By Mysore PrasannaBy Mysore Prasanna

Group General CounselGroup General Counsel

Aditya Birla Group, IndiaAditya Birla Group, India

Bombay Chartered Accountants Society The views expressed herein are that of the author and not that of the organization he represents

CROSS- BORDER M & A TRANSACTIONS

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Drivers for M & A

Diversification

Tax and FinancialBenefits

Increase in Market Power

Enhanced Profitability

Accelerated Growth

To Create To Create ValueValue M & As promote not only M & As promote not only

growth and growth and Creation of ValueCreation of Valuebut they also but they also Unlock Value Unlock Value through JVs, Spin Offs andthrough JVs, Spin Offs andtotal Divestment making themtotal Divestment making themcomplementary conceptscomplementary concepts..

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“The concept of “growing organization” is not about just growth but is all about its adaptability to global business dynamics and its ability to quickly change the way it does business and the tenacity to shed unwanted or unrelated businesses keeping in view the interest of stakeholders and their expectations”.

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FUELLING M & A GROWTH

OVERSEASOVERSEAS

CONSOLIDATE POSITIONINCREASE CAPACITIES

ACCESS TO INTERNATIONAL MARKETS

INTEGRATION

BACKWARD/FORWARD

ACQUIRE CERTAINCAPABILITIES: Technology, People and R & D

BECOME GLOBAL PLAYER

TATA TATA -- CORUSCORUS

BIRLA BIRLA –– NOVELISNOVELIS

MITTAL MITTAL –– ARCELORARCELOR

RANBAXYRANBAXY--DIIACHIDIIACHI

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Why Cross Border M&A ?

The stimulus for cross-border M&A

Globalization

Industry consolidation

Maturing markets

Emergence of global investing.

Global in Size & Scale

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Aspects Of Cross Border M & A

Aspects influencing

business case for M & A

Aspects Aspects influencing influencing

business case for business case for M & AM & ALegal & regulatory

framework

Identifying and delivering synergies

Tax regimes & treaties

Business Dynamics

Business Environment

Cultural Issues

Accounting treatment

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Aspects Of Cross Border M & A

The business case must recognize the role of :Corporate Governance

Regulatory Compliances

Corporate Social Responsibility

Human Rights

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Challenges and Risks in a Cross Border M&A

Identification of the Target / Target on block

Understanding the Jurisdiction Legal & tax regimes

Sale process / Valuation

Comprehensive Due Diligence

Evolving a structure & effective road map

Commence Negotiation

Post – merger integration process.

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Challenges and Risks in a Cross Border M&A ….. contd

Attitudinal barriers

Political interference

Employees’ reluctance

Shareholders’ perception of “foreign acquirer”

Community perception

Mismatch in perception between the Target and Acquirer

Perceived incompetencies and inefficiencies

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KEY CHALLENGES IN M & As - Pre merger challenges

Pre merger stages :Pre merger stages :Search and Screening requires identification of suitable candidates.

Planning requires a full blown evaluation of the Target to ensure it is the “Right Fit”.

Evaluation including business, financial, technical, earning potential, ROI and pay back time.

Pre acquisition period involves assessment of business life cycle, cultural and organizational differences, including cultures, role of leaders, and management styles.

To understand the ‘value’ and ‘culture’ of the Target Company

The biggest challenge is the acquisition of intangibles and growth of intellectual capital along with retention of talent.

Identification of control factors is critical - Is it with the promoters/majority shareholders/management ?

Management entrenchment is often a strong disincentive for acquirers.

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DUE DILIGENCE – IDENTIFICATION OF CHALLENGES

Just as banks believe in “Know Your Customer”, companies should focus on the concept of ““Know Your TargetKnow Your Target””..

Due diligence activity to answer “What, Where, Why , Which, When and How” so as to evaluate the merger process.

Due diligence can also help to map the pre-merger integration process.

Change of ControlChange of Control :Lender covenants

Material Contracts

Golden Parachute

Valuation Impact

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POST MERGER CHALLENGES

MANAGING THE INTEGRATION PROCESS :MANAGING THE INTEGRATION PROCESS :

Retaining talent and dealing with downsizing activities with great sensitivity.

The original intent behind the acquisition to be kept in mind when implementing systems and procedures.

The composition of the integration team to be aimed at identifying the purpose and character of the merged entity.

Communication both internal and external is a must to increase the perceived benevolence of management and promote trust amongst the employees and stakeholders.

Language barrier leads to double jeopardy of interpretation and interpreting the interpreter (like in China and Latin American countries).

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POST MERGER CHALLENGE – Cultural Issues

Prof. Geert Hofstede, Emeritus Professor,

Maastricht University

“For those who work in international business, it is sometimes amazing

how different people in other cultures behave. We tend to have a human instinct that 'deep inside' all people are the same - but they are

not. Therefore, if we go into another country and make decisions based

on how we operate in our own home country - the chances are we'll make

some very bad decisions.”

