M&A

Mergers & Acquisition: As a Strategic Concept: 

Mergers & Acquisition: As a Strategic Concept Submitted To: Prof. Rajan G.

Group Members: 

Group Members Preetam Devghare 19 Forum Parmar 50 Krishnakant Mishra 73 Abhijit Roy 90 Paresh Valiya 116

Introduction: 

Introduction Mergers:- The combining of two or more companies, generally by offering the stockholders of one company securities in the acquiring company in exchange for the surrender of their stock. Acquisitions:- A strategy where one firm buys a controlling or 100% interest in another firm with the intent of making the acquired firm a subsidiary within its portfolio.

Types of Merger : 

Types of Merger Horizontal Vertical Conglomerate Cross border Market-extension merger Product-extension merger

Value Creation Motivations for M&As : 

Value Creation Motivations for M&As 15 - 5 Operating Synergies Economies of Scale Economies of Scope Complementary Strengths Efficiency Increases Financing Synergy

Value Creation Motivations for M&As : 

Value Creation Motivations for M&As 15 - 6 Tax Benefits Losses of the Target company Depreciation Strategic Realignments:- Permits new strategies that were not feasible for prior to the acquisition because of the acquisition of new management skills, connections to markets or people, and new products/services.

Restructuring and Outcomes: 

8- 7 Restructuring and Outcomes Downscoping Downsizing Leveraged Buyout Lower Performance Reduced Labour Costs Loss of Human Capital Alternatives Short-Term Outcomes Long-Term Outcomes Higher Risk High Debt Costs Higher Performance Reduced Debt Costs Emphasis on Strategic Controls

Slide 8: 

FEW STRATEGIC MOVES LISTING THROUGH MERGER RAISING PROMOTERS’ HOLDING ACQUISITION OF LISTED COMPANY

Slide 9: 

LISTING THROUGH MERGER Small/loss making listed companies are selected by unlisted strong companies Unlisted company is merged with listed company with maximum possible shares to promoters of unlisted Company Promoters of Unlisted Company get shares in a listed entity

Slide 10: 

RAISING PROMOTERS’ HOLDING Revised provisions of SEBI Takeover Code does not allow promoters to acquire even a single share beyond 55 % Specific exemption to Merger/Demerger An Unlisted company is created by Promoters This entity is merged with listed company Promoters’ holding is raised up to 75%

Slide 11: 

ACQUISITION OF LISTED COMPANY SEBI Takeover Code does not allow acquisition of shares of a listed company beyond 15% or Change in Control by any outsider without a PA Specific exemption to Merger/Demerger An Unlisted company is created by Acquirer This company is merged with listed company Acquirers’ holding may go up to 75% of increased capital base The Management may also change.

Why M & A Takes Place ?: 

Why M & A Takes Place ? To reduce competition. To increase growth rate & capture a greater market share To improve value of organization’s stock. To acquire a needed resource quickly. To take advantage of synergy. To acquire resources to stabilize operations. To achieve economies of scale.

Case acquisition of L&Tcement by Grasim ind.: 

Case acquisition of L&Tcement by Grasim ind. This transaction has helped to unlock value for shareholders and position the demerged L&T as a focused engineering, construction and technology company Kumar Mangalam Birla always wanted to become a major player in cement industry in India and worldwide First step in order to fulfill his dreams began with acquiring of 10% stake of Reliance in L&T (Larsen and Toubro) for INR 766.5 crores (at premium of 47%) Grasim and L&T have their fingers in many business pies, cement is the prime cash driver for both companies. The combine becomes the largest player in the cement sector, overtaking the Gujarat Ambuja ‐ACC pairing.

Financing of deal: 

Financing of deal Grasim Industries acquired 8.5% equity of L&T in the new cement company. Total investment outlay was around 362 crore . Grasim made an open offer for 30% equity stake. Total Investment outlay at Rs. 1278 crore . Grasim sold its entire existing holding in L&T’s non‐cement (engineering and other business) at Rs. 120 per share. Total cash inflow for Grasim at around Rs. 470 crore . Net cash outflow for Grasim on this deal will be Rs. 1170 crores . Total investment for Grasim (including its earlier purchase from Reliance and open market of Rs. 1020 crore ) around Rs 2190 crore on this deal The Rs. 2,200 Crore required for entire deal was funded from internal accruals of Grasim Industries . This internally funded Rs.2,200 Crores transaction is the largest of its kind cash acquisition

Closure of the Deal: 

Closure of the Deal Shareholders and Creditors of L&T approved the Scheme on 3rd Feb. 2004 High Court approved the Scheme of Arrangement on 22nd April 2004 Grasim deposited balance 90% of Open Offer consideration with Escrow Agent;Total amount deposited Rs.1,279 Crs The scheme of arrangement for the demerger of the cement business sanctioned by the Honorable High Court of Bombay, became effective from Friday, 14 May, 2004. Accordingly, the cement business undertaking was transferred to and vested in UltraTech CemCo Limited.

