INTERNATIONAL INSTITUTE OF MANAGEMENT SCIENCE SUMMER PROJECT ON RATIONALE BETWEEN MERGERS & ACQUISITIONS IN THE CURRENT MELTDOWN AND

ITS FUTURE BY

ASHISH SHUKLA
PGMP2008 10 (FINANCE SPECIALISATION) ROLL NO 310

Project Director Prof. K. M. Joshi (Director & Sr. Faculty)

The research provides an opportunity to a student to demonstrate application his/her knowledge , skill and competencies required during technical session . Research also helps the student to devote his/her skill to analyze the problem to suggest alternative solution , to evaluate them and to provide feasible recommendation on the provided data .

Although I have tried my level best to provide this an error free report has been made to offer the most authentic position with accuracy .

ACKNOWLEDGEMENT
3

First of all I take this opportunity to thank Telco Water Technology Pvt. Limited, for giving me a chance to work for them as a Summer Trainee on this project.

I hereby express my gratitude to Miss Joyti Khare, project guide, for his precious guidance, without which this project would never have taken off.

I am also obliged towards, Mr. Prashant & Mr. Kamlakar from Telcos M&A department, for his suggestions, which he has offered from time to time. His precious inputs have helped me to understand this topic of Mergers & Acquisitions much better.

DECLARATION
I Ashish shukla declare that the project report entitle Study Of Merger & Acquisition Special aspect of Indian Economy at Telco Water Technology Ltd. original work based on the summer training.

Ashish Shukla Student IIMSc Project Trainee Telco water Technology Pvt. Ltd.

EXECUTIVE SUMMARY

The structure of the project and the rationale behind it are penned in this section Executive Summary. This section summarizes the complete project as to how project was planned, structured and carried out. The project is regarding Mergers and Acquisitions (M&A) done by the corporations across the world. Generally M&A comes under the corporate finance function in most of the companies.

The project was structured in such a way that one gets complete knowledge about M&A activity from an elementary level to the actual deal happenings. THE 4 MODULES: In order to achieve the objective the project was segregated into following 4 modules: -

1) Basic elements of M&A

2) Tata-Corus deal

3) Vodafone-Hutchison Essar deal

4) Daiichi-Sankyo Ranbaxy deal

As one can see the project started with elementary study of M&A then proceeding to 3 actual deals that took place. The complete design of the project is such that one gets complete knowledge of M&A. This is the aim of the project.

SELECTION OF DEALS: -

The choice of the deals was also a very strategic one. Tata-Corus deal was an example of an Indian company acquiring a foreign entity. On the other hand, Vodafone-Hutchison Essar deal was an

example of a deal between two foreign entities involving Indian assets. Further, the third deal of Daiichi-Sankyo Ranbaxy dealt with a foreign company enquiring an Indian company.

In this way the 3 deals gave an opportunity to understand M&A from 3 different perspectives. In addition all the three deals involve different sectors.

Company Profile

The word PUROCOM is derived from the word "Puro" which means pure like dew and "Com" which signify modern computerized technology.Purocom came into existence since 1992. We are from the last 16 years in the field of water industry realizing the need of Indian customers.Our product is designed for the Indian market and suits the climate and the quality of water present in various region of India.Purocom is concerned about the social responsibility and that is the reason for entering the field of water purification with the revolution technology of Reverse Osmosis. Water being a key component in determining the quality of our lives and considering the fact that drinking water quality in India is worse as compared to the developed nations of the world. Purocom has been able to develop the RO Water Purifier as per the Indian market demand

with double protection technology to provide safe and pure water with an added advantage of advance system to keep all parts of RO Water purifier system safe and long lasting.

Pure water free from bacteria and viruses as it will be purified through Multi Stage Purification. Free from dissolved impurities like salts and heavy metals as it will be purified by Reverse Osmosis process. Water comprising of all the essential natural minerals as it will be purified with Reverse Osmosis Technology.

Reverse Osmosis (RO) plants provide an excellent combination of quality and services for all your commercial and industrial requirements. Every system is manufactured with world class components achieving the highest-quality standards.

