Introduction of Mergers, Acquisitions

and Restructuring
The Takeover Process
1 Chapter
2
CORPORATE RESTRUCTURING
Broad array of activities that
expand or contract a firms operations
substantially modify its financial structure
change its organizational structure and
internal functioning
3
CORPORATE RESTRUCTURING
Includes different activities such as:
Mergers
Purchases of business units
Takeovers
Slump sales
Demergers
Leveraged buyouts
Organizational restructuring
4
MEANING OF MERGER
A combination of two or more companies into
one company
Absorption: one company acquires another
company
Consolidation: two or more companies combine
to form a new company
Tender offers:
Offer made directly to the shareholders
Hostile when offer made without approval of the
board

5
EXAMPLE OF MERGERS
With corporate banking becoming an
unprofitable business for banks due to
high risk of asset quality, banks including
financial institutions are tapping the retail
finance segment. ICICI's acquisition of
Anagram Finance from Lalbhai group,
HDFC Bank's merger with Times Bank and
ICICI Bank's merger with Bank of Madura
are some of the latest examples of
consolidation in the banking sector.
6

Horizontal: merger of firms engaged in same line of
business
Example: Glaxo Wellcome Plc. and Smithkline Beecham
Plc.
The two british pharmaceutical heavyweights Glaxo
Wellcome Plc. and Smithkline Beecham Plc. merged to
become largest drug manufacturing company globally.
The merger created a company valued at $ 182.4 billion
and with a 7.3 per cent share of the global
pharmaceutical market. The merger company expected
$1.6 billion in pretax cost savings after 3 years of
merger. The two companies had complementary drug
portfolios, and a merger would let them pool their
research and development funds and would give the
merged company a bigger sales and marketing force.


TYPES OF MERGER

7
TYPES OF MERGER

Vertical: merger of firms engaged at different
stages of production in an industry
Vertical mergers take place when both firms
plan to integrate the production process and
capitalize on the demand for the product.
Forward integration take place when a raw
material supplier finds a regular procurer of its
products while backward integration takes place
when a manufacturer finds a cheap source of
raw material supplier.

8
TYPES OF MERGER
Conglomerate: merger of firms engaged in
unrelated lines of business
Congeneric: merger of firms engaged in
related lines of business

9
REASONS FOR MERGERS
Plausible Reasons
Strategic benefit
Economies of Scale
Economies of Scope
Economies of Vertical Integration
Complementary Resources
Tax Shields
Utilization of Surplus Funds
Managerial Effectiveness
10
REASONS FOR MERGERS
Dubious Reasons
Diversification
Lower financing costs
Earnings growth
11
Issues Regarding M&A Activity
In Favor
Critical to healthy
expansion of business
firms
Increase value and
efficiency
Move resources to
optimal uses
Opposed
No improvements
subsequent to the
acquisition
Redistribution of
wealth from labor and
other stakeholders to
shareholders
Speculative activity
12
MECHANICS OF A MERGER

According to Sec 391 to 394 of Indian Companies Act 1956, the
procedure for amalgamation involves:
Examining the object clauses of both companies
Intimating stock exchanges where the amalgamated and
amalgamating companies are listed
Getting draft amalgamation proposal approved by respective boards
of directors
Applying to National Company Law Tribunal
Dispatching notice to shareholders and creditors
Holding meetings of shareholders and creditors
Presenting petition to NCLT for confirming and passing order of
amalgamation
Filing NCLT order with ROC
Transferring assets and liabilities of amalgamating company to
amalgamated company
Issuing shares and/or debentures of the amalgamated company
13
TAXATION ASPECTS

For obtaining tax concessions, the
amalgamated company should satisfy the
following conditions:
all the properties and liabilities of the amalgamating
company should become the properties and liabilities
of the amalgamated company by virtue of the
amalgamation
at least 90% of the shareholders of the
amalgamating company (by value of shares) should
become the shareholders of the amalgamated
company
14
TAXATION ASPECTS

If the amalgamating company is an Indian company,
certain tax concessions are available
Unabsorbed or unfulfilled deductions of the
amalgamating company that are available to the
amalgamated company after the amalgamation:
capital expenditure on scientific research
expenditure on patents, copyrights, know-how
expenditure on license for operating telecommunication
services
amortization of preliminary expenses
carry forward of losses
unabsorbed depreciation
15
TAKEOVERS

Acquisition of a certain block of equity capital
of a company enabling the acquirer to
exercise control over the affairs of the
company
Theoretically, more than 50% of equity
needed for complete control
Practically, 20-40% sufficient for exercising
control
16
TAKEOVERS

