Mergers & acquisition 2

8/7/2019 Mergers & acquisition 2

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Dr Sheeba Kapil 1

Mergers & Acquisition


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Key concept of mergers / acquisitions

CREATE SHAREHOLDER VALUE

Key concept of mergers / acquisitions

CREATE SHAREHOLDER VALUE

1 + 1 = 3


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Most of M&A fail ?

Pursue them when they make sense

Deals should be above average

Easier said than done Why pursued by cos?

Maximum value is given by Market toacquisition deals as compared toalliances/sale


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Stock Market Premium %

2.65

0.26

0.2

-3.1

quisit

ion

Merg

er

Sale

JointVen

ture/Allia

nc


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MARKETVALUES

ACQUISITION OTHERS

Heineken 1999-00, increase

innetturnover14%:

newacquisitions 8%,increasedsales 2%,

highersales price/mix2%,

improvedexch rates 2%

2003:04

Europe :BBAG: BrauUnion: LargestBrewerIn CentralEurope

China: Fraser& Neave: Heineken Asia PacificBreweries China,

AcquiredInterest Guangdong BreweryHoldings

Australia: JV Lion Nathan Australia: Heineken Lion Nathan


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SABMILLER

African brewer:

Int.conglomerate

InternationalacquisitionsUS, centralEurope, Africa,

Asia

2000: Narang Breweries : Lucknow

2001: Mysore Breweries Ltd, Rochees Breweries Ltd

2003: ShawWallace: BeerDivision (Strong BrandHaywards)

2006: Fosters India: Maharashtra

Mohan Meakins Acquisition Attempt


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Cash deals received more favorablemarket reaction than stock deals

(trading & signaling effect )

Overpayment in the deals has

reduced


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M&A Indices

DVA- total value deals create

POP- proportion of cos overpaying

Source: Developed by Mckinsey


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DVAMeasures aggregate value change at

time of announcement (both cos)

as a % of transactions value

Markets assessment of value to be

created


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POP Proportion of transactions in which

the initial share price reaction

negative

Acquirer overpaid


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POPULAR TERMINOLOGIES

Junk Bonds

Dawn raid UK

Saturday night special US

White knight


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Shark repellent

Golden parachute

Greenmail/ goodbye kiss

Macaroni defense Poison pill (flip in PP, flip over PP)

Lady macbeth

Bankmail


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Types of M&A

Merger

A transaction where two firms agree tointegrate their operations on arelatively coequal basis because theyhave resources and capabilities that

together may create a stronger

competitive advantage


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the 2 firms combine all assets &liabilities

Acquirer = target

Usually take a new name

JP Morgan/Chase Manhattan becomes

JP Morgan ChaseExxon and Mobil becomes Exxon-Mobil


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Target firm shares disappear

Target shareholders get either1) Shares in new firm

2) Cash

Exchange Ratio = # shares in new firm givenfor each share of Target firm

Ex) # target = 250 million & ER = 1.25

# New = 1.25 x 250 M = 312.5 M

Buyer firm shares are kept as shares in newfirm ( in effect their ER = 1).


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Amalgamation

Section 2(1B)

Amalgamation, in relation to companies, means the

merger of one or more companies with another

company or the merger of two or more companies to

form one company.

Mergers Not defined under the Income-tax Act, 1961.

However, in common parlance, merger meanscombination of two or more commercial organizations

into one


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Conditions

All properties to be transferred to theamalgamated company

All liabilities to be transferred to the

amalgamated company

Shareholders holding at least 3/4th invalue ofshares of the amalgamating companyshould

become shareholdersofthe amalgamatedcompany


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Merger/ Amalgamation Companies Act,1956

Competition Act, 2002

Income Tax Act,1961


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Observing MOA of transferee company

Convening board meeting

Preparation of valuation report and scheme document

Reconvening board meeting Notice to be given to stock exchanges

Application to High Court

Filing of application Court approves time, date, venue etc

Printing of notices Notice printed

Affidavit filed

General Meeting convened Passing of scheme document

Results reported

Court Approval Certified copy filed with Registrar of Companies


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Acquisition

A transaction where one firm buys

another firm with the intent of moreeffectively using a core competence bymaking the acquired firm a subsidiary

within its portfolio of businesses


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Taking possession of another businessalso called a takeover or buyout.

