Mergers & Acquisition

Dr Sheeba Kapil 1
1+1=3

Key
Keyconcept
conceptof
ofmergers
mergers//acquisitions
acquisitions

“CREATE
“CREATESHAREHOLDER
SHAREHOLDERVALUE”
VALUE”

Dr Sheeba Kapil 2
 Most of M&A fail ?

 Pursue them when they make sense

 Deals should be above average
 Easier said than done‼
 Why pursued by cos?

 Maximum value is given by Market to

acquisition deals as compared to
alliances/sale

Dr Sheeba Kapil 3
 Stock Market Premium %

-3.1

0.2

0.26

2.65

Dr Sheeba Kapil 4
Heineken 1999-00, increase in
net turnover 14%:
new acquisitions 8%, MARKET
increased sales 2%, VALUES
higher sales price/mix 2%,
improved exch rates 2%

ACQUISITION OTHERS

2003:04
Europe :BBAG: Brau Union: Largest Brewer In Central Europe
China: Fraser & Neave: Heineken Asia Pacific Breweries China,
Acquired Interest Guangdong Brewery Holdings
Dr Sheeba Kapil 5
Australia: JV Lion Nathan Australia: Heineken Lion Nathan
 SABMILLER
African brewer
:
Int. conglomerate

International acquisitions
US, central Europe, Africa,
Asia

2000: Narang Breweries : Lucknow

2001: Mysore Breweries Ltd, Rochees Breweries Ltd
2003: Shaw Wallace: Beer Division (Strong Brand Haywards)
2006: Foster’s India: Maharashtra
Mohan Meakin’s Acquisition Attempt
Dr Sheeba Kapil 6
 Cash deals received more favorable
market reaction than stock deals
(trading & signaling effect )

 Overpayment in the deals has

reduced

Dr Sheeba Kapil 7
 M&A Indices

 DVA- total value deals create

 POP- proportion of cos overpaying

 Source: Developed by Mckinsey

Dr Sheeba Kapil 8
DVA
Measures aggregate value change at
time of announcement (both cos)
as a % of transaction’s value

Market’s assessment of value to be

created

Dr Sheeba Kapil 9
Dr Sheeba Kapil 10
POP
 Proportion of transactions in which
the initial share price reaction
negative

 Acquirer overpaid

Dr Sheeba Kapil 11
Dr Sheeba Kapil 12
POPULAR TERMINOLOGIES

 Junk Bonds

 Dawn raid – UK

 Saturday night special – US

 White knight

Dr Sheeba Kapil 13
Shark repellent

 Golden parachute
 Greenmail/ goodbye kiss
 Macaroni defense
 Poison pill (flip in PP, flip over PP)
 Lady macbeth
 Bankmail

Dr Sheeba Kapil 14
 Types of M&A
 Merger

A transaction where two firms agree to

integrate their operations on a
relatively coequal basis because they
have resources and capabilities that
together may create a stronger
competitive advantage

Dr Sheeba Kapil 15
 the 2 firms combine all assets &
liabilities

 Acquirer = target

 Usually take a new name

JP Morgan/Chase Manhattan becomes

JP Morgan Chase
Exxon and Mobil becomes Exxon-Mobil

Dr Sheeba Kapil 16
 Target firm shares disappear
 Target shareholders get either
1) Shares in new firm
2) Cash

Exchange Ratio = # shares in new firm given

for each share of Target firm
 Ex) # target = 250 million & ER = 1.25
# New = 1.25 x 250 M = 312.5 M
 Buyer firm shares are kept as shares in new
firm ( in effect their ER = 1).
Dr Sheeba Kapil 17
Amalgamation
Section 2(1B)

“Amalgamation”, in relation to companies, means the

merger of one or more companies with another
company or the merger of two or more companies to
form one company…….”

Mergers – Not defined under the Income-tax Act, 1961.

However, in common parlance, merger means
combination of two or more commercial organizations
into one
Dr Sheeba Kapil 18
Conditions

 All properties to be transferred to the

amalgamated company

 All liabilities to be transferred to the

amalgamated company

 Shareholders holding at least 3/4th in value of

shares of the amalgamating company should
become shareholders of the amalgamated
company

Dr Sheeba Kapil 19
Merger/ Amalgamation
Companies Act,1956
Competition Act, 2002
Income Tax Act,1961

Dr Sheeba Kapil 20
 Observing MOA of transferee company
 Convening board meeting
 Preparation of valuation report and scheme document

 Reconvening board meeting

 Notice to be given to stock exchanges
 Application to High Court
 Filing of application
 Court approves time, date, venue etc
 Printing of notices
 Notice printed
 Affidavit filed
 General Meeting convened
 Passing of scheme document
 Results reported
 Court Approval
 Certified copy filed with Registrar of Companies
Dr Sheeba Kapil 21
Acquisition

A transaction where one firm buys

another firm with the intent of more
effectively using a core competence by
making the acquired firm a subsidiary
within its portfolio of businesses

Dr Sheeba Kapil 22
 Taking possession of another business
also called a takeover or buyout.

