babu banarasi das university

2019-20

CORPORATE RESTRUCTURING &

BUSINESS VALUATION

Submitted To: Submitted By:

Dr. Vinitendra Singh Shivani Rai
MBA 22
1180672130
 “Case study 1”
Acquisition of Patni by iGate On January 10, 2011, US-based iGate Corporation (iGate)
(NASDAQ:IGTE) announced the acquisition of Patni Computers Limited (Patni) (BSE: 532517)
(NSE: PATNI) (NYSE:PTI), the IT services and BPO company based in Mumbai, India. On this
occasion, Phaneesh Murthy (Phaneesh), Chief Executive Officer (CEO) of iGATE, said, “The
objective is to synergize the leadership team of both iGATE and Patni to create, over time, a
worldclass integrated leadership team which will drive the combined company to newer
horizons.” Commenting on the deal, Arup Roy (Roy), Senior Research Analyst, Gartner Inc.
(Gartner), said. “It is a better deal for iGate, since the combined entity will be worth almost a
billion dollars, which can help swing large deals in its favor.”

Patni’s Promoters and General Atlantic had made several efforts to sell their equity in the
company. According to experts, a number of IT players including Larsen & Toubro, IBM, NTT
Data Corporation (NTT), and Fujitsu Limited (Fujitsu) as well as private equity players such as
Apax Partners LLP (Apax), Texas Pacific Group (TPG), and Blackstone Group L.P. had shown
an interest in Patni at different points of time.

Try to Understand

 The various issues and challenges in Merger and Acquisition (M&A)

 The synergies and challenges of the acquisition
 The various financing methods of any acquisitions 
 The rationale behind the acquisition 
 The human resource issues involved in any acquisition of an IT company
 The role of various parties involved in M&A activities

ANSWER
• The various issues and challenges in Merger
and Acquisition (M&A)
1. Many mergers and acquisitions today involve companies headquartered in two different
countries. This can complicate the transfer of best practices, since managers generally assume
that their knowledge bases apply universally. They do not always take into consideration that
performance drivers vary from culture to culture.
2. Language barriers between the participants of a cross-national merger must be readily
countered. Information concerning the deal must be translated into both languages so questions
can be answered in real time. Employees of both cultures must be educated in the other language
so that communication between workforces can be effective and productivity can be facilitated.

3. Often human resources professionals are not sufficiently involved with the evaluation of
target companies before deals are signed. If they are not participants in the development of an
M&A strategy and the screening of talent and culture very early on, they will have to play catch-
up later on, fixing problems that might have been avoided had they been involved initially.

4. The importance of communication, employee retention, and training and other

components of integration is fairly well known. However, integration activities should be
customized based on feedback from the affected employee populations. Communication must
work in both directions, up and down the organization.

5. Even the most talented business leaders are generally not experts in the various stages of
a merger and/or acquisition. Moreover, given ongoing demands of the business, they do not
have unlimited time to devote to merger activity. Retain the services of a qualified consultant
who understands the company’s merger goals and has the skills to help achieve them.

6. A significant challenge is to ensure that ongoing business is not adversely affected by

M&A activity. Monitor employee performance to ensure that customer needs continue to be
met. Solicit customer feedback to verify that all is well on their end.

7. Integration planning and implementation should begin as early as possible, well before
the deal closes. If integration is started early, there is a better chance for a seamless transition.

8. Once integration is underway, companies can forget to stop and check their progress. It
can be challenging to redirect integration activity but it must be done to ensure desired results.
Check employee perceptions of integration progress by regularly soliciting their feedback.

9. Merger training is often overlooked and can present obstacles if not implemented
promptly. For example, a group of acquired employees may need assistance in participating in
automated benefits enrollment. Without necessary training, it will take longer for new employees
to feel part of their new work environment.

10. Managers must not only be given adequate information; they must also be trained in
appropriate dissemination techniques. They must learn how to coach and remain sensitive to
the feelings of their staff. They must learn about change management and how to deal with
resistance. If people are made to feel that their feelings are normal and are given opportunities to
openly discuss issues, their concerns can be faced head on.

11. Employee productivity often falls where major staffing decisions are being made. The
fear of making a mistake can cause a drop in creativity or efficiency, as people become
increasingly cautious. Also, the time taken to talk to other employees during the period of
uncertainty can affect productivity.

12. HR representatives must work closely with representatives of other functions to ensure
that staffing decisions are made strategically. They can help these functions to develop ways
to retain desired employees, align compensation and benefit programs, and communicate desired
information.

