MERGERS AND ACQUISTION
Merger Types of Merger Acquisition Types of Acquisition Motives & Benefits of M&A Business valuation SEBI Takeover Code Strategies Used to Prevent Hostile Acquisition Some M&A in India
A merger is when you integrate the business with another and share control of the combined businesses with other owner. A merger involves the mutual decision of two companies to combine and become one entity.
Merger: 2 firms combine all Assets and Liabilities Acquirer Target Usually take a new name
Types of Mergers
Horizontal Merger Combination of two or more firms operating in the same stage of production. Example: The merger of ACC with Damodar Cements. Vertical Merger Combination of two firms that operate in different stages of production. Example: Cement manufacturing company acquires a company engaged in civil construction.
Conglomerate Merger Merger of firms in unrelated lines of business that are neither competitors nor potential or actual customers or suppliers of each other.
Example: General Electric buying NBC television. Product Extension Merger It is executed among companies which sell different products of a related category. Market Extension Merger It occurs between two companies that sell identical products in different markets.
Acquisition may be defined as an act of acquiring effective control over assets or management of a company by another company without any combination of businesses or companies.
Types of Acquisition
Friendly Acquisition The acquisition of a target company that is willing to be taken over. Hostile Acquisition A takeover in which the target has no desire to be acquired and actively rebuffs the acquirer and refuses to provide any confidential information.
Motives & Benefits of M&A
Economies of large scale Business: This types of Organization enjoys both internal and external economics which generally lead to reduction in Cost and Increase in Profits. Adoption of Modern Technology: Corporate Organization require large resources for adoption of modern technology which may be out of reach of an individual firm. This may induce M&A of different firms . Example: Hindustan Construction Company.(India) and Karl Steiner AG(KSAG) Pvt. Ltd. (Switzerland)
Effect of Trade Cycles: Trade Cycles are the periods of Ups and Downs in the economy. These periods create unhealthy competition in the market and act as a motivating factor of M&A. Patent rights: The Exclusive right to use the invention of any new machines, method, or idea is one of the reasons favoring M&A. Patents have given monopoly position to many firms in the market at national and international level. Example: Ranbaxy Laboratories Ltd.(India) and Daiichi Sankyo Co. Ltd.(Japan)
Elimination of Competition: It is one of the motivating factors for M&A because it eliminates severe, intense and wasteful expenditure by different competing Organization. Greater value Generation(Synergy):Companies go for M&A from the idea that, the joint company will be able to generate more value than the separate firms. When a company buys another company, It expect that the newly generated shareholder value will be higher than the value of the sum of share of the two separate companies.
Cont« Desire to unified control and self sufficiency: Firms which depends on other units for their raw material requirements or which are engaged in different process of product for ensuring uninterrupted supply of raw materials are encouraged and benefitted by M&A. By bringing such firms under unified control, their dependence on other firms can be avoided. Taxes: A profitable can buy a loss maker to use the target¶s tax right off.
Cont«« M&A are also beneficial: 1. When a firm wants to enter a new market. 2. When a firm wants to introduce new product through Research and Development. 3. When a firm wants to achieve administrative benefits.
Asset Valuation Relative valuation: Relative is a comparable concept of valuation in which we compare the two entity and based on their comparison we will be valued the business. Example: 1. FMCG P/Sales 2. Real P/Assets 3. Bank P/Assets 4. Bharti EV/Subscriber 5. HUL EV/Sales 6. Steel EV/Cubic Metric Tonnage
SEBI TAKEOVER CODE
OBJECTIVES OF TAKEOVER CODE
To provide transparency in bulk acquisition. To provide reasonable profit to the small shareholders of the target company. (Under section 15H of SEBI ACT, 1992, if the acquirer fails to comply with SEBI takeover code, he shall be liable to a penalty of 25 crore or 3 times of the amount of profit made out of such failure, whichever is high)
ELEMENTS OF TAKEOVER CODE
Acquirer/Invader Person Acting in Concert(PAC) Target Company Disclosure Level Trigger Point Public Announcement Escrow Account First Counter Bid Upward Revision Creeping Acquisition Zone-1 Continual Disclosure Creeping Acquisition Zone-2 Public Announcement De-Listing Zone
ELEMENTS OF TAKEOVER CODE
± A person interested in buying the shares, voting right, or control of the target company.
PERSON ACTING In CONCERT(PAC)
± PAC are the persons who joins the hands with the acquirer to acquire the shares of the target company.
± Target company means the listed Indian company whose shares/control is acquired by the acquirer/PAC.
