Merchant Banking & Financial Services

MERCHANT BANKING &

FINANCIAL SERVICES

UNIT- III

ByKARPAGAM SIGAPPI A L

Table of content Mergers and Acquisitions

Portfolio Management Services

Credit Syndication

Credit Rating

Mutual Funds

Business Valuation

MERGERS &

ACQUISITIONS

A merger is a transaction that result in the transfer of ownership and control of a corporation.

When one company purchases another company of an approximately similar size. The two companies come together to become one.

Two companies usually agree to merge when they feel that they can do something together that they can not do one their own.

Meaning

TYPES OF MERGER

CONGLOMERATE

VERTICAL

HORIZONTAL

Horizontal mergerA merger occurring

between companies producing similar products, goods and offerings similar services.

This type of merger occurs frequently as a result of larger companies attempting to create more effective economies of scale.

Example- Boeing-McDonnell Douglas

Vertical mergerA merger between two

companies producing different goods and services for one specific finished products.

The merger of the firm that have actual or potential buyer-seller relationship.

Example- Car manufacture purchasing a tire company.

Conglomerate mergerA merge between firms that are

involved in totally interrelated business activity.

Two types of conglomerate merger are:

Pure conglomerate merger- It involve firms with nothing common.

Mixed conglomerate merger- It involves firms that are looking for product extensions or market extensions.

Example- PepsiCo-Pizza Hut; Proctor & Gamble-Clorox.

WAYS OF MERGER

A merger can take place in following ways:By purchasing of assets By purchase of common shares By exchanging of shares for

assets By exchanging of shares for

shares

By purchase of assets

The assets of company Y may be sold to company

X.Once this is done

company Y is then legally terminated and company

X survives.By purchase

of common shares

The common share of company Y may be

purchased by company X. When company X holds all the share of

company Y, it is dissolve.

By exchanging of

shares for assets

By exchanging of

shares for shares

The company X may give their shares to

stakeholders of company Y for its net assets. The

company Y terminated by its shareholder who now holds share of company

X.Company X gives its shares to the

shareholder of company Y and then company X is

terminated.

Reasons of

merger

Future goals

Mutual benefit

Maximizing

profits

Expansion of

businessEconomy of

scale

Increase market share

Cost maximization

Diversification of risk

Goodwill

Product improveme

nt

PORTFOLIO MANAGEMENT

SERVICE

SHARESBONDSGOLDSTOCKSCASH

Portfolio management is the art and science of making decisions about

• Investment mix and policy,

• Matching investments to objectives,

• Asset allocation for individuals and institutions,

• Balancing risk against performance.

Balanced Portfolio

Maximum Returns, Minimum Risks

Adjust Portfolio to market trends

Personalized Advice

Continuous monitoring

Transparency

Why PMS?

TYPES OF PMS

DISCRETIONARYPMS

NON-DISCRETIO

NARYPMS

CREDIT SYNDICATION

Definition'Syndicated Loan' is a loan offered by a group of lenders (called a syndicate) who work together to provide funds for a single borrower.

The borrower could be a

Corporation,

A large project,

Or a sovereignty (such as a government).

‘Credit syndication services’ are services rendered by the merchant bankers in the form of organizing and procuring the financial facilities form financial institutions, banks, or other lending agencies.

Financing arranged on behalf of the client for meeting both fixed capital as well as working capital requirements is known as ‘loan syndication service’

Credit syndication services

SCOPE  The scope of syndicated loan services

as provided by merchant bankers include identifying the sources of finance, approaching these sources, applying for the credit, and sanction and disbursal of loans to the clients.

CREDITRATING

Credit rating is a mechanism by which the reliability and viability of a credit instrument is brought out.

Credit rating reveals the soundness of any credit instruments issued by various business concerns for the purpose of financing their business.

In credit rating, the investor is able to analyze between different credit instruments and he can make a trade off between risk and return.

Credit Rating

Equity rating

Bond rating

Promissory note rating

Commercial paper rating

Sovereign rating. 

