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Mergers & Acquisitions

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  1. 1. Mergers & Acquisitions http://www.ranjanblog.com
  2. 2. Corporate Strategies in M&A
    • Why?
        • Gain market share
        • Economies of scale
        • Enter new markets
        • Acquire technologies
        • Strategic Benefit
        • Complementary resource
        • Tax shields
        • Utilisation of surplus funds
        • Managerial Effectiveness
        • Integrate vertically
  3. 3. Why not?
    • Grasping for a company simply because its 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.
  4. 4. 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
  5. 5. Mechanics of a Merger
    • Legal Procedure
        • The MOA to be scrutinised
        • 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
  6. 6. Mechanics of Merger (Contd)
    • Tax Aspects
        • Section 2(a) of the Income Tax Act defines amalgamation
        • Depreciation for tax purposes
        • Accumulated losses
        • Unabsorbed Depreciation
        • Capital Gains Tax
        • Accounting for Amalgamation is done according to Accounting Standard 14 (AS-14) issued by the Institute of Chartered Accountants of India
  7. 7. 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 Cost
    • NPV to B= Cash PV(B)
  8. 8. Screening Potential Deals
    • Never stop looking
    • Constantly scanning marketplace
    • Be diligent and disciplined
      • Look at various potentials in the market, not just the deal at hand
    • Dont cast strategy aside in the face of an exciting opportunity
    • Cant make a good stew unless you have good ingredients
        • shop around to find the best ingredients
  9. 9. 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
  10. 10. Look for the devils in the details!
    • Industry / Markets
    • Customers / Partners
    • Competition
    • People
    • Suppliers
    • Customer & Vendor Contracts
    • Operations & Support
    • Pricing and discounts
    • Finance, Accounting & Taxes
  11. 11. Look for the devils in the details!
    • Contingent Liabilities
    • Corporate Controls
    • Intellectual Properties
    • Human Resources
    • Legal
    • IT infrastructure & applications
    • Insurance
    • Synergy Assumption Testing!!
  12. 12. Valuation
    • No magic formula
        • Future cash flow
        • Earnings estimates
        • Assumption modeling
        • Due diligence findings
        • Synergy
    • Set limits and stick to financial discipline
    • Maintain reasonable and realistic expectations
    • XRationalization:This deal is strategic dont worry, its 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!
  13. 13. Making the Deal Happen
    • Identify the details critical to the deals success
    • Use early negotiations to foster a sense of trust with the targets top executives
    • Know who have influence on the deal target company and your company
    • Dont focus on the price yet
    • Keeping a foot on the brakes
  14. 14. 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
  15. 15. Making the Deal Good
    • PR:External & internal
    • Integration Realizing the synergy dream
        • Talent
        • Culture
        • Structure
        • Technology
        • Discovering and leveraging the unknown and unexpected treasures
  16. 16. 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
  17. 17. Jargons to understand
    • Net Present Value
    • Exchange Ratio
    • Price per share
    • Price Earning multiple
    • Earnings
    • Number of Shares/ Debentures
    • Free Cash Flow
    • Market price to Book Value ratio
  18. 18. SEBI Guidelines
    • Notification
    • Trigger point for public offer
    • Offer price
    • Contents of Public announcement
    • To ensure transparency, greater disclosures and protect the interests of small shareholders .
  19. 19. HOT DEALS
    • Mittal- Arcelor
    • SBI- GE
    • ICICI- Sangli Bank
    • United Breweries- Shaw Wallace
    • Tata- Corus
    • Jet- Sahara
    • LIC may buy UTI Bank( FE, 13.04.2007)
  20. 20. 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
  21. 21.
    • M & A Valuations to come under lens
        • Institute of Independent Valuers to be set up to standardize techniques and procedures.
    Sources: Financial Express, dated 16.04.2007 Financial Management by Prasanna Chandra http://www.ranjanblog.com