MERGERS & ACQUISITIONS

GROUP MEMBERS

 Prathamesh Potdar 75
 Amruta Rele 79
 Chetan Sankhe 81
 Gitika Thakur 108
 Pranit Vanmali 112
 Vivek Varier 114
MERGERS & ACQUISITIONS
 MERGERS-Merger refers to a situation when two or
more existing firms combine together and form a new
entity. Either a new company may be incorporated for
this purpose or one existing company (generally a bigger
one) survives and another existing company (which is
smaller) is merged into it. Laws in India use the term
amalgamation for merger.
 ACQUISITIONS- It is the buying of one company (the
‘target’) by another. An acquisition may be friendly or
hostile. In the former case, the companies cooperate in
negotiations; in the latter case, the takeover target is
unwilling to be bought or the target's board has no prior
knowledge of the offer
TYPES OF MERGERS
 Horizontal merger: It is a merger of two or more
companies that compete in the same industry.
 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.
 Reverse mergers: Reverse mergers involve mergers of
profir making companies with companies having
accumulated losses.
 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 nor vertically
MERGER PROCEDURE

1. Examination of object Clauses

2. Intimation to stock Exchanges
3. Approval of the draft amalgamation proposal by the
Respective Boards:
4. Application to the National Company Law Tribunal (NCLT):
5. Dispatch of notice to shareholders and creditors
6. Holding of Meetings of shareholders and creditors
7. Petition to the NCLT for confirmation and passing of NCLT
orders
8. Filing the order with the Registrar
9. Transfer of Assets and Liabilities
10. Issue of shares and debentures
CAUSES OF MERGER
 Horizontal merger: These involve mergers of two business
companies operating and competing in the same kind of
activity. They seek to consolidate operations of both
companies. These are generally undertaken to:
a) Achieve optimum size
b) Improve profitability
c) Carve out greater market share
d) Reduce its administrative and overhead costs.
 Vertical merger: These mergers are generally endeavored to:
a) Increased profitability
b) Economic cost (by eliminating avoidable sales tax and
excise duty payments)
c) Increased market power
d) Increased size
 Conglomerate merger:
a)Synergy arising in the form of economies of scale.
b) Cost reduction as a result of integrated operation.
c) Risk reduction by avoiding sales and profit instability.
d) Achieve optimum size and carve out optimum share in
the market.
 Reverse mergers:
Claim tax savings on account of accumulated losses that increase
profits.
b. Set up merged asset base and shift to accelerate
depreciation.
 
STEPS IN ACQUISITIONS
 Developing an Acquisition Strategy:
 A capacity to find firms that trade at less than their
true value
 Access to the funds that will be needed to complete
the acquisition
 Skill in execution

 Choosing a Target firm and valuing control/synergy

 The Value of Corporate Control
 Valuing Operating Synergy
 Valuing Financial Synergy
 Structuring the Acquisition:
 Deciding on an Acquisition Price.
 Payment for the Target Firm

 Final Considerations: The managers of acquiring firms

clearly weigh in the accounting effects of acquisitions,
even when accounting choices have little or no effect on
cash flows
 TOP MERGER & ACQUISITIONS
 Tata Steel’s mega takeover of European steel major Corus for
$12.2 billion.The biggest ever for an Indian company. The next
big thing everyone is talking about is Tata Nano.
 Vodafone’s purchase of 52% stake in Hutch Essar for about
$10 billion. Essar group still holds 32% in the Joint venture.
 Hindalco of Aditya Birla group’s acquisition of  Novellis for $6
billion.
 Ranbaxy’s sale to Japan’s Daiichi for $4.5 billion. Sing
brothers sold the company to Daiichi and since then there is no
real good news coming out of Ranbaxy.
 ONGC acquisition of Russia based Imperial Energy for $2.8
billion. This marked the turn around of India’s hunt for natural
reserves to compete with China.
 HDFC Bank acquisition of Centurion Bank of Punjab for $2.4
billion.
 Tata Motors acquisition of luxury car maker Jaguar Land
Rover for $2.3 billion. This could probably the most ambitious
deal after the Ranbaxy one. It certainly landed Tata Motors into
lot of trouble.
 Wind Energy premier Suzlon Energy’s acquistion of 
RePower for $1.7 billion.
 Reliance Industries taking over Reliance Petroleum Limited
(RPL) for 8500 crores or $1.6 billion.
 NTT DoCoMo-Tata Tele services deal for $2.7 billion. The
second biggest telecom deal after the Vodafone. Reliance MTN
deal if went through would have been a good addition to the
list.
VALUATION OF
FIRMS
INCOME APPROACH
 It involves projected cash flows for a specific number of
periods plus a terminal value to be discounted to the present,
using the appropriate discount rate