Various methods for takeovers:
Open market purchase: buying shares of the listed
company in the stock market; usually hostile
takeovers
Negotiated acquisition: buying shares of target
company from one/more existing shareholders
(mostly promoters) in a negotiated transaction
Preferential allotment: buying shares of target
company through preferential allotment of equity;
friendly acquisition
17
NEED FOR REGULATION OF
TAKEOVERS
Necessary to regulate takeovers in the
following areas:
Transparency
Transparent process will increase acceptance as
legitimate device among all parties involved
Interest of small shareholders
Regulation should ensure that
shareholders holding small numbers of
shares should not suffer
18
NEED FOR REGULATION OF
TAKEOVERS
Realization of economic gains
Ensure that primary rationale for takeover is
efficiency of operations and better utilization of
resources
Provision of suitable fiscal incentives for
takeovers of ailing units
No undue concentration of
market power
Acquirer should not enjoy undue concentration
of market power which may be used to
detriment of customers or others
19
SEBI TAKEOVER CODE

Salient points of SEBIs takeover code:
Disclosure
Any acquirer who acquires holdings
(shares/voting rights) which alongwith existing
holdings add up to 5%, 10% and 14% of the
total, should announce at each stage to the
company and concerned stock exchange about
such holdings
Stock exchanges shall put up such information
on public display
20
SEBI TAKEOVER CODE

Trigger Point
No acquirer can acquire holdings which
alongwith his existing holdings become
equal to or more than 15% of the total
holding
An acquirer can do so only if he makes a
public announcement to acquire shares
through a public offer to the extent of
20%

21
SEBI TAKEOVER CODE

Offer Price
The offer price to the public should be
atleast the highest of the following:
negotiated price
average price paid by acquirer
preferential offer price (if made in last 12
months)
average of weekly high and low for last 26
months
22
SEBI TAKEOVER CODE

Contents of Public
Announcement
The public announcement should provide the
following information:
number of shared proposed to be acquired
minimum offer price
object of acquisition
date by which offer letter will be posted
dates of opening and closing of offer
An acquirer can do so only if he makes a public
announcement to acquire shares through a public
offer to the extent of 20%
23
SEBI TAKEOVER CODE

Creeping Acquisition
No acquirer can acquire more than 5% of
holdings in any financial year without
complying with open offer requirements if his
existing holdings are between 15% and 75%
of the total
An acquirer can do creeping acquisition of up
to 5% per year without triggering off the open
offer requirements
Any purchase/sale of holding amounting to 2%
of the total should be reported within two days
of the transaction
24
ANTI-TAKEOVER DEFENCES IN
THE US

Pre-offer Defenses
Staggered Board: electing one group of directors out
of three every year
Super majority clause: high percentage of votes
(around 80%) required to approve a merger
Poison pills: granting existing shareholders the right
to purchase convertible bonds or preference stock of
the acquiring firm on favorable terms in the event of
a merger
Dual class: creating new class of shareholders with
superior voting rights
Golden parachute: high compensation to incumbent
management in the event of takeover
25
ANTI-TAKEOVER DEFENCES IN
THE US

Post-offer Defenses
Greenmail: buying acquired shares from bidder at a
premium in exchange for his promise of refraining from
hostile takeover
Pacman defence: making counter bid for the stock of the
bidder
Litigation: filing a suit against the bidder for violating
anti-trust or security laws
Asset restructuring: selling the most attractive assets
and/or buying assets that are unwanted or problematic
for the bidder
Liability restructuring: repurchasing own shares at
premium or issuing shares to friendly third party
26
ANTI-TAKEOVER DEFENCES IN
INDIA

Preferential allotment: allotting equity shares or
convertible securities preferentially to promoters
to enhance their equity stake
Creeping enhancement: raising equity holding
by creeping enhancement
Amalgamate group companies: amalgamating
two or more group companies to form a larger
company less vulnerable to takeover
Selling crown jewels: selling the assets which
are attractive to bidder
Searching for white knight: soliciting support
from a friendly third party
27
BUSINESS ALLIANCES

Viable alternatives to mergers and acquisitions
Most commonly used forms:
Joint ventures: independent legal entity in which two or more separate
legal organizations participate preserving their own corporate identity
and autonomy
Strategic alliances: co-operative relationship without creation of
separate legal entity
Equity partnership: co-operative relationship in which one party takes a
minority equity stake in the other
Licensing: licensing of technology/product/process or
trademark/copyright
Franchising alliance: right to sell goods and services to multiple
licensees in different geographical locations
Network alliance: web of inter-connecting alliances for collaborations
between companies
28
RATIONALE FOR BUSINESS
ALLIANCES

Sharing risks and resources
Access to new markets
Cost reduction through sharing or
combining of facilities
Favorable regulatory treatment
Preclude to acquisition or exit
29
SUCCESS FACTORS FOR
BUSINESS ALLIANCES

Complementary strengths of partners
Sharing of exorbitant cost of developing new
product
Ability of partners to cooperate with each other
Clarity of purpose, roles and responsibilities
Perception of equitable division of risks and
rewards among partners
Similar time horizons and financial expectations
of partners
30
MANAGING AN ACQUISITION

