MERGERS & ACQUISITIONS

GROUP MEMBERS
Prathamesh Potdar Amruta Rele Chetan Sankhe Gitika Thakur Pranit Vanmali Vivek Varier

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MERGERS & ACQUISITIONS
MERGERS-Merger refers to a situation when two or more existing firms combine together and form a new entity. Either a new company may be incorporated for this purpose or one existing company (generally a bigger one) survives and another existing company (which is smaller) is merged into it. Laws in India use the term amalgamation for merger. ACQUISITIONS- It is the buying of one company (the ¶target·) by another. An acquisition may be friendly or hostile. In the former case, the companies cooperate in negotiations; in the latter case, the takeover target is unwilling to be bought or the target's board has no prior knowledge of the offer

the business of two companies are not related to each other horizontally nor vertically . Conglomerate merger: These mergers involve firms engaged in unrelated type of business activities i.TYPES OF MERGERS Horizontal merger: It is a merger of two or more companies that compete in the same industry.e. Vertical merger: It is a merger which takes place upon the combination of two companies which are operating in the same industry but at different stages of production or distribution system. Reverse mergers: Reverse mergers involve mergers of profir making companies with companies having accumulated losses.

4. 9. 3. 2. 7. 5. 10. Examination of object Clauses Intimation to stock Exchanges Approval of the draft amalgamation proposal by the Respective Boards: Application to the National Company Law Tribunal (NCLT): Dispatch of notice to shareholders and creditors Holding of Meetings of shareholders and creditors Petition to the NCLT for confirmation and passing of NCLT orders Filing the order with the Registrar Transfer of Assets and Liabilities Issue of shares and debentures .MERGER PROCEDURE 1. 6. 8.

Vertical merger: These mergers are generally endeavored to: a) Increased profitability b) Economic cost (by eliminating avoidable sales tax and excise duty payments) c) Increased market power d) Increased size . These are generally undertaken to: a) Achieve optimum size b) Improve profitability c) Carve out greater market share d) Reduce its administrative and overhead costs.CAUSES OF MERGER   Horizontal merger: These involve mergers of two business companies operating and competing in the same kind of activity. They seek to consolidate operations of both companies.

c) Risk reduction by avoiding sales and profit instability. d) Achieve optimum size and carve out optimum share in the market. . Set up merged asset base and shift to accelerate depreciation. Reverse mergers: Claim tax savings on account of accumulated losses that increase profits. b) Cost reduction as a result of integrated operation.  Conglomerate merger: a)Synergy arising in the form of economies of scale. b.

STEPS IN ACQUISITIONS   Developing an Acquisition Strategy:  A capacity to find firms that trade at less than their true value  Access to the funds that will be needed to complete the acquisition  Skill in execution Choosing a Target firm and valuing control/synergy    The Value of Corporate Control Valuing Operating Synergy Valuing Financial Synergy .

 Payment for the Target Firm Final Considerations: The managers of acquiring firms clearly weigh in the accounting effects of acquisitions. Structuring the Acquisition:  Deciding on an Acquisition Price. even when accounting choices have little or no effect on cash flows  .

TOP MERGER & ACQUISITIONS Tata Steel·s mega takeover of European steel major Corus for $12.8 billion.2 billion. ONGC acquisition of Russia based Imperial Energy for $2.5 billion. The next big thing everyone is talking about is Tata Nano. Ranbaxy·s sale to Japan·s Daiichi for $4. .The biggest ever for an Indian company. Essar group still holds 32% in the Joint venture. This marked the turn around of India·s hunt for natural reserves to compete with China. Hindalco of Aditya Birla group·s acquisition of Novellis for $6 billion. Sing brothers sold the company to Daiichi and since then there is no real good news coming out of Ranbaxy. Vodafone·s purchase of 52% stake in Hutch Essar for about $10 billion.

The second biggest telecom deal after the Vodafone. This could probably the most ambitious deal after the Ranbaxy one. Tata Motors acquisition of luxury car maker Jaguar Land Rover for $2.HDFC Bank acquisition of Centurion Bank of Punjab for $2. Reliance MTN deal if went through would have been a good addition to the list. Reliance Industries taking over Reliance Petroleum Limited (RPL) for 8500 crores or $1. It certainly landed Tata Motors into lot of trouble.3 billion. NTT DoCoMo-Tata Tele services deal for $2.7 billion.4 billion.6 billion. . Wind Energy premier Suzlon Energy·s acquistion of RePower for $1.7 billion.

