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Types of Merger

1. Horizontal merger: It is a merger of two or more companies that compete in the same industry. It is a merger with a direct competitor and hence expands as the firms operations in the same industry. Horizontal mergers are designed to produce substantial economies of scale and result in decrease in the number of competitors in the industry. The merger of Tata Oil Mills Ltd. with the Hindustan lever Ltd. was a horizontal merger. In case of horizontal merger, the top management of the company being meted is generally, replaced, by the management of the transferee company. One potential repercussion of the horizontal merger is that it may result in monopolies and restrict the trade. Weinberg and Blank define horizontal merger as follows: A takeover or merger is horizontal if it involves the joining together of two companies which are producing essentially the same products or services or products or services which compete directly with each other (for example sugar and artificial sweetness). In recent years, the great majority of takeover and mergers have been horizontal. As horizontal takeovers and mergers involve a reduction in the number of competing firms in an industry, they tend to create the greatest concern from an anti-monopoly point of view, on the other hand horizontal mergers and takeovers are likely to give the greatest scope for economies of scale and elimination of duplicate facilities. 2. Vertical merger: It is a merger which takes place upon the combination of two companies which are operating in the same industry but at different stages of production or distribution system. If a company takes over its supplier/producers of raw material, then it may result in backward integration of its activities. On the other hand, Forward integration may result if a company decides to take over the retailer or Customer Company. Vertical merger may result in many operating and financial economies. The transferee firm will get a stronger position in the market as its production/distribution chain will be more integrated than that of the competitors. Vertical merger provides a way for total integration to those firms which are striving for owning of all phases of the production schedule together with the marketing network (i.e., from the acquisition of raw material to the relating of final products). A takeover of merger is vertical where one of two companies is an actual or potential supplier of goods or services to the other, so that the two companies are both engaged in the manufacture or provision of the same goods or services but at the different stages in the supply route (for example where a motor car manufacturer takes over a manufacturer of sheet metal or a car distributing firm). Here the object is usually to ensure a source of supply or an outlet for products or services, but the effect of the merger may be to improve efficiency through improving the flow of production and reducing stock holding and handling costs, where, however there is a

degree of concentration in the markets of either of the companies, anti-monopoly problems may arise. 3. Co generic Merger: In these, mergers the acquirer and target companies are related through basic technologies, production processes or markets. The acquired company represents an extension of product line, market participants or technologies of the acquiring companies. These mergers represent an outward movement by the acquiring company from its current set of business to adjoining business. The acquiring company derives benefits by exploitation of strategic resources and from entry into a related market having higher return than it enjoyed earlier. The potential benefit from these mergers is high because these transactions offer opportunities to diversify around a common case of strategic resources. Western and Mansinghka classified cogeneric mergers into product extension and market extension types. When a new product line allied to or complimentary to an existing product line is added to existing product line through merger, it defined as product extension merger, Similarly market extension merger help to add a new market either through same line of business or adding an allied field . Both these types bear some common elements of horizontal, vertical and conglomerate merger. For example, merger between Hindustan Sanitary ware industries Ltd. and associated Glass Ltd. is a Product extension merger and merger between GMM Company Ltd. and Xpro Ltd. contains elements of both product extension and market extension merger. 4. Conglomerate merger: These mergers involve firms engaged in unrelated type of business activities i.e. the business of two companies are not related to each other horizontally ( in the sense of producing the same or competing products), nor vertically( in the sense of standing towards each other n the relationship of buyer and supplier or potential buyer and supplier). In a pure conglomerate, there are no important common factors between the companies in production, marketing, research and development and technology. In practice, however, there is some degree of overlap in one or more of this common factors. Conglomerate mergers are unification of different kinds of businesses under one flagship company. The purpose of merger remains utilization of financial resources enlarged debt capacity and also synergy of managerial functions. However these transactions are not explicitly aimed at sharing these resources, technologies, synergies or product market strategies. Rather, the focus of such conglomerate mergers is on how the acquiring firm can improve its overall stability and use resources in a better way to generate additional revenue. It does not have direct impact on acquisition of monopoly power and is thus favored through out the world as a means of diversification.

crossborder merger
A cross-border merger is a transaction in which the assets and operation of two firms belonging to or registered in two different countries are combined to establish a new legal entity. In a cross-border acquisition, the control of assets and operations is transferred from a local to a foreign company, with the former becoming an affiliate of the latter.

Definition of 'Divestiture'
The partial or full disposal of an investment or asset through sale, exchange, closure or bankruptcy. Divestiture can be done slowly and systematically over a long period of time, or in large lots over a short time period.

Investopedia explains 'Divestiture'


For a business, divestiture is the removal of assets from the books. Businesses divest by the selling of ownership stakes, the closure of subsidiaries, the bankruptcy of divisions, and so on. In personal finance, investors selling shares of a business can be said to be divesting their interests in the company being sold.

Post Merger Integration


Successful Post Merger Integration requires well-planned, coordinated communications. Improvising communication, just "winging it," can feed the rumor mill, create needless anxiety, and harm productivity. Studies done on customer satisfaction in mergers say that customers typically expect merging companies to have the majority of their customer-facing issues resolved within 100 days postclose. They will be pretty tolerant of mistakes, glitches, and bumps up to that period, but after about 100 days, they expect things to be running smoothly, if not perfectly. Merging companies that take longer than 100 days to iron out their customer issues begin to experience dramatically-rising customer defection rates. One can sometimes refer to 100 days as the customer tolerance point

Definition of 'Leveraged Buyout - LBO'


The acquisition of another company using a significant amount of borrowed money (bonds or loans) to meet the cost of acquisition. Often, the assets of the company being acquired are used as collateral for the loans in addition to the assets of the acquiring company. The purpose of leveraged buyouts is to allow companies to make large acquisitions without having to commit a lot of capital.

Investopedia explains 'Leveraged Buyout - LBO'


In an LBO, there is usually a ratio of 90% debt to 10% equity. Because of this high debt/equity ratio, the bonds usually are not investment grade and are referred to as junk bonds. Leveraged buyouts have had a notorious history, especially in the 1980s when several prominent buyouts led to the eventual bankruptcy of the acquired companies. This was mainly due to the fact that the leverage ratio was nearly 100% and the interest payments were so large that the company's operating cash flows were unable to meet the obligation. One of the largest LBOs on record was the acquisition of HCA Inc. in 2006 by Kohlberg Kravis Roberts & Co. (KKR), Bain & Co., and Merrill Lynch. The three companies paid around $33 billion for the acquisition. It can be considered ironic that a company's success (in the form of assets on the balance sheet) can be used against it as collateral by a hostile company that acquires it. For this reason, some regard LBOs as an especially ruthless, predatory tactic.

Definition of 'Enterprise Value - EV'


A measure of a company's value, often used as an alternative to straightforward market capitalization. Enterprise value is calculated as market cap plus debt, minority interest and preferred shares, minus total cash and cash equivalents.

Investopedia explains 'Enterprise Value - EV'


Think of enterprise value as the theoretical takeover price. In the event of a buyout, an acquirer would have to take on the company's debt, but would pocket its cash. EV differs significantly from simple market capitalization in several ways, and many consider it to be a more accurate representation of a firm's value. The value of a firm's debt, for example, would need to be paid by the buyer when taking over a company, thus EV provides a much more accurate takeover valuation because it includes debt in its value calculation.

