MERGERS

AND
ACQUISITIONS
MERGER
Merger

 The combination of two firms into a new legal entity

 A new company is created

 Both sets of shareholders have to approve the transaction.

 The equation for merger is A+B=C

 Both companies' stocks are surrendered and new company stock

is issued in its place..
ACQUISITION
 an act of one enterprise of acquiring, directly or indirectly of
shares, voting rights, assets or control over the management, of
another enterprise .

 Strong companies will act to buy other companies to create a

more competitive, cost-efficient company.

 The equation for acquisition is A+B=A

 There is no exchange of stock or consolidation as a new company

 Tata Steel acquired UK based Corus for $ 8 billion.

TYPES OF MERGERS

1. Horizontal
 A merger in which two firms in the same industry combine.
 Often in an attempt to achieve economies of scale and/or scope.
 Kingfisher jet alliance
2. Vertical
 A merger in which one firm acquires a supplier or another firm
that is closer to its existing customers.
 Often in an attempt to control supply or distribution channels.
 Merck largest drug manufacturer merging with medco – largest
distributor
3. Conglomerate
 A merger in which two firms in unrelated businesses combine.
 Purpose is often to ‘diversify’ the company by combining
uncorrelated assets and income streams
BENEFITS OF M&A
The primary motive should be the creation of synergy.

Synergy value is created from economies of integrating a target and acquiring

a company; the amount by which the value of the combined firm exceeds the
sum value of the two individual firms.

 V  V A T -(V A  VT )

 Staff reduction
 Economies of scale
 Improved market reach and industry visibility
Valuation Matters
Comparative Ratios
1.Price-earning ratio
2.Enterprise value to sales ratio
Replacement Cost
Discounted Cash Flow (DCF)
Reasons for M&A
Horizontal integration
Vertical integration
 Assurance of supply
 Lower inventory cost
 Not to pay profit to the supplier
 Transaction cost and disruptions at end of contract

Improved management
Improved R&D
Hubris
 Acquiring for personal motive than economic gains
 Winners curse
Strategies Of Mergers&Acquisitions
 Friendly Takeovers
 Hostile Takeovers
- Tender Offers
- Bear Hug
- Proxy Fights
- Lady Macbeth Strategy

15 - 8
Friendly Takeovers
 The acquisition of a target
company that is willing to
be taken over.
 Usually, the target will
accommodate overtures
and provide access to
confidential information
to facilitate the scoping
and due diligence
processes.
Hostile Takeovers
 A hostile takeover allows a
suitor to bypass a target
company's management
unwilling to agree to a
merger or takeover.
 The target has no desire to
be acquired and actively
rebuffs the acquirer and
refuses to provide any
confidential information.
Hostile Takeover – Tender Offers
 The tender offer is a public, open offer or invitation by a
prospective acquirer to all stockholders of a publicly
traded corporation to tender their stock for sale at a
specified price during a specified time.

 To induce the shareholders of the target company to sell,

the acquirer's offer price usually includes a premium over
the current market price of the target company's shares.
Bear Hug
 An offer made by one
company to buy the shares
of another for a much
higher per-share price than
what that company is worth.
 The target company's
management is essentially
forced to accept such a
generous offer because it is
legally obligated to look out
for the best interests of its
shareholders.
Lady Macbeth Strategy
 A corporate-takeover
strategy with which a
third party poses as a
white knight to gain
trust, but then turns
around and joins with
unfriendly bidders.
 White Knight & Black
Knight.
Proxy Fight
 An acquiring company,
frustrated by the
takeover defences of the
management, may
initiate a proxy fight to
install a more compliant
management of the
target.
 Eg: HP’s takeover of
Compaq.
Defensive Techniques
 Poison Pills.

 Selling the crown jewels.

 White knight
 AS 14
Accounting for Amalgamations
Definitions
Transferor company means the company which is
amalgamated into another company.
Transferee company means the company into which a
transferor company is amalgamated.
Reserve means the portion of earnings, receipts or other
surplus of an enterprise
Consideration for the amalgamation means the aggregate of
the shares and other securities issued and the payment made in
the form of cash or other assets by the transferee company to
the shareholders of the transferor company.
Amalgamation in the nature of merger
Assets and liabilities of the transferor company become the
assets and liabilities of the transferee company.
Equity shareholders of the transferee company.
Issue of equity shares in the transferee company.
Business of the transferor company is intended to be carried
on.
No adjustment is intended to be made to the book values of the
assets and liabilities
Methods of Accounting for Amalgamations

The pooling of interests method

The purchase method.

The Pooling of Interests Method
The assets, liabilities and reserves of the transferor company
are recorded by the transferee company at their existing
carrying amounts

A uniform set of accounting policies is adopted following the

amalgamation.
The Purchase Method
Allocates the consideration to individual identifiable assets and
liabilities of the transferor company on the basis of their fair
values at the date of amalgamation.

