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WELCOME TO MERGERS
AND ACQUISITIONS
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1st
2nd
3rd
4th
5th
Started Peaked Ended
1981 1989
U.S
Globalbut most
pronounced
in U.S.
1916 1921
1965 1969
1897 1898-1902 1904
1992
FIVEWAVES
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1st Wave: 1897-1904
1. Primary metals 6. Transportation
2. Bituminous coal Equipment
3. Food products 7. Petroleum
4. Chemicals 8. Fabricated metal
5. Machinery products
Impact on 8 specific industries (2/3 of the total mergers)
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1stWAVE
Merging for Monopoly
Horizontal Merger
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1stWave
Create monopoly
US Steel
by J P Morgan
Carnegie Steel
by Andrew Carnegie
US Steel
Smaller Steel Cos
75% of mkt.
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1stWave
Creation of trusts
Put their stock in a voting trust and agreed
not to compete against each other.
e.g : Sugar trusts
Copper trusts
Shipping trusts etc.
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1stWave
Products:
GE
Dupont
Eastman Kodak
Navistar International etc.
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1stWave.End
Due to financial factors:
stock market crash-1904panic in banking1907
The Application of anti-trust legislations.
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2nd Wave: 1916-1929
Merging For Oligopoly
Consolidation
Fueled by first world warThe anti-trust became more stricter
thru Clayton Act,1914
Resulted vertical merger.
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2ndWave
E.g. Ford Motor
vertically integrated co.
Mfg. own tyres from rubber produced
from its own plantation in Brazil.
Mfg. Own steel for body of car which in
turn got iron from its own mines andshipped on its own railroad.
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2ndWave
Conglomerates non related fields
Industries 1. Food products
2. Chemical
3. Primary metals
4. Petroleum
5. Transportation equipments.
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2ndWaveEnd
Stock mkt crash1929
Black Thursday 29thOct1929.
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3rd Wave: 1965 - 1969
A historically high level of merger activity.
Fueled by booming American Economy.
Acquisition of larger cos by smaller cos.
Conglomerate transaction - Non related,
Highly diversified,Unrelated industries.
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1960s Bull mkt.
Eq. Sh - P/E multiple of certain cos.
ATEq. Sh A
Eq. Sh T
Stock Swaps
3rdWave
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4th Wave: 1981 - 1989
Hostile take over.
Fortune 500 became the target of acquirers.
Professional corporate raider.
Leveraged buyouts.
Role of investment Bankers.
Active among European and Japanese firms.
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5th Wave: 1992
Mega mergers.
Cross border mergers.
Drivers :- Deregulations, Globalization & Technology.
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Business CombinationsReasons:
Growth
Economies of Scale
Synergy
NAV = PVab( PVa + PVb )PE Managerial efficiency
Market entry
Acquire Technology Diversification
Tax shields
Strategic
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Business Combinations
Some unstated reasons for acquisitions
Megalomania
Hubris spirit
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Why not?
Grasping for a company simply because its
on the market or because a competitor
wants to buy itIt is available for sale
It seems very attractive
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Forms of Business Combinations
Consolidation
result: a new firm
e.g. Sandoz + Ciba Geigy = NovartisMerger
result: only one survive
e.g. HDFC BK + TIMES BK = HDFC
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Forms of Business Combinations
Takeovers
control over mgmt thru substantial
portion of its equity .e.g. Credit Swiss Group controlled
First Bostons Mgmt thru Equity
acquisition.Both remained in existence.
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Forms of Business Combinations
Asset purchases
A buyout a division or assets of T
e.g. Coca-Cola paid Rs 170Cr to Parle for
its Soft drinks brands like Thumps up,
Limca, Gold Spot, etc.
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Types of Mergers
Horizontal Merger
Vertical Merger
Conglomeration
Market Extension Merger
Product Extension Merger
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Major Acquisitions: Big DealsTARGET BUYER VALUE ($Bn) YEAR
ARCELOR MITTAL STEEL 31.00 2006
NKK CORP KAWASAKI STEEL 14.10 2001
LNM HOLDINGS ISPAT INTL 13.30 2004
CORUS TATA STEEL 12.00 2006
KRUPP AG THYSSEN 8.00 1997
DOFASCO ARCELOR 5.20 2005
INTL STEEL MITTAL STEEL 4.80 2005
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Merger: Nokia-Siemens
A new 50-50 JV company Nokia-Siemens
Network (3rd largest communications
equipment provider in the world after
Ericsson and Alcatel/Lucent)
Annual revenue : Euro 16bn
Workforce : 60000 (expected job cuts 10-
15% in next 4yrs mainly in Germany)
Cost reduction of Euro1.5bn per year by 2010
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Theories of Mergers
Differential efficiency
Inefficient management
Financial synergy
Operating synergy
Strategic realignment
Undervaluation Short term results Vs Long term investment
Market below replacement cost
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Theories of Mergers
Information and signaling
Agency problems and Managerialism
Protect or build the empire
Free cash flow theory
Market power
Tax consideration
Redistribution
Winners curse - Hubris
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The Acquisition Process
Acquisition Search
Approaching the Target
Passive Strategy
Active Strategy
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The Acquisition Process
Valuation
Discounted Cash Flow Method
Comparable Companies Method Book Value Method
Market Value Method
Negotiation
Due Diligence
Acquisition Finance
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Valuation
Acquirers perspective
Sellers perspective
Lenders perspective
Investors perspective
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Acquirers perspective
Increase the synergy / Decrease the premium
Managerial synergy HLL & TOMCO
Exchange inefficiency: Vertical integration
will circumvent mkt transactions cost Tata Tea took over Consolidated Coffee Ltd
Operating synergy: Economies of scale
ICICI acquired ITC classic India Cement acquired Visaka cement, Raasi cement, CCI
plant at Yerraguntla
Tax advantages: acquiring sick companies
e.g. Voltas acquired AllwynKumar Bijoy 31
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Acquirers perspective
Regulatory considerations: to bypass the law of
fully owned subsidiaries by foreign co. e.g.
