiaWorld with a face value of Rs. 10?

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Some analysts voiced their concerns about the deal being grossly overvalued. Expressing his concerns, Manish Gunwani, a financial analyst at SSKI6 said, "There aren't too many popular Indian portals and IndiaWorld had a high profile. Even then, the valuation seems very stretched. It's based on what may happen, not on current realities." Analysts also drew comparisons with the leading software company Infosys whose Rs. 10 paid up shares quoted at Rs. 9, 250 on November 30, 1999. However, Sifys CEO and managing director, R Ramaraj (Ramaraj) remained confident about the deal.He said, "The acquisition would be a good strategic fit to Satyam Info way's portal business adding a large overseas Indian audience to the large India based audience that www.satyamonline.com currently enjoys. The combined portal network is expected to be a mega portal for India interest audience in India and elsewhere." Valuing Dotcoms The objective of valuing any company is to determine a fair price, which an investor should pay to buy an equity stake in the company. The traditional methods for valuing firms were developed keeping in mind the companies in the brick and mortar sector. These companies had tangible physical assets as well as clearly defined sources of revenues. The traditional methods for valuing firms included the Discounted Cash Flow Method (DCF), the Economic Value Added (EVA) method, the pure play or comparable company approach and the multiplier method (Refer Exhibit I). Most of the traditional models for valuing a B&M firms were based on publicly available financial figures. The traditional models like the Cost Method valued companies based on the book value or net asset value of their tangible assets such as buildings, machinery and intangible assets such as goodwill of the firm.The Discounted Cash Flow Approach valued a firm on the basis of the present value of the future cash flows that the firm would generate. However, using traditional models to value dotcoms had several anomalies. For a dotcom company , tangible assets were only a few web servers, some equipment and office space, which was not a substantial investment. Since most of the dotcoms were fairly new companies intangible assets such as goodwill were non-existent for them. Moreover, traditional model like Discounted Cash Flow Approach could not be applied for dotcoms as there was a lack of sufficient historical data to project future cash flows. In the absence of historical data, dotcoms could not be valued through the Comparable Company or Pure play model. This model involved comparison of one firm with another firm engaged in a similar business and of similar size. In the case of dotcoms, it was difficult to find such strictly comparable firms with all financial and business information necessary for valuation.

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The valuation of dotcoms was further complicated by the fact that they were not profitable. Most dotcom companies including large ones such as Yahoo! And Amazon had not recorded positive earnings. Because of the negative earnings, valuation experts were not in a position to measure the expected growth rate of a dotcom firm. Given the difference between dotcoms and B&M firms, a different model was needed for valuation of dotcoms. Some analysis felt that dotcom valuation must be based on internet metrics such as the volume of internet traffic and their conversion to potential revenues. Though the initial cash burn rate for dotcoms was higher, they were also expected to generate profits at a much higher growth rate than the traditional firms. Some analysts were of the opinion that the most important asset for any dotcom company was its customer base. Hence, they argues that the valuation should be based on a companys ability to increase its customer base and increase revenue generation. Other key factors that influenced that valuation of dotcoms were the size of the market in which the dotcom was operating the features of the dotcoms website, the competition in the industry segment and so on. For the accurate valuation of dotcoms, traditional methods of valuation needed to be modified to include the above parameters . Expressing the problem in valuing dotcoms, Mckinsey & Company commented, Valuing these high-growth, high-loss firms has been a challenge, to say the least; some practitioners have even described it as a hopeless one. Acquisition of Indiaworld The Mumbai-based India World was established by rajesh in 1994. it provided web-based solutions and Indiabased content to non-resident Indians. The company operated popular portals such as sanchar.com, khel.com,, dhan.com, bawarchi.com, khoj.com etc. These portals recorded a total of 13.5 million page views during October, 1999. IndiaWorld was the only dotcom in India that had been earning profits consistently for three years prior to the acquisitions. Its profits were merger, but at that time, very few companies in the global dotcom industry had profitable operations. The first phase of IndiaWorld's acquisition was financed by Sify through the funds raised from its initial public offering (IPO) of American Depository Shares (ADS) on NASDAQ which raised $75 million in October 1999. (this offering raised $75 million in October, 1999). Sify completed the second phase of the acquisition of IndiaWorld on June 30, 2000, after modifying the agreement entered into in November 1999. The revised agreement changed the acquisition from an all cash transaction to a cash plus stock deal. Sify settled the final payment of Rs. 3.25 billion by making a payment of Rs. 2.15 billion in cash and issuing 2,68,500 fresh equity shares of Sify worth Rs. 1.10 billion. Hence, in the second phase of deal each equity share of Sify was valued at Rs. 4097. The equity shares issued under the deal were neither listed in India nor could be converted into ADSs according to the law during that time.