Subsequent performance: 

Subsequent performance ULTRATECH CemCo Ltd had reported a net loss of Rs 2.3 crore for the second quarter and a net loss of Rs 3.3 crore for the half‐year ended September 30, 2004, in its first reported results since its listing on the stock exchanges. The company’s performance has been constrained because of input costs, mainly those of power and fuel, said a company release. Grasim increased exports with increase in capacity. Grasim Industries have reported increased shipments, year‐on‐year, for both Grasim Cement as well as UltraTech Cemco Ltd. Despatches at Grasim Cement moved up 12.54 per cent from the year‐ago despatch quantity, amounting to 11.37 lakh tonnes . Production increased 14.36 per cent to 11.61 lakh tonnes . HIGHER sales volumes and realisations in all of its businesses have helped Grasim Industries report a 68 per cent increase in net profit for the quarter ended June 30, 2004. Net profit for the quarter amounted to Rs 219 crore , up from Rs 130.5 crore reported for the corresponding quarter of the previous year.

Slide 17: 

UltraTech draws up Rs 200‐cr capex plan (Q2 2004) for the next two years that would generate around 2.5 million tonnes of capacity through debottlenecking and reduction of the company’ s debt equity ratio. Subsequently as a result, Ultra Tech Cement reported a 76 percent rise in net profit at US$ 56.65 million in the last quarter of 2006‐07 . Its sale of cement stood at 3.57 mn . tons and clinker at 0.77 mn . tons. Domestic cement realisations at Rs.3,019 per ton increased by 50 per cent. Net profit grew by 573 per cent from Rs.32 crore to Rs.214 crore .

Cairn – Vedanta : 

Cairn – Vedanta Acquiring 51% to 60% of Cairn India for a total consideration of $ 8.5bn to $ 9.6bn. Vedanta to acquire a 31% to 40% interest Sesa Goa to acquire a 20% interest Implied equity value of Cairn India of $16.6bn Premium of 21.8% to the undisturbed share price of INR332.602 Subject to shareholder and regulatory approvals Immediately EPS accretive for shareholders Funded through debt and cash resources

Transaction: 

Transaction Vedanta Group to acquire between 51% - 60% of Cairn India via the following steps Vedanta Resources Plc to acquire 51% from Cairn Energy Sesa Goa to tender for 20% via an open offer Vedanta's purchase to be reduced by the shares acquired under the tender offer to a minimum of 40% If Sesa Goa’s open offer is not fully taken up, it will purchase shares from Vedanta Plc to reach 20% Result: Vedanta Resources Plc holding 31 – 40% and Sesa Goa holding 20% Put and call options written to enable either Vedanta or Cairn Energy to ensure a minimum of 50% of Cairn India is acquired from Cairn Energy

Track Record of Value Creation: 

Track Record of Value Creation Hindustan Zinc Sesa Goa Capacity ( mmtpa ) Production ( mmtpa ) 114% Acquisitions + efficiencies + exploration + expansion = value creation

Unique Opportunity: 

Unique Opportunity A unique investment to create an Indian natural resources champion. Leverages Vedanta’s core skills. Unique position in Rajasthan. Cairn India is a world class asset. Large, diverse resource base with substantial upside. Potential to produce 2,40,000 bopd . Low cost producer with strong cash flow generation. Enhances and diversifies Vedanta’s strong growth pipeline. Immediately earnings accretive.

Ranbaxy - Daiichi: 

Ranbaxy - Daiichi Ranbaxy Integrated research based, international pharma company provides wide base of generic medicines. Went public in 1973. Daiichi Established in 2005 through merger of Daiichi & Sankyo, two Pharma co’s of Japan. Continuous development of novel drugs & enrich the quality of life for patients around the world by producing medicines for different diseases.

Deal….: 

Deal…. Daiichi agreed to buy atleast 50.1% for $4.6 bn. It agreed to pay Rs 737 per share to Ranbaxy’s shareholders, 31% premium to the closing price of the share on 9 J une, 2008. The merged value at that time was $30bn.