 Either through share purchase or

asset purchase.

 It is characterized by the purchase of

a smaller company by a much larger
one.

Dr Sheeba Kapil 23
Takeover (hostile)

An acquisition where the target firm did

not solicit the bid of the acquiring firm

IBM’s acquisition of Lotus in 1995;

Oracle’s bid for PeopleSoft in 2003

Dr Sheeba Kapil 24
Acquisition /takeover
The Securities and Exchange Board
of India Act,1992

Dr Sheeba Kapil 25
TRANSACTION STRUCTURE
•Companies Act,1956
•Income Tax Act,1961
•Competition Act,2002

LISTED COMPANIES
•SEBI Regulations
•Stock Exchange – Listing Agreement

CROSS-BORDER TRANSACTIONS
•Foreign Exchange Management Act ,1999
Dr Sheeba Kapil 26
Foreign entity involved
Foreign Exchange Management
Act,1999

Dr Sheeba Kapil 27
Dr Sheeba Kapil 28
FDI- Prohibited Sectors
 Gambling and betting
 Lottery Business
 Atomic Energy
 Retail Trading (Multi brand)
 Agricultural or plantation activities of Agriculture
 Housing and Real estate business (excluding integrated
township)

Dr Sheeba Kapil 29
 FDI (Govt Route)
 manufacture of electronic aerospace and defense equipments
 manufacture of cigars & cigarettes of tobacco and manufactured
 tobacco substitutes
 manufacture of items reserved or small scale industries with more than
24 per cent foreign investment
 all proposals falling outside the notified sectoral policy/caps
 all proposals in which foreign financial and/or technical collaborators
have previous/existing joint ventures and/or technology transfer and/or
trademark agreements in India in the same field
 No Objection Certificate (NOC)

Dr Sheeba Kapil 30
 FDI (Automatic Route)
 Automatic ApprovaI Route
 Does not require any prior approvaI either by the
 Govemment or
 Reserve Bank of India (RBI).
 The investors are only required to notify the Regional Office
concerned of RBI within 30 days of receipt of inward
remittances and file the required documents with that office
within 3O days of issue of shares of foreign investors

Dr Sheeba Kapil 31
Dr Sheeba Kapil 32
 Foreign financial/ technical collaborators with
previous/existing joint ventures, technology
transfer/trade mark agreements entered into
 ON OR AFTER January 12,2005

 NOC is not required (but in any case the related

agreements must be evaluated in order to check the
presence of non conflict clauses)

Dr Sheeba Kapil 33
 Types of mergers

Dr Sheeba Kapil 34
Horizontal Merger

Results in the consolidation of firms that

are direct rivals- i.e. sell substitutable
products within overlapping
geographical markets

Increase mkt power

Increase eff gain (economies of scale,
rationalization)
Dr Sheeba Kapil 35
Contd….
 Two firm same industry
 Seek economies of scale
(BP & Amoco expected to save $2 bn p.a.
from operations)
 huge challenge of integration
(Exxon & mobil, Helene-Curtis and unilever)

Dr Sheeba Kapil 36
Kuhn & motto (1999)

 Increases prices, decreases consumer

surplus
 Always benefits the merging firm
 Increases outsider’s profits
 Increases producer surplus
 Reduces net welfare

Dr Sheeba Kapil 37
 Vertical mergers

1. Two firms participate at difft stages of

production or value chain
2. cos do not own operations in major
segment of value chain

Forward integration- Merck-medco

Backward integration- Chevron’s oil- gulf oil,
America online- mapquest

Dr Sheeba Kapil 38
Conglomerate merger

Consolidated firms may sell related products, share

marketing & distribution channels & production
processes, or they may be wholly unrelated

 Ciba-Geigy (contact lens, Ritalin, Maalox) &

Sandoz(Gerber Baby Food, Ovaltine) - Novartis
 US steel- marathon oil = USX
 AOL- time Warner
 PepsiCo- pizza hut
 Citicorp- travelers insurance
 P&G & clorox
 Cardinal healthcare - allegiance
Dr Sheeba Kapil 39
Pure conglomerate
Such merger unites firms that have no
obvious relationship of any kind

AT&T – hartford insurance

Bankcorp of America- Hughes
electronics
R J Reynolds- burmah oil & gas

Dr Sheeba Kapil 40
 Participants
Investment bankers –
 strategic & tactical advice
 Screen potential buyers & sellers
 Contact & negotiate
 Valuation
 Deal structuring
Goldman Sachs (40%), Morgan
Stanley (26%), Merill Lynch
(22%)
Dr Sheeba Kapil 41
LAWYERS
 Thomson financial securities data
corporation
 Sherman & sterling,
 meagher & flom
 Skadden
 Simpson thatcher & barlet
 Nishith Desai Associates

Dr Sheeba Kapil 42
Accountants
 Tax structure
 Due diligence

 Georgeson & co
 D F king & co

Dr Sheeba Kapil 43