International Acquisitions

BIBLIOGRAPHY & REFERENCES: Financial Management Pandey -IM

Cross-Border mergers and Acquisitions - S Shiva Ramu Global Acquisitions - Stan Lees

Effective International Joint venture Management -Ronald Charles Wolf

BIBLIOGRAPHY & REFERENCES:

    

Business World -10th Sep , 2007 Business Today -23rd Sep , 2007 Economic Times -1st Feb , 2007 http://india.gov.in/business/growing_business/m Indian Brand Equity Foundation’s Journal on “India Inc.”

Growth and Expansion

Internal Expansion

External Expansion or Business Combination

External Expansion
Mergers  Acquisitions  Takeovers  Joint Ventures Strategic Alliances

Merger
A merger is a combination of two or more companies into one company. It may be in the form of one or more companies being merged into an existing company or a new company may be formed to merge two or more existing companies. The Income Tax Act, 1961 of India uses the term ‘Amalgamation” for merger. [Section 2(1A)]  The Property  The Liabilities  Shareholders

Forms of Merger

Absorption
A B A

Consolidation
A B

C

Acquisition
Acquisition may be defined as an act of acquiring effective control over the assets or management of a company by another company without any combination of businesses or companies. Acquisition (Friendly Takeover). Takeover (Unwilling or Forced takeover) Under the MRTP Act, takeover means acquisition of not less than 25% of the voting power in a company.

Takeover Vs. Acquisition

Benefits & Economics

Accelerated Growth
Expanding its existing markets Entering in new markets

Enhanced Profitability
Economies of Scale Operating Economies Synergy

Diversification of risk

Reduction in Tax Liability

Financial Benefits
Eliminating the Financial Constraint Deploying surplus cash Enhancing debt capacity Lowering the financing costs

Increased Market Power

DIVERSITY OF ACQUISITION MOTIVES:

Rationale for Acquisitions
Acquiring Company

Acquirer Company
 

Diversification to achieve economic protection Adding new products faster Acquiring management or technical personnel Acquiring profitable operations

 

Major stockholders wishing to retire Need for further financing Means of survival Prospect of technological or marketing change Attractive purchase or exchange offer

Types of Acquisitions

Horizontal Acquisition
Book Publisher Book Publisher

A

B

Vertical Acquisition
TV Manufacturing company TV Marketing company

(Forward and Backward Acquisition)

Concentric or Congeneric Acquisition
Machine Tool Mfr. Industrial Conveyor System

Conglomerate Acquisition Cement Electronics
Company Company

Value Creation through Acquisitions
Acquisition will create an Economic Advantage when the combined present value of the merged firm is greater than the sum of their individual present values as separate firms.

P
Value:

Q
Vp Vq

PQ
Vpq

EA will occur if, And

Vpq > ( Vp + Vq ) EA = Vpq – ( Vp + Vq )

Cost of Acquisition = Price (Say cash paid) - Vq

Net Economic Advantage is positive if Economic Advantage exceeds the cost of Acquisition.

Therefore, or )

NEA = EA - Cost of Acquisition NEA = [ Vpq - ( Vp + Vq ) ] - ( Cash Paid - Vq

CORPORATE STRATEGY AND ACQUISITION PROCESS:
1.    

Acquisition Search: Candidates with Net Operating Losses. Candidates that offer Synergetic Prospects. Candidates with Turnaround Prospects. Candidates with low Price – Earnings Multiples. Candidates that must avoid Improper Profit Accumulations

2. Approaching the Target:

Passive Strategy:

Active Strategy

3. Valuation:

Discounted Cash Flow Method Comparable Companies Method Book Value Method Market Value Method

4. Negotiation:

5. Due Diligence:

Why do Acquisitions Fail?
Excessive Premium  Faulty Evaluation  Lack of Research Failure to manage Post-Merger Integration

RESISTANCE TO AN ACQUISITION:

FAILURE TO UNDERSTAND TARGET FIRM'S PROBLEM FUTURE PLANS NOT IN THE INTEREST OF TARGET FIRM'S SHAREHOLDERS TENDER PRICE OR EXCHANGE RATIO TOO LOW ACQUIRING FIRM'S PLAN FOR NEW MANAGEMENT

Fighting Strategies in Acquisitions
Different strategies adopted by target firm’s management are:
     

White knight (more suitable acquirer) Poison pills (special rights to holders) Greenmail (repurchase at premium) Leveraged Recapitalization (large debt-financed dividend ) Golden Parachutes (sizable compensation to key personals) Shark Repellents (anti takeover amendments)

MECHANISMS OF ACQUISITION:
1.

STOCK PURCHASE STATUTORY STOCK MERGER ASSET PURCHASE

2.

3.

STOCK PURCHASE

STATUTORY STOCK MERGER

ASSET PURCHASE

Statutory procedures involved in Acquisition
1. 2.
   

Appoint a registered Merchant Banker (MB), PA is required to be made through the said MB,
What is public announcement? Disclosures required Objective of PA Timing of PA

3.
   

Hard and soft copy of PA Draft letter of offer within 14 days from the date of PA Filing fee of Rs.50,000 per letter of offer Due diligence certificate as well as registration details as per SEBI circular no. RMB (G-1) series dated June 26, 1997.

Documents are to be filed with SEBI,

4. 5.
 

SEBI approves the draft letter of offer Letter of offer send to the shareholders.
Within 45 days from the date of PA Offer remains open for 30 days.

Global Footprints

REGULATIONS FOR ACQUISITIONS:

The Companies Act, 1956
o o o o o o o o o Permission for Acquisition Information to the stock exchange Approval of board of directors Application in the High Court Shareholders' and creditors' meetings Sanction by the High Court Filing of the Court order Transfer of assets and liabilities Payment by cash or securities

REGULATIONS FOR ACQUISITIONS:

The Foreign Exchange Management Act, 1999 199

The Income Tax Act, 1961 Securities and Exchange Board of India (SEBI) The Competition Act, 2002

Tata-Corus
Tata Steel, post-acquisition, emerged as world’s 5th largest Steel company from its current rank of 56.
SHARE PRICE:

Tata Steel UK, which has been formed to make the Acquisition, offered 608 pence per share, valuing US $12.1 Billion. It is the second largest in the global steel industry Deal values Corus at an enterprise value of US $ 13.6 billion, which amounts 9 times its EBITDA for 2005-06.

OPERATIONAL DETAILS:

Tata Steel’s Chairman Ratan Tata will be Chairman of the new board of Corus to be formed after the acquisition The enlarged company will have a crude steel production of 27 million tones in 2007

FUNDS FOR ACQUISITION

FINANCIAL PERFORMANCE:

6.4 times improvement in turnover (from Rs 4,198 crore to Rs 31,155 crore) 5.2 times growth in adjusted net profits (to Rs 6,360 crore from Rs 1,222 crore)

#first quarter of the current fiscal year

Corus recorded a turnover of £2,405 million from its continuing businesses which would have translated into Rs 20,298 crore at the exchange rate of Rs 84.4 to a pound sterling as on June 2007.

FUTURE AHEAD:
The acquisition by Tata Steel with Corus will lead to a saving of $400 million to the company after three years. The Tata-Corus will provide $130 million savings this year till March 2008. After three years, the integration will lead to $400 million yearly savings to the company

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