VALUATION OF FIRMS .

Approaches to Valuation Income Approach Market Approach Asset Approach .

using the appropriate discount rate Difference in the number of periods Types Capitalization Method Discounted Cash Flow Method     .INCOME APPROACH  It involves projected cash flows for a specific number of periods plus a terminal value to be discounted to the present.

book value. sales. cash flows etc Reflects the current mood of the market & not the intrinsic value   .MARKET APPROACH   Comparable Company Method Based on the principle of substitution Estimates the value of the firm in relation to the value of other similar firms based on various parameters like earnings.

ASSET APPROACH Hypothetical sale of the company·s underlying assets  To achieve control of the assets owned by the target  Used in capital intensive industries   Adjusted Book Value Method Estimation of the market value of the assets & liabilities of the firms as a going concern Liquidation Value Method  .

 Replacement Cost Approach Option Pricing Model Used to value assets which have option like features  ..SOME OTHER APPROACHES.

ROLE OF VALUATION  Portfolio Management Acquisition Analysis Corporate Finance   .

the process does not matter The market is always wrong Valuation should be more qualitative for better estimates      .MISCONCEPTIONS IN VALUATION  Valuation models give an exact estimate of value Valuation is a totally objective exercise A well done valuation is a timeless treasure The value estimated is important.

LEGAL CONSIDERATIONS The MoA to be scrutinized Intimation to Stock Exchanges Approval of Draft amalgamation proposal Application to the court Notice to shareholders and creditors Filing the order Transfer of assets and liabilities Issue of shares and debentures .

current or pending legal cases look at the detail in the business' current and possible future contractual obligations with its employees (including pension obligations). equipment. . intellectual property. customers and suppliers.LEGAL ASPECTS TO CONSIDER obtain proof that the target business owns key assets such as property. consider the impact of a change in the business' ownership on existing contracts. copyright and patents. obtain details of past.

S.ACCOUNTING METHODOLOGY Standards prescribing suitable methods of accounting for mergers and acquisitions: 1)Accounting Principles Board(in U.A.) 2)The International Accounting Standards(IAS) 3)Financial Reporting Standard (U.) 4)Accounting Standards (India) .K.

METHODS OF ACCOUNTING FOR M&A Pooling of Interest Method Purchase Method .

b)The identity and separation of the preamalgamation reserve is not maintained in the books of purchasing company. a)Assets and liabilities of purchased company are recorded in the books of purchasing company at their current fair market values.COMPARISON Pooling of Interest method 1)Treatment of Assets and Liabilities a)Assets and liabilities of the amalgamating companies are carried forward to the books of amalgamated company at the book value. b)Pre-amalgamation reserves are allowed to appear in the books of the amalgamated company at its original book value. c)Profit of the amalgamated company includes profit of the amalgamating companies for the whole year irrespective of the date of amalgamation. Purchase method . c)Profit of the purchased company is not included in the profit of the purchasing company as this part of profit is attributed to pre-acquisition period.

COMPARISON Pooling of Interest method 2) Goodwill a)No goodwill is created since assets and liabilities of the amalgamating entity is carried over to the books of amalgamated company at their existing book value. 1)Good will arises in the book of purchasing company since purchase consideration is based on the bargained value of the net assets acquired. . any excess of purchase consideration over the fair value of net assets acquired is recognised as good will. b)Here purchase consideration id determined by bargain or negotiation over the value of net assets acquired. Purchase method b)Purchase consideration for the amalgamation is determined by the book value of net assets carried over.

COMPARISON Pooling of Interest method 3) Presentation of Financial Statement a) Asssets and liabilities of the amalgamating companies are carried over in the books of amalgamated company at their book values. . retained earnings. c) Assets. b) Retained earnings of the amalgamting company appear in the books of the amalgamted company in the same form as it had been in the books of amalgamting company. b) Retained earnings of the purchased company do not appear in the books of the Purchasing company as the entity of the purchased company is terminated following the acquisition. Operating results of the Purchasing company continue to remain in its books at their existing book value because the entity of such company is retained after the acquisition is completed. retained earnings. liabilities. liabilities. operating results of the amalgamating companies for the whole year are presented on a combined basis in the financial statement of the amalgamated company. c) Assets. a) Assets and liabilities of the purchased Purchase method company are recorded at their fair value in the books of the purchasing company.