 Difference in the number of periods

 Types -
 Capitalization Method
 Discounted Cash Flow Method
MARKET APPROACH
 Comparable Company Method
 Based on the principle of substitution

 Estimates the value of the firm in relation to the value of

other similar firms based on various parameters like
earnings, sales, book value, cash flows etc

 Reflects the current mood of the market & not the

intrinsic value
ASSET APPROACH
 Hypothetical sale of the company’s underlying assets
 To achieve control of the assets owned by the target

 Used in capital intensive industries

 Adjusted Book Value Method

Estimation of the market value of the assets & liabilities
of the firms as a going concern

 Liquidation Value Method

SOME OTHER APPROACHES..
 Replacement Cost Approach

 Option Pricing Model

Used to value assets which have option like features
ROLE OF VALUATION
 Portfolio Management

 Acquisition Analysis

 Corporate Finance
MISCONCEPTIONS IN VALUATION
 Valuation models give an exact estimate of value

 Valuation is a totally objective exercise

 A well done valuation is a timeless treasure

 The value estimated is important; the process does not matter

 The market is always wrong

 Valuation should be more qualitative for better estimates

LEGAL CONSIDERATIONS
 The MoA to be scrutinized
 Intimation to Stock Exchanges

 Approval of Draft amalgamation proposal

 Application to the court

 Notice to shareholders and creditors

 Filing the order

 Transfer of assets and liabilities

 Issue of shares and debentures

LEGAL ASPECTS TO CONSIDER
 obtain proof that the target business owns key assets such as property,
equipment, intellectual property, copyright and patents.

 obtain details of past, current or pending legal cases

 look at the detail in the business' current and possible future

contractual obligations with its employees (including pension
obligations), customers and suppliers.

 consider the impact of a change in the business' ownership on existing

contracts.
ACCOUNTING METHODOLOGY
Standards prescribing suitable methods of accounting for mergers and acquisitions:
1)Accounting Principles Board(in U.S.A.)
2)The International Accounting Standards(IAS)
3)Financial Reporting Standard (U.K.)
4)Accounting Standards (India)
METHODS OF ACCOUNTING FOR M&A
 Pooling of Interest Method
 Purchase Method
COMPARISON

Pooling of Interest method Purchase method

1)Treatment of Assets and Liabilities

a)Assets and liabilities of the amalgamating a)Assets and liabilities of purchased company
companies are carried forward to the books of are recorded in the books of purchasing
amalgamated company at the book value. company at their current fair market values.

b)Pre-amalgamation reserves are allowed to b)The identity and separation of the pre-
appear in the books of the amalgamated amalgamation reserve is not maintained in
company at its original book value. the books of purchasing company.

c)Profit of the amalgamated company c)Profit of the purchased company is not

includes profit of the amalgamating included in the profit of the purchasing
companies for the whole year irrespective of company as this part of profit is attributed to
the date of amalgamation. pre-acquisition period.
COMPARISON
Pooling of Interest method
2) Goodwill
a)No goodwill is created since assets and
liabilities of the amalgamating entity is
carried over to the books of amalgamated
company at their existing book value.
b)Purchase consideration for the
amalgamation is determined by the book
value of net assets carried over.
Purchase method
1)Good will arises in the book of purchasing
company since purchase consideration is
based on the bargained value of the net
assets acquired; any excess of purchase
consideration over the fair value of net assets
acquired is recognised as good will.
b)Here purchase consideration id determined
by bargain or negotiation over the value of
net assets acquired.
COMPARISON
Pooling of Interest method
3) Presentation of Financial Statement
a) Asssets and liabilities of the amalgamating
companies are carried over in the books of
amalgamated company at their book values.
b) Retained earnings of the amalgamting
company appear in the books of the
amalgamted company in the same form as it
had been in the books of amalgamting
company.
c) Assets, liabilities, retained earnings,
operating results of the amalgamating
companies for the whole year are presented
on a combined basis in the financial
statement of the amalgamated company.
Purchase method
a) Assets and liabilities of the purchased
company are recorded at their fair value in
the books of the purchasing company.
b) Retained earnings of the purchased
company do not appear in the books of the
Purchasing company as the entity of the
purchased company is terminated following
the acquisition.
c) Assets, liabilities, retained earnings,
Operating results of the Purchasing company
continue to remain in its books at their
existing book value because the entity of such
company is retained after the acquisition is
completed.
COMPARISON
Pooling of Interest method Purchase method