Either through share purchase orasset purchase.

It is characterized by the purchase ofa smaller company by a much largerone.


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Takeover (hostile)

An acquisition where the target firm didnot solicit the bid of the acquiring firm

IBMs acquisition of Lotus in 1995;

Oracles bid for PeopleSoft in 2003


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Acquisition /takeoverThe Securities and Exchange Board

of India Act,1992


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TRANSACTION STRUCTURE

Companies Act,1956

Income Tax Act,1961

Competition Act,2002

CROSS-BORDER TRANSACTIONS

Foreign ExchangeManagement Act ,1999

LISTED COMPANIES

SEBI Regulations

Stock Exchange Listing Agreement


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Foreign entity involvedForeign Exchange Management

Act,1999


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FDI- Prohibited Sectors Gamblingandbetting

LotteryBusiness

AtomicEnergy

RetailTrading (Multibrand)

AgriculturalorplantationactivitiesofAgriculture

HousingandRealestate business (excludingintegrated

township)


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FDI (Govt Route) manufactureofelectronicaerospaceanddefenseequipments

manufactureofcigars & cigarettesoftobaccoandmanufactured

tobaccosubstitutes

manufactureofitemsreservedorsmallscaleindustrieswith morethan24 percentforeigninvestment

allproposalsfallingoutsidethenotifiedsectoralpolicy/caps

allproposalsinwhich foreignfinancialand/ortechnicalcollaborators

have previous/existing jointventuresand/ortechnologytransferand/ortrademarkagreementsin Indiainthesamefield

No Objection Certificate (NOC)


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FDI (Automatic Route) AutomaticApprovaI Route

DoesnotrequireanypriorapprovaIeitherbythe

Govemmentor Reserve BankofIndia (RBI).

Theinvestorsareonlyrequiredtonotifythe RegionalOffice

concernedofRBIwithin 30daysofreceiptofinward

remittancesandfiletherequireddocumentswith thatofficewithin 3O daysofissueofsharesofforeigninvestors


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Foreignfinancial/technicalcollaboratorswith

previous/existing jointventures, technology

transfer/trademarkagreementsenteredinto ON OR AFTER January12,2005

NOCisnotrequired(butinanycasetherelated

agreementsmustbeevaluatedinordertocheckthe

presenceofnonconflictclauses)


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Types of mergers


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Horizontal Merger

Results in the consolidation of firms thatare direct rivals- i.e. sell substitutable

products within overlappinggeographical markets

Increase mkt powerIncrease eff gain (economies of scale,

rationalization)


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Contd.

Two firm same industry

Seek economies of scale

(BP & Amoco expected tosave $2 bn p.a.from operations)

huge challenge of integration

(Exxon & mobil, Helene-Curtis and unilever)


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Kuhn & motto (1999)

Increases prices, decreases consumersurplus

Always benefits the merging firm Increases outsiders profits

Increases producer surplus

Reduces net welfare


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Vertical mergers

1. Two firms participate at difft stages ofproduction or value chain

2. cos do not own operations in majorsegment of value chain

Forward integration- Merck-medco

Backward integration- Chevrons oil- gulf oil,America online- mapquest


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Conglomerate merger

Consolidated firms may sell related products,share marketing & distribution channels &

production processes, or they may be whollyunrelated

Ciba-Geigy (contact lens, Ritalin, Maalox) &Sandoz(Gerber Baby Food, Ovaltine) - Novartis

US steel- marathon oil = USX

AOL- time Warner PepsiCo- pizza hut

Citicorp- travelers insurance

P&G & clorox

Cardinal healthcare - allegiance


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Pure conglomerate

Such merger unites firms that have noobvious relationship of any kind

AT&T hartford insurance

Bankcorp of America- Hugheselectronics

R J Reynolds- burmah oil & gas


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Participants

Investment bankers strategic & tactical advice

Screen potential buyers & sellers

Contact & negotiate Valuation

Deal structuring

Goldman Sachs (40%), MorganStanley (26%), Merill Lynch(22%)


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LAWYERS

Thomson financial securities datacorporation

Sherman & sterling,

meagher & flom

Skadden

Simpson thatcher & barlet

Nishith Desai Associates


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Accountants

Tax structure

Due diligence

Georgeson & co

D F king & co

Documents

Mergers & acquisition 2