Hostile takeovers

A hostile takeover can be conducted in several ways. A tender offer can be made where the acquiring company makes a public offer at a fixed price above the current market price. Tender offers in the United States are regulated by the Williams Act. An acquiring company can also engage in a proxy fight, whereby it tries to persuade enough shareholders, usually a simple majority, to replace the management with a new one which will approve the takeover. Another method involves quietly purchasing enough stock on the open market, known as a creeping

tender offer, to effect a change in management. In all of these ways, management resists the acquisition but it is carried out anyway. The main consequence of a bid being considered hostile is practical rather than legal. If the board of the target cooperates, the bidder can conduct extensive due diligence into the affairs of the target company, providing the bidder with a comprehensive analysis of the target company's finances. In contrast, a hostile bidder will only have more limited, publicly-available information about the target company available, rendering the bidder vulnerable to hidden risks regarding the target company's finances. An additional problem is that takeovers often require loans provided by banks in order to service the offer, but banks are often less willing to back a hostile bidder because of the relative lack of information about the target available to them.

Tender offer
Tender offer is a corporate finance term denoting a type of takeover bid. The tender offer is a public, open offer or invitation (usually announced in a newspaper advertisement) by a prospective acquirer to all stockholders of a publicly traded corporation (the target corporation) to tender their stock for sale at a specified price during a specified time, subject to the tendering of a minimum and maximum number of shares. In a tender offer, the bidder contacts shareholders directly; the directors of the company may or may not have endorsed the tender offer proposal. 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. For example, if a target corporation's stock were trading at $10 per share, an acquirer might offer $11.50 per share to shareholders on the condition that 51% of shareholders agree. Cash or securities may be offered to the target company's shareholders, although a tender offer in which securities are offered as consideration is generally referred to as an "exchange offer."

Proxy fight
A proxy fight or proxy battle is an event that may occur when a corporation's stockholders develop opposition to some aspect of the corporate governance, often focusing on directorial and management positions. Corporate activists may attempt to persuade shareholders to use their proxy votes (i.e. votes by one individual or institution as the authorized representative of another) to install new management for any of a variety of reasons. Shareholders of a public corporation may appoint an agent to attend shareholder meetings and vote on their behalf. That agent is the shareholder's proxy.[1] In a proxy fight, incumbent directors and management have the odds stacked in their favor over those trying to force the corporate change. These incumbents use various corporate governance tactics to stay in power including: staggering the boards (i.e. having different election years for

different directors), controlling access to the corporation's money, and creating restrictive requirements in the bylaws. As a result, most proxy fights are unsuccessful. However, it has been recently noted that proxy fights waged by hedge funds are successful more than 60% of the time.[2]

Examples
An acquiring company, frustrated by the takeover defenses of the management, may initiate a proxy fight to install a more compliant management of the target. Stockholder dissidents opposed to an impending takeover in the view that it will dilute value may also use a proxy fight to stop it. An example of a proxy fight took place within HewlettPackard, when the management of that company sought to take over Compaq. Opponents of the Compaq takeover lost the fight. The management, under Carly Fiorina, remained in place, and the merger went ahead.[3] In the absence of any looming takeover, proxy fights can come about because dissidents are unhappy with management, as with Carl Icahn's effort in 2005-2006 to oust a majority of the board of Time Warner.[4] An early history of proxy fighting, detailing such 1950s battles as the fight for control of some of America's largest corporations, including the Bank of America and the New York Central Railroad, can be found in David Karr's 1956 volume, Fight for Control.

Steps of the M&A Process


1. Compile a target list. You can't buy or sell a business unless you have a list of suitable Sellers or Buyers. 2. Contact the targets. Making a phone call and discussing the target's interest is important. That discussion allows you to gauge the target's interest level and whether proceeding makes sense. Knowing how to make a pitch is an art, and believe it or not, being a Buyer is far more difficult than being a Seller! 3. Send/receive a teaser. The teaser (sometimes called an executive summary) is the document Seller sends to Buyer to give Buyer just enough information (the product, the customers, the problem the company solves, and some high-level financials) to make Buyer want to learn more. The teaser is usually anonymous; that is, Buyer doesn't know which specific company is sending the document.

4. Sign a confidentiality agreement. Both sides agree to keep the deal discussions and materials confidential. 5. Send/review the confidential information memorandum (CIM). The CIM or deal book is the Seller's bible and provides all the information (including company history, product descriptions, financials, customer info, and more) Buyer needs to determine whether to make an offer. 6. Submit/solicit an indication of interest (IOI). Buyer expresses interest in doing a deal by submitting this simple written offer, most often with a valuation range rather than a specific price. 7. Conduct management meetings. Buyer and Seller get a chance to meet face to face. In these meetings, Seller provides Buyer with an update of the business and guidance for future performance. Additionally, both sides gauge how compatible they are. 8. Ask for or submit a letter of intent (LOI). Based on the material in the CIM and on the updates from the management meetings, Buyer submits this detailed offer with a firm price. 9. Conduct due diligence. In the due diligence phase, Buyer examines Seller's books and records to confirm everything Seller has claimed. 10. Write the purchase agreement. Buyer and Seller memorialize the deal in this legally binding contract. 11. Close the deal. Closing is rather anticlimactic: Both sides sign lots of papers, Buyer gives Seller the money, and Seller gives Buyer the company. 12. Handle any post-closing adjustments and integration. Closing isn't the end of the deal. Buyer and Seller usually have some post-closing financial adjustments, and Buyer has to integrate the acquired company into the parent company or make sure it can continue to operate as a standalone business.

FIRM VALUATION IN MERGERS AND ACQUISITIONS BALANCE SHEET VALUATION The balance sheet technique is one of the most commonly used methods of evaluating a business, although it is not highly recommended because it oversimplifies the valuation process. This method computes the company's net worth or owner's equity (net worth = assets - liabilities) and uses this figure as the value. The problem with this technique is that it fails to recognize reality: Most small businesses have market values that exceed their reported book values. The first step is to determine which assets are included in the sale. In most cases, the owner has some personal assets he does not want to sell. Remember that net worth on a financial statement will likely differ significantly from actual net worth in the market. Variation: Adjusted Balance Sheet Technique. A more realistic method for determining a company's value is to adjust the book value of net worth to reflect actual market value. The values reported on a companys books may overstate or understate the true value of assets and liabilities. Typical assets in a business sale include notes and accounts receivable, inventories, supplies, and fixtures. If a buyer purchases notes and accounts receivable, he should estimate the likelihood of their collection and adjust their value accordingly. In manufacturing, wholesale, and retail businesses, inventory usually is the largest single asset involved in the sale. Taking a physical inventory count is the best way to determine accurately the quantity of goods to be transferred. The sale may include three types of inventory, each having its own method of valuation: raw materials, work in-process, and finished goods. The buyer and the seller must arrive at a method for evaluating the inventory First-in-first-out (FIFO), last-in-first out (LIFO), and average costing are three frequently used techniques, but the most common methods use the cost of last purchase and the replacement value of the inventory. Before accepting any inventory value, the buyer should evaluate the condition of the goods. One young couple purchased a lumber yard without examining the inventory completely. After completing the sale, they discovered that most of the lumber in a warehouse they had neglected to inspect was warped and was of little value as building material. The bargain price they paid for the business turned out not to be the good deal they had expected. To avoid such problems, some buyers insist on having a knowledgeable representative on an inventory team that counts the inventory and checks its condition. Nearly every sale involves merchandise that

cannot be sold; but, by taking this precaution, a buyer minimizes the chance of being stuck with worthless inventory. Fixed assets transferred in a sale might include land, buildings, equipment, and fixtures. Business owners frequently carry real estate and buildings at prices well below their actual market value. Equipment and fixtures, depending on their condition and usefulness, may increase or decrease the true value of the business. Appraisals of these assets on insurance policies are helpful guidelines for establishing market value. Business evaluations based on balance sheet method suffer one major drawback: they do not consider the future earning potential of the business. These techniques value assets at current prices and do not consider them as tools for creating future profits. The next method for computing the value of a business is based on its expected future earnings.