Highly compact Easy to maintain Easy to operate Standard and Modular Available in ranges and sizes from 25lph to 10000lph

Purocom in commercial way is best suited for:

Offices Apartments & Societies Beverages Industries Pharmaceutical Industries Dialysis Bottle Water Plant Industrial Water Treatment Cooling Tower Textile Industry Swimming Pool Green House Farm Houses

Testimonials

Tested by recognized laboratories and claims certifies. ISO: 9001-2000 certified company with highest quality standard. Premium brand of RO water purifiers since the last 12 years with trouble-free performance observed by million of customers. Prompt after-sale service from a wide network across the country. Wall mounted with in-built water storage tank. No space wastage on a below the kitchen counter. Modern styling with elegant transparent tank to protect from the dust and moisture. Purified water capacity of liters/hour with a duty cycle of 75 liters/day.

8 liters water storage capacity with purified water available on demand, even during load shedding. Fully automatic with auto-start and auto-o

Commercial Products

Large RO System
with SOFTNER

RO

R.O. 50 LPH Softner

R.O. 100 to 150 LPH

Introduction of M&A

A merger is a combination of two companies to form a new company, while an acquisition is the purchase of one company by another in which no new company is formed . 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 reasoning behind M&A.

This rationale is particularly alluring to companies when times are tough. 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.

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 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.

Definition of M&A

 Mergers- A merger is a combination of two companies into one larger company, which

involves stock swap or cash payment to the target. Merger means merging of 2 entities to form a combined new entity.

An example of merger is that of the deal between Arcelor and Mittal, which combined to form ArcelorMittal

Acquisition - When one company takes over another and clearly established itself as the new owner, the purchase is called an acquisition. From a legal point of view, the target company ceases to exist, the buyer "swallows" the business and the buyer's stock continues to be traded.

Acquisition means a firm acquiring a controlling stake in a target firm, post-which only the former exists while the latter ceases to exist.

An example of an acquisition is that of the deal between Tata and Corus, wherein Tata acquired a 100% stake in Corus.

Types of M&A

Types of M&A Horizontal M&A Vertical M&A Market extension Product extension

Key feature

Example

Both firms have similar products / Exxon and Mobil services in the same market. The relationship between the two Time Warner and The Turner firms is that of a buyer-supplier. Corporation Both firms have similar products / Tata Steel Ltd. & Corus Group services but in different markets. Ltd. PLC. Both firms have differing products / services in the same business. Both firms are in different industries. ICICI and Madura Bank

Conglomerate

Another Criteria of Classification

Objective of M&A

Gain market share Economies of scale Enter new markets Acquire technology Utilization of surplus funds Managerial Effectiveness Strategic Objective Vertical integration

Merger

Nokia- Siemens A new 50-50 joint venture company is formed. This new company will instantly become the third largest communications equipment provider in the world with annual revenues of over 15 billion Euros or more than US $30 billion
The new entity is 50-50 joint venture, called Nokia Siemens Networks and will encompass

both fixed-line and mobile networking products as well as managed services offered to carriers.
Nokia Siemens Networks would have annual sales of close to 16 billion Euros (20 billion

dollars) and a workforce of 60,000, making it number three in the sector behind Ericsson and Alcatel/Lucent; Nokia and Siemens aim to save cash through the marriage, predicting cost reductions of 1.5bn per year by 2010.
The integration of the two businesses would also lead to job cuts mainly in Germany, with

10-15% of the combined 60,000-strong workforce - or 9,000 jobs in all - to be axed over the next four years .

Acquisition Structure Asset Purchase Business Purchase Share Purchase A Mixture Apportionment of Risk

 No Hidden matters Remedy warranty Indemnity

Tata-Corus

Tata acquired Corus, which is four times larger than its size and the largest steel producer in the U.K. The deal, which creates the world's fifth-largest steelmaker, is India's largest ever foreign takeover and follows Mittal Steel's $31 billion acquisition of rival Arcelor in the same year. Tata acquired Corus on the 2nd of April 2007 for a price of $12 billion. The price per share was 608 pence, which is 33.6% higher than the first offer which was 455 pence.

