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Mergers & AcquisitionsMergers & Acquisitions(Case Study)
June 11 2010June 11, 2010
♣
Sunny Goel II Research Associate IISunny Goel II Research Associate II
Corporate Catalyst India www.cci.in&
ASA & Associates chartered accountants www.asa.in
C t tContents
1) Introduction) Wh t i ?a) What is merger?
b) What is acquisition?
2) Distinction between Mergers & Acquisitions2) Distinction between Mergers & Acquisitions
3) Case study – TATA CORUSa) LBOsa) LBOsb) The Dealc) Negotiationsd) Synergies) y g
4) Snapshot – Bharti Zain
5) Causes for failure of M&A
6) Conclusion
I t d tiIntroduction
Important tools of corporate growthImportant tools of corporate growth
Alternative way to achieve growth is resort to external arrangements like M&A (inorganic growth)
Restructuring the corporation to meet global competition
Main idea – one plus one makes three
Economies of scale
Acquiring new technology
Improved market reach
Staff reduction
85% are using M&A as a core growth strategy85% are using M&A as a core growth strategy.
Wh t i M ?What is Merger?
A true merger in the legal sense occurs when both business di l d f ld th i t d li biliti i t l t ddissolves and fold their assets and liabilities into a newly created third entity. This entails the creation of a new corporation.
A transaction where two firms agree to integrate their A transaction where two firms agree to integrate their operations on a relatively coequal basis because they have resources and capabilities that together may create a stronger competitive advantage create a stronger competitive advantage.
Cl ifi ti f MClassifications of Mergers
Similar kind of business e g TATA and Jaguar &
Horizontal Merger
e.g. TATA and Jaguar & Land Roover.Combination of firms
related to each other in terms of customer
Vertical Concenti
groups, customer functions or alternative technologies.
Vertical Mergerric
Mergers
Combination of firms Conglomerate
Mergersinvolved in different stages of production/operation as forward or backward integration e g cone
Engaged in unrelated line of business activities.
integration e.g. cone supplier with an ice cream maker.
R f MReasons of Merger
Economies of Scale
Marketing and Economic ManagementNecessity
Growth and Diversification
Eliminations of
Competition
Utilization of T Shi ld
Technology Sh i Tax ShieldsSharing
Wh t i A i iti ?What is Acquisition?
An acquisition, also known as a takeover or a An acquisition, also known as a takeover or a buyout, is the buying of one company (the ‘target’) by another. An acquisition may be friendly or hostile. In the former case the companies cooperate in negotiations; in the case, the companies cooperate in negotiations; in the latter case, the takeover target is unwilling to be bought or the target's board has no prior knowledge of the offer. Acquisition usually refers to a purchase of a smaller firm by a larger one.
R f A i itiReasons for Acquisitions
Increased market powerIncreased market power
Learning and Developing new capabilities
Overcoming entry barriers
Cost of new product developmentp p
Increase speed to market
Lower risk than developing new products
Distinction between M d A i itiMerger and Acquisition
When one company takes over another and clearly When one company takes over another and clearly establishes itself as the new owner, the purchase is called an acquisition. From a legal point of view, the target company ceases to exist, the buyer "swallows" target company ceases to exist, the buyer swallows the business and the buyer's stock continues to be traded.
In the pure sense of the term, a merger happens when two firms, often of about the same size, agree to go forward as a single new company rather than remain separately owned and operated. This kind of action is more precisely referred to as a "merger of equals". Both companies' stocks are surrendered and new company stock is issued in its place stock is issued in its place.
TATA TATA CORUSCORUSTATA TATA -- CORUSCORUSA C St dA Case Study
B i f B k dBrief Background
AcquirerAcquirer
Name: Tata Steel
Former Name: Tata Iron and Steel company Limited
Founded: 1907
F d J h dji N ji T tFounder: Jamshedji Nusserwanji Tata
Headquarters: Jamshedpur, Jharkhand
Chairman: Ratan TataChairman: Ratan Tata
Type: Public
Industry: SteelIndustry: Steel
Parent: TATA Group
B i f B k dBrief Background
TargetTarget
Name: Corus
Founded: 1999
Formation: Merger of British Steel Corporation and
K i klijk H N VKoninklijke Hoogovens N.V.
Headquarters: London, England, UK
CEO: Kirby AdamsCEO: Kirby Adams
Type: Subsidiary
Industry: SteelIndustry: Steel
Parent: Tata Steel
Th D l
Official Announcement: April 02, 2007
The Deal
Official Announcement: April 02, 2007
Price of Deal: 608 pence per ordinary share in cash
Total value of Deal: Pound 6 2 billion (USD $12 billion)Total value of Deal: Pound 6.2 billion (USD $12 billion)
Deal Competitor: Companhia Siderurgica Nacional (CSN)
C tit ’ Bid 603 hCompetitor’s Bid: 603 pence per share
Deal process commencement: September 20, 2006
Deal process completion: July 02, 2007
C bi d A biti
Become a global player with a balanced presence in developed
Combined Ambition
European and fast growing Asian marketsAcquire strong position in construction, automotive and packaging market sectorsSi ifi t t i l it d fi ld / b fi ldSignificant raw material security and greenfield / brownfielddevelopmentsLowest cost position in Europe and South-East AsiaOwn development plans
By 2012: EBITDA of
Own development plans
Current: EBITDA of 13%; 25 million tonnes :# 6
25%; 40 million tonnes :# 2
Double the size and profitability
tonnes :# 6
D l I t t V hi l
A holding company was set up by Tata Steel in Singapore to
Deal: Investment Vehicle
g p y p y g p
acquire Corus.
Idea was to have all the foreign acquisitions under one holding
company.