The dividend discount model (DDM) is a way of valuing a company based on the theory that a stock is worth the discounted sum of all of its future dividend payments.[1] In other words, it is used to value stocks based on the net present value of the future dividends. The equation most always used is called the Gordon growth model. It is named after Myron J. Gordon, who originally published it in 1959;[2] although the theoretical underpin was provided by John Burr Williams in his 1938 text "The Theory of Investment Value". The variables are: is the current stock price. is the constant growth rate in perpetuity expected for the dividends. is the constant cost of equity for that company. is the value of the next year's dividends. There is no reason to use a calculation of next year's dividend using the current dividend and the growth rate, when management commonly disclose the future year's dividend and websites post it.
Price Earnings Multiple Valuation The price-earnings ration (P/E) is simply the price of a company's share of common stock in the public market divided by its earnings per share. By multiplying this P/E multiple by the net income, the value for the business could be determined. This valuation method provides a benchmark business valuation as the non-listed companies wishing to use this method; a comparable quoted company/sector should be used. Financial experts believe that business valuations using any method should not be too high or too low because that could be costly, resulting in either overpayment or lost opportunities. The firms that face important investment, acquisition, or growth decisions, particularly in a rapidly changing competitive environment, effective management requires an understanding of value creation and a command over valuation analysis.

Valuation using discounted cash flows


Valuation using discounted cash flows is a method for determining the current value of a company using future cash flows adjusted for time value. The future cash flow set is made up of the cash flows within the determined forecast period and a continuing value that represents the cash flow stream after the forecast period.

EVA Analysis - Business Valuation Method


The EVA presents the analysis of the Economic Value Added, an advanced evaluation method that measures the performance and the profitability of the business, taking in account the cost of capital that the business employs. This method, invented by Stern Stewart & Co. is used today by more and more companies as a framework for their financial management and their incentive compensation system for the managers and the employees.

Joint venture
A joint venture (JV) is a business agreement in which parties agree to develop, for a finite time, a new entity and new assets by contributing equity. They exercise control over the enterprise and consequently share revenues, expenses and assets. There are other types of companies such as JV limited by guarantee, joint ventures limited by guarantee with partners holding shares. In European law, the term 'joint-venture' (or joint undertaking) is an elusive legal concept, better defined under the rules of company law. In France, the term 'joint venture' is variously translated as 'association d'entreprises', 'entreprise conjointe', 'coentreprise' or 'entreprise commune'. But generally, the term societe anonyme loosely covers all foreign collaborations. In Germany, 'joint venture' is better represented as a 'combination of companies' (Konzern).[1] With individuals, when two or more persons come together to form a temporary partnership for the purpose of carrying out a particular project, such partnership can also be called a joint venture where the parties are "co-venturers". The venture can be for one specific project only - when the JV is referred to more correctly as a consortium (as the building of the Channel Tunnel) - or a continuing business relationship. The consortium JV (also known as a cooperative agreement) is formed where one party seeks technological expertise or technical service arrangements, franchise and brand use agreements, management contracts, rental agreements, for one-time contracts. The JV is dissolved when that goal is reached. Some major joint ventures include Dow Corning, MillerCoors, Sony Ericsson, Penske Truck Leasing, Norampac, and Owens-Corning.

A joint venture takes place when two parties come together to take on one project. In a joint venture, both parties are equally invested in the project in terms of money, time, and effort to build on the original concept. While joint ventures are generally small projects, major corporations also use this method in order to diversify. A joint venture can ensure the success of smaller projects for those that are just starting in the business world or for established corporations. Since the cost of starting new projects is generally high, a joint venture allows both parties to share the burden of the project, as well as the resulting profits. Since money is involved in a joint venture, it is necessary to have a strategic plan in place. In short, both parties must be committed to focusing on the future of the partnership, rather than just the immediate returns. Ultimately, short term and long term successes are both important. In order to achieve this success, honesty, integrity, and communication within the joint venture are necessary. What are the Advantages of forming a Joint Venture?

Provide companies with the opportunity to gain new capacity and expertise Allow companies to enter related businesses or new geographic markets or gain new technological knowledge access to greater resources, including specialised staff and technology sharing of risks with a venture partner Joint ventures can be flexible. For example, a joint venture can have a limited life span and only cover part of what you do, thus limiting both your commitment and the business' exposure. In the era of divestiture and consolidation, JVs offer a creative way for companies to exit from non-core businesses. Companies can gradually separate a business from the rest of the organisation, and eventually, sell it to the other parent company. Roughly 80% of all joint ventures end in a sale by one partner to the other.

The Disadvantages of Joint Ventures


It takes time and effort to build the right relationship and partnering with another business can be challenging. Problems are likely to arise if: The objectives of the venture are not 100 per cent clear and communicated to everyone involved. There is an imbalance in levels of expertise, investment or assets brought into the venture by the different partners. Different cultures and management styles result in poor integration and co-operation. The partners don't provide enough leadership and support in the early stages. Success in a joint venture depends on thorough research and analysis of the objectives.

Definition of 'Vertical Merger'


A merger between two companies producing different goods or services for one specific finished product. A vertical merger occurs when two or more firms, operating at different levels within an

industry's supply chain, merge operations. Most often the logic behind the merger is to increase synergies created by merging firms that would be more efficient operating as one.

Investopedia explains 'Vertical Merger'


In vertical mergers, by directly merging with suppliers, a company can decrease reliance and increase profitability. An example of a vertical merger is a car manufacturer purchasing a tire company. Such a vertical merger would reduce the cost of tires for the automaker and potentially expand business to supply tires to competing automakers.

Merger and acquisition funding at a competitive rate requires a properly structured transaction. Financing for such scenarios comes in a variety of alternatives. These financing alternatives include:

New private equity placement Sale leaseback vehicles Bridge or term loans Other mezzanine-type products Revolving lines of credit

Role of The Investment Bankers


Acheiving Strategic Objectives

Investment bankers meet regularly with management to discuss what objectives the company is strategically focusing on. The banker also needs to provide an outside view of what competitor companies are doing and what, if any, strategic complications this provides. Bankers must provide solutions for achieving objectives and have the financial strength to lead bond and stock offerings on behalf of the company.

Due Diligence

If a company has made a bid for another company an outside third party such as the investment banker will need to supply an opinion regarding the careful study and decision making that went into acquiring the company. This is called a due diligence report. The due diligence report is a necessary document and requires that the investment banker ask probing questions and ascertain that the company did everything in its power to uncover problems that might arise later.