a)As per AS-14 good will has to be amortized over a period of 5 years unless a longer period can be justified. there is no question of amortization of the same.COMPARISON Pooling of Interest method 4) Amortization a) Since no good will arises here. Purchase method .

c) Fair value of shares of the transferor company on the date of merger have to be disclosed which would help in establishing swap ratio. b) Post-merger financial results of the operation of transferor company have to be shown to project profitability.COMPARISON Pooling of Interest method 5) Disclosure Requirement a) Value of the reserves taken over from the transferor company included in total value of reserves. b) This is optional. a)Good will created have to be disclosed in order to prevent projection of any fake good will. c) Book value of the assets acquired from the transferor company on the date of acquisition have to be disclosed which would help in establishing the revaluation of the assets. Purchase method . Nature and objective of statutory reserves have to be disclosed.

.SIMILARITIES BETWEEN THE TWO METHODS a) continuity of ownership interests and businesses of the amalgamating entities in the amalgamated company b) exchange of equity shares or other voting shares only to affectuate the amalgamation.

Care must be taken to analyze your strategic objectives and find transaction candidates that are a good fit for your long-term organizational goals. . In good times and in bad.DUE DILIGENCE CONSIDERATIONS FOR MERGERS AND ACQUISITIONS M & A is an opportunity to expand market share or to re-organize the strategic and operating plans for the much anticipated economic recovery. mergers and acquisitions can lead to increased shareholder value.

This process goes beyond basic financial analysis and allows your organization to narrow the field of candidates to those best suited to your longterm goals and objectives.STRATEGIC OBJECTIVES AND TOLERANCE FOR RISK If your organization is contemplating a merger. geographic and cultural attributes of a transaction candidate that when added to your organization will create additional shareholder value. the first place to begin is by defining your overall strategic objectives and tolerance for risk. Key members of senior management and members of the board of directors should be gathered to discuss financial. . acquisition.

internal audit. . credit.ESTABLISH A PROJECT TEAM Start by selecting a well-respected internal member of management with sound project management skills. operations. The project manager should be provided with a cross-functional team including finance. risk management and regulatory compliance. information technology.

. internal audit. risk management. they may not have the time or experience necessary to execute on all aspects of a due diligence project. While your internal management team may be very good at performing their current duties. Consider professionals that have unique specialization including accounting. investment bankers and tax advisors.

geographic fit and cultural considerations. Pre-screening will also save time and money. so that substantial resources are not devoted to a transaction that was doomed from the start.µ This prescreening process will allow you to evaluate financial metrics. .CANDIDATE PRE-SCREENING PROCESS The first step in the pre-screening process is to identify any potential ´deal killers.

µ establishing pricing assumptions and financial modeling. . Additional considerations include development of letters of intent and confidentiality/nondisclosure agreements. Often outside professionals provide valuable advice to avoid potential problems from the start.DUE DILIGENCE PLANNING Due diligence planning is an essential element to ensure the project is properly focused on your organizational objectives. Early steps include forming the ´deal.

consumer compliance. investment portfolio. Several high risk areas include the loan portfolio. Other areas of importance include contracts/agreements. allowance for loan and lease losses. information technology. financial reporting controls and overall management capabilities. deposit stability. .SCOPE ² HIGH PRIORITIES Critical importance that you spend your time in areas of highest risk. litigation. bank secrecy act and an evaluation of the potential tax implications to the transaction. operations.

COMMON DEAL KILLERS Loan quality ² Cannot find the bottom on asset quality ALL shortfalls ² Typically ties in with inaccurate loan risk rating systems or optimistic views of work-out plans Investment impairment ² Derivatives. sub-prime or high risk securities Long-term contracts ² Premises. terms and conditions Regulatory challenges ² Lack of comfort with new risk profile . information technology or employment agreements Board composition ² The parties cannot reach agreement on the new board Disclosure ² Problems were understood by the candidate bank during pre-screening Deal pricing ² Inability to reach agreement on pricing.

POST . Factors responsible for Changes are : 1. hence the post M&A programmes has a Direct and possibly a negative impact. 2. 3. .M & A According to Executive·s Online Report. 5. 4. Restructuring Improvement in Efficiency Cost Reduction M&A New Technology Crucial to any business success is keeping staff motivated.

