Mergers, Acquisitions & Joint Ventures
Mergers & Acquisition Differences Modes of Mergers & Acquisitions Types of Mergers Types of Acquisitions The Reasons Behind Mergers & Acquisitions Pakistan Scenario- Real Life Examples Joint Venture Benefits & Risks of Joint Venture Pakistan Scenario – Real Life Example Difference between Merger, Acquisition, Joint Venture
Merger and Acquisition
A Merger is a tool used by companies for the purpose of expanding their operations often aiming at an increase of their long term profitability. An Acquisition, also known as a takeover, is the buying of one company (the ‘target’) by another.
Two firms are combined on a relatively co-equal basis
One firm buys another firm
Parent stocks are usually retired and new stock issued Name may be the original or a combination
Can be by means of controlling share, a majority, or all of the target firm’s stock Can be friendly or hostile Usually done through a tender offer
One of the partners take over the dominant management
Modes of Mergers & Acquisitions
Types of Mergers
Horizontal – between business competitors Vertical – Moving up or down the value chain Conglomerate – Unrelated sectors De-merger – Hive-off of an undertaking into a separate company
Practical Examples of Merger
Merger of M/s. Pakistan Credit and Investment Corporation with and 31-12-2007 into M/s. NIB Bank Limited. Merger of M/s. PICIC Commercial Bank Limited with and into M/s. 31-12-2007 NIB Bank Limited.. Merger of M/s. Yousaf Sugar Mills Limited with M/s. Abdullah Sugar Mills Limited Merger of M/s. Crescent Bahuman Energy and M/s. Crescent Bahuman Textile Limited with and into M/s. Crescent Bahuman Limited. Merger of M/s. Jubilee Energy Limited with and into M/s. Jubilee Spinning and Weaving Mills Limited. Merger of M/s. Nishat Apparel Limited with and into M/s Nishat Mills Limited. 24-06-2008
Types of Acquisitions
Asset Purchase Stock Purchase
Practical Examples OF Acquisition
Acquisition of shares of M/s. Wazeer Ali Industries Limited by M/s. Dalda Foods (Pvt) Limited. Acquisition of shares of M/s. MCB Bank Limited by M/s. Malayan Banking Berhad 20-05-2008
Acquisition of shares of Agro General Insurance Company by M/s. The 21-05-2008 Direct Insurance Company. 21-05-2008 Acquisition of shares of M/s. ABN Amro Bank ( Pakistan ) Limited by 22-05-2008 a consortium led by The Royal Bank of Scotland Group PLC. Acquisition of shares of M/s. Pakistan Cement Company Limited by M/s. Lafarge S .A. 23-05-2008
In an acquisition one firm acquires the other, in either a friendly or hostile takeover:
Friendly Procedure Unfriendly Procedure
Have to be willing to give up their shares for the offered price The majority must approve for an acquisition to be successful
The Reasons Behind Mergers & Acquisitions
Synergies Growth Diversification to Reduce Risk Economies of Scale Acquiring Assets Cheaply Tax Losses
Consider the following possible combination of Rich Inc. and Poor Inc. Rich Inc. Poor Inc. Merged
EBT Tax (35%) EAT
$2,000 ($1,000) 700 -0$1,400 ($1,000)
$1,000 350 $650
Operating independently Rich pays $700 in taxes while Poor pays nothing, for a combined total of $700. However, the merged companies pay a combined tax of only $350.
Pakistan Scenario Real Life Examples
CCP (Competition Commission Pakistan) SECP (Security Exchange Commission of Pakistan) SBP (State Bank of Pakistan) High Court
Example of Merger
NIB Bank Ltd.
NIB Bank Ltd. merged with PICIC and PICIC Commercial Bank on 31 December 2007 Horizontal type NIB Bank Ltd is a wholly owned subsidiary of Temasek Holdings of Singapore Initially NIB had 41 branches(2006) A total of about 646.6mn shares were issued by NIB at the merger NIB financed the merger at a right issue of Rs.18.65bn and acquired 63.36% of stake in the PICIC Now NIB Bank is the 7th largest bank of Pakistan with 240 branches, 450,000 customers and 100 ATMs in 60 cities of Pakistan
NIB Bank Ltd.
