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Concepts related to Mergers & Acquisition Types of Merger
Horizontal Vertical Conglomerate
Reasons for M&A History of M&A Financing Methods Market Reaction to M&A Reasons for Failure M&A Scenario in India
One firm absorbs the assets and liabilities of the other firm in a merger. The acquiring firm retains its identity. In many cases, control is shared between the two management teams. Transactions were generally conducted on friendly terms.
• In a consolidation, an entirely new firm is created. • Mergers must comply with applicable state laws. Usually,
shareholders must approve the merger by a vote.
Traditionally, the term describes a situation when a larger corporation purchases the assets or stock of a smaller corporation, while control remains exclusively with the larger corporation.
• Often a tender offer is made to the target firm (friendly) or
directly to the shareholders (often a hostile takeover).
• Transactions that bypass the management are considered
hostile, as the target firm’s managers are generally opposed to the deal.
Divestiture & Spin-off
• Divestiture: a transaction in which a firm sells one of its
subsidiaries or divisions to another firm.
• Spin-off: a transaction in which a firm either sells or issues
all or part of its subsidiaries to its existing public investors, by issuing public equity. In 1997 PepsiCo spun-off its restaurant division. Shareholders received one share of the new restaurant company (TRICON), for every 10 issues of Pepsi they held.
• Target: The corporation being purchased, when there is a
clear buyer and seller.
• Bidder: The corporation that makes the purchase, when
there is a clear buyer and seller. Also known as the acquiring firm.
• Friendly: The transaction takes place with the approval of
each firm’s management.
• Hostile: The transaction is not approved by the management
of the target firm.
Before the M&A Pre-deal due diligence
Sniff Test • Opportunistic vs. Strategic • Economic Sense • Cultural Compatibility • Leadership • Governance
Post-deal due diligence
•Understanding everything you can about the Target • Develop Project plan and refine cost, value and schedule estimates • Implement Program Management and Governance • Determine your organization and people
How to deal with challenges within agreed time frame with available resources
Some firms adopt so-called shark-repellent charter amendments to deter potential bidders
Staggered boards (board is staggered in groups with only one group elected each year, thus making it more difficult for bidders to gain control) Require supermajority (above 80%) to approve a merger Restrict mergers unless a fair price is received Unwelcome acquirers must wait a number of years before a merger can be completed
Other pre-offer defenses include
Poison pills: Existing shareholders are issued the right to buy stock at a discount if there is a significant purchase of shares by an outside bidder Poison put: Bondholders can demand repayment if there is a hostile takeover
• Issue new shares or repurchase shares from shareholders at a premium • Buy assets that the bidder does not want or that can create antitrust problems
Mergers between two firms in the same line of business. • Chemical Bank’s merger with Chase & Nationbank’s purchase of BankAmerica • Oil Giants Exxon and Mobil • British Petroleum (BP) and Amoco • Kingfisher & Air Deccan
Mergers between Companies at different stages Walt Disney’s acquisition of ABC television network. Disney planned to use the ABC network to show “The Lion King” and other recent movies to huge audience. Production Stage- The buyer may expand back towards the source of raw material or forward in the direction of the ultimate consumer.
Merger between Companies in unrelated lines of businesses. Hugely prevalent between 1960s and 1970s
Reasons for M&A
Reasons for M&A
History of M&A
First Wave mergers (1897-1904)
Horizontal mergers took place between manufacturing industries
Second Wave Mergers (1916-1929)
Mergers between Oligopolies
Third wave mergers (1965-69)
Conglomerate mergers Companies taking over larger than themselves
Fourth Wave mergers (1981-1989)
Hostile takeovers was the order
Fifth Wave Mergers (1992-2000)
Mainly in banking and telecommunications
Financing Methods for M&A
Mergers are generally differentiated from acquisitions partly by the way in which they are financed and partly by the relative size of the companies. Various methods of financing an M&A deal exist:
Payment by cash. Such transactions are usually termed acquisitions rather than mergers because the shareholders of the target company are removed from the picture and the target comes under the (indirect) control of the bidder's shareholders alone. A cash deal would make more sense during a downward trend in the interest rates. Another advantage of using cash for an acquisition is that there tends to lesser chances of EPS dilution for the acquiring company. But a caveat in using cash is that it places constraints on the cash flow of the company.
Financing capital may be borrowed from a bank, or raised by an issue of bonds. Alternatively, the acquirer's stock may be offered as consideration. Acquisitions financed through debt are known as leveraged buyouts if they take the target private, and the debt will often be moved down onto the balance sheet of the acquired company. An acquisition can involve a combination of cash and debt, or a combination of cash and stock of the purchasing entity.