Explain any Differences from the Original Plan.Hostile Takeovers .POST M&A PHASE Communicate the ´New Storyµ.Mergers of Equals 2. Two Types of M&A Environment: 1. Follow up the long term results.

VARIOUS ISSUES Staff Issues Management Problems Senior Management Ownership Leadership Skills .

STAFF ISSUES Decisions comes from the Top. The workforce is usually Tightlipped. . Shortage of Skills. Not allowing Enough Time. Lack of Leadership.

.MANAGEMENT PROBLEMS Lack of Management Resource. Reluctance to take Decisions. Lack of Vision. Management Style and Skills. A Distraction for Employees. Middle Managers inefficiency.

21% of the staff said Senior Management is not good at inspiring the workforce. .SENIOR MANAGEMENT OWNERSHIP A survey conducted states that. 18% said not good at Managing the Change and 16% said not good at Effective Leadership.

The most important and majorly concerned areas has to be worked upon. Effective Change Leadership Communication Delegation of Task and Power. .LEADERSHIP SKILLS Areas where Senior Managers could improve were .

on average. . large M&A deals cause the domestic currency of the target corporation to appreciate by 1% relative to the acquirer's. there is generally a strong upward movement in the target corporation's domestic currency. In the period immediately after the deal is announced.CROSS-BORDER MERGER AND ACQUISITION In a study conducted by Lehman Brothers It was found that.

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5 4.6 20.2 5.3 100.8 6.9 4.4 20.0 .A SECTORIAL COMPOSITION SECTOR IT/SOFTWARE/BPO PHARMACEUTICALS AUTOMOTIVE CHEMICALS & FERTILIZERS CONSUMER GOODS METALS AND MINING OIL AND GAS OTHERS TOTAL NUMBER 90 62 27 19 17 15 14 62 306 % 29.3 8.

From a Strategic perspective M&As might change the market structure and as such have an impact on firm profits.MOTIVES OF CROSS BORDER M&A Two basic motives stand out: An efficiency motive and a strategic motive. . Efficiency gains arise because M&As increase synergy between firms through increased use of economies of scale or scope.

Tax Barriers III. Attitudinal barriers . Economic Barriers V.OBSTACLES TO CROSS-BORDER MERGERS I. Legal Barriers II. Implications of supervisory rules and requirements IV.

CASE STUDY .

ARCELOR MITTAL DEAL .

.ARCELOR MITTAL DEAL The deal is noteworthy for its legal aspects as for its commercial significance. y y y combining cross-border regulatory complexity. innovative bid defence techniques and measures to overcome them dramatic shareholder revolt.

. but on June 20 . EU approved it on June 6. and the new company will account for 10% of global production Guy Dole initially rejected Mittal as a ´Company of Indiansµ and two did not share strategic vision.ARCELOR MITTAL DEAL World·s two largest steel makers merge: new entity will be three times larger than the rivals individually . on June 23. SeverStal revised merger terms by lowering equity to 25% and raised the offer to 2billion euros. But. Arcelor shareholders rejected SeverStal and ratified the Arcelor Mittal deal.

LEGAL COMPLEXITIES Multinational Jurisdiction EC Directive Anti competition Laws .

which were part of the consideration offered. France. the offer also had to comply with US Securities and Exchange Commission (SEC) rules and regulations. . Mittal is a Dutch NV and its shares. Thus. and the offer document (share listing prospectus) required the approval of the SEC and the Dutch securities regulator. Luxembourg and Spain).MULTI-JURISDICTIONAL OFFER The offer was governed by takeover regulations all the jurisdictions in which Arcelor·s securities were listed (Belgium. The offer terms and documents required the approval of the relevant securities regulators in each jurisdiction. are listed on the New York Stock Exchange (the primary listing pre-offer) and on Euronext Amsterdam.

EC DIRECTIVE: IMPLEMENTATION AND IMPACT .

EC DIRECTIVE: KEY ISSUES WITH ALL THE
MEMBER STATES

SHARED JURISDICTION

If bidder company is not registered in the country where its making bid for target company, then such bids need to comply with 2 sets of compliancess. & 2 regulators will have juridiction over different elements of bids.

PRE-BID DEFENSES AND FRUSTRATING ACTION: OPTING IN OR OUT

Breakthrough provision: bidder can over ride target shareholders blocking rights

but rest 5% are resisting.SQUEEZE-OUTS AND INFORMATION If bidder acquire 90-95% shares of firm. Hence left rest members to fix there own threshold and time period. Restriction on share transfer needs to disclosed .