Fairness Opinions

Another document necessary for the purchase of one company by another is the fairness opinion. The fairness opinion is written by the investment banker and provides detailed determinations, often using several investment metrics, to demonstrate that the company did not overpay for the acquired company. Fairness opinions allow management to show that substantial effort was used to get the best price possible for investors. An investment banker may be sued by shareholders if it is later learned that his opinion was incorrect.

Managing Debt Offerings

Investment bankers suggest ways to finance or refinance financial obligations. In a period of low interest rates a banker may demonstrate cost savings by redeeming outstanding debt at higher interest rates and substituting a new, lower interest cost issue. The banker earns fees for the underwriting while guiding the company's efforts to choose the proper size and maturity of the offering as well as handling negotiations with the debt rating agencies.

Managing Stock Offerings

Investment bankers are responsible for bringing new companies to the public markets for the first time (also called an IPO or initial public offering), raising capital for privately held companies, or improving the capital strength of existing public companies by redeeming debt with additional stock offerings. Taking a company public is a difficult task as the stock offering may not be received well if it is overpriced or will rise greatly in value if it is under-priced. It is the job of the banker to negotiate terms and get all legal, accounting and regulatory documents prepared. In addition, the investment banker will work with the sales force and other customers to buy the stock.

Definition of 'Conglomerate'
A corporation that is made up of a number of different, seemingly unrelated businesses. In a conglomerate, one company owns a controlling stake in a number of smaller companies, which conduct business separately. Each of a conglomerate's subsidiary businesses runs independently of the other business divisions, but the subsidiaries' management reports to senior management at the parent company. The largest conglomerates diversify business risk by participating in a number of different markets, although some conglomerates elect to participate in a single industry - for example, mining.

Conglomerate Diversification According to Business Dictionary Conglomerate Diversification is a type of diversification whereby a firm enters, through acquisition or merger, an entirely different market that has little or no synergy with its core business or technology. Conglomerate diversification helps in strengthening the internal structure of a company and it is an essential form of diversification.

Financial factors to be considered in an Acquisition


Share Price - will the price of the target enable the synergies to be achieved whilst adding value to your own share price? Earnings - what level of additional earnings will be generated as a result of the transaction, in both the short and long term? Financial stability and consistency - will the transaction add to your financial stability and the consistency of earnings? Overall asset quality - what is the quality of the assets held by the target? Will the transaction improve your overall asset quality? Capital adequacy and debt - what will be the impact of the transaction on your capital and debt ratios? Could it create any capital adequacy issues? Asset and liability mix - what will be the impact of the transaction on your asset and liability mix, in terms of currency, interest rates, maturities etc.? Off-balance sheet risks - how will the off-balance sheet risks be affected by the transaction? Will there be excessive exposures to any particular markets which will have to be managed? Profitability - how will the cost/income ratio be affected by the transaction in the short and long term? Integration costs - what are the likely costs of the integration?

Non-financial factors to be considered in an Acquisition

Corporate culture - how does the corporate culture of the target compare with your own? How will this affect the integration? Regulatory and anticompetitive factors - how easy will it be to gain acceptance of the merger? Will there be regulatory problems because of the size of the market or competitive positioning? Management - what are the strengths and weaknesses of the existing management team? What is their management style? What impact will this have on the integration? Corporate governance - how does the corporate governance of the target compare with your own? How will this affect the integration? Markets - what are the possible synergies between the markets of both yourselves and the target? How can they be achieved? Image and marketing - how do the images of the two corporations compare? Can this be exploited in marketing? What will be the costs, risks and benefits of the integration? Organisational fit - how does the organisational structure of the target compare with your own? Will it be easy to integrate functions? Location - how do the locations of the target relate to your locations? What benefits can be obtained through combining some of the locations? What are the costs and risks of doing this? Are some locations likely to be surplus to requirements? Can these be disposed of? What are the implications of doing this? Personnel - how do the skills and experience of the personnel of the target relate to those of your own personnel? What benefits can be obtained through combining some of the teams? What are the costs and risks of doing this? How many personnel are likely to have their contracts terminated as a result of the transaction? How can this be achieved? What are the implications of doing this? Technology - how do the technologies of the target compare with your own? Can your own systems handle the projected increase in products, customers and transactions? Will systems integration be necessary? What are the costs and risks associated with this? Customer base - how does the customer base and mix compare with your own? Are there overlaps in the customer base which could provide risk management issues? What potential is there for cross-selling? What percentage of customers are likely to be lost as a result of the transaction? Customer quality - what quality of customers does the target have, in terms of longevity, risk profile, share of wallet, propensity to buy, loyalty, etc.? How does it compare with your own? What will be the impact of the transaction on customer profitability?

Product range - what is the product range of the target? How does it compare with your own? Are there any products in their range which will be of strong benefit to you? How will the product ranges be integrated? What are the costs and risks associated with this? Integration risks - what are the risks of the integration not being achieved in the planned time scales and costs? What can be done to minimise these risks?

Definition of 'Merger'
The combining of two or more companies, generally by offering the stockholders of one company securities in the acquiring company in exchange for the surrender of their stock.

Investopedia explains 'Merger'


Basically, when two companies become one. This decision is usually mutual between both firms. Distinction between mergers and acquisitions

The terms merger and acquisition mean slightly different things. The legal concept of a merger (with the resulting corporate mechanics, statutory merger or statutory consolidation, which have nothing to do with the resulting power grab as between the management of the target and the acquirer) is different from the business point of view of a "merger", which can be achieved independently of the corporate mechanics through various means such as "triangular merger", statutory merger, acquisition, etc. When one company takes over another and clearly establishes 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. In the pure sense of the term, a merger happens when two firms agree to go forward as a single new company rather than remain separately owned and operated. This kind of action is more precisely referred to as a "merger of equals". The firms are often of about the same size. Both companies' stocks are surrendered and new company stock is issued in its place.For example, in the 1999 merger of Glaxo Wellcome and SmithKline Beecham, both firms ceased to exist when they merged, and a new company, GlaxoSmithKline, was created. In practice, however, actual mergers of equals don't happen very often. Usually, one company will buy another and, as part of the deal's terms, simply allow the acquired firm to proclaim that the action is a merger of equals, even if it is technically an acquisition. Being bought out often carries negative connotations; therefore, by describing the deal euphemistically as a merger, deal makers and top managers try to make the takeover more palatable. An example of this would be the takeover of Chrysler by Daimler-Benz in 1999 which was widely referred to as a merger at the time.