Singapore has favorable tax jurisdiction and gave Tata Steel an
easy avenue for raising global resources / funds.
Tata SteelTata Steel
India
Tata Steel Asia
Holdings (Singapore)
Tata Steel U.K.
Corus Group Ltd.
U.K.
N ti ti
September 20, 2006: Corus steel has decided to acquire a strategic partnership with a company that is a low cost producer
Negotiations
strategic partnership with a company that is a low cost producer
October 05, 2006: The Indian steel giant, Tata Steel wants to fulfill its ambition to expand its further
October 06 2006: The initial offer from Tata Steel is considered October 06, 2006: The initial offer from Tata Steel is considered to be too low both by Corus and analysts
October 17, 2006: Tata Steel has kept its offer to 455 p per share
October 20 2006: Corus accepts terms of Pound 4 3 billion October 20, 2006: Corus accepts terms of Pound 4.3 billion takeover bid from Tata Steel
October 23, 2006: The Brazilian Steel Group CSN recruits a leading investment bank to offer advice on possible counter offer to Tata Steel’s bidto Tata Steel s bid
October 27, 2006: Corus was criticized by the chairman of JCB, Sir Anthony Bamford, for its decision to accept an offer from Tata.
N ti ti
November 03, 2006: The Russian steel giant Severstal announces ffi i ll th t it ill t k bid f C
Negotiations
officially that it will not make a bid for Corus
November 18, 2006: the battle over Corus intensifies when Brazilian group CSN approached the board of the company with a bid of 475p per sharebid of 475p per share
December 18, 2006: Within hours of Tata Steel increasing its original bid to 500p per share, Brazil’s CSN made its formal counter bid at 515p per share in cash, 3% more than Tata Steel’s p p ,offer
January 31, 2007: Britain’s Takeover Panel announces in an e-mailed statement that after an auction Tata Steel had agreed to offer Corus investors 608 pence per share in cashoffer Corus investors 608 pence per share in cash
April 02, 2007: Tata Steel manages to win the acquisition to CSN and has the full voting support from Corus’ shareholders.
Fi i
TATA – Corus Deal - $12 billion
Financing
TATA Corus Deal $12 billion
Equity contribution from Tata Steel - $3.38 billion
Credit Suisse leaded, joined by ABN AMRO and Deutsche
Bank in the consortium
Of the $8.12 billion of financing, Credit Suisse provided
45% and ABN AMRO and Deutsche provided 27.5% each.
C lt l I t ti
Tata Steel Corus
Cultural Integration
Tata SteelContinuous Improvement Program – “ASPIRE”
CorusContinuous Improvement Program – “The Corus Way”
Core Values
Trusteeship
Integrity
Core Values – Code of Ethics
Integrity
Creating value in steelIntegrity
Respect for the individual
Credibility
Creating value in steel
Customer focus
Selective growthy
Excellence
World class governance
g
Respect for our people
World class governance
S i
Tata is a low cost steel producer whereas Corus was a high
Synergies
value product manufacturer
Tata was a major supplier to the Indian auto industry and the demand for value added steel products was growing in the demand for value added steel products was growing in this market
Hence there would be a powerful combination of high quality developed and low cost high growth marketsquality developed and low cost high growth markets
Technology transfer and cross-fertilization of R&D capabilities
Capturing global market
A t Gl b l M k t
TATA CORUS
Access to Global Market
23% 8%
IndiaAsia ex India
49%10%9%
3%EuropeUK
69%
Asia ex IndiaROW
29%
N. AmericaAsiaROW
COMBINED ENTITY
37%8% 9%EuropeUKAsia
22%24%
N. AmericaROW
C l i
Tata Steel can target becoming one of the top-3 steel
Conclusion
makers globally by 2015.
The company would have an aggregate capacity of close to 56 million tones per annum.56 million tones per annum.
The company can plan for Greenfield capacities too.
Post deal for smooth functioning Tata Corus defined Group g pStrategy Function:
Strategy / Business Development Group – corporate development
Strategic Modeling Group strategic models and benchmarkingStrategic Modeling Group – strategic models and benchmarking
Industry Group – industry monitoring, market intelligence and issuing assumptions for other two groups
BHARTI BHARTI ZAINZAINBHARTI BHARTI -- ZAINZAINA S h tA Snapshot
Bh ti Z i
Bharti acquired Zain for USD 10.7 bn
Bharti - Zain
Bharti acquired Zain Telecom’s operation in 15 countries
Manoj Kohli, CEO & Joint Managing Director is the key person behind the deal
Deal completed in 45 days
Execution of deal:Financing teamFinancing team
Accounting team
Regulatory team
Legal teamLegal team
Country visits team
Future: Bharti Airtel plan to have 100 million customers, USD 5 billion revenue and USD 2 billion EBITDA by 2013.5 billion revenue and USD 2 billion EBITDA by 2013.
C f F ilCauses for Failures
Payment of higher price: can dilute shareholders’ earnings (Overstated y g p g (/ overestimated synergies)Cultural Clash: conflicting management styles, differing expectations, communication channels, formal/ participative…..Failure to integrate operationsPoor business fit: product/service of acquired company does not fit into acquirer’s sales, distribution systems or geographic requirementsInadequate due diligence: some of the financial and business risks of seller may go undetectedOver leverage/ inappropriate financing structure: may create liquidity/ servicing problemsBoardroom split: lack of compatibility amongst directors of two companies mergedR l t / t d d l i i l t ti f l d Regulatory/ unexpected delays in implementation of merger: can lead to loss of valuable employees, customer, supplier relationships
Hence proper planning and executionproper planning and execution of M&A transaction is a must for it to succeed and not backfiremust for it to succeed and not backfire
Thank YouThank YouThank YouThank You
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