A seminar on

Mergers and Acquisitions

What is MERGER?
Joining of two or more companies to form a new company with a name different from the names of the joining companies.

Types of Merger
Horizontal Merger

Vertical Merger
Conglomerate Merger

Horizontal Merger
Horizontal mergers are those mergers where the companies manufacturing similar kinds of commodities or running similar type of businesses merge with each other. Examples:
Lipton India and Broke Bond Associated Cement Companies Ltd and Damodar Cement

Vertical Merger
A merger between two companies producing different goods or services. Examples: Tata Motors and Trilix Srl

Conglomerate Merger
A merger between firms that are involved in totally unrelated business activities. Two types of conglomerate mergers:
Pure conglomerate mergers involve firms with nothing in common. Mixed conglomerate mergers involve firms that are looking for product extensions or market extensions.

Contd..
Example: Walt Disney Company and American Broadcasting Company

What is Acquisition?
When one company takes over another and clearly established itself as the new owner, the purchase is called an acquisition.

Types of Acquisition
Friendly Acquisition

Reverse Acquisition
Back-flip Acquisition Hostile Acquisition

Reasons for Merger and Acquisition

Synergy value: 2+2=5 Three forms of synergy value:
Revenues Expenses Cost of capital

Motives behind M & A

Economy of scale Economy of scope Increased revenue or market share Taxation Resource transfer Vertical Integration Hiring

Procedure for evaluating the decision on merger and acquisition

Planning
Analysis of industry and firm data like market growth, nature of competition, ease of entry, capital and labour intensity, degree of regulation, etc.

Contd..
Search and Screening
Looking for suitable candidates for acquisition

Financial Evaluation
Useful for the determination of earnings, areas of risk, the maximum price payable to the target company and the best way to finance the merger.

Overall process of Merger and Acquisition

The overall process of merger and acquisition consists of five phases: Pre-Acquisition Review
Accessing companys own situation and determining if M&A should be implemented. Determining whether growth targets can be achieved internally.

Search and Screen targets

Searching for the possible takeover candidates and screening to select the best one.

Contd..
Investigate and value the target
Detailed analysis and evaluation of data: Due Diligence Determines the kind of fit between the two merging companies:
Investment Fit Strategic Fit Marketing Fit Operating Fit Management Fit Market Customer Competition Legal

Also exposes risks of the proposed merger:

Contd..
Information to be collected for Due Diligence: Corporate Records Financial Records Tax Records Regulatory Records Debt Records Employment Records Miscellaneous Agreements:

Contd..
Acquire through Negotiation
Negotiation based on the following key questions: How much resistance will be encountered from the Target Company? What are the benefits of the M & A for the Target Company? What will be the bidding strategy? How much should be offered in the first round of bidding? Phase II Due Diligence: Detailed review to determine whether the proposed merger will work?

Contd..
Post-Merger Integration
Announcement of merger of two companies. Deal gets finalized. Putting all the things to work. Most difficult phase of all.

M & A Valuation
Determines the maximum price a buyer is willing to pay for buying the target company. Different valuation techniques and principles. Calculation of Swap Ratio:
Swap Ratio is the ratio at which the shares of acquiring company will be exchanged with the shares of the acquired company. For example, a swap ratio of 1:2 means that the acquiring a company will provide its one share for every two shares of the other company.

Financing M & A
Cash Stock
Issuing of stock of the acquiring company to the shareholders of the acquired company.

Reality Check
Reasons behind failed mergers:
Poor Strategic Fit Cultural and Social Differences Incomplete and Inadequate Due Diligence Poorly managed Integration Paying too much Overly Optimistic

Difference between merger and acquisition

Merger: Combination of two or more companies to expand their business operations. Both the companies sharing equal profits. Acquisition: One company taking over the other company and its business operations. Combined operations being run under the name of powerful entity.

Contd..
In merger, two companies of same sizes merge together to increase their strength and financial gains. In acquisition, two companies of different sizes come together to overcome the challenges of downturn.

Legal and Regulatory Considerations

Letter of Intent
How will the acquisition price be determined? What will be the form of payment? How much time will the Target Company allow for negotiations? How much compensation will the acquiring company be entitled to in the event that the target is acquired by another company? Will there be any operating restrictions imposed on either company during negotiations? What exactly is being acquired?

Regulatory Environment
Various laws governing merger and acquisitions. Objective: To make deals transparent and protect the interest of share holders. Laws:
The Companies Act, 1956 The Competition Act,2002

The Companies Act,1956

Following legal procedure: Permission for merger Information to the stock exchange Approval of the board of directors Application in the High Court Shareholders and creators meeting

Contd..
Sanction by High Court Filing of court order Transfer of assets and liabilities Payment by cash or securities

The Competition Act,2002

Regulates the various forms of business combinations through Competition Commission of India. To check merger/acquisition does not have adverse effect on competition in relevant market.

Contd..
Factors to be considered:
Actual and potential competition through imports. Extent of entry barriers into the market. Level of competition in the market. Extent of effective competition likely to sustain the market. Nature and extent of innovation. Market share of parties to the combination individually as well as with combination. Whether the benefits of the combinations outweigh the adverse impact of the combination.

Examples
Acquisition of Canada based firm NOVELIS by Aditya Birla Groups HINDALCO INDUSTRIES. Acquisition of ZAIN by AIRTEL. Merger of ARCELOR and MITTAL STEEL. Acquisition of CHORUS GROUP by TATA STEEL. Acquisition of COMPAQ by HEWLETTPACKARD.

Top 10 acquisitions made by Indian companies worldwide

Acquirer Tata Steel Hindalco Videocon

Target Country Company targeted Corus Group plc UK Novelis Daewoo Electronics Corp. Canada Korea Germany Belgium Kenya

Deal value ($ Industry ml) 12,000 Steel 5,982 729 597 565 500 Steel Electronics Pharmaceutical Energy Oil and Gas

Dr. Reddys Betapharm Labs Suzlon Energy Hansen Group Kenya HPCL Petroleum Refinery Ltd. Ranbaxy Labs Terapia SA Tata Steel Videocon VSNL Natsteel Thomson SA Teleglobe

Romania
Singapore France Canada

324
293 290 239

Pharmaceutical
Steel Electronics Telecom

Benefits of mergers and acquisitions

Accelerating Companys growth. Enhancing profitability. Obtaining quality employees and new skills. Improving efficiencies at work. Reducing costs.

Impairments of merger and acquisition

Infrequent and irrelevant communication Triangulation Social and cultural differences Preoccupation Due diligence not done properly

Why Mergers and Acquisitions can Fail?

1+1 =3 not true in real sense. Flawed Intentions Obstacles to making it work.

Conclusion
M & A are the most difficult of all business transactions. Ultimate goal it to create synergy values. Well researched and realistic planning and designing of M&A can improve the synergy values.