Creation of specific provisions for the expected costs

Treatment of Reserves on Amalgamation
‘Amalgamation in the nature of merger’, the identity of the
reserves is preserved

‘Amalgamation in the nature of purchase’, the identity of the

reserves, other than the statutory reserves dealt, is not
preserved
Treatment of Goodwill Arising on
Amalgamation
Goodwill arising on amalgamation represents a payment
made in anticipation of future income

Treat it as an asset to be amortized to income on a

systematic basis
Balance of Profit and Loss Account
Amalgamation in the nature of merger
Aggregated with the corresponding balance appearing in
the financial statements of the transferee company

Amalgamation in the nature of purchase

Loses its identity
Disclosure
Names and general nature of business of the
amalgamating companies
Effective date of amalgamation for accounting purposes
The method of accounting used to reflect the
amalgamation
Disclosures
Pooling of interests
Description and number of shares issued
The amount of any difference between the consideration and
the value of net identifiable assets
Purchase method
Consideration for the amalgamation and a description of the
consideration paid
Period of amortisation of any goodwill
The Case of RIL – RPL Merger
RIL Highlights
Enviable track record in refining
Consistently demonstrated higher GRMs compared to
global benchmarks
Jamnagar refinery – World class with a competitive
capital cost
RPL Highlights
Crude processing capacity of 580,000 barrels/day
Built to supply ultra-clean fuels to meet the world’s
evolving needs
Focus on high growth transportation fuel segment
Merger Rationale
Unlock synergies from combined operations
– Crude sourcing, Product placement, Supply
Chain Optimisation
Greater flexibility in operations planning
Optimised utilisation of secondary process units
and infrastructure
Integrated energy companies consistently get
higher valuations vis-à-vis pure refiners
Merger Details
Merger ratio of 1 share of RIL for every 16 shares of
RPL
RPL shares held by RIL to be cancelled. No fresh
treasury stock created
RIL to issue 6.92 crore shares to RPL shareholders
Promoter holding in RIL will reduce from 49% to
47%
Impact of Merger Proposal
RIL among top 10 private sector refining
companies globally
Will own 2 of the world’s 3 largest, most complex
modern refineries
Will be the world’s largest producer of ultra-clean
fuels at a single location
Among 50 most profitable companies globally
Among five largest producers of Polypropylene
RPL Performance

 Source: Moneycontrol
RIL Performance

 Source: Moneycontrol
The Case of TATA – Corus Acquisition
 Chronology of the event

Sep 20, 06 : CORUS uses the strategy to work with low cost producer
Oct 06, 06 : Initial offer by TATA is considered to be too low.
Oct 17, 06: TATA kept its offer to 455 pence per share.
Oct 20, 06 : CORUS accepts the offer of £4.3 billion.
Oct 23, 06 : Brazilian Steel Group CSN counter-offer to TATA’s offer.
Oct 27, 06 : CORUS criticized by JCB for acceptance of TATA’s offer.
Nov 18, 06 : The CSN approaches Corus With an offer of 475
pence/share
Nov 27, 06 : Board of Corus decides to give more time for shareholders
to decide whether it issue forward a formal offer.
Dec h18,06 : Tata increases its original bid for Corus 500 pence/share,
then CSN made its counter bid at 515 pence/share in cash
Jan 31, 07 : TATA agreed to offer Corus investors 608 pence/share in
cash
Apr 02, 07 : Tata steel manages to win acquisition to CSN and has the
full voting support from Corus shareholders
Synergies for Corus
Global Reach
Total debt of Corus as on the date of acquisition-
GBP1.6 Billion
Corus needed supply of raw materials at lower cost
Though Corus had revenues of $18.06bn, its profit was
a mere $626mn compared to Tata’s revenue of $4.84bn
and profit of $824mn
Production facilities of Corus were relatively old with
high cost production
Employee cost is 15% (Tata 9%)
Synergies for TATA
Tata has been looking to manufacture finished products in mature
markets like Europe
Diversified product mix
–Reduces risks
–Higher end products will add to bottom line
Corus holds a number of patents and R&D facilities and immediate access
to advanced technology
Greenfield plant
–Cost
–Time
Will catapult Tata from 55th largest producer to 5th largest.
Will make it difficult for other companies to make a hostile bid for TATA
Steels
Financing the deal
Tata Corus deal – $12.1 Billion
Contribution from Tata Steel - $3.88 Billion
–$2bn equity
–$1.8 billion Bridge loan
Lead by credit Suisse, later joined by ABN AMRO and
Deutsche Bank in the consortium
Of the $ 8.12 billion of financing , Credit Suisse
provided 45% and ABN AMRO and Deutsche provided
27.5% each.
Pre and Post Acquisition
TATA
Date of announcement –536.60
Date of Acquisition- 464.90
Today’s price- 536.10

TATA acquires 21.1

% stake in Corus
Corus
On the date of announcement – 360.5 Pence/share
On the date of Acquisition-608 pence/share
TATA becomes 5th largest steel manufacturing
company in the world post acquisition.