An acquisition can involve a combination of cash and debt, or a combination of cash and stock of the purchasing entity
First, the bad news… Most deals do not create value
Market Reaction to Mergers
Empirical evidence has shown that upon announcement of a merger bid, on average:
Share price of the targeted company rise 16% Share price of acquiring company are essentially unchanged (a fall of 0.7%) Value of total package (buyer plus seller) rises on average by 1.8%
Sellers earn higher returns because
Buyers are typically substantially much larger firms that the significant gains from the merger do not affect the firm’s share price More importantly, it is often the case that there is a competition among bidders, which increases the gains for the target firm(HCL-INFOSYSAXON)
Reasons for failure
• The organization enters a fundamentally unprofitable industry or refuses to • • • • •
exit from one. The organization steps far away from what is known. They key strategic drivers of profitability have less to do with focus and relatedness and more to do with knowledge, mastery and competencies. The economic benefits of the deal are improbable. Success is less likely when there are many competitive bids (public companies) as opposed to less competitive segments of the market like private firms and assets. Poor structuring of the deal – the use of cash, debt financing, tax shields, staged payments, merger of equals terms and earn out incentive structures are all associated with higher buyer returns. Poor governance – oversight and delegation of decision making authority within the firm.
International Stats of M&A
Break-up by No of Deals
6% 16% 37%
Americas Europe Asia-Pacific Africa/Middle East
Break-up by Value
15% 4% 36%
Americas Europe Asia-Pacific Africa/Middle East
M&A Scenario In India
Indian Companies Going Abroad
“The Indian Multinational”
- A steel company in UK, an oil & gas
explorer in Norway, a generic drug manufacturer in Germany; all have one thing in common - they are all flying the Indian tricolor
Value of outbound deals larger than inbound
-In Jan-March 2007, 40 out-bound deals with a total value of € 15bn Led by TataCorus, Hindalco-Novelis, Aban-Sinvest
Companies looking to expand their product portfolio, access new markets, technologies from regional to global player
Indian Outbound Deal
Which was the biggest deal in Indian M&A history?
Tata Corus Deal
Top 10 Acquisitions by Indian Companies
Rank 1 2 3 4 5 6 7 8 9 10 Acquirer Tata Steel Hindalco Videocon Dr. Reddy's Labs Suzlon Energy HPCL Ranbaxy Labs Tata Steel Videocon VSNL Total Targeted Co. Corus Group plc. Novelis Daewoo Electronics Corp. Betapharm Hansen Group Kenya Petroleum Refinery Ltd. Terapia SA Natsteel Thomson SA Teleglobe Targeted Country UK Canada Korea Germany Belgium Kenya Romania Singapore France Canada Deal Value( in U.S$ bn) 12 5.98 0.729 0.597 0.565 0.5 0.324 0.293 0.29 0.239 21.519 Industry Steel Aluminium Electronics Pharmaceutical Energy Oil And Gas Pharmaceutical Steel Electronics Telecom
Change in RBI policy
• Hiked the overseas investment limit from 300 per cent of the net worth to
400 per cent of the net worth;
• Hiked the limit on overseas portfolio investment by Indian companies
from 35 per cent of their net worth to 50 per cent of their net worth;
• Allowed Indian residents to remit up to US$ 2,00,000 per financial year,
from US$ 1,00,000 previously, for any current or capital account transaction or a combination of both.
• Allowed mutual funds to make an aggregate investment to the tune of US$
5 billion in US$ 4 billion. overseas avenues, from an earlier cap of
• Which was the largest M&A deal in
2008 in India? Daiichi-Sankyo’s Acquisition of Ranbaxy for $4.5 bn
M&A Scenario in India (2008)
• Top 10 deals accounted for 64%
when compared to that in 73% in 2007
• 9 out of 10 top deals in 2008 were
cross border in nature
deal value is $69.03 million in 2008 when compared to $93.55 million in 2007
• 37% of total M&A deal in 2008
accounted to Telecom, Healthcare and Biotech. Pharma,
Sector wise Breakup of M&A deals by value Sep-Oct 2008
Question 3 Find the M&A…..
Overall Scenario of M&A
Cash rich firms, owing to slow growth and tight liquidity both at home and overseas are curbing big aspirations for mergers and acquisitions. Eg: Infosys - Cash of US $ 1.9 Bn
Compare that to China, where acquisition volume is up 156 percent to $47.9 billion, though cross border acquisition plans by Chinese companies are closely tied to the government and are less impacted by financing constraints.
In case of Indian Companies there are no takers for the new issue of stocks for the Mergers and acquisitions. Eg Tata Motors and Hindalco
Question 4 FIND THE M&A