13. The assessment and selection of employees after a merger or acquisition must be based
on revised operational requirements. When cuts are made too quickly, valuable human capital
can be lost and the process of attracting new employees or re-recruiting former employees can
cost significantly more than retaining original employees in the first place.

14. Lack of information concerning whether or not their jobs will continue fosters fear in
employees. This fear can create an atmosphere of distrust and competition for jobs. Employees
can feel that either their co-workers from their own company or their counterparts in the “other”
company are potentially stealing their jobs. This can create anger and resentment. People are less
likely to be effective during this time, especially in a team environment.

• The synergies and challenges of the acquisition

SOURCES OF VALUE SYNERGY

The acquisition of Patni Computers and its subsequent delisting and merger with iGate is in the
nature of a horizontal merger. The sources of value synergy in horizontal mergers can be
derived through:

• enhancement of revenue while maintaining the existing cost base

• cost reduction while maintaining the existing revenue level

• generation of new resources, capabilities, products, markets and processes that lead to

revenue growth or cost reduction.

Post integration, Patni will benefit by getting access to fast growing verticals like B&FS & iGate
will get the benefit of large scale of Patni computers. Since the major demand comes from
banking and finance vertical and the limited exposure of Patni, just over 11percent share in the
total revenue, could be one of the causes for a slump in its revenue growth and operating profit
margin in the year 2010 and 2011. Companies that had thrust in banking and financial services
clocked higher growth. iGate was part of it with half of its revenue coming from this fast
growing sector. After the integration, Patni will be able to take benefit of iGate’s thrust in this
sector. Also the opportunity of cross-selling each other’s products become a reality.

• The various financing methods of any

acquisitions
1. Stock Swap Transaction

When companies own stock that is traded publicly, the acquirer can exchange its stock with the
target company. Stock swaps are common for private companies, whereby the owner of the
target company wants to retain a portion of the stake in the combined company since they will
likely remain actively involved in the operation of the business. The acquiring company often
relies on the proficiency of the owner of the target firm to operate effectively.

Careful stock valuation is important when considering a stock swap for private companies. There
are various stock valuation methodologies used by proficient merchant bankers, such as
Comparative Company Analysis, DCF Valuation Analysis, and Comparative Transaction
Valuation Analysis.

2. Acquisition through Equity

In acquisition finance, equity is the most expensive form of capital. Equity financing is often
desirable by acquiring companies that target companies that operate in unstable industries and
with unsteady free cash flows. Acquisition financing is also more flexible, due to the absence of
commitment for periodic payments.

3. Cash Acquisition

In an all-cash acquisition deal, shares are usually swapped for cash. The equity portion of the
balance sheet of the parent company remains the same. Cash transactions during an acquisition
often happen in situations where the company being acquired is smaller and with lower cash
reserves than the acquirer.

4. Acquisition Through Debt

Debt financing is one of the favorite ways of financing acquisitions. Most companies either lack
the capacity to pay out of cash or their balance sheets won’t allow it. Debt is also considered the
most inexpensive method of financing an acquisition and comes in numerous forms. When
providing funds for an acquisition, the bank usually analyzes the target company’s projected cash
flow, profit margins, and liabilities. Analysis of the financial health of both the acquiring
company and the target company is a pre-requisite.

Asset-backed financing is a method of debt financing where banks can lend funds based on the
collateral offered by the target company. Collateral may include fixed assets, receivables,
intellectual property, and inventory. Debt financing also commonly offers tax advantages.

5. Acquisition through Mezzanine or Quasi Debt

Mezzanine or quasi-debt is an integrated form of financing that includes both equity and debt
features. It usually comes with an option of being converted to equity. Mezzanine financing is
suitable for target companies with a strong balance sheet and steady profitability. Flexibility
makes mezzanine financing appealing.

6. Leveraged Buyout

A leveraged buyout is a unique mix of both equity and debt that is used to finance an acquisition.
It is one of the most popular acquisition finance structures. In an LBO, the assets of both the
acquiring company and target company are considered as secured collateral.

Companies that involve themselves in LBO transactions are usually mature, possess a strong
asset base, generate consistent and strong operating cash flows, and have few capital
requirements. The principal idea behind a leveraged buyout is to compel companies to yield
steady free cash flows capable of financing the debt taken on to acquire them.

