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Irfan Inamdar
AGENDA
What is a M&A? Differentiating M & A Common Ways of Business Valuation How Do We Get Finance? Specialist M&A Advisory Firms What Motives Lie Behind? Effects on Management Brand Building or Brand Destroying? Factors of the Merger Movement Merger Waves Cross Border M & A Major M&As
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WHAT IS A M&A?
An aspect of corporate strategy, corporate finance and strategic management. Deals with buying, selling, combining of different companies that can
Aid Finance Help
a growing company in a given industry grow rapidly without having to create a new business entity.
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ACQUISITION
Purchase of one company by another company.
Company 1 Company 2
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TYPES OF ACQUISITIONS
Depending upon
Acquiree or merging is or isnt listed in public markets. How the communication is done and received by the target.
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FRIENDLY
HOSTILE
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CONFIDENTIALITY BUBBLE
Quite normal for M&A deal communication to take place in a so called confidentiality bubble. Here information flows are restricted due to confidentiality agreements.
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FRIENDLY ACQUISITIONS
Companies cooperate in negotiations. Synonymous to merger of equals.
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HOSTILE ACQUISITIONS
Takeover target unwilling to be purchased. It can also be if the acquiree company has no prior knowledge of offer. Hostile takeovers do turn friendly in the end. Most of the times. For the above thing to happen, offer is usually improved.
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REVERSE TAKEOVERS
Acquisition usually refers to purchase of smaller firm by larger firm. Sometimes, smaller firm acquire management control of a larger / longer established company. Keep its name for combined entity. Known as reverse takeover.
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REVERSE MERGER
Another type of acquisition. Is a deal enabling a private company to become a public company. The deal enables private company by listing in a short time period. Occurs when a private company has strong prospects and is eager to raise financing, buys a publicly listed shell company. Usually the public one is one with
No business Limited assets
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i. Increase Market Share. ii. Economies of scale iii. Profit for Research and development. iv. Benefits on account of tax shields like carried forward losses or unclaimed depreciation. v. Reduction of competition.
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i. Increased market share. ii. Increased speed to market iii. Lower risk comparing to develop new products. iv. Increased diversification v. Avoid excessive competition
i. Inadequate valuation of target. ii. Inability to achieve synergy. iii. Finance by taking huge debt.
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Types of M&A
M&A
Market-extension merger
Product-extension merger
Conglomeration
Two companies selling different but related products in the same market
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SOME STATISTICS
Achieving acquisition successfully has proven to be tough. Various studies show 50% of them are unsuccessful. Process very complex, many dimensions influence its outcome. Variety of structures used in securing asset control. Different tax and regulatory implications
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If buyer buys out entire assets, then target company = empty shell. Buyer often cherry picks his assets
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Sometimes used to indicate a situation where one company splits into two, generating a 2nd company separately listed on a stock exchange.
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ACQUISITIONS FIRST
When one company takes over another, clearly establishes as its new owner. Legal View: target ceases to exist. Buyer swallows target Buyers stock continues to be traded.
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MERGERS NEXT
Happens when two firms agree to go forward as a single new company rather than remain separate. Often precisely termed as merger of equals. Firms are often of same size. Both companies stock surrendered New company stock put into place instead. Example: 1999 merger of Glaxo Wellcome and SmithKline Beecham, both firms ceased to exist and a new firm GlaxoSmithKline was created.
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ACQUISITION
Buying one organization by another. ii. It can be friendly takeover or hostile takeover. iii. Acquisition is less expensive than merger. iv. Buyers cannot raise their enough capital. v. It is faster and easier transaction. vi. The acquirer does not experience the dilution of Irfan Inamdar 23 ownership. i.
MERGERS IN PRACTICE
Actually the principle of mergers of equals dont really happen. Usually one company buys another. Simply allow acquired firm to pronounce it as a merger, though technically it is an acquisition. Being purchased always portends negative connotations. Therefore, they term it as merger, makes takeover more acceptable. Example : takeover of Chrysler by Daimler-Benz in 1999. Purchase deal also a merger -> friendly takeovers. Hostile takeovers -> mainly acquisitions.
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ASSET VALUATION
Valuations are made for:
Excess or restricted cash Other non-operating assets and liabilities Lack of marketability discount Control premium Above or below market leases Excess salaries in case private companies
Working capital adjustment Deferred capital expenditures Cost of goods sold adjustment Non recurring professional fees and costs Certain non operating income/expense items
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Uses either
Present value model Estimating the costs to recreate it
Process time consuming and costly Often necessary for financial reporting and intellectual property transactions. Stock markets give only an indirect value. Can be regarded as difference between its market capitalization and its book value.
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Fair market value is standard value. CIMVal Standards are recognized standards for mining project valuations.
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RELATIVE VALUATION
Generic term that refers to the notion of comparing asset price to market value of similar assets. Presumably spot pricing anomalies on securities market. Compare certain financial ratios such as:
Price to book value Price to earnings EV/EBITDA Mainly statistical and historical
Compare national or industry stock performance to economic and market fundamentals like:
GDP growth Interest rate Inflation forecasts Earnings growth National equity index
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THINK STRATEGIC!!!!
With pure cash deals, no doubt on real bid value. Contingency of share payment removed., Cash offer preempts competitors.
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TAXES
Should be evaluated with counsel of
Competent tax advisors Competent accounting advisors
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LETS GENERALIZE
Stock will create flexibility. Transaction costs also to be considered but tend to have greater impact. Remember:
Buyers tend to offer stock when they believe their shares are overvalued and cash when undervalued.