At the date, 2nd highest paid-up capital of Rs.28.43bn after SCBPL with the total assets of Rs.176.6bn PACRA rating AA- long-term and A1+ short-term Merger with PICIC was in order to expand the business and enhance in innovative products Concentrating on SME and Commercial banking and Salaam banking
Combined entity will gear up the operational excellence by:
enhancing staff productivity and customer service delivery channels improving in technology and its usage strengthening the risk management and controlling the environmental challenges improving in the asset management arms and insurance affiliate in order to ensure attractive dividend stream for NIB
Example of an Acquisition
Reasons Of Standard Chartered
Getting listed in KSE Commonalities in both bank Expanded geographic coverage Access to new customer segments [SME / Middle Market / Agriculture]
Combined Entity Will Deliver
Economies of scale Stronger operating platform Wider distribution reach
Results Of Acquisition
5th largest bank in Pakistan in terms of profitability and assets Revenue USD 225 million Operations in 22 cities of Pakistan. 800,000 Customers; 9000 workforce 6th largest Consumer Banking in the Group 3rd largest branch network (115 braches) in the Group
Combining complementary R & D technologies Efficient commercialization of a technology or business concept Developing or acquiring marketing or distribution expertise Sharing of professionals with unique skills Financial support or sharing of economic risk Acceleration of revenue growth Ability to increase profit margins Expansion to new domestic markets New product development
Benefits of Joint Ventures
Businesses of any size can use joint ventures to strengthen long-term relationships or to collaborate on short-term projects. A successful joint venture can offer:
access to new markets and distribution networks increased capacity sharing of risks and costs with a partner access to greater resources, including specialized staff, technology and finance A joint venture can also be very flexible. For example, a joint venture can have a limited life span and only cover part of what you do, thus limiting the commitment for both parties and the business' exposure. Joint ventures are especially popular with businesses in the transport and travel industries that operate in different countries.
Risks of Joint Ventures
Partnering with another business can be complex. It takes time and effort to build the right relationship. Problems are likely to arise if:
the objectives of the venture are not 100 per cent clear and communicated to everyone involved the partners have different objectives for the joint venture 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 cooperation the partners don't provide sufficient leadership and support in the early stages Success in a joint venture depends on thorough research and analysis of aims and objectives. This should be followed up with effective communication of the business plan to everyone involved.
Example of a Joint Venture
Indus Motor Company Ltd.
Indus Motor Company is a joint venture of the House of Habib, Toyota Motor Corporation and Toyota Tsusho Corporation. It manufactures and markets Toyota and Daihatsu vehicles in Pakistan. This is one of the few Toyota manufacturing sites in the world that manufactures both Toyota and Daihatsu vehicles on the same production line.
Indus Motor Company Ltd.
Indus Motor Company, with support from Toyota Motor Corporation has worked closely with its 62 local vendors for increased localization and technology transfer. Pakistan is the highest producer of Corolla in Asia. At the time of the Corolla launch in March 2002, the company was producing 57 vehicles per day. Today, it produces 200 vehicles per day. Indus Motor has undertaken a number of expansion projects which include an in-house press plant for making car body parts, a cogeneration power plant to optimize energy consumption etc. which is a part of long term technology transfer strategy.
PSO and Pizza Hut’s Joint Venture
Pakistan State Oil and Pizza Hut‘s joint venture. Pizza Hut and Pakistan state Oil (PSO) jointly decided to open Pizza Hut branch on every PSO petrol pump all over the Pakistan. The first shop is opened at the PSO branch of Lahore Cantt. As per MD PSO Mr. Muhammad Jalees, it is the proof of quality service of PSO that Pizza Hut decided to make a Joint venture with them.
Difference between Merger, Acquisition & Joint Venture
Merger = two companies come together "permanently" for mutual gains or to reduce competition Acquisition = one company buys another company which may or may not be doing well Takeover = same like "acquisition", but generally a company buys another company which is not doing well or has gone bankrupt. Joint Venture = two companies come together "temporarily" for mutual gains for a particular project/job. after the project/job is completed the joint venture is dissolved.