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Mergers & Acquisitions
http://www.ranjanblog.com
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Corporate Strategies in M&A
Why? Gain market shareEconomies of scaleEnter new marketsAcquire technologiesStrategic BenefitComplementary resourceTax shieldsUtilisation of surplus fundsManagerial EffectivenessIntegrate vertically
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Why not? Grasping for a company simply because it’s
on the market, or because a competitor wants to buy it .
Overpayment or misguided purchase Reduce cost of debt. Diverse Business; Unmanageable Leaping without looking at the value; Win-
Win or no deal Inability to integrate well.
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Corporate Strategies in M&A
Exploit market power, economies of scale & scope, and market inefficiencies
Same industry/Same market- Consolidation
Related industries- Horizontal-Jet-Sahara
Same industry/Different market(Conglomerate)-LIC-UTI Bank
Suppliers-Vertical-ITC
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Mechanics of a Merger
Legal ProcedureThe MOA to be scrutinised Intimation to Stock ExchangesApproval of draft amalgamation proposalApplication to the CourtNotice to shareholders and creditorsFiling the orderTransfer of assets and liabilities Issue of shares and debentures
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Mechanics of Merger (Cont’d)
Tax AspectsSection 2(a) of the Income Tax Act defines
amalgamationDepreciation for tax purposesAccumulated lossesUnabsorbed DepreciationCapital Gains TaxAccounting for Amalgamation is done according to
Accounting Standard 14 (AS-14) issued by the Institute of Chartered Accountants of India
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Costs & Benefits
When firm A acquires firm B, A is making a capital investment while B is making capital divestment based on NPV method
Benefit = PV(AB) – {PV(A) + PV(B)} Cost = Cash – PV(B)
NPV to A= Benefit – CostNPV to B= Cash – PV(B)
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Screening Potential Deals
Never stop lookingConstantly scanning marketplaceBe diligent and disciplined
Look at various potentials in the market, not just the deal at hand
Don’t cast strategy aside in the face of an exciting opportunity
Can’t make a good stew unless you have good ingredients
shop around to find the best ingredients
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Due Diligence
Look for the devil in the details A 360 approach –
external-internal ………. peel the onion! past-present-future scenario modeling on synergy assumptions
Link due diligence with business planning
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Look for the devils in the details!
Industry / MarketsCustomers / Partners
Competition People
SuppliersCustomer & Vendor Contracts
Operations & SupportPricing and discounts
Finance, Accounting & Taxes
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Look for the devils in the details!
Contingent LiabilitiesCorporate Controls
Intellectual PropertiesHuman Resources
LegalIT – infrastructure & applications
Insurance Synergy – Assumption Testing!!
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Valuation No magic formula
Future cash flowEarnings estimatesAssumption modelingDue diligence findingsSynergy
Set limits and stick to financial discipline Maintain reasonable and realistic expectations
X Rationalization: “This deal is strategic – don’t worry, it’s all going to work out in the end no matter what price we pay.”
Wisdom: “If you stumble across too many red flags while evaluating a business, walk away!”
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Making the Deal Happen Identify the details critical to the deal’s success
Use early negotiations to foster a sense of trust with the target’s top executives
Know who have influence on the deal – target company and your company
Don’t focus on the price yet
Keeping a foot on the brakes
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Making the Deal Good
Negotiate on several fronts simultaneously
Make sure you have alternatives to this deal
Anticipate the competition
Close quickly after setting final terms
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Making the Deal Good
PR: External & internal Integration – Realizing the synergy
dreamTalentCultureStructureTechnologyDiscovering and leveraging the unknown
and unexpected treasures
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Are You the Strongest Acquirer?
Ability to realize synergies Financing capacity Ability to make quick decisions Attractiveness of currency Reputation
Negotiations People treatment Integration
Post-acquisition performance record
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Jargons to understand
Net Present ValueExchange RatioPrice per sharePrice Earning multipleEarningsNumber of Shares/ DebenturesFree Cash FlowMarket price to Book Value ratio
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SEBI Guidelines
NotificationTrigger point for public offerOffer priceContents of Public announcement
To ensure transparency, greater disclosures and protect the interests of small shareholders.
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HOT DEALS
Mittal- ArcelorSBI- GEICICI- Sangli BankUnited Breweries- Shaw WallaceTata- CorusJet- SaharaLIC may buy UTI Bank ( FE, 13.04.2007)
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Air Sahara in Jet Air Fold
Deal for Rs 1450 crore, 40% less than the deal in Jan’ 2006.
NPV of Price is Rs 1200 crore.Rs 200 crore debt of Air Sahara will
increase the acquisition cost.The merged entity will have a market
share of 42% (largest domestic private )Buyout helps Jet Air to go International.
Source: Financial Dailies
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छपतेछपते M & A Valuations to come under lens
Institute of Independent Valuers to be set up to standardize techniques and procedures.
Sources: Financial Express, dated 16.04.2007Financial Management by Prasanna Chandra
http://www.ranjanblog.com
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