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Recently, specialized M&A firms have emerged. Sometimes referred to as Transition Companies. Assisting business referred to as companies in transition.
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CROSS SELLING
A bank buying a stock broking firm Manufacturer acquiring and selling complementary products.
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TAXATION
Profitable company can buy a loss maker to use targets loss as their advantage by reducing their tax liability. But there are certain regulations to follow.
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GEOGRAPHICAL DIVERSIFICATION
Designed to smooth company earnings Smoothens stock price Gives conservative investors more confidence But does not always deliver value to shareholders.
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RESOURCE TRANSFER
Resources unevenly distributed across firms. Can create value by
Overcoming information asymmetry Combining scarce resources
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VERTICAL INTEGRATION
Occurs when an upstream firm merges with a downstream firm. One reason is externality problem. Common example is double marginalization
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EFFECTS ON MANAGEMENT
M&A according to some studies destroy leadership continuity in target companies. Target companies lose 21% of their executives each year following an acquisition.
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BRAND CONSIDERATIONS
M&As often create brand problems. 4 different approaches:
Keep one name and discontinue other. Ex: United Airlines and Continental Airlines Merger. Keep one name and demote other: Caterpillar Inc. keeping Bucyrus International. Keep both names and use together: Pricewaterhouse Coopers. Discard both legacy names and adopt new one:
merger of Bell Atlantic and GTE which became Verizon Communications. This merger was successful. Merger of Yellow Freight and Roadway Corporation which became YRC Worldwide. This merger was partially successful, brand value lost.
Factors range from political to tactical. Ego as well as rational factors drive choice. Rational factors : brand value, costs involved with changing brands.
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MERGER WAVES
PERIOD 1897 1904 1916 1929 1965 1969 1981 1989 NAME FIRST WAVE SECOND WAVE THIRD WAVE FOURTH WAVE FACET HORIZONTAL MERGERS VERTICAL MERGERS DIVERSIFIED CONGLOMERATE MERGERS CONGENERIC MERGERS; HOSTILE TAKEOVERS; CORPORATE RAIDING CROSS BORDER MERGERS SHAREHOLDER ACTIVISM, LEVERAGED BUYOUTS, PRIVATE EQUITY 48
MAJOR M&AS
RANK YEAR PURCHASER PURCHASERD TRANSACTION VALUE (IN MIL. USD) 52000
2008
INBEV INC.
2 3 4
JP MORGAN CHASE & CO PFIZER INC. SPIN-OFF: NORTEL NETWORKS CORPORATION PFIZER INC.
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WYETH
68000
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STEEL co.
100 % stake in CORUS paying Rs 428/- per share
Image: B Mutharaman, Tata Steel MD; Ratan Tata, Tata chairman; J Leng, Corus chair; and P Varin, Corus CEO.
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3. Hindalco-Novelis: $6 billion
June 2008 Aluminium and copper sector Hindalco Acquired Novelis Hindalco entered the Fortune-500 listing of world's largest companies by sales revenues
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Image: Malvinder Singh (left), ex-CEO of Ranbaxy, and Takashi Shoda, president and CEO of Daiichi Sankyo.
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5. ONGC-Imperial Energy:$2.8billion
January 2009 Acquisition deal Imperial energy is a biggest chinese co. ONGC paid 880 per share to the shareholders of imperial energy ONGC wanted to tap the siberian market
Image: Imperial Oil CEO Bruce March.
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6. NTT
November 2008 Telecom sector Acquisition deal Japanese telecom giant NTT DoCoMo acquired 26 per cent equity stake in Tata Teleservices for DoCoMo-Tataabout Tele: Rs $2.7 13,070b cr.
Image: A man walks past a signboard of Japan's biggest mobile phone operator NTT Irfan Inamdar Docomo Inc. in Tokyo.
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February, 2008 Banking sector Acquisition deal CBoP shareholders got one share of HDFC Bank for every 29 shares held by them. 9,510 crore
Image: Rana Talwar (rear) Centurion Bank of Punjab chairman, Deepak Parekh, HDFC Bank chairman.
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8.
March 2008 (just a year after acquiring Corus) Automobile sector Acquisition deal Tata Motors-Jaguar Gave tuffLand competition to after signing the Rover: $2.3 M&M billion deal with ford
Image: A Union flag flies behind a Jaguar car emblem outside a dealership in Manchester, England.
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Why India?
Dynamic government policies Corporate investments in industry Economic stability Ready to experiment attitude of Indian industrialists
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Amongst BRIC Nations, India second most targeted country for Mergers & Acquisitions(2010):
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i. Approval of Board of Directors ii. Information to the stock exchange iii. Application in the High Court iv. Shareholders and Creditors meetings v. Sanction by the High Court vi. Filing of the court order vii. Transfer of assets or liabilities viii. Payment by cash and securities
Maximum Waiting period:210 days from the filing of notice(or the order of the commission Irfan Inamdar 65
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No detailed investigating
Poor stake holder outreach
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EXPERIENCES IN M&A
Learn from mistakes of others Define your objectives clearly Complete strategy to achieve goal. SWOT analysis for the merged business - a must Conservative attitude necessary at evaluation deskstrong arguments to support project Pick holes in strategy to get the best Will merged units be able to work at efficient / ideal level? Acquire expertise to interpret changes
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THANK YOU
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