4) Amortization

a) Since no good will arises here, there is no a)As per AS-14 good will has to be amortized
question of amortization of the same. over a period of 5 years unless a longer
period can be justified.
COMPARISON
Pooling of Interest method Purchase method

5) Disclosure Requirement

a) Value of the reserves taken over from the a)Good will created have to be disclosed in
transferor company included in total value of order to prevent projection of any fake
reserves. Nature and objective of statutory good will.
reserves have to be disclosed.

b) Post-merger financial results of the

operation of transferor company have to be b) This is optional.
shown to project profitability.

c) Fair value of shares of the transferor

company on the date of merger have to be c) Book value of the assets acquired from the
disclosed which would help in establishing transferor company on the date of acquisition
swap ratio. have to be disclosed which would help in
establishing the revaluation of the assets.
SIMILARITIES BETWEEN THE TWO
METHODS
a) continuity of ownership interests and businesses
of the amalgamating entities in the
amalgamated company

b) exchange of equity shares or other voting shares only to

affectuate the amalgamation.
DUE DILIGENCE CONSIDERATIONS FOR
MERGERS AND ACQUISITIONS

 M & A is an opportunity to expand market share or to re-

organize the strategic and operating plans for the much
anticipated economic recovery.
 In good times and in bad, mergers and acquisitions can
lead to increased shareholder value.
 Care must be taken to analyze your strategic objectives
and find transaction candidates that are a good fit for
your long-term organizational goals.
STRATEGIC OBJECTIVES AND
TOLERANCE FOR RISK
 If your organization is contemplating a merger,
acquisition, the first place to begin is by defining your
overall strategic objectives and tolerance for risk.
 Key members of senior management and members of the
board of directors should be gathered to discuss
financial, geographic and cultural attributes of a
transaction candidate that when added to your
organization will create additional shareholder value.
 This process goes beyond basic financial analysis and
allows your organization to narrow the field of
candidates to those best suited to your long-term goals
and objectives.
ESTABLISH A PROJECT TEAM
 Start by selecting a well-respected internal member of
management with sound project management skills.

 The project manager should be provided with a cross-

functional team including finance, credit, operations,
information technology, internal audit, risk management
and regulatory compliance.
 While your internal management team may be very good
at performing their current duties, they may not have the
time or experience necessary to execute on all aspects of
a due diligence project.

 Consider professionals that have unique specialization

including accounting, risk management, internal audit,
investment bankers and tax advisors.
CANDIDATE PRE-SCREENING
PROCESS

 The first step in the pre-screening process is to identify

any potential “deal killers.” This pre-screening process
will allow you to evaluate financial metrics, geographic
fit and cultural considerations.
 Pre-screening will also save time and money, so that
substantial resources are not devoted to a transaction that
was doomed from the start.
DUE DILIGENCE PLANNING

 Due diligence planning is an essential element to ensure

the project is properly focused on your organizational
objectives.
 Early steps include forming the “deal,” establishing
pricing assumptions and financial modeling.
 Often outside professionals provide valuable advice to
avoid potential problems from the start.
 Additional considerations include development of letters
of intent and confidentiality/non-disclosure agreements.
SCOPE – HIGH PRIORITIES

 Critical importance that you spend your time in areas of

highest risk.
 Several high risk areas include the loan portfolio,
allowance for loan and lease losses, deposit stability,
investment portfolio, financial reporting controls and
overall management capabilities.
 Other areas of importance include contracts/agreements,
litigation, information technology, operations, consumer
compliance, bank secrecy act and an evaluation of the
potential tax implications to the transaction.
COMMON DEAL KILLERS

 Loan quality – Cannot find the bottom on asset quality

 ALL shortfalls – Typically ties in with inaccurate loan risk rating
systems or optimistic views of work-out plans
 Investment impairment – Derivatives, sub-prime or high risk
securities
 Long-term contracts – Premises, information technology or
employment agreements
 Board composition – The parties cannot reach agreement on the new
board
 Disclosure – Problems were understood by the candidate bank
during pre-screening
 Deal pricing – Inability to reach agreement on pricing, terms and
conditions
 Regulatory challenges – Lack of comfort with new risk profile
 POST - M & A
According to Executive’s Online Report, Factors responsible for
Changes are :

1.Restructuring

2.Improvement in Efficiency
3.Cost Reduction

4.M&A

5.New Technology

Crucial to any business success is keeping staff motivated,

hence the post M&A programmes has a Direct and possibly a
negative impact.
 POST M&A PHASE
 Communicate the “New Story”.
 Follow up the long term results.