Particulars Year ASSETS DEBTS LIABILITIES REVENUE NET INCOME

Corus Currency: Rupee Millions 2006 582750.00 98100.00 231300.00 760500.00 33900.00 2005 533925.00 105525.00 178425.00 699900.00 33450.00 2004 467775.00 96000.00 155475.00 596475.00 -22875.00

TATA Steel Ltd Currency: Rupee Millions 2006 205,450.70 45,932.70 30492.10 202,444.30 37,346.20 2005 177,033.10 42,073.10 33146.80 159,986.10 36,032.60 2004 147,988.70 39,982.90 32665.90 111,294.40 17,887.80

Process of Acquisition

Finding A Target Business Appointing Advisers Negotiating terms Due Diligence Exchange of Contracts Completion

Appointing Advisers The Right Chemistry The Right Experience Size is not Everything Talk Your Language

CORUS J P MORGAN CAZENOVE HSBC

TATA ABN AMRO DEUTSCHE BANK STANDARD CHARTERED

Negotiating Terms The nature of the fit Commonality of client base Financial strength Strategic intent Sharing of resources Applicable Benefits Negotiation By Tata
September 20, 2006 : Corus Steel has decided to acquire a strategic partnership with a

Company that is a low cost producer

 October 5, 2006 : The Indian steel giant, Tata Steel wants to fulfill its ambition to Expand

its business further.

October 6, 2006 : The initial offer from Tata Steel is considered to be too low both by

Corus and analysts.

October 17, 2006 : Tata Steel has kept its offer to 455p per share. October 18, 2006 : Tata still doesnt react to Corus and its bid price remains the same. October 20, 2006 : Corus accepts terms of 4.3 billion takeover bid from Tata Steel October 23, 2006 : The Brazilian Steel Group CSN recruits a leading investment bank to

offer advice on possible counter-offer to Tata Steels bid.

October 27, 2006 : Corus is criticized by the chairman of JCB, Sir Anthony Bamford, for

its decision to accept an offer from Tata.

November 3, 2006 : The Russian steel giant Severstal announces officially that it will not

make a bid for Corus

November 18, 2006 : The battle over Corus intensifies when Brazilian group CSN

approached the board of the company with a bid of 475p per share
December 18, 2006 : Within hours of Tata Steel increasing its original bid for Corus to

500 pence per share, Brazil's CSN made its formal counter bid for Corus at 515 pence per share in cash, 3% more than Tata Steel's offer.

January 31, 2007 : Britain's Takeover Panel announces in an e-mailed statement that after

an auction Tata Steel had agreed to offer Corus investors 608 pence per share in cash
April 2, 2007 : Tata Steel manages to win the acquisition to CSN and has the full voting

support from Corus shareholders

Legal Documentation Share sale Agreement

The shares being sold The Price Restrictive Agreements

Warranties Conditions to the Deal Transferring tangible assets Transferring Intangible assets Transferring Liabilities Transferring Employees The Tax Deed The Disclosure Letter

Synergy In M&A

Synergy refers to the ability of 2 or more units/companies to generate greater value working together than they could working apart. An important point to note here is, synergy should be such that it difficult for competitors to replicate.

Quantifying Synergy in M&A

Major Reasons for failure of M&A Failure to anticipate foreseeable events Acquirer paying too much premium Synergies non-existent or their overestimation Adverse economic conditions / external events Incompatible cultures

Due Diligence In M&A

Due diligence in simple term means a process of getting information of the target firm from all aspects. Inadequate or non-performance of due-diligence is mostly responsible for failure of M&A.