MULTI-JURISDICTIONAL OFFER To complicate matters further. . the deadline for implementation of the Takeovers Directive fell during the acceptance period and the implementation arrangements differed in each of the jurisdictions.

One area of particular interest was the potential impact of including y Dofasco.ANTI-COMPETITION ISSUES: Competition/anti-trust filings were required in the EU. the US. . a German steel company. Arcelor had acquired control of Dofasco in January 2006 following a takeover battle with ThyssenKrupp AG (ThyssenKrupp). within the merged group. Inc (Dofasco). Canada and elsewhere. a Canadian steel company. y Mittal·s operations in North America were already extensive and this led to strategic and competition issues.

it would cause Arcelor to sell Dofasco to ThyssenKrupp at ThyssenKrupp¶s highest bid price. However. a Dutch foundation (stichting) created for the purpose. Dutch stichtings have been used in bid defences before. including in Gucci Group NV¶s 1999 defence against LVMH Moët Hennessy Louis Vuitton SA¶s unsolicited (and ultimately unsuccessful) takeover bid. one of only a handful of such decrees in the past decade. if Mittal acquired a controlling interest in Arcelor. to prevent any sale of Dofasco for five years (unless the stichting board decides to dissolve the stichting sooner). as part of its bid defence. . Mittal proposed to compensate Arcelor for the difference between the price it had paid and the proceeds of the sale to ThyssenKrupp. Arcelor transferred Dofasco to Strategic Steel Stichting.ANTI-COMPETITION ISSUES: Mittal agreed with ThyssenKrupp that. Mittal entered into a ³pocket consent decree´ with the US Department of Justice. In response. under which it was agreed that any antitrust issue could be resolved through the disposal of an alternative asset if Mittal was unable to sell Dofasco as a result of the stichting.

a Russian steel company .WHITE KNIGHT DEFENSE AND SHAREHOLDER REVOLT The most powerful weapon in Arcelor·s arsenal was fired on 26 May 2006. Instead of being structured as a competing bid. the deal was structured as a contribution of assets by Mr Mordashov in return for shares in Arcelor. . and without the need to seek approval from Arcelor shareholders. Arcelor shareholders were. including 89. able to veto the Severstal deal. when the company announced that it had agreed to acquire the mining and steel assets of Alexey Mordashov. however. This meant that the consideration shares could be issued under existing delegations to the Arcelor board of directors.6% of OAO Severstal (Severstal). provided that holders of more than 50% of Arcelor·s share capital voted against it at a shareholders· meeting.

as attendance at past meetings had never been above 35%. with between 20 to 30% of Arcelor·s shareholders signing a letter to Arcelor demanding the right to choose between the Severstal and Mittal proposals. a veto seemed unlikely. Mittal was able to announce that 92% of Arcelor·s shares had been tendered in response to its offer. in practice. On 30 June 2006. two-thirds of shareholders present and voting) and.WHITE KNIGHT DEFENSE AND SHAREHOLDER REVOLT This was a much higher threshold than is usual for shareholder approval (typically. On 26 July 2006. . culminating in the announcement of the agreed memorandum of understanding between Arcelor and Mittal and the Arcelor board·s recommendation of Mittal·s offer on 25 June 2006. An intense period of negotiations with Mittal followed. It is intended that Mittal will formally merge into Arcelor later in 2007. The arrangements triggered a shareholder revolt. Arcelor shareholders holding about 58% of the outstanding share capital voted against the proposed Severstal merger at a rescheduled meeting. It is perhaps in this regard that the practical legacy of the deal in Europe will be most notable.

companies must now consider how best to balance the interests of that specific. population of shareholders with those of other stakeholders. In hostile situations. with target shareholders organising and acting in the face of entrenchment measures. particularly in terms of shareholder democracy in Europe. a partner at Cleary Gottlieb Steen & Hamilton. and very vocal. who advised on the deal. Pierre Servan-Schreiber.COMMENTS ON DEAL BY LEADING LAW FIRMS: ´It was a ground-breaking transaction.µ .µ says John Brinitzer. a partner at Skadden Arps Slate Meagher & Flom agrees: ´The deal illustrates very clearly the rise of the professional shareholder activist in Europe.

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