Whether SEBI takeover code, would apply in following situation or not
S . SITUATION No 1. TATA steel acquired Corus 2. 3. 4. 5. Daichii Sankyo acquired Ranbaxy Vodafone acquired 66.67% in Hutch Essar India(Pvt) LIMITED Grasim acquired L & T cement company Mittal steel acquired Arcelor APPLICABLE
Mr. A¶s(Acquirer) Shareholding in the Target Company Initial Shareholding as on 23/02/xxxx Shares acquired by Mr A on 24/05/xxxx TOTAL Shares acquired by Mr A on 13/06/xxxx Shares acquired by Mr A on 18/06/xxxx TOTAL Shares acquired by Mr A on 12/07/xxxx Shares acquired by Mr A on 8/09/xxxx TOTAL Shares acquired by Mr A on 11/10/xxxx TOTAL
%Shareholding Whether Mr. A is required to make disclosure 3% 2.1% 5.1% 3.5% 1.5% 10.1% 1.7% 2.4% 14.2% .79% 14.99% No No Yes No Yes No Yes
ELEMENTS OF TAKEOVER CODE
It is the point in which once the acquirer/PAC acquires 15% shareholding, they have to make a public announcement(PA) within 4 days to acquire 20% more stake of the target company. Such PA is drafted by merchant bankers appointed by acquirer.
It is opened by acquirer, but controlled by merchant banker. In this account 25% of the first 100cr and minimum 10% of the balance amount is deposited.
ELEMENTS OF TAKEOVER CODE
FIRST COUNTER BID
It is the first bid given by the promoters of the target company against the acquirer to buy their own share within 21 days of PA.
UPWARD REVISIONS Of OFFER
The acquirer & promoter of the company is given ³n´ number chances for upward revision of their offer price.
ELEMENTS OF TAKEOVER CODE
CREEPING ACQUISITION ZONE-1
In this acquirer can acquire 55% shareholding. In each fiscal year of the company he can acquire 5% of shares to buy more than 5% of share he has to make a PA.
Every person holding 15% shares of the target company shall disclose his shareholding to the target company. Promoters discloses this information.
CREEPING ACQUISITION ZONE-2
In this the acquirer can acquire up to 75% of shares of the target company but only from open market.
If the acquirer acquires more than 75% shares of the target company, then, either he shall off load extra shareholding back into the market, or otherwise he shall pick up the remaining shares from market as per SEBI(delisting of securities) Guidelines, 2003 by the way of reverse book building.
Strategies Used to Prevent Hostile Acquisition
It is the contract with between the target company and it¶s managing director that, he is removed before his tenure, then the company is liable to pay him big compensation. In India it is prohibited according to section 320 of the Companies act.
AOA of the target company is modified such that it become unattractive. Ex- Issue of equity shares to it¶s promoter.
Target company disposes its profitable assets.
Offence is a best way of defense.
Target company takes the help of another person(white knight) to make a counter bid.
Target company¶s friend acquire the shares of acquirer company.
Issue of low price preferential shares to the existing shareholders.
Love letter to acquirer
Filing false litigation against the acquirer.
Exchange of shares between the target company shares and shareholders of acquirer company.
Some M&A in India
The proposed merger between Bharti Airtel and South Africa's MTN would be India's biggest-ever M&A deal. The potential value of the Bharti Airtel-MTN deal would amount to $23 billion. As per the exploring agreement, MTN and its shareholders would acquire around 36 per cent economic interest in Bharti Airtel, while, the Sunil Mittal - promoted Bharti Airtel would acquire 49 per cent stake in South African telecom giant MTN.
Tata Steel-Corus: $12.2 billion.
On January 30, 2007, Tata Steel purchased a 100% stake in the Corus Group at 608 pence per share in an all cash deal, cumulatively valued at $12.2 billion.The deal is the largest Indian takeover of a foreign company till date and made Tata Steel the world's fifth-largest steel group
Vodafone-Hutchison Essar: $11.1 billion.
On February 11, 2007, Vodafone agreed to buy out the controlling interest of 67% held by Li Ka Shing Holdings in Hutch-Essar for $11.1 billion. This is the second-largest M&A deal ever involving an Indian company. Vodafone Essar is owned by Vodafone 52%, Essar Group 33% and other Indian nationals 15%.
HDFC Bank-Centurion Bank of Punjab: $2.4 billion.
HDFC Bank approved the acquisition of Centurion Bank of Punjab for Rs 9,510 crore ($2.4 billion) in one of the largest mergers in the financial sector in India in February, 2008. CBoP shareholders got one share of HDFC Bank for every 29 shares held by them. Post-acquisition, HDFC Bank became the second-largest private sector bank in India.
MAJOR MERGERS AND ACQUISITIONS IN INDIA
Recently the Indian companies have undertaken some important acquisitions. Some of those are as follows: #Hindalco acquired Canada based Novelis. The deal involved transaction of $5,982 million. #Tata Steel acquired Corus Group plc. The acquisition deal amounted to $12,000 million. #Dr. Reddy's Labs acquired Betapharm through a deal worth of $597 million. # Ranbaxy Labs acquired Terapia SA. The deal amounted to $324 million. # Suzlon Energy acquired Hansen Group through a deal of $565 million. # The acquisition of Daewoo Electronics Corp. by Videocon involved transaction of $729 million. # HPCL acquired Kenya Petroleum Refinery Ltd.. The deal amounted to $500 million. # VSNL acquired Teleglobe through a deal of $239 million.