A purchase deal will also be called a merger when both CEOs agree that joining together is in the best interest of both of their companies. But when the deal is unfriendly (that is, when the target company does not want to be purchased) it is always regarded as an acquisition. Horizontal Mergers A horizontal merger is when two companies competing in the same market merge or join together. This type of merger can either have a very large effect or little to no effect on the market. When two extremely small companies combine, or horizontally merge, the results of the merger are less noticeable. These smaller horizontal mergers are very common. If a small local drug store were to horizontally merge with another local drugstore, the effect of this merger on the drugstore market would be minimal. In a large horizontal merger, however, the resulting ripple effects can be felt throughout the market sector and sometimes throughout the whole economy. Large horizontal mergers are often perceived as anticompetitive. If one company holding twenty percent of the market share combines with another company also holding twenty percent of the market share, their combined share holding will then increase to forty percent. This large horizontal merger has now given the new company an unfair market advantage over its competitors. Vertical Mergers A vertical merger is one in which a firm or company combines with a supplier or distributor. This type of merger can be viewed as anticompetitive because it can often rob supply business from its competition. If a contractor has been receiving a material from two separate firms, and then decides to acquire the two supplying firms, the vertical merger could cause the contractors competitors to go out of business. Antitrust concerns are a focal point of investigation if competition is hurt. The Federal Trade Commission can rule to prevent mergers if they feel they violate antitrust laws. Example of Vertical Merger Vertical mergers can best be understood from examining real world deals. One such merger occurred between Time Warner Incorporated, a major cable operation, and the Turner Corporation, which produces CNN, TBS, and other programming. In this merger, the Federal Trade Commission (FTC) was alarmed by the fact that such a merger would allow Time Warner to monopolize much of the programming on television. Ultimately, the FTC voted to allow the merger but stipulated that the merger could not act in the interests of anti-competitiveness to the point at which the public good was harmed. Accretive Merger: Accretive mergers occur when a company with a high price to earnings ratio purchases a company with a low price to earnings ratio. This makes the purchasing companys earnings per share increase. This type or merger is the opposite of a dilutive merger.

Leveraged buyout
A leveraged buyout (or LBO, or highly leveraged transaction (HLT), or "bootstrap" transaction) occurs when an investor, typically a financial sponsor, acquires a controlling interest in a company's equity and where a significant percentage of the purchase price is financed through leverage (borrowing). The assets of the acquired company are used as collateral for the borrowed capital, sometimes with assets of the acquiring company. Typically, leveraged buyout uses a combination of various debt instruments from bank and debt capital markets. The bonds or other paper issued for leveraged buyouts are commonly considered not to be investment grade because of the significant risks involved.[1] If the company subsequently defaults on its debts, the LBO transaction will frequently be challenged by creditors or a bankruptcy trustee under a theory of fraudulent transfer.[2] Companies of all sizes and industries have been the target of leveraged buyout transactions, although because of the importance of debt and the ability of the acquired firm to make regular loan payments after the completion of a leveraged buyout, some features of potential target firms make for more attractive leverage buyout candidates, including:

Low existing debt loads; A multi-year history of stable and recurring cash flows; Hard assets (property, plant and equipment, inventory, receivables) that may be used as collateral for lower cost secured debt; The potential for new management to make operational or other improvements to the firm to boost cash flows, such as workforce reductions or eliminations; Market conditions and perceptions that depress the valuation or stock price.

Synergy Synergy is the magic force that allows for enhanced cost efficiencies of the new business. Synergy takes the form of revenue enhancement and cost savings. By merging, the companies hope to benefit from the following:

Staff reductions - As every employee knows, mergers tend to mean job losses. Consider all the money saved from reducing the number of staff members from accounting, marketing and other departments. Job cuts will also include the former CEO, who typically leaves with a compensation package. Economies of scale - Yes, size matters. Whether it's purchasing stationery or a new corporate IT system, a bigger company placing the orders can save more on costs. Mergers also translate into improved purchasing power to buy equipment or office supplies - when placing larger orders, companies have a greater ability to negotiate prices with their suppliers. Acquiring new technology - To stay competitive, companies need to stay on top of technological developments and their business applications. By buying a smaller company with unique technologies, a large company can maintain or develop a competitive edge. Improved market reach and industry visibility - Companies buy companies to reach new markets and grow revenues and earnings. A merge may expand two companies' marketing and

distribution, giving them new sales opportunities. A merger can also improve a company's standing in the investment community: bigger firms often have an easier time raising capital than smaller ones.

That said, achieving synergy is easier said than done - it is not automatically realized once two companies merge. Sure, there ought to be economies of scale when two businesses are combined, but sometimes a merger does just the opposite. In many cases, one and one add up to less than two. Sadly, synergy opportunities may exist only in the minds of the corporate leaders and the deal makers. Where there is no value to be created, the CEO and investment bankers - who have much to gain from a successful M&A deal - will try to create an image of enhanced value. The market, however, eventually sees through this and penalizes the company by assigning it a discounted share price. We'll talk more about why M&A may fail in a later section of this tutorial.

Reverse takeover
A reverse takeover or reverse merger (reverse IPO) is the acquisition of a public company by a private company so that the private company can bypass the lengthy and complex process of going public. The transaction typically requires reorganization of capitalization of the acquiring company.

Process
In a reverse takeover, shareholders of the private company purchase control of the public shell company and then merge it with the private company. The publicly traded corporation is called a "shell" since all that exists of the original company is its organizational structure. The private company shareholders receive a substantial majority of the shares of the public company and control of its board of directors. The transaction can be accomplished within weeks. If the shell is an SEC-registered company, the private company does not go through an expensive and timeconsuming review with state and federal regulators because this process was completed beforehand with the public company. However, a comprehensive disclosure document containing audited financial statements and significant legal disclosures is required by the Securities Exchange Commission for reporting issuers. The disclosure is filed on Form 8-K and is filed immediately upon completion of the reverse merger transaction. The transaction involves the private and shell company exchanging information on each other, negotiating the merger terms, and signing a share exchange agreement. At the closing, the shell company issues a substantial majority of its shares and board control to the shareholders of the private company. The private company's shareholders pay for the shell company by contributing their shares in the private company to the shell company that they now control. This share exchange and change of control completes the reverse takeover, transforming the formerly privately held company into a publicly held company. By contrast, a reverse merger can be

completed in as little as thirty days. The Reverse Merger Process is essentially simple to anyone familiar with M&A -- mergers & acquisitions.: An operating company seeking to go public locates a public shell. Terms are negotiated & generally the public shell issues stock to the shareholders of the private, operating company. The proper securities filing is made if the shell is registered with the SEC. if this is a pink sheet shell, a disclosure filing is made with the Pink Sheet division of OTCMarkets. The public shell company usually changes its name to the name of the operating company, but does not need to do so. TAKEOVER CODE- BASIC CONCEPTS
By Abhinav Singh,

Vth BSL.LL.B, MM Law College, Pune

INTRODUCTION

Restructuring in its literal sense means, changing the basic structure of . Every company big or small has a basic capital structure as far as its share capital is concerned which is approved by its Memorandum of Association. This structure of a company cannot be changed before the company has actually gone through certain procedures of law. Restructuring of a company is generally of two types :
(i) (ii) Organic Restructuring Non organic Restructuring

Organic restructuring- This generally refers to any internal change in the structure of the company, without the corporate entity undergoing any change. Some examples of such kind of restructuring are buy back of securities by a company, Employee Stock Option Plan (ESOP) by a company or Reduction of share capital of a company. All these kinds of restructuring have to be done by a company under different circumstances, sometimes they are to give value to their shareholders(as in the case of rights issue) or sometimes as an incentive to their employees ( as in issue of sweat equity) or sometimes as a defensive measure from hostile take overs( as in the case of buy back of securities).

Non organic restructuring- In case of this type restructuring there is an overall change in the corporate entity of the company. Unlike organic restructuring there is an element of third party involved in it.

The foremost examples of this type of restructuring are Merger and amalgamation , de-merger , reorganization of a company. In the wake of India emerging as one of the fastest growing economies in the world, Mergers & Acquisitions (M&A) have become one of the most common type of restructuring. Every company big or small have jumped in the race of ongoing M&A feast that has been served in the Indian market in plenty.