Shareholding Pattern: 

Shareholding Pattern

Reasons …..: 

Reasons ….. Complimentary business combination. An expanded global reach. Strong growth potential. Cost competitiveness by optimizing usage of R&D & manufacturing facilities.

Recent Progress…..: 

Recent Progress….. 13% rise in annual sales for Daiichi, helped by strong contribution from Ranbaxy. Daiichi sales increased by 16% in US & by 28% in Europe. In India, revenue increased by 292%. Ranbaxy posted a net profit of 1,148 cr for 2010. Sales at 5,672 cr for 2010.

Dalal Street Moves….: 

Dalal Street Moves…. Share price of Ranbaxy rose 3.86% to 526/- on 9 June, 2007 two days before the deal. Sensex plunged 508 pts on the same day. On 10 June, Ranbaxy spurted 6.52% to 560/- & Sensex fell 177 pts.

Slide 28: 

TATA -JAGUAR -LAND ROVER DEAL

Tata Motors – J & LR: 

Tata Motors – J & LR Tata Motors It is the 5th largest medium and heavy commercial vehicle manufacturer in the world. listed in BSE, NSE & NYSE. TATA GROUP is 150 year old, Previously Tata Engineering and Locomotive Company, Telco. India's largest passenger automobile and commercial vehicle Tata Motors was established in 1945 Subsidiaries- JAGUAR CARS LAND ROVER TATA DAEWOO COMMERCIAL

Tata – J & LR: 

Tata – J & LR Jagour Jaguar was founded in 1922 by William Lyons and William Walmsley , Originally planned to build a motorcycle with side cars. The two started a company called the Swallow Sidecar Company in Blackpool, UK. By 1927. They had started building cars in 1928, they moved to Coventry, UK. 1990 - Taken over by Ford Land Rover Founded in 1948 as a marquee of the Rover Company. Known for superior off-road performance, Used by military for projects and expeditions, Safe but less reliable, Makeover in recent times . In 1994 Rover Group is taken over by BMW & sold to FORD MOTORS in 2000.

Deal….: 

Deal…. Ford acquired Jaguar for $2.5 billion in 1989. Ford acquired Land Rover for $2.75 billion in 2000. 12/06/2007 - Announcement from Ford that it plans to sell Land Rover and Jaguar. August 2007 - Major bidders are identified Likely buyers: Tata Motors, M&M, Ceribrus capital Management, TPG Capital, Apollo Management India’s Tata Motors and M&M arrive as top bidders ($ 2.05b & $ 1.9b) 03/01/2008 – Ford announces Tatas as the preferred bidders On 27 March 2008, Tata Motors reached an agreement with Ford to purchase their Jaguar Land Rover operations forUS$2.3 billion. The sale was completed on 2 June 2008. [

Reasons …..: 

Reasons ….. the acquisition would help the company acquire a global footprint and enter the high-end premier segment of the global automobile market. Tata Motors would own the world's cheapest car - the US$ 2,500 Nano , and luxury marquees like the Jaguar and Land Rover. Tata also got two advance design studios and technology as part of the deal. Tata Motors access to latest technology which would also allow Tata to improve their core products in India, for eg , Indica and Safari suffered from internal noise and vibration problems. this deal provided Tata an instant recognition and credibility across globe which would otherwise would have taken years the cost competitive advantage as Corus was the main supplier of automotive high grade steel to JLR and other automobile industry in US and Europe. This would have provided a synergy for TATA Group on a whole.

Recent Progress…..: 

Recent Progress….. Tata Motors is performing better now than in 2009. The company is profitable again, with net income of around $550 million. Last week Tata Motors announced its annual numbers and it revealed that more than 80 percent or $1.7 billion of its bumper $2.04 billion annual profits came from the JLR unit alone. JLR’s net profit was reported at around $20 million. Sales grew by an impressive 18% on a month-on-month basis. Even sales of light commercial vehicles grew at an impressive rate of 35% year-on-year and 21% month-on-month.

Emami & Zandu: 

Emami & Zandu Emami Zandu Emami , a prominent FMCG company, delivering innovative products based on holistic ayurvedic recipes, using modern scientific practices. Zandu , a century-old company delivering ayurvedic , ethical and generic products based on strict ayurvedic protocols.