 Explain any Differences from the Original Plan.

Two Types of M&A Environment:

1.Mergers of Equals
2.Hostile Takeovers
 VARIOUS ISSUES
 Staff Issues
 Management Problems
 Senior Management Ownership
 Leadership Skills
 STAFF ISSUES
 Decisions comes from the Top.
 The workforce is usually Tightlipped.

 Not allowing Enough Time.

 Shortage of Skills.

 Lack of Leadership.
 MANAGEMENT PROBLEMS
 Lack of Management Resource.
 Management Style and Skills.

 Lack of Vision.

 Reluctance to take Decisions.

 Middle Managers inefficiency.

 A Distraction for Employees.

 SENIOR MANAGEMENT OWNERSHIP
A survey conducted states that,

21% of the staff said Senior Management is not good at

inspiring the workforce.
18% said not good at Managing the Change and
16% said not good at Effective Leadership.
 LEADERSHIP SKILLS

Areas where Senior Managers could improve were ,

 Effective Change Leadership

 Communication

 Delegation of Task and Power.

The most important and majorly concerned areas has to be

worked upon.
 CROSS-BORDER MERGER AND
ACQUISITION
In a study conducted by Lehman Brothers
 It was found that, on average, large M&A deals cause the
domestic currency of the target corporation to appreciate by
1% relative to the acquirer's.

 In the period immediately after the deal is announced, there

is generally a strong upward movement in the target
corporation's domestic currency.
 A SECTORIAL COMPOSITION
SECTOR NUMBER %

IT/SOFTWARE/BPO 90 29.4

PHARMACEUTICALS 62 20.3

AUTOMOTIVE 27 8.8

CHEMICALS & FERTILIZERS 19 6.2

CONSUMER GOODS 17 5.5

METALS AND MINING 15 4.9

OIL AND GAS 14 4.6

OTHERS 62 20.3

TOTAL 306 100.0

 MOTIVES OF CROSS BORDER M&A
Two basic motives stand out:
 An efficiency motive and a strategic motive.

 Efficiency gains arise because M&As increase synergy

between firms through
increased use of economies of scale or scope.
 From a Strategic perspective M&As might change the market
structure and as such have an impact on firm profits.
 OBSTACLES TO CROSS-BORDER
MERGERS
I. Legal Barriers
II. Tax Barriers

III. Implications of supervisory rules and requirements

IV. Economic Barriers

V. Attitudinal barriers
CASE STUDY
ARCELOR MITTAL DEAL
ARCELOR MITTAL DEAL
 The deal is noteworthy for its legal aspects as for its
commercial significance;
 combining cross-border regulatory complexity,
 innovative bid defence techniques and measures to overcome
them
 dramatic shareholder revolt.
ARCELOR MITTAL DEAL
 World’s two largest steel makers merge: new entity will
be three times larger than the rivals individually , and the
new company will account for 10% of global production
 Guy Dole initially rejected Mittal as a “Company of
Indians” and two did not share strategic vision;
 EU approved it on June 6; but on June 20 , SeverStal
revised merger terms by lowering equity to 25% and
raised the offer to 2billion euros. But, on June 23,
Arcelor shareholders rejected SeverStal and ratified the
Arcelor Mittal deal.
LEGAL COMPLEXITIES
 Multinational Jurisdiction

 EC Directive

 Anti competition Laws

MULTI-JURISDICTIONAL OFFER
 The offer was governed by takeover regulations all the jurisdictions in
which Arcelor’s securities were listed (Belgium, France, Luxembourg
and Spain).
 The offer terms and documents required the approval of the relevant
securities regulators in each jurisdiction.
 Mittal is a Dutch NV and its shares, which were part of the
consideration offered, are listed on the New York Stock Exchange (the
primary listing pre-offer) and on Euronext Amsterdam.
 Thus, the offer also had to comply with US Securities and Exchange
Commission (SEC) rules and regulations, and the offer document
(share listing prospectus) required the approval of the SEC and the
Dutch securities regulator.
EC DIRECTIVE: IMPLEMENTATION AND
IMPACT
EC DIRECTIVE: KEY ISSUES WITH ALL
THE MEMBER STATES
 SHARED JURISDICTION

If bidder company is not registered in the country where its making bid for target
company, then such bids need to comply with 2 sets of compliancess. & 2 regulators
will have juridiction over different elements of bids.
PRE-BID DEFENSES AND FRUSTRATING
ACTION: OPTING IN OR OUT

Breakthrough provision: bidder can over ride target shareholders

blocking rights
SQUEEZE-OUTS AND INFORMATION

If bidder acquire 90-95% shares of firm, but rest 5% are resisting. Hence left
rest members to fix there own threshold and time period.
Restriction on share transfer needs to disclosed
MULTI-JURISDICTIONAL OFFER
 To complicate matters further, the deadline for
implementation of the Takeovers Directive fell during
the acceptance period and the implementation
arrangements differed in each of the jurisdictions.
ANTI-COMPETITION ISSUES:
 Competition/anti-trust filings were required in the EU,
the US, Canada and elsewhere. One area of particular
interest was the potential impact of including
 Dofasco, Inc (Dofasco), a Canadian steel company, within the
merged group.