" Culture is more often a source of conflict than of

synergy. Cultural differences are a nuisance at best

and often a disaster."

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INTEGRATION CHALLENGES

MANUFACTURING

MARKETING

LOGISTICS

PROCESSES (IT)

POLICIES

REMUNERATION AND BENEFITS

Research & Development Vendors – Suppliers

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HR ISSUES

The M & A drivers which largely concentrate on the financial nitty-gritties must also

focus on people issues

Issues that crop up include compensation and benefits plans, performance appraisal

systems, leadership assessment and innovation and “Corporate Culture” issues

If the process of M & A involves acquisition of human capital as a major component,

the issue assumes a humongous intangible dimension

Post-mergers leaders should aim to attain a scenario where the corporate functioning

reflects the cultural attributes of the merged corporation

Not only does leadership determine corporate destiny it also helps establish the

cultural boundaries and norms for the workforce to follow

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NEED TO REGULATE COMBINATION

Advantages of combinationincreased efficiencythe market becomes more competitive andconsumers benefit from higher-quality goods at fairer prices.

It may harm consumers through higher prices, reduced choice or less innovation

May result in lessening of competition in the market or reinforcing the dominant position

The objective of examining proposed mergers is to prevent harmful effects on competition effects on competition

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Competition Act, 2002( “ Act”)

Section 3 (Anti-competitive agreements) and section 4 (Abuse of dominant position) are notified.

Competition (Amendment) Ordinance 2009 of Oct 14th abolished MRTPC (Section 66 has been notified)

All pending cases before MRTPC relating to UTP, RTP & MTP are now transferred to CAT ( Competition Appellate Tribunal)

All pending cases relating to Goods & Services (except which relate to giving false information for disparaging of goods and services of another person under the MRTP Act) will now be transferred to the National Commission constituted under the Consumer Protection Act 1986

Section 5 & 6 ( relating to M & A) yet to be notified.

Given the RBI reservations, Banking Sector might be exempted from the purview of this Act in relation to M& A.

Clearance timeframe by CCI is now 210 days and 30 days incase there is no prima facie case in relation to sec 3 & 4 of the Act.

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FDI Regime

Sector FDI Cap M & A Procedure

Banking 74% -stringent due to RBI’s reservations

Telecom FDI upto 74%,-Automatic upto 49 %,beyond 49% FIPB approval required

-liberal due to the progressive polices of the TRAI and deregulations

- subject to DOT, SEBI, FEMA, CCI approval

Insurance 26% -stringent procedures

-subject to IRDA and SEBI approvals

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INDIAN MERGER EVALUATION PROCESS

A combination that gives rise to “Appreciable Adverse Effect on Competition”

(AAEC )will be prohibited and is void.

Identification of Relevant market, consisting of relevant product market and

relevant geographic market

To be seen in light of whether it results in or even has a potential to have adverse

affect on competition in the Relevant market.

Rule of reason to be applied by CCI while assessing AAEC

Effect of Merger on competition is seen in the form of Unilateral effects and

Coordinated effects.

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WHY MERGERS FAIL

AFTERMATH OF NON AFTERMATH OF NON -- INTEGRATIONINTEGRATION

Disruption of work processes

Diminishing customer confidence

Damage to company's reputation and goodwill

Poor employee motivation levels.

Attrition

Mergers that just end up averaging strengths and weaknesses rather than creating new capabilities and averaging costs and profits cannot go far enough to be globally competitive.

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WHY MERGERS FAIL Contd…

Post-merger productivity drops post-merger as retention of workforce, relevance and/or redundancy and integration are not adequately addressed.

The success of a merger hinges on how well the post-merged entity positions itself to achieve cost and profit efficiencies.

A merger is an emotive issue both at the individual and collective levels and, more so, in the Indian context where the employees are recruited for the organizations and not for specific jobs.

The real test of the success of a merger is making people connect to each other.

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Summing up…..

PRE MERGERPRE MERGER

PLANExamine business strategy and the HR strategy Identify and evaluate Target- Method of functioning - Manpower- Infrastructure

Mandating consultants for HR, tax and financial aspects.

INVESTIGATEDue diligenceAnti-Trust issuesChange of control triggersIntegration Issues

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Summing up Contd…

NEGOTIATESet deal terms - Legal- Human capital - Structural Obtain stakeholders agreementDocumentation- Legal - RegulatoryWith Lenders

IMPLEMENTExamine Alternate StructuresPlan of ArrangementTender OfferOutright Sale

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Summing up Contd…

POST MERGERPOST MERGER

INTEGRATE

Finalize and execute integration plans - Structure - Resources- System - Human capital

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UNDERLYING PRINCIPLE OF M & A UNDERLYING PRINCIPLE OF M & A TRANSACTIONTRANSACTION

1 + 1 1 + 1 = 11= 11

ADDITIONAL VALUE OF ADDITIONAL VALUE OF ““SYNERGIESSYNERGIES””

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THANK YOU