Whirlpool (Indian Wing) merged with Expo
Machinery & Kelvinator India = Whirlpool India
Size: e.g. Merger of SCICI & ICICI
Financial synergy: channeling of cash/resources
Diversifying risk: e.g. Torrent group acquired
Ahmadabad electricity Co and Surat electricity
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Sellers perspective
Good price: Godrejs offer of Rs 100cr to
Transelectra more attractive than Unilever
Better business relationship: SRF Ltd soldSRF finance to G E Caps at lower price
Better mgmt and employee care: JRD Tata
had imposed a condition on S M Datta ofHLL that after merger, not a single
employee of TOMCO would be retrenched
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Lenders perspective
Creating shareholders value: e.g. APIDC
the lending institution sold its 2.3% stake of
Raasi cements to India cementsBetter corporate governance
Better portfolio
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Investors perspective
Addition to their wealth
Potential growth: e.g. shareholders of Raasi
have positively responded to the open offerof India Cements (Rs 300ps)
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Valuation of Target companiesFinancial valuation: calculation of P/E ratio,
Intrinsic value (true MPS)
P/E depends on
Goodwill of the business
Proven abilities Character of the business
Tangible assets & Intangible assets: valued
either at fair value or at the open market value
Free cash flows: DCF method (discounted at
WACC or higher)
The substitution cost is calculated and
compared with acquisition costKumar Bijoy 36
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Financial evaluationIndian context
Look at 5Ps
Personnel:
Nicholas lab acquired Roche for its well trained sales force
Product:
HLL acquired BBLIL for its 17brands in Tea segment
Plant:
India cement acquired Raasi cement and Visaka cements
Potential: Whirlpool acquired Kelvinator
Profit:
SRF finance selected GE Cap as buyerKumar Bijoy 37
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Pricing the Bid
1.Divide the cos Net Asset Value by its total noof shares i.e. NAV per share
2a.Make a projection of the target cos turnover
and profit for the next five years
2b. Discount the profit of 5th yr at expected RoR
2c. Divide the discounted figure by the no. of sh
3. Calculate the average price of the target cos
share over the last one yearThese three values indicate the range within which initial negotiating
price must be quoted.Kumar Bijoy 38
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Valuations.Practical e.g.
Coca cola has offered the price to Parle soft drinks
equal to its turnover
Khaitans of Williamson Major have paid a price of
Rs290cr to the Union Carbide (Rs 150cr for theirfuture earnings, Rs 100 for the brand value
(Eveready) and Rs40cr for giving mgmt stake in co.
Whirlpool Corporation paid Rs 300cr for its 51%
stake in Kelvinator India. The share price was fixedat Rs 197.16ps (total 1.52cr shares) which is the
average share price over the previous six months.
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Lazard Capital applies a thumb rule in valuing a
FMCG co i.e. 1 to 1.5 times of its turnover
SRF paid a sum of Rs 325cr for acquiring the Ceats
Nylon tyre cord plant. A new plant of same capacitywould have cost Rs 450cr with a gestation period of
18 months.
Bayer India has offered Rs 80ps of ABS. Independentvaluers like C C Choksi & co, ICICI securities and SR
Batliboi & co had suggested the Rs 65 -70 per share
for the offer
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Issues in empirical studies
If value is increased by mergers or tender offer is
it maintained?
Is value maintained in the short term only for a
period of six months or less?
Do value increases represent social gains or
merely redistribution?
How the gains are divided b/w bidders and
targets?
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What will be the effects on other firms in
the same industry?
Whether the return to the common stock ofindividual firm or group of firms is greater
or less than that predicted by general market
relationship b/w return and riskWhat is the reasonable time frame for
testing merger success?
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Sell-offs
Opportunistic
Forced
Planned
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Forms of Corporate Downsizing
Spin-Off
A new legal entity is created to takeover the
operations of an existing division.The Shares of
the new unit is distributed pro rata among the
existing share holders.
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Forms of Corporate Downsizing
Split-Off
A new legal entity is created to takeover the
operations of an existing division.The Shares of parent
co are exchanged for the shares of the new co. Hence
the share-holding of the new entity does not reflect the
share holding of the parent firm.
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Forms of Corporate Downsizing
Split-Up
A complete break up of a company into two
or more and parent firm ceases to exist.
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Forms of Corporate Downsizing
Equity Carveouts
Conversion of existing division or unit into a
wholly owned subsidiary.Result in positive cash
flow.
Divestitures
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Forms of Corporate Downsizing
Divestitures
Outright sale of a portion of the firm to
outsiders. The firm receives purchase
consideration in the form of cash or
securities or both.
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The Divestitures Process
Developing Sale Strategy
Negotiated sale
Auction sale
Valuation
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The Divestitures Process
Drafting offer memorandum
Executive Summary
Sale procedure
Background
Operations
Marketing Human resources
Financial
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The Divestitures ProcessEnd
Identify potential buyers
Negotiation & Closing the deal
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Takeover Defenses
Share Repurchases
White Knights
Poison Pills
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Takeover Defenses
Corporate Charter Amendments
Golden Parachutes
Greenmail
Standstill Agreements
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Takeover Defenses
Poison Puts
White Squire
Pacman Strategy
Crown Jewels
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Corporate Restructuring
Going Public
Going Private
Joint Venture