MERGERS AND ACQUISITIONS

11/10/2021
Mergers are dime a dozen
Landmark events
- Raising money
- Forming a company
- Getting your company in the index
- Acquiring or getting acquired
Acquisition – investment
Sell off divestment
Important things for MA to succeed
- Pre-acq
- Post-acq
(TATA – planning to integrate news, Reliance acquisition)
BSE 100 company as acquirer and BSE 500 company as target – no finservices or bank –
a company that has history – preferably in the same industry. Use primary sources –
consolidated – Ideally 8 years data
Yahoo’s financial statements would be nothing if not for Alibaba
EXPANSION FORMATS:
Mergers: Amalgamations
Acquisition: Friendly acq
Takeover: Hostile Acq
Tender acquisition: (Eg. Corus) – Air India – Spicejet – bidding
Asset acquisitions – Divisional Purchase – one division of company – Aditya Birla
Joint Venture – Oversees insurance can start in india only if Indian insurance hold
26% min; Maruti and GoI; either government says or the company itself feels
Strategic Alliance: Renault 26% Nissan stake and 40% vice versa
Sun Pharma and Dr. Reddys – for Dr. Reddys, Sun Pharma will do marketing – quid
pro quo
OTHER ADJECTIVES:
Global and Domestic
Product Line Expansion
Product Market Expansion
Merger and Acquisition: Merger 2 companies come together on pro equal terms.
There can never be a merger between a large and small co. – small co. gets kicked
out(target co.)
  Compaq and HP
 DaimlerChrysler AG merger - disaster

STRATEGIC INTENT IN M&A = GROWTH

 Fortune 100 1901 and 2001 only one company was common (General Electric)
 GE will not be in 2101
 But how do we measure growth
 If company keeps adding itself – organic growth, can add revenues, profits,
market share etc.
 What is money? Medium of value
 “Value of firm” is the objective.
 Firm value is represented primarily by value to investors – which in turn is
valuation of bonds and equity. Since value of debt is more or less a stable factor
due to stated covenants, firm valuation gyrations land at lap of equity investors.
 Therefore debt return remains same but the change in return goes to Equity
Shareholders.
 That is why market value of firm is most important. – maxisimisation of
shareholder wealth.
 Apollo has subsidiaries in overseas as well. MRF - India

Apollo – Cooper
1. Is it merger, acq or something else
2. What will it be named if they acquired?
 Apollo strong in market and Cooper is strong in
 Mostly it would have remained as Cooper then Apollo – Cooper then
Apollo
 (Reliance -shapoorji Pallonji later will become Reliance) (Tata
acquired Corus in 2008, in 1908 Jamshedji tata applied for license and
was rejected as Indians cannot make steels, Largest british company
was acquired by tata, 2015 – Corus Cup became Tata Corus Cup then
tata cup)
 (iSoft submerged in debt – IBA 1/5th its size acquired it)
3. No. of Apollo plants

What’s a good M&A

$300 million dollars minimum – due to lack of information availability – u should be
able to fill all details
Check media releases

If u acquire > 25%, another 25% to be acquired. 51% - ended up. We will reduce to 40%

Business interest : prop of equity capital to be acquired. Lets u control business

EV and Equity Value – 2 things
EV = Equity + Debt – Cash and Cash equivalents(Non-operating)
Non-operating cash can be used to settle debt. Operating cash is only required for
operations
It means if u say debt – cash n cash equ. U are acquiring not jus equity but debt as well.
If it is division, we can say divisional acquisition
(Show debt and equity if available. Cash is paid for equity part mostly)
7.6 crores account for 40% of stake
They have to make offer to existing shareholders – 25.90%
3630 is for 50.1%, not for 40%,

If we have 2 of 3, we must get the 3rd one

Vertical – companies in same supply chain, either my supplier or customer

Horizontal – Apollo and Cooper – acquiring ur competitor/same industry
Conglomerate –
RIL-REC – Non-generic acquisition – different industry with energy industry – u can not
consider it as same industry – ( he feels so) so not conglomerate
Most cases indian companies acquiring foreign – cash only – acquirer ll give cash
Target company macquire shares in Relaince company

Reliance issuing his own shares to target is all equity

Part cash and part reliance shares – part both
How are you funding the purchase consideration is not asked here
In tata-croma story

Since its from foreign parent – it is global

Takeover cannot be friendly
Valuation aspects (dig out)
EPS of company

16th OCT 2021

Growth opp for apollo
- Apollo is largest
- What is the scope for scale?
Major inputs (high input costs)

 RM cost is high 65%

 Selling and Administration expenses 8%
 Employee cost 5%

Major products or services (Volume wise)

- Two-wheeler tyres
- Passenger cars
- Trucks and Bus – value wise highest
End User (these people are powerful)
- OEM - major buyer
- Replacement market
- Export
There is a big entry barrier for this industry
Jagdish Seth – The rule of 3 – any industry 3 companies will take 2/3 of market
share – A bitter fight for market share
CK Prahalad – Management Consultant
 Apollo – expansion in India is going to be difficult

Organic or Inorganic – which is better?

 Depends on circumstances
 Gaurav Kumar – June 2013 – Apollo-Cooper expansion
Confusion between organic and inorganic – should breakeven in 3-4 years
 Koushik Chaterjee, CFO of TISCO
  Value to capture is limited – in terms of tech, product profiles, product mix
and good management.
 (Value capture – core of acquisition)

Sales – Cost = Profit

- Sales is determined by product markets
- Profit is controlled by capital markets
- Cost is only thing under the biz control
 Daimler and Chrysler had best divorce

Empirical evidence about efficacy of inorganic growth

- 83% show no value accreation
Impact of cooper acq attempt for shareholders of Apollo
- Market did not like Kanwar’s idea
- Full 7 months to reach original share price
- Write of 710 mn as exceptional losses
- Subsequent to cooper calling off deal, the share prices rose from Rs. 90 level to
Rs. 160 level by end of March 2014
Does it benefit shareholders?
- Target shareholders benefit – acquirer company shareholders
Over the period
- Overestimate revenue possibilities
- Underestimate cost compulsions
Venture capitalists know only 1/6 they invest in gets ROI – they want business that are
risky
 Daniel Vasella CEO, Novartiis, July 2002 – you must combine to grow
Compelling reasons for Apollo to acquire Cooper tires
- In presentation also
(Kraft acquiring Cadbury)
- Cost synergies - reduction in cost

Gordon’s growth model = E(1+g)/ke – g

Shows importance of g
Why cooper wants to sell?
Why companies sell?
- No access to new technologies
- Competitor pressure
- Strong market entry
- Critical mass could not be realised
- Badly positioned on supply and demand side
- New strategic BUs for future growth

WINDOW OF L&T AND ICICI – Board managed companies – not

OPPORTUNITY: promoter driven – western companies are board driven
POSSBILITY TO so when they find a good opportunity they sell out
SELL THE BUSINESS Why is Apollo willing to give $7 extra – ebitda
AT AN ATTRACTIVE increases, saves $100 million every year, 7th position
PRICE also benefits Apollo

 Cooper increased ; Apollo fell – happens in every acquisition

 Tata Steel – Corus deal – Won in auctions – Share prices fell as they felt Tata paid
way too much
 Commodity companies valued less