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Mergers, Acquisitions and

Corporate Restructuring
By Prof. Samie

M&A basics
Global M&A Overview
Case Study

Lets begin.
M&A is a tool used by companies to perform
corporate restructuring.
Is there a difference in merger and
acquisition or are they a part of the same
activity?
Merger is defined as a process where in two or
more companies combine in such a way that the
target company loses its identity (absorption) or
a completely new company is formed with both
companies losing their identity (consolidation).
IPCLs merger with Reliance Industries is a
merger by absorption. HCL was formed by
consolidation of three companies Hindustan
Computers Ltd, Hindustan Instruments and
Software Company and Indian Reprographics
Ltd.

So how are Acquisitions


different?
The basic differentiating factor is that none of the
companies looses its identity. In an acquisition, the
company may not necessarily loose its identity.
An acquisition is defined as an act of acquiring
effective control by one company over assets or
management of another company without any
combination of companies. Both companies remain
separate legal entities with a possible change in
management control.
British Petroleum recently acquired 30% stake in
Reliances 23 out of 29 exploration blocks including
the KG-D6 basin for USD 7.2 billion.
To summarize, both activities have the same
objective corporate restructuring to help inorganic
growth. That is why they are mentioned in the same
league.

A general overview of M&A

Identify potential target company


Immediately involve Investment bankers for expertise
Get investment bankers into the deal by signing a Non-Disclosure Agreement
Share broad financing plans and way forward with respect to the acquisition
Assess debt capacity of company /target and decide on financing route

Arrange for Bridge loan financing towards the deal for the next 12 months or
so

Proceed with the deal, focusing on the synergies and benefits


Refinance acquisition Rights Issue, Placements, Convertible Debt, Debt
A successful M&A deal ???

M&A
Origination

M&A
Execution

From an Indian Perspective


Laws in India use the term 'amalgamation' for
merger.
The Income Tax Act,1961 [Section 2(1A)] defines
amalgamation as the merger of one or more
companies with another or the merger of two or
more companies to form a new company, in such
a way that all assets and liabilities of the
amalgamating companies become assets and
liabilities of the amalgamated company and
shareholders not less than nine-tenths in value of
the shares in the amalgamating company or
companies become shareholders of the
amalgamated company.
The Companies Act 1956, The Income Tax Act
1961, The FEMA 1999, and The Competition Act

M&A can get hostile...


When M&A is done with the approval of the target
company, it is called a Friendly Takeover.
When the target companys management
disapproves the merger or acquisition, it is called
Hostile Takeover.
ArcelorMittal is the classic example of a Hostile
Takeover.
Malcolm Glazer forced his way to 98% holding in
Manchester United shares to finally de list the
company.

What about reverse


mergers?
Reverse mergers, as the name implies, work in
reverse whereby a small private company
acquires a publicly listed company (commonly
called the Shell) in order to quickly gain access to
equity markets for raising capital.
Reverse mergers are a very popular way for
small start-up companies to "go public" without
all the trouble and expense of an Initial Public
Offering (IPO) - This route is popular in the US
which sees more than 200 such deals every year.
In India, unlisted Hardcastle Restaurants (master
franchisee for McDonald's in West and South
India) merged with Westlife Development, a shell
company.

Spin Off
Spin-Off : The creation of an independent company
through the sale or distribution ofnew sharesof an
existingbusiness OR division ofa parentcompany.
In a "spin-off," a parent company distributes
shares of a subsidiary to the parent company's
shareholders. The shares are usually distributed on
a pro rata basis and the subsidiary becomes a
separate company.
Packaged consumer goods firm Marico spun off its
services business Kaya into a separate listed firm
to improve valuations of the parent company.
Marico Kaya will be listed separately on the
Bombay Stock Exchange and the National Stock
Exchange and will have its own board of directors
"Kaya is a feminine business; 85% of Marico's employees are male, which created a
distinct
from
Marico's
board.
macho
system that
did not
understand
the requirements of Kaya where 85% of
employees are women," Milind Sarwate, CFO at Marico,

Equity Carve Out


A transaction in which a parent firm offers one of its
subsidiaries common stock to the general public, to
bring in cash infusion to the parent without loss of
control.
Each carved-out subsidiary has its own board,
operating CEO, and financial statements, while the
parent provides strategic direction and central
resources.
L&T Finance holdings is a good example of equity
carve out post IPO L&Ts holding in L&T Finance
came down to 83%.
L&T Finance Holdings came out with an IPO in
August 2011 and stated that the proceeds of the
issue will be used to repay the Rs 3.45 billion debt

Demerger
Demerger can be defined as split or division of a
company into more number of companies A demerger is a
form of restructure in which owners of interests in the head
entity (for example, shareholders or unit-holders) gain
direct ownership in an entity that they formerly owned
indirectly (the demerged entity).
Bajaj Auto did a demerger in 2008 thereby creating three
separate entities with management focus on:
auto company would focus on auto business; (Bajaj Auto
Ltd)
the wind power and financial services company will
focus on wind-energy generation, insurance, consumer
finance and new initiatives in financial services space;
and (Bajaj Finserv Ltd)
the primary investment company will focus on new
business opportunities (Bajaj Holdings & Investment
Limited)

Divestment ( Strategic Sell


Down)
Divestment is the opposite of investment selling of stake
or assets to achieve financial or strategic objectives.
Prime reasons for sell down sale of non-core business,
need for funds, selling of underperforming units,
regulatory reasons.
In May 2011, Realty firm DLF announced that it plans to
raise up to Rs 7,000 crore in the next 2-3 years from the
sale of non-core assets to cut its net debt, which stood at
Rs 21,424 crore.
DLF stated that it has raised the divestment target for
non-core assets (including land parcels) to Rs 10,000 crore
from Rs 4,500 crore earlier.