7. Seller’s Financing / Vendor Take-Back Loan (VTB)

Seller’s financing is where the acquiring company’s source of acquisition financing is internal,
within the deal, coming from the target company. Buyers usually resort to the seller’s financing
method when obtaining capital from outside is difficult. The financing may be through delayed
payments, seller note, earn-outs, etc.

• The Rationale Behind The Acquisition 

The acquisition will help iGate to remove its tag of being a smaller organization and take a leap
into the higher league of Indian IT industry more so, when a minimum level of USD 1billionin
revenues has become a sort of pre requisites to participate in larger deals. The rationale behind
the acquisition is the synergies in the competencies and skill sets. iGate had a professional staff
of process, domain and operational consultants and Patni had excellent technical capabilities and
strong micro-domain knowledge – the understanding of sub-segments within a vertical.

• The human resource issues involved in any

acquisition of an IT company
Some of the human resource issues involved in an acquisition are:

a) Identifying and communicating the reasons for the M&A to employees. Often
employees see change as dislocating and upsetting. HR must communicate effectively
and openly with all employees throughout the transition. Specifically, HR must
communicate with employees about the necessity for the change, explain how the change
will benefit them, and manage the stresses that accompany change.
b) Forming an M&A team and choosing and coaching an M&A leader. The team leader
must focus solely on the M&A rather than be involved in running the business, be
sensitive to cultural differences, lead the change process, and retain and motivate key
employees.
c) Assessing the corporate cultures. One company may be driven by a sales mentality
while another may be focused on innovation. Or decisions in one company may be top
down while the other may be used to more participative decision making. HR must
anticipate cultural challenges and take steps to integrate the two cultures.
d) Deciding who stays and who goes. HR must determine the new organizational structure,
and retain and motivate key talent. Our workforce planning template can help you better
assess this issue. Download it here.
e) Comparing benefits, compensation and union contracts and deciding on HR policies
and practices.
• The role of various parties involved in M&A
activities
People in M&A

A variety of stakeholders should be involved in the M&A process, with each party having
varying levels of involvement and effort throughout.

a) C-suite and investment committee

b) Business unit leadership
c) Corporate development
d) Transaction lead
e) External advisors

C-Suite And Investment Committee

The investment committee (IC) includes the CEO and other C-suite and senior-level executives.
This group serves as the most influential constituent—the ultimate decision maker, retaining
accountability for the effectiveness (or lack thereof) of every transaction.

The IC’s role encompasses:

 Ensuring that the right people and teams are in place

 Driving a culture of teamwork and discipline
 Maintaining organization-wide focus and long-term, value-enhancing goals
 Bringing objectivity, and “pressure testing” the deal to confirm that it is being done for
the right reasons

The IC should be involved early on in the M&A process to establish a coherent strategy and a
unified vision across the company. Later, it can assume a less day-to-day active role while other
groups execute on the strategic plan it set.

Business Unit Leadership

Once a transaction is completed, the business unit (BU) operates the acquired business. Thus, its
role is critical in the latter stages of the M&A lifecycle. However, it’s important to bring in
operational knowledge and aptitude early in the M&A process so that the BU can meld its
experience with the strategic imperatives in the following ways:

 Identifying areas where an acquisition could have an outsized impact

 Tracking competitors’ actions
 Recommending to the IC when it’s a good time to act
Effective acquirers note that the BU leadership should support the due diligence and integration
processes, as they have specific knowledge that could raise potential red flags and have a full
understanding of how the target business should operate once acquired.

Corporate Development

The corporate development team is arguably more involved in the numerous steps throughout
the M&A lifecycle. Its role, effectively, is M&A—and thus it stays involved in all aspects of the
transaction.

Many serial acquirers have a dedicated corporate development team responsible for
spearheading the tactical components of an acquisition. This typically includes:

 Developing and maintaining the M&A pipeline

 Monitoring and homing in on targets
 Comprehensively managing the diligence process to ensure that the transaction doesn’t
get ahead of the diligence performed
 Preparing for bidding and negotiation

Another key responsibility of corporate development is more of a sales role—portraying the

company as an “acquirer of choice.” The corporate development team most frequently interfaces
with the target and thus can demonstrate extensive knowledge of the target, have a well-
articulated acquisition strategy and execution plan, and ensure that the required capital is
available or can be secured.

Transaction Lead

The transaction lead’s primary role is at the end stages of an acquisition—driving deal execution
and integration.