360 Due Diligence

Valuating an M&A

Objective of M&A Operating Synergy Tax Benefits Debt Capacity Cash Slack Undervaluation Diversification Control Managers hubris

Value of Target Firm V + Synergy value V + PV of Tax Benefits V + Increase in value of debt that can be carried V + NPV of Projects / Target V V Value of target firm run optimally V

Note: At a time more than one objective will be present and hence all such factors must be factored in for valuation. Assume: Value of Target Firm on stand-alone basis = V PV = Present Value NPV = Net Present Value

Financing an M&A

Features of financing

Cash offer Lower premiums paid Cash receipts create tax liabilities for target firms

Stock Offer Higher premiums paid Acquiring firms resort this way when they feel their stock is overvalued

Cash offer can be made by a mix of debt and equity

There is dilution of ownership when stock payment is done

Here goodwill is created and hence it amortized Here no goodwill is created. which is non-tax deductible Due amortization of goodwill EPS of acquiring EPS is greater than than that reported when a cash firm gets hit. offer is made. Benefits of Mergers and Acquisitions Merger refers to the process of combination of two companies, whereby a new company is formed. An acquisition refers to the process whereby a company simply purchases another company. In this case there is no new company being formed. Benefits of mergers and acquisitions are quite a handful. Mergers and acquisitions generally succeed in generating cost efficiency through the implementation of economies of scale. It may also lead to tax gains and can even lead to a revenue enhancement through market share gain. The principal benefits from mergers and acquisitions can be listed as increased value generation, increase in cost efficiency and increase in market share. Mergers and acquisitions often lead to an increased value generation for the company. It is expected that the shareholder value of a firm after mergers or acquisitions would be greater than the sum of the shareholder values of the parent companies. An increase in cost efficiency is effected through the procedure of mergers and acquisitions. This is because mergers and acquisitions lead to economies of scale. This in turn promotes cost efficiency. As the parent firms amalgamate to form a bigger new firm the scale of operations of the new firm increases. As output production rises there are chances that the cost per unit of production will come down.

An increase in market share is one of the plausible benefits of mergers and acquisitions. In case a financially strong company acquires a relatively distressed one, the resultant organization can experience a substantial increase in market share. The new firm is usually more cost-efficient and competitive as compared to its financially weak parent organization. It can be noted that mergers and acquisitions prove to be useful in the following situations:

Firstly, when a business firm wishes to make its presence felt in a new market. Secondly, when a business organization wants to avail some administrative benefits. Thirdly, when a business firm is in the process of introduction of new products. New products are developed by the R&D wing of a company.

Terminologies used in M&A

Asset Stripping When a company acquires another and sells it in parts expecting that the funds generated would match the costs of acquisition, it is known as asset stripping. Black Knight The company that makes a hostile takeover is known the Black Knight. Dawn Raid This is a process of buying shares of the target company with the expectation that the market prices may fall till the acquisition is completed. Demerger or Spin off During the process of corporate restructuring, a part of the company may beak up and set up as a new company and this is known as demerger. Zeneca and Argos are good examples in this regard that split from ICI and American Tobacco respectively. Carve out This is a case of selling a small portion of the company as an Initial Public Offering. Greenmail Greenmail is a situation where the target company purchases back its own shares from the bidding company at a higher price.

Grey Knight A grey knight is a company that takes over another company and its intentions are not clear. Hostile Takeover Hostile bids occur when acquisitions take place without the consent of the directors of the target company. This confrontation on the part of the directors of the target company may be short lived and the hostile takeover may end up being friendly. Most American\n and British companies like the phenomenon of hostile takeovers while there is some more which do not like such unfriendly takeovers. Management Buy In When a company is purchased and the investors bring in their managers to control the company, it is known as management buyout. Management Buy Out In a management buy out, the managers of a company purchases it with support from venture capitalists. Poison Pill or Suicide Pill Defense This is a strategy that is taken by the target company to make itself less appealing for a hostile takeover. The bondholders are given the right to redeem their bonds at a premium should a takeover occur.

Presentation of deal

Tata Corus
3

Manufacturing Facilities Tata Steel

Company

Country

Capacity (MT)

Tata Steel Limited

Jamshedpur, India

Tata Steel Thailand (Millenium Steel) NatSteel Asia

Thailand

1.7

Singapore

Total Capacity

8.7

Key facts of Tata Steel Ltd

Parameter (2007-08)

Tata Steel Limited

Tata Steel Thailand NatSteel Asia

Revenues (USD million) Production (MTPA)

5,005 4.78

1,020 1.43 126 12 %

1,915 2.49 57 3%

EBIDTA (USD million) 2,139 EBIDTA Margin 43 %

Tata Steel has a strong resource tie-up. It meets 100% of its iron ore requirements and 60% of its coal requirements from its captive mines. The cost of production of per tonne of steel for Tata Steel is USD 247.