DISCIPLINED ACQUISITION PROGRAMME
Manage the Pre-acquisition Phase
Thorough evaluation of itself
Brainstorming for acquisition ideas
Screen Candidates
Evaluate Remaining Candidates
Determine the Mode of Acquisition
Negotiate and Consummate the Deal
Manage the Post-acquisition Integration
31
PITFALLS/SINS OF ACQUISITION

Straying into very unrelated areas
Striving for large size
Failure to investigate thoroughly before
acquisition
Overpaying
Failing in post-acquisition integration
32
DIVESTITURES

Partial Sell-off
Demerger
Equity Carveout
A) PARTIAL SELL-OFF
Sale of business unit/plant of one company to another
Also called slump sale
Motives for Sell-off
Raising capital
Curtailing losses
Strategic realignment
Efficiency gain
33
DIVESTITURES

Financial Evaluation of Sell-off
Estimating divisional post-tax cash flows
Establishing discount rate for the division taking as base
cost of capital of some firm of almost the same size
engaged solely in the same line of business
Calculating PV of division by using discount rate
Finding market value of division specific liabilities i.e. PV
of obligations arising from the divisions liabilities
Deducing parent firms value of ownership position
(VOP)
VOP = PV of divisions CF MV of division-specific
liabilities
Comparing VOP with divestiture proceeds (DP)
Taking decision about sell-off
34
DEMERGER

Transfer of one or more undertaking by a company to
another company
Demerged company: whose undertaking is transferred
Resulting company: to which undertaking is transferred
May take form of spin-off or split-up
Spin-off: undertaking/division of company is spun off
into an independent company; parent and spun off
company are separate corporate entities
Split-up: company is split up into two or more
independent companies; parent company disappears and
new corporate entities emerge
Spin-offs and split-ups enable sharper business focus
Strengthens managerial incentives and increases
accountability
35
EQUITY CARVEOUT

Parent company sells a portion of its
equity in a wholly owned subsidiary
Sale may be made to general public or a
strategic investor
Brings cash infusion to the company
Helps induct strategic investor in a
subsidiary
36
OWNERSHIP RESTRUCTURING

Going Private
Leveraged Buyout
Holding Company
A) GOING PRIVATE
Converting publicly held company into private company
Stock of private company usually held by small group of
investors with incumbent management having
substantial stake
Typically done by buying out shares held by public
Factors prompting management:
Cost savings
Focus on long-term value creation
37
OWNERSHIP RESTRUCTURING
LEVERAGED BUYOUT
Transfer of ownership consummated
mainly with debt
Mostly involve a business unit of a
company
Often buyout is by management (MBO)
After LBO/MBO, unit becomes private
company
38
OWNERSHIP RESTRUCTURING
HOLDING COMPANY
Company holding stocks of other companies to
exercise control over them
Advantages:
Control with fractional ownership
Isolation of risk
Enormous financial leverage
Disadvantages:
Partial multiple taxation
Parental responsibility
39
PRIVATIZATION

Transfer of partial or total ownership
(represented by equity shares) of public
enterprise from the government to
individuals and non-government
institutions
Rationale behind privatization:
Improving efficiency
Generating resources
Promoting popular capitalism
40
ORGANISATIONAL
RESTRUCTURING

Elements in organizational restructuring
programmes:
Regrouping of businesses
Decentralization
Downsizing
Outsourcing
Business process re-engineering (BPR)
Enterprise resource planning (ERP)
Total quality management (TQM)
41
Tender Offers
Bidder seeks target's shareholders
approval
Minority shareholders
Terms may be "crammed down"
May be subject to "freeze-in"
Minority may bring legal actions
2001-2002, many minority squeeze-outs
Usually reversing equity carve-out
Parents often make high bid to avoid shareholder
lawsuits
42
Tender Offers
Kinds of tender offers and provisions
Conditional vs. unconditional
Restricted vs. unrestricted
"Any-or-all" tender offer
Contested offers
Two-tier offers
Three-piece suitor
43
Risk Arbitrage in M&A Activity
In M&A, risk arbitragers take a position in a
merger for short-term profitable resale
Arbitragers bet that a deal will be completed:
bear deal risk & try to minimize market risk
Provide liquidity for target shareholders seeking
to sell to realize gains from premium
Arbitrage funds
Spread deal risk over portfolio of deals
Performance of these funds is often high
But, funds are highly exposed to market crashes
44
Risk Arbitrage in M&A Activity
Illustrative Example
Sears announced a cash tender offer for Lands End
Tender offer was for $62; at close on announcement
date, LE was at $61.72
Investing at $61.72 would yield 3.7% annual return if
deal closed in the forecasted 45 days
( )
1
72 . 61
72 . 61 62
1 % 7 . 3 return Annual
45
365

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