TAKEOVER- Its Meaning Broadly speaking Takeover refers to the acquisition of one company by another company. In the words of M.A. Weinberg one of the pioneers in the formation of law and practice relating to takeovers, it has been defined as

a transaction or a series of transactions whereby a person acquires control over the assets of a company, either directly by becoming the owner of those assets or indirectly by obtaining control of the management of the company. Where shares are closely held (i.e. by small number of persons), a takeover will generally be effected by agreement with the holders of the majority of the share capital of the company being acquired. Where the shares are held by the public generally the take over may be effected: 1) by agreement between the acquirers and the controllers of the acquired company. 2) by purchase of shares on the stock exchange. 3) by means of a takeover bid.

Takeovers are quite often taken as a prelude to the mergers. Corporates generally embark on acquisition of another company and then take steps to merge or amalgamate the acquired company or merge or amalgamate with the acquired companies and in the process also demerge certain undertakings. Takeover can be either friendly which is done by a mutual agreement between two companies or it can be hostile.

HISTORY Basically speaking takeover is nothing but the acquisition of shares of one company by another company. The laws relating to takeovers in India where not very organized until the year 1994, calling it unorganized would rather be an understatement because laws relating to takeovers in India until 1994 hardly existed. Except for certain provisions of the Companies Act, 1956 ( Section 372, regarding intercorporate loans by companies and Section 395, regarding acquisition of the shares of dissentient shareholders) there was hardly anything solid enough to be called as organized takeover laws. The guidelines of the Securities and Exchange board of India (Substantial acquisition of shares and takeover) 1994 was a maiden Indian attempt towards an organized set of laws for regulating takeovers in India. The need for changes in the regulation was felt just two years after its inception. A need was certain changes in the regulation had been felt and so a committee under the chairmanship of Justice P.N Bhagwati was constituted to review the regulations and suggest the necessary changes required under the act. The regulations were amended in 1997 and they finally were implementation. Since then the regulations have been known as, Securities and Exchange Board of India(Substantial Acquisition of Shares and Takeover)Guidelines, 1997 or TAKEOVER CODE. Since then many amendments have been made to the regulations.

WHAT DO THE REGULATIONS STAND FOR The objective of the Takeover code is to regulate in an organized manner the substantial acquisition of shares and take overs of a company whose shares are quoted on a stock exchange i.e. listed company. In a limited sense these regulations also apply to certain unlisted companies including a body corporate incorporated outside India to an extent where the acquisition results in the control of a listed company by the acquirer.

Substantial Acquisition The most important point to be understood is what would constitute substantial acquisition under these regulations? Substantial acquisition as such has not been defined under the regulations, nor has it been defined in any other related Acts. Nevertheless, if we read through regulations 10 and 11, the question as to what constitutes substantial acquisition is made relatively very clear. The following for the purpose of these regulation can be considered as substantial acquisition: (a) Acquisition by a person or two or more persons acting together with common intention, 15% or more shares or voting rights of the target company

(b) Acquisition by a person or two or more persons acting together with common intention, who have already acquired 15% or more but less than 55% of share or voting rights, further acquire 5% or more of share capital or voting rights in the same financial year ending on 31st March. An important point to be noted from the summary of regulations above is that not only the acquisition of shares but also the acquisition of voting rights would also constitute substantial acquisition. It is to be noted that voting rights of a shareholder are accompanied with the shares of the company. Until a person is a registered shareholder of a company he cannot have the voting rights, but there are cases when a person has paid the consideration for the share but an official instrument of share transfer has not been formulated, in such case a power of attorney to transfer the voting rights of the transferor can be formulated or the transferee may demand for a proxy from the transferor or he may make the transferee exercise the voting rights as he demands. Maybe this was the reason why acquisition of voting rights have been expressly mentioned in the regulations as far as substantial acquisition is concerned.

SOME IMPORTANT PROVISIONS Few regulations that need a detailed study under the guidelines are given below-

Regulations regarding limits according to which shares shall be acquired: The regulation for the minimum amount of shares to be acquired and a public announcement to be made in accordance with it are given under regulations 10,11 and 12. a) Regulation 10- According to this regulation, no person either alone or with someone acting with the same intention shall acquire shares in a company that would enable the person or persons to practice more than 15% voting rights. The regulations further say that, this could only be done by a person who has made public announcement to acquire such shares in accordance with the regulations. In other words a person by himself or with a person acting with the same intention shall make a public offer to acquire a minimum of 20% of shares in accordance with the regulation. b) Regulation 11- This regulation talks about an Acquisition by a person or two or more persons acting together with common intention, who have already acquired 15% or more but less than 55% of share or voting rights, which would enable them to exercise further 5% but not more voting rights in the same financial year ending on 31st March. Though this can be done if the acquirer makes a public offer to acquire such shares in accordance with the regulations. The regulation further talks about acquirers who already have 55% or more shares but less than 75% shares of the target

company but intend to acquire more share, this can only be done if the acquirer makes a public announcement in this regard c) Regulation 12- The regulations further say that, any control over the company shall not go into the hands of the acquirer irrespective of whether acquisition of shares or voting rights has taken place or not, until a public announcement to acquire such shares has been made in accordance with the regulations.

PUBLIC ANNOUNCEMENT A Public announcement is generally an announcement given in the newspapers by the acquirer, primarily to disclose his intention to acquire a minimum of 20% of the voting capital of the target company from the existing shareholders by means of an open offer Another very important aspect of the Takeover Code, 1997 is the mandatory public offer to be made at various important stages of acquisition as prescribed by the Securities and Exchange Board of India in the regulations. Under the Takeover Code, 1997 a minimum threshold limit has been set, crossing which the acquirer has to make a compulsory public announcement.. Regulation 14 of the Code states that a mandatory offer to the public has to be made within four days from the date of the acquirer agreeing to acquire the shares of the company. The threshold limit under the regulations has been set at 15%. This means that as soon as a person acquires or agrees to acquire 15% or more of the shares of a company he shall make a mandatory public offer. The basic purpose of making it compulsory for the acquirer to make a public announcement was to allow the shareholder to have an exit opportunity in case of acquisition or stay in the target company. This can be done by identifying their interest by going through the additional disclosure made in the letter of offer. The acquirer is required to appoint a merchant banker who is registered with SEBI before making the public offer. As mentioned above the public offer shall be made within four working days of the agreement to acquire shares. There are certain other disclosures to be made in the public offer to acquire share. The letter of offer shall contain :

The offer price

Number of shares to be acquired from public Identity of acquirer

Purpose of acquisition Change in control in the target company Plans of the acquirer regarding the target company, if any.

The draft letter of offer has to be sent to SEBI within 14 days of the public announcement along with the filing fees through the merchant banker. The merchant banker shall also produce a due diligence certificate. The offer document has to be sent to every shareholder with the acceptance form within 45 days of public announcement. The acceptance form shall be blank. The offer remains open for 30 days for the shareholders. It becomes obligatory for the acquirer to give a minimum offer price to the every shareholder who agrees to sell his share, within 30 days of closing of the offer

CONCLUSION:
The regulations though not very old but have still proved to be very significant for the purpose of regulation of acquisition of shares. These regulations are a set of magnificently drafted rules. The credit for making the regulations so practical should be given to Justice P.N.Bhagwati committee.