Companies, however, often underestimate the effort required to integrate an acquisition and do
not engage their transaction leads early enough, which can result in unrealized synergies. The
earlier a transaction lead is engaged the more thoroughly he or she can understand the specific
risks, challenges, and opportunities of the deal.

While it’s generally beneficial to select someone with prior transaction experience, an employee
with strong cross-functional management and execution skills can be effective with the support
of an experienced corporate development team and strong leadership from the investment
committee.

External advisors

Advisors provide the role of augmenting a company’s internal capabilities, providing access to
targets, and providing support as needed, throughout the M&A process. Experienced buyers
have a deep network of their own, but for many companies newer to the M&A scene, an
external advisor can provide great assistance with sourcing and screening potential targets.

Besides sourcing targets, advisors can provide assistance throughout the M&A lifecycle,
including in conducting diligence, supporting negotiations, and execution. It’s important for
each company to weigh the cost of hiring external advisors against the risk of running a
suboptimal or flawed acquisition process, which could ultimately destroy value. Some
companies will find they need external advisors for nearly every deal, while others will assess
their use on a case-by-case basis.

“Case study 2”
In June 06, there was the announcement of the Merger between two giant telecom vendors N
and S. The following are the perceived benefits/ synergies might arise from this proposed deal.

The back ground, proposed set up/shareholding, key rationale and perceived benefits/synergies:

a) Both are from Europe – One Finnish and the other German. Therefore, lesser Possibility of
cultural barriers.

b) They are big communications giants and both share the intention to join together their
respective network/communications equipment and service provider businesses to create the
sectors third-biggest company and close the gap on market leader E.

c) A new 50-50 joint venture company will be formed.

d) This new company will instantly become the third largest communications equipment
provider in the world with annual revenues of over 15 billion euros.

Proposed Set up of the new entity in relation to shareholding:

• The new entity is 50-50 joint venture, called N-S Networks and will encompass both
fixed-line and mobile networking products as well as managed services offered to carriers.

• N would still have an enterprise business unit, and S would own business unit that sells
PBXs and networking equipment; and N and S will remain separate companies with distinct
enterprise offers and channels for other divisions.

• The companies said the new joint venture will be immediately profitable. Approximately
78 percent of its revenue will come from wireless products, with the remainder coming from the
fixed-line business.

Rationales and Perceived Benefits/Synergies: 

• The union is aimed at making both companies bigger players in the fixed-mobile
convergence (FMC) market, where consumers use a single device to make calls over both
mobile and landline networks.

• Based on current market share data, N-S Networks will be the second largest global
company in mobile industry.

• The deal addresses the need for both companies to achieve global scale and
geographical diversity.

• The proposed deal is viewed as a defensive move where both N and S are buying market
share and dealing with industry consolidation.

• The move is risky due to N’s lack of a fixed line presence but added the benefits of scale
will help both companies.

• N’s management will be tasked with turning around a business that S’s management had
been trying to turn around for five years.

Questions:

(i) What are the challenges the new merged company would face in such a merger?

(ii) What is the synergic effect N and S could enjoy after the deal ?

(iii) Bring out the effect the companies would face individually in their management.

(iv) According to you what do you think would have been the motive of both the companies
agreeing for such a deal?

ANSWER
Q.No. (i) What are the challenges the new merged company
would face in such a merger?
Differences

One of the primary reasons that mergers sometimes fall apart before they can ever be completed is due to the

differences between those attempting the merger in the first place. Differences in opinion or management style
may cause potential partners to fail to see eye-to-eye, causing the merger negotiations to break down. This can

happen for other reasons as well. Differences in personality may cause two potential partners to part ways

even though it may be mutually beneficial to combine their efforts.

Legal Issues

Legal issues present another major snafu the companies may run into during the merger process. Since the

passage of the Sherman Anti-trust Act of 1890, companies in the United States have been forbidden to form

any type of business entity that might result in the restriction of fair trade. This applies to mergers at the

corporate level as well. The act indicates that any "combinations" in restraint of trade are also illegal. It has

taken well over a century for U.S. policymakers to fully spell out what this means, but it is an important

consideration that companies must make when moving forward in the merger process.

Integration

One of the most significant problems that occurs in relation to a corporate merger is the post-merger

integration that must take place. Companies that combine their efforts and resources must learn to

do so by bringing all of the constituent elements of their organizations together. This is easier said

than done. The amount of planning and negotiating required to bring this about is fairly significant

and usually takes place during the merger process. This integration planning is closely related to

cultural issues because it requires those involved in the planning process to determine what

corporate culture will look like after the merger.