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The restructuring of the deal was done with the mutual consent of both Sify and IndiaWorld. The deal was accounted for as a two-step acquisition under the purchase method of accounting. Rajesh Jain (Rajesh), Managing Director of IndiaWorld, said The acceptance of shares in Sify instead of cash for part of the deal reflected the confidence in and commitment for Sifys business and future. In November, 1999, Rajesh also become a member of Sifys advisory board, which was responsible for deciding Sifys future course of business. Sify planned to integrate IndiaWorlds numerous websites into its own portal, www.satyamonline.com. In 1999, Sify was one of the largest ISPs with a subscriber base in excess of 100,000 spread over 30 cities. Sify also had popular websites like walletwatch.com, carnaticmusic.com, carstreet.com, which provided content and ecommerce solutions to resident Indians. IndiaWorld, with its large overseas audience , provided Satyam an ideal opportunity to extend its services to the NRI segment. The merger also provided Sify 13.5 million page views per month (of IndiaWorld) in addition to its own 13 million page views. Sify was confident about the benefits of this expensive acquisition. Ramraj said that though Sify could have invested the funds raised through the ADS issue to set up its own websites, it would have taken a very long time for these websites to record the page views that IndiaWorld attracted. Moreover, the websites of IndiaWorld had good brand equity and enjoyed a high level of popularity among overseas Indians. He was of the opinion that the acquisition was in the line with Sifys overall objective of providing total internet solutions to customers. The Valuation Debate Though the analysts and valuation experts were convinced about the benefits to Sify from IndiaWorld's acquisition they were divided on the valuation of the deal. Some of the experts felt that the value of a company varied depending on the buyer. For example, a strategic buyer could be willing to pay a higher price for a company compared to a financial buyer. Analysts argued that Sify had acquired IndiaWorld for strategic reasons. They said the IndiaWorld would be a perfect complement to Sifys website. The deal would allow sify to exploit cross-selling opportunities within its own portal and ISP service and provide ready access to the existing customer base and content of IndiaWorlds portal. IndiaWorld was the second largest in India in 1999. They felt that Sify was following a strategy similar to that used by America Online (AOL) in the US. AOL had consistently acquired leading content and service providers to retain its customers. However, traditional stock analysts felt that the valuation of IndiaWorld was purely based on internet metrics such as page views, eyeballs, or hits that IndiaWorld might attract, and not on the potential earnings that the company might generate. They felt that this was a speculative approach that did not reflect the true fundamentals of IndiaWorld. Rashesh Shah, an Investment Banker with Edelweiss capital, felt that most of the Indian dotcom ventures were in the early stage if life cycle. Consequently, they were attracting greater page views and hits. It would be a long time before such companies would achieve sustained revenues and profitability.

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Many financial analysts also felt that Sifys decision to make a substantial amount of the payment in cash was not the right decision. The cash could have been utilized for other important projects of Sify. They felt that Sify should have opted for an all-stock transaction to fund the acquisition. In spite of apprehensions about the acquisition, the stock market welcomed Sifys move. The ADS listed on NASDAQ rose by $32 to $140 on the day the announcement was made. This increased Sifys market capitalization on NASDAQ by $680 million to $2.9 billion. For the financial year 1999-2000 Sify generated total revenues for Rs. 775.67 million out of which Rs. 34.47 million came from IndiaWorld . Questions 1. The acquisition of IndiaWorld by Sify provides financial analysts an ideal opportunity ti understand the objective of and mechanism for valuing dotcoms. What is the primary objective of valuing a company? What are the problems involved in using traditional models of valuation for valuing companies in the Internet industry?

2.

IndiaWorld was acquired for Rs. 4.99 bn or $ 115 mn by Sify in November, 1999. Using the page views multiplier model to value dotcoms, calculate price/revenue multiple in terms of page views for IndiaWorld.com. Compare it with the price/revenue multiple of Rediff in June 2000. the page views of Rediff.com for the first quarter of 2000-2001 was 300 mn and the portal advertising revenues for the quarter was $0.82 mn. Rediffs market capitalization in June 2000 was $55 mn. (Note : use the price of acquisition as the market value of IndiaWorld and 1/4 th of India Worlds yearly revenues to determine quarterly revenues. The exchange rate as on march 31, 2000 is $1 = Rs. 43.5)

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