Hostile takeover (hostile merger) defence strategies


In Corporate restructuring, Finance, MBA on October 27, 2010 at 8:22 pm

A target company has various options on how to fight a hostile takeover, which is also called a hostile merger. The target company generally obtains assistance of an investment banker and lawyer to ensure that fighting the hostile takeover will be successful. Below are the nine common tactics refused by target companies.
1. Target companies may inform shareholders why the merger will be disadvantageous for the company. 2. Repurchase of stock is sometimes undertaken by companies to decrease the attractiveness of the target company for hostile takeover. Mergers can be attractive due to a companys liquidity position. If the company has a lot of cash, it can be used to cover all or part of the debt undertaken to finance the acquisition. By using available cash to repurchase stock, the firm decreases its attractiveness as a takeover target. Moreover, repurchase of shares increases the price per share which makes takeover more expensive. 3. Greenmail is another defensive strategy. It leads to the target company buying a large bulk of shares from one or more shareholders which attempt a hostile takeover.

4. Another strategy to protect itself against hostile takeover is defensive acquisition. The purpose of such action is for the target company to make itself less attractive to the acquiring company. In such situations, the target company will acquire another company as a defensive acquisition and finance such acquisition through debt. Due to increased debt of the target company, the acquiring company, which previously planned hostile takeover, will likely lose interest in acquiring the now highly leveraged target company. Before a defensive acquisition is undertaken, it is important to make sure that such action is better for shareholders wealth than the merger with the acquiring company which pursues a hostile takeover. 5. Finding a white knight is another hostile takeover defence strategy. It involves finding a more appropriate acquiring company that will take over the target company on more favourable terms and at a better price than the original bidder. White knights are seen as a protector of the target company against the black knight which is the acquiring company which attempted a hostile takeover. 6. Golden parachutes are another way to discourage hostile takeover. This strategy means including provisions in the employment contracts of top executives which will require a large payments to key executives if the organization is taken over. Nevertheless, the amounts to be paid are small relative to the size of the transaction. Therefore, this strategy may not be sufficiently effective on its own but will make the acquisition target less attractive. 7. Leveraged recapitalization is yet another way to deter hostile takeovers. It refers to the distribution of a sizable dividend financed by debt. This increases the financial leverage of the target company and decreases its attractiveness. 8. The term poison pill was created by mergers and acquisitions lawyer Martin Lipton in the 1980s and refers to a further hostile takeover defence strategy. It involves an arrangement that will make the target companys stock unattractive for the acquiring company.

The poison pill strategy includes two main variations. Such variations are flip-in and flip-over. Flip-in tactic occurs when management offers to buy shares at a discount to all investors except for the acquiring company. Such an option is exercised when the acquiring company purchases a certain amount of the shares of the target company. Flip-over occurs where the Target Company will be able to purchase shares of the acquiring company at a discount after the merger is completed. This will decrease the value of the acquiring companys shares and dilute the companys control. The poison pill can be effective in discouraging a hostile takeover and allows the target company more time to find a white knight. Yahoo is a famous example of a company that the uses poison pill as a defence strategy. It will be exercised if any company or investor buys more than 15% of its shares without the approval of the board of directors.
1. The target company may also use the crown jewel defence strategy. Crown jewels refer to the most valuable assets and parts of the company. According to this strategy, the target company has the right to sell its best and most profitable assets and valuable parts of the business to another party if a hostile takeover occurs. This discourages hostile takeovers as it makes the target company less attractive.

2. Pac-Man defence is a hostile defence strategy named after the popular arcade video game of the 1980s. According to this strategy, the target company turns the tables and attempts to acquire an acquiring company which attempted the hostile takeover.

Although these hostile takeover defence strategies may not be successful, there are costs such as transaction costs which are involved in undertaking them. Transaction costs may include hiring of investment bankers and lawyers. In making decisions whether or not to undertake any defence actions against hostile takeovers, management needs to continue to act in the best interests of shareholders by keeping the maximization of the shareholders wealth as the main objective.

Mahindra buys 70% in SsangYong

Mahindra & Mahindra, market leader in the utility vehicle and tractor segments, today signed a definitive agreement to buy a 70 per cent stake in the ailing South Korean auto maker, SsangYong Motor Company (SYMC), for $463 million (Rs 2,100 crore). This is the biggest outbound deal by the city-based $7.1 billion (Rs 32,200 crore) group and the largest in the automotive sector. It will be completed by March, after the approval of creditors of the Korean company. M&M will subscribe to new shares of SsangYong worth $378 million (Rs 1,700 crore), while corporate bonds worth $85 million (Rs 385 crore) will also be acquired, the company stated \in a media release after the deal was signed in Seoul, Korea, earlier today. Mahindra intends to launch as many as three new SsangYong models in the next few years in an attempt to revive sales of the company, fifth largest in the sector in that country. Ssangyong had sought bankruptcy protection after continued dismal sales. Pawan Goenka, president - automotive and farm equipment sectors, M&M, said: The coming together of Mahindra and SsangYong will result in a competitive global UV (utility vehicle) player. Together with its financial capability, M&M offers competence in sourcing and marketing strategy, while SsangYong has strong capabilities in technology. We are committed to leverage the combined synergies by investing in a new SsangYong product portfolio, to gain momentum in global markets. Adding: There is an opportunity to introduce a premium portfolio of SUVs in the Indian market, providing a new growth avenue for SsangYong and further strengthen our dominant position in the UV segment. M&M had been in dialogue with the SsangYong management since August, after the Korean company declared M&M the preferred bidder from the original list of seven. Those had included the Pawan Ruia group, Renault-Nissan, private equity firm Seoul Invest and Yong An Hat Company. The majority dropped out due to the high valuation sought.

It was, however, not made clear as to how M&M, with a debt to equity ratio of 0.20:1, with cash reserves of $500 million (Rs 2,200 crore), intended to fund the purchase. Earlier, senior executives had said it would be done through a mix of debt and equity. M&M has already deposited 10 per cent of the final purchase price, as earlier agreed. The balance to be deposited three days prior to SYMCs stakeholders meeting. SYMC will continue to function as an independent entity, with a primarily Korean management. There are strong complementarities between the SsangYong and M&M product portfolios, providing an opportunity to create distinct positioning. The wide sales and distribution networks and complementary products lines will provide access to many overseas markets for both companies, the release stated. The labour union of SYMC, M&M and SYMC have also signed a tripartite agreement with provisions for employment protection, long-term investment and a commitment for no labour disputes.

Mahindra & Mahindra looks to make Ssangyong profitable


MUMBAI: When Mahindra & Mahindra acquired Ssangyong Motor for $473 million in March last year, the Korean sports utility maker was fighting for survival. Its products were flailing, banks had cut off credit, workers were unhappy, losses were piling up and a court was deciding whether it should live or be consigned to bankruptcy. Exactly a year later, Ssangyong is still fighting, but not for survival. The battle now - after a dramatic turnaround in the marketplace - is to return to profitability. Recent success of some of its products like Korando C, a new compact utility vehicle launched in 2011, helped Ssangyong grow revenues by 32% to Rs 11,150 crore (2 trillion and 787 billion Korean won). Yet, losses have increased to Rs 450 crore (112.4 billion won) in 2011 from Rs 107 crore (27.02 billion won) in 2010. Now, the question is how soon can M&M nurse Ssangyong back into the black. "Overall, we are ahead of the plans we had set out to do," says Pawan Goenka, PresidentAutomotive & Farm Equipment Sectors, M&M and holds the dual charge as chairman of Ssangyong. On the back of a 30% volume growth last year, Ssangyong, is targeting 123,000 units by end 2012 and 300,000 units by 2015.