Q.No.(ii) What is the synergic effect N and S could enjoy

after the deal ?

Synergy benefits can come from four potential sources:

1. Revenue increase. This can be done by selling more different goods and services
using a broadened product distribution. This will help the new company to compete
for customers which originally were not the clients.
2. Expenses reduction. Because of a merger or acquisition, many companies optimize
internal positions and introduce more responsibilities to the existing roles.
 3. Process optimization. It is done by introducing enhanced marketing tactics and
strategies, branding, better technologies, and more effective distribution.
4. Financial economy. United enterprise from the legal prospective can get better tax
benefits, state support etc. But the buyers should remember: financial economy alone
can’t optimize the strategic position of a company. So it should not be the only value
driver in the deal.

Q.No.(iii) Bring out the effect the companies would face

individually in their management.
M&A Effects

Capital Structure

M&A activity obviously has long-term ramifications for the acquiring company or the dominant
entity in a merger than it does for the target company in an acquisition or the firm that is
subsumed in a merger.

For the target company, an M&A transaction gives its shareholders the opportunity to cash out
at a significant premium, especially if the transaction is an all-cash deal. If the acquirer pays
partly in cash and partly in its own stock, the target company’s shareholders get a stake in the
acquirer, and thus have a vested interest in its long-term success.

For the acquirer, the impact of an M&A transaction depends on the deal size relative to the
company’s size. The larger the potential target, the bigger the risk to the acquirer. A company
may be able to withstand the failure of a small-sized acquisition, but the failure of a huge
purchase may severely jeopardize its long-term success.

Once an M&A transaction has closed, the acquirer’s capital structure will change, depending on
how the M&A deal was designed. An all-cash deal will substantially deplete the acquirer’s cash
holdings. But as many companies seldom have the cash hoard available to make full payment
for a target firm outright, all-cash deals are often financed through debt. While this increases a
company’s indebtedness, the higher debt load may be justified by the additional cash flows
contributed by the target firm.

Market Reaction

Market reaction to news of an M&A transaction may be favorable or unfavorable, depending on

the perception of market participants about the merits of the deal. In most cases, the target
company’s shares will rise to a level close to that of the acquirer’s offer, assuming of course that
the offer represents a significant premium to the target’s previous stock price. In fact, the
target’s shares may trade above the offer price if the perception is either that the acquirer has
low-balled the offer for the target and may be forced to raise it, or that the target company is
coveted enough to attract a rival bid.

Q.No. (iv) According to you what do you think would have

been the motive of both the companies agreeing for such a
deal?
The following are the motivations behind merger that occurs between the companies:

 SYNERGIES
This is the most common reason for a merger. It is expected that when two companies merge to
form a new bigger company, the value of the new entity will be more than the combined value
of two separate companies. Generally, there are two types of synergies that are aimed for:

 COST SYNERGIES
Synergies that reduce costs through the economies of scale in various divisions of the company,
viz. research and development, procurement, sales and marketing, manufacturing, distribution
and general administration.

 REVENUE SYNERGIES
Synergies that increase the overall revenue through expanded markets, products cross-selling
and an increase in prices.

 RAPID GROWTH
Generally, any company has two options to grow, viz. organic growth and external growth.
Organic growth is achieved by an increase in sales by making internal investments. External
growth is achieved by an increase in sales by buying external resources through mergers and
acquisitions. Often, companies prefer to grow externally, especially the ones in a mature
industry as the industry offers limited opportunities for growth. It is less risky to have external
growth.

 MARKET POWER
A horizontal merger in a small industry will definitely help in increasing the market share. An
increased market share will, in turn, give the power to influence prices. In fact, monopoly is an
extreme example of a horizontal merger. A vertical merger can also increase the market power
by reducing the dependence on external suppliers.

 UNIQUE CAPABILITIES
Not every company can have all the resources or strengths required for a successful growth.
There will come a time when the company wants to acquire the competencies and resources that
it lacks. This can easily be done through mergers and acquisitions in a very cost-effective way as
compared to developing the capabilities internally.

 DIVERSIFICATION
Diversification of the company’s total cash flows is a reason argued by managers for the
mergers. However, shareholders are not convinced by this reason as they can easily diversify
their investments themselves at the portfolio level. This is cheaper and less painful than the
company going through the process of merging with another company to achieve synergies
created by diversification.