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Such actions are commonly voluntary and involve stock swap or cash payment to the target. Merger & Acquisition Acquisition An acquisition, also known as a takeover, is the buying of one company (the ‘target’) by another. An acquisition may be friendly or hostile Slide 4: Horizontal merger Vertical merger Market-extension merger Product extension Conglomeration Merger & Acquisition Types of M & A Slide 5: Synergies: This refers to the fact that the combined company can often reduce its fixed costs by removing duplicate departments or operations. Increased revenue/Increased Market Share: This assumes that the buyer will be absorbing a major competitor and thus increase its market power. Cross selling: A manufacturer can acquire and sell complementary products. Economies of Scale: For example, managerial economies such as the increased opportunity of managerial specialization. Merger & Acquisition Motive Behind M & A Slide 6: Taxes: A profitable company can buy a loss maker to use the target's loss as their advantage by reducing their tax liability. Geographical or other diversification: This is designed to smooth the earnings results of a company, which over the long term smoothens the stock price of a company, giving conservative investors more confidence in investing in the company. Resource transfer: Resources are unevenly distributed across firms and the interaction of target and acquiring firm resources can create value through either overcoming information asymmetry or by combining scarce resources Merger & Acquisition Motive Behind M & A Slide 7: Gain market share Economies of scale Enter new markets Acquire technology Utilization of surplus funds Managerial Effectiveness Strategic Objective Vertical integration Merger & Acquisition Need of Merger & Acquisitions Slide 8: Finalize strategy & Due diligence Valuation / Negotiations Board meeting / Application to High court Notices and General body meeting Approval by court Merger & Acquisition Structuring an M & A Slide 9: Vodafone purchased stake in Hutch (Hutchison Telecom International) for USD 11.08 billion HORIZONTAL MERGER: SIMILAR LINE OF ACTIVITIES Merger & Acquisition Slide 10: Founded : 1983 as Racal Telecom, independent 1991 Group : Vodafone Plc Headquarters : Berkshire, UK Key People : Vittorio Colao, CEO & Sir John Bond, Chairman Industry : Mobile Telecommunications. Presence : Equity Interest in 25 Countries & Network Partner in 42 Strength : 2,30,000 (Employees) Revenue : £ 35,478 Million(14.1% Growth) Net Income : £ 10,047 Million(10.1% Growth) EPS : 7.51 Pence Dividend Per Share(11.1% Growth) Merger & Acquisition Background – Vodafone (Voice Data Fone) Slide 11: Operations : 1992 Circles : 16 + license for 6 circles Revenue : $ 1,282 Million EBITDA : $ 415 Million Operating Profit : $ 313 Million Subscriber Base : 29.2 Million ARPU : Rs. 340.15 Merger & Acquisition Background – Hutch - Essar Slide 12: Hutch was often praised for its award winning advertisements which all follow a clean, minimalist look. Its successful ad campaign in 2003 featured a pug named Cheeka following a boy around in unlikely places, with the tagline, Wherever you go, our network follows. The simple yet powerful advertisement campaigns won it many admirers. Merger & Acquisition Hutch - Essar Slide 13: 1992: Hutchison Whampoa and Max Group established Hutchison Max 2000: Acquisition of Delhi operations Entered Calcutta and Gujarat markets through ESSAR acquisition 2001: Won auction for licenses to operate GSM services in Karnataka, Andhra Pradesh and Chennai. 2003: Acquired AirCel Digilink (ADIL - Essar Subsidiary) which operated in Rajasthan, Uttar Pradesh East and Haryana telecom circles and renamed it under Hutch brand Merger & Acquisition Growth of Hutchison Essar Slide 14: 2004: Launched in three additional telecom circles of India namely Punjab, Uttar Pradesh and West Bengal. 2005: Acquired BPL, another mobile service provider in India 2007: Vodafone acquired HTIL stake in Hutchison-Essar 2008: Vodafone acquired Dishnet Wireless, a service provider in Orissa and has successfully launched its services in the following circle. 