Goenka says a "strong product plan" will support this kind of volume growth. "It is not wishful thinking, it is looking very good." Ssangyong president and CEO, Yoo II Lee, is now rolling out a 100-step program to get the company back on track. For example, Ssangyong's field rate (ability to reach customer with spares, within 24 hours) was under 50%, which has since recovered to 85%. The target is to reach 95% this year. Such measures, he told ET in an interview at the Auto Expo earlier this year, will make the company profitable in two to three years. Moreover, Ssangyong recently became the first company in Korea to get an assurance from the union in writing that they will not go on strike, if specified terms are adhered to by the company, shedding any fear on labour issues. Two things have happened since M&M moved into the driver's seat at Ssangyong. First, it sorted out the cash crunch. It infused $200 million in equity helping the maker of Korando and Rexton to whittle liabilities down from Rs 4,452 crore to Rs 3,550 crore, thus improving the debt-equity ratio from 179.3% to 97.1%. Banks have not only restored credit limits, but have also opened up hedging limits to SUV maker which exports two-third's of its production. "Ssangyong's problem was financial and labour related, and M&M has resolved both," says VG Ramakrishnan, senior director, automotive practice at Frost & Sullivan. "But the real test lies ahead." Second, the companies have hammered out a new a product co-development plan under which the two will jointly develop three vehicle platforms, which will then spawn different variants suited for the markets of each company. This will help both save on costs and draw synergies from each other. Work on the first such new joint platform - XIV concept for compact Utility Vehicles - has already started. "This will be our first major new launch," says Goenka. It may hit the market in three years. "We'll be announcing more joint platforms in 12 months," he adds. The two SUV makers also plan to develop a "new family of engines" which will come in several different displacements (engine capacities ) and two different fuels - diesel and petrol to meet specific requirements of Mahindra and Ssangyong. "That work has started. This will be a big plus for both the companies," says Goenka. An investment of Rs 1,200-1 ,500 crore was approved by Ssangyong board just last month which it will invest on its own without any financial support from M&M, going ahead the plan is to invest close Rs 6,000 crore in four new products including variants till 2016 along with M&M. They are also working on transmission projects. Bangalore-based electric car-maker Reva, which M&M had acquired in 2010, is a third partner in this co-development strategy. M&M, Ssangyong and Reva will together develop an electric

vehicle platform. Engineers from the three companies will soon come together at M&M's spanking new R&D centre in Oragadam, Chennai. Lastly, since coming into the Mahindra fold, Ssangyong has announced plans of setting up assembly bases across BRIC nations. Ssangyong has re-entered China; sales have spurted in Russia and the first Ssangyong vehicles will hit Indian roads this festive season. A deeper penetration into the BRIC markets will drive volumes while synergies of joint development and joint sourcing with M&M will help in improving profitability for the automaker. BOX: The path to integration M&M, which never had crash test facilities, will now use Ssangyong's facilities. The company has already posted 8-9 key officials in South Korea to oversee critical areas of sourcing, development and integration. A key M&M official, Hemant Sikka, has been posted in South Korea to check feasibility of sourcing components from India. M&M may assemble and sell its product in Russia through Ssangyong's distribution network. Ssangyong products will be sold through M&M's network in South Africa. More such cross-utilisation of distribution networks will happen.

Definition of 'De-Merger'
A business strategy in which a single business is broken into components, either to operate on their own, to be sold or to be dissolved. A de-merger allows a large company, such as a conglomerate, to split off its various brands to invite or prevent an acquisition, to raise capital by selling off components that are no longer part of the business's core product line, or to create separate legal entities to handle different operations.

Investopedia explains 'De-Merger'


For example, in 2001, British Telecom conducted a de-merger of its mobile phone operations, BT Wireless, in an attempt to boost the performance of its stock. British Telecom took this action because it was struggling under high debt levels from the wireless venture. Another example would be a utility that separates its business into two components: one to manage the utility's infrastructure assets and another to manage the delivery of energy to consumers.

Definition of 'Friendly Takeover'


A situation in which a target company's management and board of directors agree to a merger or acquisition by another company. In a friendly takeover, a public offer of stock or cash is made by the acquiring firm, and the board of the target firm will publicly approve the buyout terms, which may yet be subject to shareholder or regulatory approval. This stands in contrast to a hostile takeover, where the company being acquired does not approve of the buyout and fights against the acquisition.

Investopedia explains 'Friendly Takeover'


In most cases, if the board approves a buyout offer from an acquiring firm, the shareholders will vote to pass it as well. The key determinant in whether the buyout will occur is the price per share being offered. The acquiring company will offer a premium to the current market price, but the size of this premium (given the company's growth prospects) will determine the overall support for the buyout within the target company.

Definition of 'Hostile Takeover'


The acquisition of one company (called the target company) by another (called the acquirer) that is accomplished not by coming to an agreement with the target company's management, but by going directly to the companys shareholders or fighting to replace management in order to get the acquisition approved. A hostile takeover can be accomplished through either a tender offer or a proxy fight.

Investopedia explains 'Hostile Takeover'


The key characteristic of a hostile takeover is that the target company's management does not want the deal to go through. Sometimes a company's management will defend against unwanted hostile takeovers by using several controversial strategies including the poison pill, crown-jewel defense, golden parachute, pac-man defense, and others.

What is Corporate Restructuring?

Corporate restructuring is the process of redesigning one or more aspects of a company. The process of reorganizing a company may be implemented due to a number of different factors, such as positioning the company to be more competitive, survive a currently adverse economic climate, or poise the corporation to move in an entirely new direction. Here are some examples of why corporate restructuring may take place and what it can mean for the company. Restructuring a corporate entity is often a necessity when the company has grown to the point that the original structure can no longer efficiently manage the output and general interests of the company. For example, a corporate restructuring may call for spinning off some departments into subsidiaries as a means of creating a more effective management model as well as taking advantage of tax breaks that would allow the corporation to divert more revenue to the production process. In this scenario, the restructuring is seen as a positive sign of growth of the company and is often welcome by those who wish to see the corporation gain a larger market share.

However, financial restructuring may take place in response to a drop in sales, due to a sluggish economy or temporary concerns about the economy in general. When this happens, the corporation may need to reorder finances as a means of keeping the company operational through this rough time. Costs may be cut by combining divisions or departments, reassigning responsibilities and eliminating personnel, or scaling back production at various facilities owned by the company. With this type of corporate restructuring, the focus is on survival in a difficult market rather than on expanding the company to meet growing consumer demand. Corporate restructuring may take place as a result of the acquisition of the company by new owners. The acquisition may be in the form of a leveraged buyout, a hostile takeover, or a merger of some type that keeps the company intact as a subsidiary of the controlling corporation. When the restructuring is due to a hostile takeover, corporate raiders often implement a dismantling of the company, selling off properties and other assets in order to make a profit from the buyout. What remains after this restructuring may be a smaller entity that can continue to function, albeit not at the level possible before the takeover took place. In general, the idea of corporate restructuring is to allow the company to continue functioning in some manner. Even when corporate raiders break up the company and leave behind a shell of the original structure, there is still usually the hope that what remains can function well enough for a new buyer to purchase the diminished corporation and return it to profitability.

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