Types of Credit Rating

1. EQUITY RATING: While judging the equity rating, the past

performance of the company, the earning per share and the turn-over of the company will be taken into account. If a loss making company turns into a profit making one, after wiping off its losses, its equity rating will go up.

2. BOND RATING: Rating of bonds will depends on the rate of interest

offered and the value of the currency it represents.

3. PROMISSORY NOTE RATING: Depending upon the credit rating, ranging from P1

to P6, promissory notes are preferred as a short-dated instrument.

4. COMMERCIAL PAPERS:In order to enable the commercial banks to discount

commercial papers, credit rating is provided to the commercial papers which depends upon the standing of the non-banking financial company NBFC) which is issuing the commercial paper.

5. SOVEREIGN RATING: When countries are issuing credit instruments in the

international market such as Treasury bills and Bonds, they will be rated according to the economic condition of the country. Generally, the countries in the world are grouped under three categories, viz.,

(a) Countries which are politically and economically well developed.

(b) Countries which are politically stable but economically week.

(c) Countries which are politically and economically unstable or weak.

MUTUAL FUNDS

 A mutual fund is a fund exchanged between the public and the capital market through a corporate body.

The Securities and Exchange Board of India Regulations, 1993 defines a mutual fund as ‘a fund established in the form of a trust by a sponsor, to raise monies by the trustees through the sale of units to the public, under one or more schemes, for investing in securities in accordance with these regulations’.

Mutual Funds

M U T U A L F U N D S

PUBLIC CORPORATE BODY

CAPITAL

MARKET

FUND FUND

On the basis of operation

OPEN ENDED

CLOSE ENDED

Mutual Funds Types

INCOME FUND

GROWTH FUND

BALANCED FUND

SPECIALISED FUND

MONEY MARKET

FUNDTAXATION

FUND

On the basis of yield and investment

CLOSE ENDED FUNDS Close ended funds are funds which have

definite period or target amount . Once the period is over and or the target is reached, the door is closed for the investors. E.g. UTI Master Share, 1986.

OPEN ENDED FUNDS Open ended funds are those which have no fixed

maturity periods. Investors can buy or repurchase units at net asset value or net value related prices, as decided by the mutual fund. Example: Unit Trust of India’s Growth sector funds.

INCOME FUND: Income funds are those which generate regular

income to the members on a periodical basis. It concentrates more on the distribution of regular income and it also sees that the average return is higher than that of the income from bank deposits.

GROWTH FUND: Growth are those which concentrate mainly on long

term gains i.e., capital appreciation. Hence they are termed as “Nest Eggs” investments.

BALANCED FUND: It is a balance between income and growth fund.

This is called as “Income –cum-growth”. It aims at distributing regular income as well as capital appreciation.

SPECIALISED FUNDS: These are special funds to meet specific needs of

specific categories of people like pensioners, widows etc.

BUSINESS VALUATION

Business valuation is a process and a set of procedures used to estimate the economic value of an owner's interest in a business. Valuation is used by financial market participants to determine the price they are willing to pay or receive to effect a sale of a business

Meaning

Economic conditions

Financial Analysis

Normalization of financial statements Income approach

Asset approach

Market Approaches

Elements of business valuation

The income approaches determine fair market value by multiplying the benefit stream generated by the subject or target company times a discount or capitalization rate. The discount or capitalization rate converts the stream of benefits into present value.

Income Approach to business valuation

The asset approach to business valuation is based on the principle of substitution: no rational investor will pay more for the business assets than the cost of procuring assets of similar economic utility. Most assets are reported on the books of the subject company at their acquisition value, net of depreciation where applicable. These values must be adjusted to fair market value wherever possible.

Asset Approach to business valuation

In certain industries, when businesses change hand on a regular basis, industry-wide rules of thumb are sometimes used to value a company.

Examples of such industries include recruitment agencies, accountancy firms, etc. Buyers would not pay more for the business, and the sellers will not accept less, than the price of a comparable business enterprise.

Market Approach to business valuation

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