2008: Vodafone launched the Apple iPhone 3G to be used on its 17 circle 2G network. Merger & Acquisition Growth of Hutchison Essar Slide 15: Urban markets in the country had become saturated. Future expansion would have had to be only in the rural areas, which would lead to falling average revenue per user (ARPU) and consequently lower returns on its investments HTIL also wanted to use the money earned through this deal to fund its businesses in Europe The sale of its interests in India will enable Hutchison Telecom to become one of Asia’s best capitalized companies Merger & Acquisition Reasons for Hutchison’s Exit Slide 16: None of its recent global acquisitions, including those of the German business of Mannesmann, telecom businesses in Japan and Belgium, were performing up to the mark Markets, including the US, were maturing and were not growing in a big way Stiff competition among almost all major players in the industry, including global telecom majors like BT,O2 of UK, Verizon from the US, Maxis Telecommunications of Malaysia, Orascom from Egypt, the Hinduja group, Reliance and Bharti Airtel from India On February 11, 2007, Vodafone agreed to acquire the controlling interest of 67% of holdings in Hutch-Essar for US$11.1 billion, Merger & Acquisition Why & How the deal came through… Slide 17: Deal size and stake Fourth largest deal of the year 2007 (to date) at $13.3 bn ($11.1 bn plus $2 bn debt). Hutchison Essar valued at $18.8 bn. Regulatory Approvals Vodafone acquisition is subject to a number of approvals including from the Department of Telecommunications and the Government (FIPB). Foreign Direct Investment Policy Press Note 5 of 2005 provides that direct and indirect foreign shareholding in a telecom company cannot exceed 74%. Department of Telecom The Department of Telecommunication has given its nod All licensing conditions to be met by Vodafone. Merger & Acquisition Slide 18: Accelerates Vodafone’s move to a controlling position in a leading operator in the attractive and fast growing Indian mobile market India is the world’s 2nd most populated country with over 1.1 billion inhabitants India is the fastest growing major mobile market in the world, with around 6.5 million monthly net adds in the last quarter India benefits from strong economic fundamentals with expected real GDP growth in high single digits Increases Vodafone’s presence in higher growth emerging markets Merger & Acquisition Principal Benefits for Vodafone Slide 19: Potential for Hutch Essar to bring Vodafone’s innovative products and services to the Indian market, including Vodafone’s focus on total communication solutions for customers Vodafone and Hutch Essar both expected to benefit from increased purchasing power and the sharing of best practices Merger & Acquisition Principal Benefits for Vodafone … Cont Slide 20: Why Does The Hutch and Vodafone merger have problems -with respect to FEMA and tax? Hutchison Essor Indian Company Vodafone(Briton) A Foreign company HTIL(Whampoa group of Li-Ka Shing.Hong Kong A foreign company 67% Takes over Asim Ghosh-12% A.Singh and other companies (Minority) Essor group Slide 21: Finance Bill 2008 also proposes to ensure that capital gains tax should be levied on acquisitions in India. Buyer will be responsible for paying the tax after purchasing any capital asset - a share or debenture of a company in India. The buyer will have to deduct TDS and failure to do so would leave him liable to pay the tax. The tax will have to be paid with a retrospective effect from June 2002. Department sent a notice to Vodafone, asking for about $1.7 billion as capital gains tax in the sale of 52% stake in Hutchison Essar to Vodafone It argues that the company should have deducted tax at source while making payment to HTIL Merger & Acquisition Taxation Slide 22: The cellular telephony is extremely competitive, and India has one of the lowest ARPUs in the world. Besides, ARPU growth is slowing. • It has an uneasy equation with Essar, which is one-third partner in Hutch-Essar. That could be a source of problem. • The Vodafone brand is relatively unknown in the Indian market. Besides the brand will cost money and take time • Telecom valuations are at a high and this could mean it is years Vodafone recovers its multi-billion dollar investment • Its big competitors are home-grown majors, who can manage the ‘environment’ better. Merger & Acquisition Immediate challenges Slide 23: Superman' Shing at home in Hong Kong, 78-year-old Li Ka Shing is famed for his ability to exit businesses at the right price. His deal with Vodafone, would give him $11.1 billion, a coup considering he entered the Indian entity for as little as $2.6 billion. Li Ka Shing, Chairman, Hutchison Whampoa. Merger & Acquisition Men behind the deal Slide 24: Vodafone's CEO since 2003, Sarin's bid would give him access to 24.4 million customers in one of the world's biggest and fastest growing markets. Arun Sarin, CEO, Vodafone Merger & Acquisition Men behind the deal You do not have the permission to view this presentation. In order to view it, please contact the author of the presentation.