The Deal: 

The Deal Emami Ltd, which has acquired 27.5% of Zandu Pharmaceutical Works Ltd, is willing to pay a premium for a stake held by a founder family that manages operations at the herbal health care company. Emami said it would make an open offer for 20% more of Zandu’s shares, which, if fully subscribed, will raise its stake to 47.5%. It had earlier acquired 3.5% of Zandu’s stake from the market. In India, companies acquiring a stake of 15% or more must make an offer to buy another 20% in the target firm. The acquisition was funded by a judicious mix of debt and internal resources. Thereafter, the mobilisation of QIP (Rs. 310 cr ) neutralised a large part of debt. (713 Cr.) Going ahead, the enhanced earnings of 2009-10 are expected to pare net debt down to less than Rs. 100 cr in 2009-10 and completely eliminate all debt by 2010-11.

Contd…: 

Contd … Emami had bought the entire 24 per cent stake of the Vaidya family, the other promoter group in Zandu,taking its total holding to 27.5 per cent. The company then announced an open offer to acquire another 20 per cent at Rs 7,315 a share, a premium to the two-week average stock price. Emami picked up the Vaidya stake of around Rs 130 crore and paid Rs 6,900 (inclusive of non-compete fees of Rs100) per share of Zandu through off-market deals.

Reason for Acquisition: 

Reason for Acquisition A commonality of culture, values and product development. Emami , on the other hand, is growing aggressively, thanks to strong brand equity, penetrative distribution network, innovative R&D, aggressive marketing and dynamic management. The combination of Zandu with Emami will help grow the trusted Zandu brands aggressively, extending synergic benefits to Emami as well. Zandu’s age-old ayurvedic wisdom can be effectively applied with Emami’s innovative and modern scientific practices to cater to growing consumer needs in health and the personal care segment, resulting in accelerated revenues. Common real estate interests of Emami and Zandu , which, if given focused attention, can develop into significant revenue-generating segment.

Financials : 

Financials Emami’s market capitalisation increased over 250% to Rs. 35 billion-plus. Emami had paid the Vaidya’s Rs6,900 per share and priced its open offer initially at Rs7,300 apiece. In the end, Emami raised its offer to Rs16,500 a share, and the Parikh’s sold out.

Dalal Street Moves….: 

Dalal Street Moves…. The price of Zandu’s shares has declined substantially from its peak in October. But on the day of deal, it rose 3.33% on the National Stock Exchange to close at Rs7,471 apiece, while the bourses key S&P CNX Nifty Index declined 2.4%. Emami’s shares, however, fell 5.59% to Rs 335.45.

Idea - Spice acquisition: What an Idea! : 

Idea - Spice acquisition: What an Idea! Idea Cellular A leading GSM mobile services operator Idea Cellular is a part of the $ 30 billion Aditya Birla Group, a multinational corporation of India Idea operates in around 20 countries. In India, Idea holds Pan-India License.

Slide 42: 

Spice was incorporated as Modicom Network Private Limited on 28 March 1995 as a private limited company Spice Communications is fairly well-placed in its two circles of operations, namely Punjab and Karnataka with market share of 22.5 % and 10 % resp. As of 30 April 2008, Spice had 4.4 million subscribers representing a 1.7% market share in India

Slide 43: 

The Deal. . . .

Share Holding Pattern Of Spice: 

Share Holding Pattern Of Spice

Share Holding Pattern Of Idea: 

Share Holding Pattern Of Idea

Slide 46: 

Synergies The new entity would form the fifth largest GSM telco after Bharti , RCOM, Vodafone and BSNL with a total of 11.2% market share Accretion to subscriber base, market share gains and operating profitability Two circles of operations, namely Punjab and Karnataka. Gaining access to spectrum in the 900 MHz band TMI as a Strategic Investor

Slide 47: 

Post Acquisition Objectives 3G licenses in India along with the experience of TMI Idea shall become a debt free company. To invest in growth and expansion into existing and newer service areas by earmarking Rs10,000cr over the next 2 years for expansion plans.

Financials: 

Financials 31 % rise in service revenue for Idea Cellular Ltd. post merger, i.e. 2008-2009

Conclusion: 

Conclusion Equity dilution (Rs. In crores )

Disadvantages of M&A: 

Disadvantages of M&A Reduced competition may even facilitate monopolistic or oligopolistic tendencies among firms. Increase of prices. Job losses for employees. Difficulties in cultural integration of the merging firms.

Slide 51: 

THANK YOU !!!