 Arcelor had acquired control of Dofasco in January 2006

following a takeover battle with ThyssenKrupp AG
(ThyssenKrupp), a German steel company.

 Mittal’s operations in North America were already

extensive and this led to strategic and competition issues.
 ANTI-COMPETITION ISSUES:
 Mittal agreed with ThyssenKrupp that, if Mittal acquired a controlling interest in Arcelor, it
would cause Arcelor to sell Dofasco to ThyssenKrupp at ThyssenKrupp’s highest bid price.

 Mittal proposed to compensate Arcelor for the difference between the price it had paid and the
proceeds of the sale to ThyssenKrupp.

 However, as part of its bid defence, Arcelor transferred Dofasco to Strategic Steel Stichting, a
Dutch foundation (stichting) created for the purpose, to prevent any sale of Dofasco for five
years (unless the stichting board decides to dissolve the stichting sooner).

 Dutch stichtings have been used in bid defences before, including in Gucci Group NV’s 1999
defence against LVMH Moët Hennessy Louis Vuitton SA’s unsolicited (and ultimately
unsuccessful) takeover bid.

 In response, Mittal entered into a “pocket consent decree” with the US Department of Justice,
one of only a handful of such decrees in the past decade, under which it was agreed that any
antitrust issue could be resolved through the disposal of an alternative asset if Mittal was
unable to sell Dofasco as a result of the stichting.
 WHITE KNIGHT DEFENSE AND
SHAREHOLDER REVOLT
 The most powerful weapon in Arcelor’s arsenal was fired on 26 May 2006,
when the company announced that it had agreed to acquire the mining and
steel assets of Alexey Mordashov, including 89.6% of OAO Severstal
(Severstal), a Russian steel company .
 Instead of being structured as a competing bid, the deal was structured as a
contribution of assets by Mr Mordashov in return for shares in Arcelor. This
meant that the consideration shares could be issued under existing
delegations to the Arcelor board of directors, and without the need to seek
approval from Arcelor shareholders.

 Arcelor shareholders were, however, able to veto the Severstal deal,

provided that holders of more than 50% of Arcelor’s share capital voted
against it at a shareholders’ meeting.
 WHITE KNIGHT DEFENSE AND
SHAREHOLDER REVOLT
 This was a much higher threshold than is usual for shareholder approval (typically, two-thirds of
shareholders present and voting) and, in practice, a veto seemed unlikely, as attendance at past
meetings had never been above 35%.

 The arrangements triggered a shareholder revolt, with between 20 to 30% of Arcelor’s shareholders
signing a letter to Arcelor demanding the right to choose between the Severstal and Mittal
proposals.

 An intense period of negotiations with Mittal followed, culminating in the announcement of the
agreed memorandum of understanding between Arcelor and Mittal and the Arcelor board’s
recommendation of Mittal’s offer on 25 June 2006.

 On 26 July 2006, Mittal was able to announce that 92% of Arcelor’s shares had been tendered in
response to its offer. It is intended that Mittal will formally merge into Arcelor later in 2007. On 30
June 2006, Arcelor shareholders holding about 58% of the outstanding share capital voted against
the proposed Severstal merger at a rescheduled meeting. It is perhaps in this regard that the practical
legacy of the deal in Europe will be most notable.
 COMMENTS ON DEAL BY LEADING
LAW FIRMS:
 “It was a ground-breaking transaction, particularly in terms of
shareholder democracy in Europe, with target shareholders organising
and acting in the face of entrenchment measures,” says John
Brinitzer, a partner at Cleary Gottlieb Steen & Hamilton, who advised
on the deal.

 Pierre Servan-Schreiber, a partner at Skadden Arps Slate Meagher &

Flom agrees: “The deal illustrates very clearly the rise of the
professional shareholder activist in Europe. In hostile situations,
companies must now consider how best to balance the interests of that
specific, and very vocal, population of shareholders with those of other
stakeholders.”
THANK YOU