Key facts of Tata Steel Ltd.

Resource Iron ore

Location Jharkhand and Orissa

Approximate Distance (kms) 150

Coal Manganese Chrome/ Dolomite

West Bokaro and Jharia (Jharkhand) Orissa

150

Worlds one of the most cost-effective producers of iron and steel.

Consolidated figures for Tata Steel Ltd

Parameter Revenues (USD million)) Production (MTPA) EBIDTA (USD million) EBIDTA Margin PBT (USD million) PBT margin

Tata Steel (2007-08) 33,011 31.99 4,640 14 % 4,091 12%

PAT (USD million) PAT margin

3,086 9%

Post-Deal

Company Arcelor - Mittal Nippon Steel Posco JEF Steel Tata Steel Corus Bao Steel China US Steel Nucor

Capacity (MPTA) 110 32 30.5 30.0 27.7 23 19 18.5

Riva Thyssen Krupp Tata steel will be the 5th largest producer of steel

17.5 16.5

Planned Capacity Expansion of Tata Steel

Company Tata Steel Limited

Country Jamshedpur, India Jharkand, India Orissa, India Chattisgarh

Capacity (MTPA) 10 12 6 5 1.7 2 19 55.7

Tata Steel Thailand (Millenium Steel) NatSteel Asia Tata Steel Netherlands B.V Total planned Capacity

Thailand Singapore U.K and Netherlands

Features of the Deal

Value of deal - $12.9 billion 100% buyout of Corus Leveraged buyout (LBO) All cash deal Deal routed through a S.P.V

SWOT For Tata Steel

Strength Lowest cost steel producer Weakness Corus was triple the size of Tata Steel Opportunity Exposure to global industry In line with consolidation trend in steel industry Threats

CSN was the rival bidder. Non-materialization of the anticipated synergies.

SWOT For Corus

Strength High technology of steel manufacturing

Weakness High operating costs Opportunity To get access to highly efficient cost structure of Tata Steel Threats Huge pension liability might have led to collapse of the deal

Valuation of Corus

No. of outstanding Corus shares Price/per share paid by Tata Total value of Corus equity Net debt of Corus assumed by Tata Steel Total Enterprise value of Corus EBIDTA (737 million GBP for 12 months Sepc2006) multiple paid by Tata

946,090,659 608 pence 5.75 billion GBP 850 million GBP 6.6 billion GBP 9 times

Critical facts in Valuation of Corus

The bid-price of 608 pence / share was at a premium of approximately 68.7 % to the average closing mid-market price of 360.5 pence per Corus Share for the twelve months ended 4 October 2006.

The bid-price of 608 pence / share was at a premium of approximately 33.6 % to the first bid-price of 455 pence / share by Tata Steel on 20th Oct 2006. Arcelor-Mittal merger was at 4.5 times EBITDA of Arcelor.

MEANS OF FINANCING In January 2007 when the acquisition was approved then the a large amount of funding was through bridge loans. The funding structure as on April 2, 2007 was: -

Bridge Funding Cash from Tata Steel Long term debt TOTAL

$10.56 billion $1.09 billion $ 1.66 billion $ 13.3 billion

The following structure was approved at the Board Meeting of Tata Steel on 17th April 2007 Equity Capital from Tata Steel Ltd. Long term debt from consortium of banks taken by Tata Steel U.K $4.10 billion $6.14 billion Rs.17,850 crores Rs.26,730 crores

Quasi-equity funding at Tata $ 1.25 billion Steel Asia Singapore Long term capital funding at $ 1.41 billion Tata Steel Asia Singapore TOTAL $ 12.9 billion

