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GROUP MEMBERS

„ Prathamesh Potdar 75
„ Amruta Rele 79
„ Chetan Sankhe 81
„ Gitika Thakur 108
„ Pranit Vanmali 112
„ Vivek Varier 114
MERGERS & ACQUISITIONS
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à àà à 
„ Õ   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
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 Reverse mergers involve
mergers of profir making companies with
companies having accumulated losses
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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
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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.
„ ˜  ·s purchase of 52% stake in Hutch Essar for
about  . Essar group still holds 32% in the
Joint venture.
„ Hindalco of Aditya Birla group·s acquisition
of Novellis for   .
„ 
sale to Japan·s Daiichi for  
Sing brothers sold the company to Daiichi and since
then there is no real good news coming out of Ranbaxy.
„  acquisition of Russia based
 
for $2.8 billion. This marked the turn around of India·s
hunt for natural reserves to compete with China.
„ r acquisition of Centurion Bank of Punjab
for  
„ m   acquisition of luxury car maker †
  for   This could probably the
most ambitious deal after the Ranbaxy one. It
certainly landed Tata Motors into lot of trouble.
„ üind Energy premier    acquistion
of   for  
„ 
  taking over Reliance Petroleum
Limited (RPL) for 8500 crores or   
„ NTT DoCoMo-Tata Tele services deal for  .
The second biggest telecom deal after the Vodafone.
Reliance MTN deal if went through would have been a
good addition to the list.
˜    

Approaches to Valuation

Income Approach Market Approach Asset Approach


INCOME APPROACH
Î 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

Î Difference in the number of periods

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

å 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

å Reflects the current mood of the market & not


the intrinsic value
ASSET APPROACH
Î Hypothetical sale of the company·s underlying
assets
Î To achieve control of the assets owned by the
target
Î Used in capital intensive industries

å Adjusted Book Value Method


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

å Liquidation Value Method


SOME OTHER APPROACHES..
å Replacement Cost Approach

å Option Pricing Model


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

å Acquisition Analysis

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

å Valuation is a totally objective exercise

å A well done valuation is a timeless treasure

å The value estimated is important; the process does not


matter

å The market is always wrong

å 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.

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METHODS OF ACCOUNTING FOR M&A
„ Pooling of Interest Method
„ Purchase Method
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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.
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a)No goodwill is created since assets and 1)Good will arises in the book of purchasing
liabilities of the amalgamating entity is company since purchase consideration is
carried over to the books of amalgamated based on the bargained value of the net
company at their existing book value. assets acquired; any excess of purchase
consideration over the fair value of net assets
acquired is recognised as good will.

b)Purchase consideration for the b)Here purchase consideration id determined


amalgamation is determined by the book by bargain or negotiation over the value of
value of net assets carried over. net assets acquired.
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a) Asssets and liabilities of the amalgamating a) Assets and liabilities of the purchased
companies are carried over in the books of company are recorded at their fair value in
amalgamated company at their book values. the books of the purchasing company.

b) Retained earnings of the amalgamting b) Retained earnings of the purchased


company appear in the books of the company do not appear in the books of the
amalgamted company in the same form as it Purchasing company as the entity of the
had been in the books of amalgamting purchased company is terminated following
company. the acquisition.

c) Assets, liabilities, retained earnings, c) Assets, liabilities, retained earnings,


operating results of the amalgamating Operating results of the Purchasing company
companies for the whole year are presented continue to remain in its books at their
on a combined basis in the financial existing book value because the entity of such
statement of the amalgamated company. company is retained after the acquisition is
completed.
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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.
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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 BETüEEN THE TüO
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.
 

   
 
  
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„ 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.
  
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„ 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.
 
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„ 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.
„ ühile 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.
 
  
   

„The first step in the pre-screening process is to


identify any potential ´deal killers.µ 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 is an essential element to


ensure the project is properly focused on your
organizational objectives.
„ Early steps include forming the ´deal,µ
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.
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„ 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.
 mm   !
 

„ Loan quality ² Cannot find the bottom on asset quality


„ ALL shortfalls ² Typically ties in with inaccurate loan risk
rating systems or optimistic views of work-out plans
„ Investment impairment ² Derivatives, sub-prime or high
risk securities
„ Long-term contracts ² Premises, information technology or
employment agreements
„ Board composition ² The parties cannot reach agreement
on the new board
„ Disclosure ² Problems were understood by the candidate
bank during pre-screening
„ Deal pricing ² Inability to reach agreement on pricing,
terms and conditions
„ Regulatory challenges ² Lack of comfort with new risk
profile
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POST M&A PHASE
„ Communicate the ´New Storyµ.
„ 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 OüNERSHIP
A survey conducted states that,

# of the staff said Senior Management is not good


at inspiring the workforce.
$# said not good at Managing the Change and
 # 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 #relative to the acquirer's.

„ In the period immediately after the deal is


announced, there is generally a strong 
 in the target corporation's domestic
currency.
  
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IT/SOFTüARE/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.

„  gains arise because M&As increase


synergy between firms through
increased use of economies of scale or scope.
„ From a  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;
0 combining cross-border regulatory complexity,
0 innovative bid defence techniques and measures to
overcome them
0 dramatic shareholder revolt.
ARCELOR MITTAL DEAL
„ üorld·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 Indiansµ 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 üITH ALL THE
MEMBER STATES
SHARED JURISDICTION

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PRE-BID DEFENSES AND FRUSTRATING
ACTION: OPTING IN OR OUT

 
    
 
SQUEEZE-OUTS AND INFORMATION

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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.

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„ 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

0 Dofasco, Inc (Dofasco), a Canadian steel company,


within the merged group.

0 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.

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„ 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.
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„ 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.
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