Buybacks
In a share buyback, a company purchases shares it
has issued to shareholders.
Companies prefer to do buyback for the following
reasons:
Increase promoter holding, increase EPS, to pay
surplus cash not required currently by business.
Share buyback was not allowed in India till 1998.
The slowdown in the Indian economy between
1998-2002 was one of the prime reasons for the
Government accepting the industry proposal for
allowing a share buyback.
India PSU and private companies were sitting on
idle cash as there was a lack of investment
opportunities on account of the slowdown during

Delisting
Delisting involves removing a listed security from an
exchange.
Multinationals which set up subsidiaries in India
initially were forced to dilute the parent holdings
under the erstwhile FERA (Foreign Exchange
Regulation Act, 1973) by listing at very low prices in
Indian stock exchanges.
Cadbury which listed in India in June 1977 decided to
get delisted from Indian stock exchanges in 2003.
However, till 2011 Cadbury was unable to fully buy
its delisted shares from the market on account of
valuation issues with minority shareholders.

Global M&A : 2002 2012


5
4.3
4

3.5

2.8

2.7

2.5

1.9

2
1.2

1.6

1.4

0
2002

2003

2004

2005

2006

2007

2008

2009

2010

Value in USD T N

Global M&A in 2012 (US$ 2.1745tn) was down 2.7% on the same
period in 2011 (US$ 2.2342tn).
In 2013, Global M&A was USD2.91tn up by 9% over 2012.
Source : Bloomberg, Wall Street Journal , Thomson Reuters

Top Global Deals -2013


Date

Buyer

Target

Deal Value
(USD)

Jan 2013

Existing
Shareholders

AbbVie (USA)

64BN

Feb 2013

Berkshire
Hathway
3G Capital

HJ Heinz (USA)

27.5BN

Feb 2013

Liberty Global

Virgin Media
(UK)

25BN

Feb 2013

Silverlake
Management
LLC (MB)

Dell (USA)

21BN

Feb 2013

Creditors
US Airways

AMR Group
(USA)

19BN

Jul 2013

Omnicom

Publicis
(France)

18BN

Top Indian Deals 2013-14


Date

Buyer

Target

Deal Value
(USD)

Apr -2014

Sun Pharma

Ranbaxy

4BN

Apr 2013

Unilever NV

Unilever India

3.5BN

Aug 2013

ONGC Videsh

Andarko
Petroleum

2.6BN

Jul -2013

Ambuja
Cements

ACC

2.4BN

Jun -2013

Apollo Tyres
(called off)

Copper Tire and


Rubber
Company

2.3BN

May -2014

Adani Ports

Dharma Port
Company

0.9BN

May -2014

Reliance
Industries

Network 18

0.8BN

Recap of our discussion so


far
M&A is a corporate restructuring tool.
Mergers, Acquisitions, De-mergers, Divestments,
Reverse Mergers, Spin Offs and Equity Carve Outs
are all used in M&A activities.
M&A is a common phenomenon in the western
world with trillions of dollars of activities
performed every year.
Asia is catching up with its western counterparts
in performing M&A.
Lets go to our first case study now

ICICI Bank - A Success


Story
The Government of India established ICICI in
1955 as a Financial Institution (FI)with the
objective of financing large industrial projects.
ICICI acted only as FI which primarily involved
raising money from market and lending loans.
ICICI was not keen on moving towards banking
because as a bank they will have to maintain
liquid reserves.
Trivia question : What is the current CRR? SLR ?
Repo Rate ?
Liberalization of the Indian economy in 1992

ICICI Bank A Success story

ICICI established its subsidiary ICICI Bank Limited in


1994 to join the wave of liberalization in India.

ICICI bank started building base for a successful bank all


through the 1990s much on the lines of Citigroup.

In 2002, the Board Members of ICICI took a strategic


move to perform a reverse merger.

The strategic move entailed a reverse merger of ICICI


Personal Financial Services and ICICI Capital Services
with ICICI Bank.

ICICI Bank A Success


story
The basic objective of the reverse merger was to
create universal bank. And? .

ICICI bank would have access to CASA and not


the other way round.
ICICI was unable to sustain NPAs on its balance
sheet as it did not have access to CASA.
The reverse merger took a period of 18 months to
happen. Why?
Reason : CRR & SLR

Conclusion : ICICI Bank Case


Was the reverse merger really a success or stroke of
good luck ?
Irrespective of the reasons for the success of ICICI
bank, the fact that ICICI is Indias second largest
bank based on assets clearly proves that the
strategic move was a success.
ICICI had its vision of becoming one of Indias leading
bank and its strategy was based on this vision.
Should this vision of universal banking be pursued in
the wake of the fall of Citibank?
The success of any organization lies in having a clear