Rs.5,440 crores Rs.6,130 crores Rs.56,150 crores

Corus Shares As per terms of the deal Tata acquired 100% equity of Corus

Also, post the deal the shares of Corus were delisted from the stock exchanges of London, New York and Amsterdam in April 2007

VODAFONE & HUTCHISON ESSAR DEAL

HUTCHISON ESSAR Ltd. (HEL

Established in 1992 as Hutchison Max by Hutchison Whampoa and Max Group Offered both prepaid and postpaid GSM cellular services in India Owns brands like Orange, Hutch and 3 Presence in 16 telecom circles. It increased its presence though Essar acquisition. Known for its presence in metros, hence enjoyed higher ARPUs in the industry Had approx. 22.2million subscribers Contributed more than 45% to the total revenues of HTIL

Vodafone Group Plc Established in 1991 as Racal Telecom and now it is headquartered in Berkshire, England U.K Offers both fixed line and mobile services across the world. Revenues in 2007 were 31.1 GBP billion with operating loss of 1.564 GBP billion. Presence in Europe (incl. Eastern Europe), Middle East, Africa, Asia Pacific and the USA. Had over 200 million subscribers

Controversial shareholding It is alleged that Asim Ghosh, Analjit Singh and IDFC were mere front entities acting on behalf of Hutchison, as it could not own more than 74% in HEL. Hutchison always said that 15% holding by these 3 entities was Indian and hence not to be classified as FDI.

 But, there are transactions showing loans and financial support provided to Asim Ghosh, Analjit Singh and IDFC for forming myriad chain of companies. Also, HTIL had options to buy trios stake at par value.

VODAFONE HUTCHISON DEAL

Vodafone acquired 52% direct and indirect stake in Hutchison Essar Ltd on 8th May 2007. It paid $11.1 billion for 52% stake and other loans of HTIL (the 15% stake). Vodafone owns only 52% stake in HEL even today. Essar had the first right of refusal but didnt exercise it. It was an all cash deal. The deal gave HEL and enterprise value of $18.8 billion Vodafone beat rival bidders like RCom, Hindujas and Ruias. Vodafone simultaneously sold its 5.6% direct stake in Bharti Airtel.

Factors for justifying the premium

Mobile penetration in India was then just 14% India was adding highest number of subscribers per month only next to China. Today it beats China as well. Hutchison-Essar enjoyed by the highest ARPU in Indian telecom market, thanks to its stron hold in metros. Vodafone itself was posting losses in saturated European and US markets. Therefore, its keeness to enter high potential emerging markets can also be factor in the premium.

Enterprise Valuation of Hutchison Essar Ltd. (HEL)

Market Value (GBP miilions) Net Consideration paid by Vodafone Gross debt assumed by Vodafone Enterprise value of complete Hutchison Essar Enterprise value/subscriber for HEL as per deal Enterprise value/subscriber for Bharti Airtel (FY 2007) 5,438 1,483 $18.8 billion $794 $614

Financing of Deal Vodafone to fund the acquisition through debt and existing cash reserves. Vodafone would have to take on a debt of USD 3.5 billion to fund this deal.

Post- Deal HTIL At EV of $18.8 billion represents 77% of HTILs total EV based on the net debt of HK$33bn as at the end of June 2006. It also implies that the remaining businesses were valued at just 5x of 2006 EV/EBITDA. The company will be facing start-up losses in Indonesia and Vietnam over the next few years. The stock of HTIL was predicted in all likely hood to lose its appeal to those who regard HTIL as an Indian proxy and would command lower multiples.

DAIICHI SANKYO-RANBAXY DEAL

RANBAXY LABORATIES LTD

A family controlled pharmaceutical business. Malvinder Singh is from the 3rd generation. Its main business is generic non-proprietary drugs. Presence in 56 countries including Mexico, Russia, East Europe, where Daiichi Sankyo is not present. Revenues in 2008 were Rs.4,472 crores with operating loss of Rs.571 crores.

Formation of Daiichi Sankyo Formed in 2005 by merger of Daiichi Pharmaceutical Co., Ltd. and Sankyo Company, Limited Its business is R&D, manufacturing, import and sales & marketing proprietary drugs. Revenues in 2008 were USD 8.8 billion with operating income of USD 1.568 billion. Business operations in 21 countries.

