Mergers & Acquisition
Dr Sheeba Kapil 1
1+1=3
Key
Keyconcept
conceptof
ofmergers
mergers//acquisitions
acquisitions
“CREATE
“CREATESHAREHOLDER
SHAREHOLDERVALUE”
VALUE”
Dr Sheeba Kapil 2
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 to
acquisition deals as compared to
alliances/sale
Dr Sheeba Kapil 3
Stock Market Premium %
-3.1
0.2
0.26
2.65
Dr Sheeba Kapil 4
Heineken 1999-00, increase in
net turnover 14%:
new acquisitions 8%, MARKET
increased sales 2%, VALUES
higher sales price/mix 2%,
improved exch rates 2%
ACQUISITION OTHERS
2003:04
Europe :BBAG: Brau Union: Largest Brewer In Central Europe
China: Fraser & Neave: Heineken Asia Pacific Breweries China,
Acquired Interest Guangdong Brewery Holdings
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Australia: JV Lion Nathan Australia: Heineken Lion Nathan
SABMILLER
African brewer
:
Int. conglomerate
International acquisitions
US, central Europe, Africa,
Asia
2000: Narang Breweries : Lucknow
2001: Mysore Breweries Ltd, Rochees Breweries Ltd
2003: Shaw Wallace: Beer Division (Strong Brand Haywards)
2006: Foster’s India: Maharashtra
Mohan Meakin’s Acquisition Attempt
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Cash deals received more favorable
market 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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DVA
Measures aggregate value change at
time of announcement (both cos)
as a % of transaction’s value
Market’s 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 to
integrate their operations on a
relatively coequal basis because they
have 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 Chase
Exxon and Mobil becomes Exxon-Mobil
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Target firm shares disappear
Target shareholders get either
1) Shares in new firm
2) Cash
Exchange Ratio = # shares in new firm given
for 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 new
firm ( 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 means
combination of two or more commercial organizations
into one
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Conditions
All properties to be transferred to the
amalgamated company
All liabilities to be transferred to the
amalgamated company
Shareholders holding at least 3/4th in value of
shares of the amalgamating company should
become shareholders of the amalgamated
company
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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 more
effectively using a core competence by
making the acquired firm a subsidiary
within its portfolio of businesses
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Taking possession of another business
also called a takeover or buyout.
Either through share purchase or
asset purchase.
It is characterized by the purchase of
a smaller company by a much larger
one.
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Takeover (hostile)
An acquisition where the target firm did
not solicit the bid of the acquiring firm
IBM’s acquisition of Lotus in 1995;
Oracle’s bid for PeopleSoft in 2003
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Acquisition /takeover
The Securities and Exchange Board
of India Act,1992
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TRANSACTION STRUCTURE
•Companies Act,1956
•Income Tax Act,1961
•Competition Act,2002
LISTED COMPANIES
•SEBI Regulations
•Stock Exchange – Listing Agreement
CROSS-BORDER TRANSACTIONS
•Foreign Exchange Management Act ,1999
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Foreign entity involved
Foreign Exchange Management
Act,1999
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FDI- Prohibited Sectors
Gambling and betting
Lottery Business
Atomic Energy
Retail Trading (Multi brand)
Agricultural or plantation activities of Agriculture
Housing and Real estate business (excluding integrated
township)
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FDI (Govt Route)
manufacture of electronic aerospace and defense equipments
manufacture of cigars & cigarettes of tobacco and manufactured
tobacco substitutes
manufacture of items reserved or small scale industries with more than
24 per cent foreign investment
all proposals falling outside the notified sectoral policy/caps
all proposals in which foreign financial and/or technical collaborators
have previous/existing joint ventures and/or technology transfer and/or
trademark agreements in India in the same field
No Objection Certificate (NOC)
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FDI (Automatic Route)
Automatic ApprovaI Route
Does not require any prior approvaI either by the
Govemment or
Reserve Bank of India (RBI).
The investors are only required to notify the Regional Office
concerned of RBI within 30 days of receipt of inward
remittances and file the required documents with that office
within 3O days of issue of shares of foreign investors
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Foreign financial/ technical collaborators with
previous/existing joint ventures, technology
transfer/trade mark agreements entered into
ON OR AFTER January 12,2005
NOC is not required (but in any case the related
agreements must be evaluated in order to check the
presence of non conflict clauses)
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Types of mergers
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Horizontal Merger
Results in the consolidation of firms that
are direct rivals- i.e. sell substitutable
products within overlapping
geographical markets
Increase mkt power
Increase eff gain (economies of scale,
rationalization)
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Contd….
Two firm same industry
Seek economies of scale
(BP & Amoco expected to save $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 consumer
surplus
Always benefits the merging firm
Increases outsider’s profits
Increases producer surplus
Reduces net welfare
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Vertical mergers
1. Two firms participate at difft stages of
production or value chain
2. cos do not own operations in major
segment of value chain
Forward integration- Merck-medco
Backward integration- Chevron’s 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 wholly unrelated
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 no
obvious relationship of any kind
AT&T – hartford insurance
Bankcorp of America- Hughes
electronics
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%), Morgan
Stanley (26%), Merill Lynch
(22%)
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LAWYERS
Thomson financial securities data
corporation
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
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