SYNERGY

Presence in emerging markets for Daiichi-Sankyo Geographical diversification . Entry into non-proprietary drugs for Daiichi-Sankyo Product Extension . Realization of sustainable growth through a complementary business model. Acceleration of innovative drug creation by optimizing value chain efficiency.

DAIICHI SANKYO RANBAXY DEAL On June 11, 2008 the Daiichi agreed to purchase more than 50.1 percent of the voting right of Ranbaxy at a price of Rs737 per share with the total transaction value expected to be between 368.5 billion (Rs147 billion) to 495 billion (Rs198 billion: Rs1 = 2.5) by its own fund and borrowing. It was an all cash deal. Daiichi Sankyo acquired 63.92% direct stake in Ranbaxy on November 2008. On a fully diluted basis, the deal values Ranbaxy at $8.5bn. The deal leads to the emergence of 15th largest pharmaceutical company The deal infused US $ 736 million into Ranbaxy's Balance Sheet.

How did Daiichi acquire Ranbaxy?

How much did Daiichi pay? Nature of transaction Open market share purchases Share purchases from founding family Share purchases by issuance of new shares Direct acquisition related expenditures Total Acquisition consideration (in million yens) 169,407 230,970 85,001 2,974 488,354

How did Daiichi value Ranbaxy?

Assets and Liabilities Book value of assets and liabilities (Cash, Inventory etc.) Inventories (Increase in inventories to fair value) Tangible assets (Land) Intangible assets (Leasehold land) Intangible assets (Increase in current products, etc. to fair value) In-process R&D expenses Deferred tax liability Minority Interests Goodwill Total consideration

Value attributed (Yen billions) 78.8 2.0 10.0 5.9 41.0 6.9 (20.0) (45.0) 408.7 488.3

Valuation of Ranbaxy Laboratories Ltd.

Price paid per share by Daiichi

Rs.737

52 week high / low as on 11th June 2008 for Ranbaxy Rs. 593 / 300 share Valuation of 63.92% stake by Daiichi Valuation of 100% equity of Ranbaxy as per the deal Enterprise valuation of Ranbaxy (on a fully diluted basis) EV / EBIDTA on CY 2009E Weighted avg EV / EBIDTA for Indian pharmaceutical companies for CY2009 E Market capitalization of Ranbaxy as on 30th May 2009 (conclusion of deal) 19804 crores 30982 crores $ 8.5 billion 24.7 times 14.7 times 10434 crores

Global down turn due to the financial crisis has made Daiichi take a huge hit on its balance sheet due to the acquisition of Ranbaxy.

Impact of Ranbaxy deal on Daiichis Balance Sheet

In Yens billion Reason

Net profit / (loss) for Daiichi-Sankyo in FY2008 Net profit / (loss) for Daiichi-Sankyo in FY2009 Net cash used in investing activities in FY2008 Net cash used in investing activities in FY2009 Short term bank loans in FY2008 Short term bank loans in FY2009

97.6 (351.3) 49.4 413.8 0.1 264.3

Recording of 351.3 billion in extraordinary losses due to a one-time write-down of goodwill pertaining to the investment in Ranbaxy. It is due to the cash acquisitions of shares in U3 Pharma and Ranbaxy, which entailed cash outgos.

Borrowings for the acquisition of Ranbaxy's share +240.0 billion Increase by consolidation of Ranbaxy

In Yens billion Loss on valuation of derivatives in FY 2008 Loss on valuation of derivatives in FY 2009 Foreign exchange losses in FY 2008 Foreign exchange losses in FY 2008 Purchases of investments in consolidated subsidiaries in FY 2008 Purchases of investments in consolidated subsidiaries in FY 2008 0.7 20.5 0 17.5 0.8 411.3

Reason Consolidation of Ranbaxy: +14.8 billion

Consolidation of Ranbaxy: -10.6 billion

Acquisition of Ranbaxy: 387.0 billion

Financing of Deal Daiichi funded the acquisition through debt and existing cash reserves. Daiichi has a taken a short and long term loans of 240 billion yens.

Thats almost 50% of the total funding requirement of the deal.

Risks in the deal for Daiichi

Ranbaxys exposure to the US dollar USFDA invocation may affect overall business in the country. The anticipated synergies may fail to realize if Ranbaxy faces regulatory hurdles world over.

Factors appearing in the trends

Companies from which country/region would be featuring as acquirers. Companies from which country/region would be featuring as being acquired. The factors on which the premium would be paid. Sectors that will witness heightened M&A activity. Objectives of merger i.e. product extension, geographical diversification etc. Means of financing that will gain popularity i.e. cash / stock deals. Role of intermediaries in the deal like that of investment bankers. Role of taxation in the execution of deals.

Data Analysis

Qu. 1] Do you know about merger &acquisition?

Yes 50

No 35

Cant Say 15

100 80 60 40 20 0 1s Qtr 2ndQtr 3rdQtr 4thQtr t Es at W t es N orth

Observation

Most of the employee are knowing about M&A.

Qu.2] Are you agree with M&A?

Yes 55

No 27

Cant say 18

Observation This question could not able to give good answer.

Qu.3] Do you think M&A is beneficial for bidder company?

Yes 83

No 2

Cant say 15

Observation In this Qu. Maximum employee is favor it.

Qu.4] Do you agree M&A is beneficial for target company?

Yes 48

No 36

Cant say 16

Observation

This Qu.is not able to get right answer.

Qu.5] Do you know about the process of M&A?

Yes 21

No 67

Cant say 12

Observation

In this answer maximum employee are unknown about the process of M&A.

Qu.6] Do you agree with the process of M&A?

Yes 17

No 46

Cant say 37

Observation

In this answer most of the employee are disagree.

Qu.7] Do you think M&A create monopoly?

Yes

No

Cant say

53

37

10

Observation

In this answer maximum are favor it.

Qu.8] Is M&A beneficial for employment?

Yes 54

No 36

Cant say 10

Observation

In this answer most of the employee are not favor it.

Qu.9] Is M&A beneficial for economy of country?

Yes 65

No 22

Cant say 13

Observation

In this answer maximum employee favor it that M&A is beneficial for economy.

Qu.10] Do you think M&A is the right solution for financial & Administration,Weakness of target company.

Yes

No

Cant say

72

10

18

Observation

Maximum no. of employee are favor it.

Qu.11] Do you think M&A is the creator of competition?

Yes 42

No 40

Cant say 18

Observation

This Qu. Is not able to get right answer.

Qu.12] Do you think M&A related authority is playing great role in the process of M&A?

Yes

No

Cant say

56

24

20

Observation

In this answer most of the employee are not satisfied this rule & regulation.

Finding

1. When I go to employee of Telco water technology for ask a question , they are in

some hesitation to give their answer .

2. Most of members have no knowledge about Merger & Acquisition. 3. The members do not know the basics of Merger & Acquisition.

4. Some employee are the combination of old and new member so some confusion arises

among them.

5. Most of the employee are able to give good answer.

6. By this research I find that M&A is beneficial for economy if related authority is playing great role in the process of M&A.

Recommendation

1. Give proper training to the employee about M&A.

2. Give them brief knowledge about Target Company because they can easily adjust after M&A.

3. During the M&A suggestion of employee should be taken.

4. Make sure that M&A is going to according to rules & regulation.

5. The process of M&A is slow make it fast as possible as both company can.

References & Bibliography

1. A swath Damodaran, Damodaran On Valuation: Security Analysis For Investment And Corporate Finance 2. Hitt, Harrison & Ireland, "Merger & Acquisitions" - A Guide To Creating Value For Stakeholders. 3 . Shiva Ramu, "Corporate Growth through Mergers and Acquisitions". 4. KPMG, Mergers & Acquisitions, Global Research Report 1999. 5 . www.crisilresearch.com, Crisil Reports on Indian Steel, Pharmaceutical and Telecommunications Industry. 6 . www.investopedia.com