16 Careers: The Fast Track
1
THE ECONOMIC TIMES | MUMBAI | TUESDAY | 26 JULY 2016 Case Library initiated by The Economic Times For more insightful case studies rooted in the Indian context, log on to www.etcases.com ABT and CGRAM are two com- bining companies undertak- ing corporate restructuring activity via acquisition route whereby the ABT serves as the acquirer and CGRAM serves as the acquiree. The effective date of acquisition happens to be April 1, 2002. As part of the due-diligence process in connection with this M&A, the existing man- agement of the ABT in gen- eral and ABT’s M&A Team in particular, analysed the his- torical performance of both ABT and CGRAM, and in turn derived the 5-year account- ing forecasts for the combining companies in their standalone capacity. Having gone through a tortu- ous and not-so- amusing negotia- tion phase, ABT’s management made an offer for 100% of out- standing com- mon shares of CGRAM at a premium of 30% vs CGRAM’s recent closing share price in the market. Further, ABT intends to fund the total purchase con- sideration for the M&A deal through a combination of cash (30%), new issuance of debt (30%) and new issuance of equity of the combined entity (40%). Such a financ- ing structure would come with direct and indirect costs that need to be accounted at the time of preparing the consolidated financial state- ments. To be specific, the 30% cash component would imply lesser cash on the books of the consolidated entity, which in turn would lead to foregone interest income. Further, apart from the forecasted interest expenses of ABT and CGRAM in their standalone capacity, the issuance of new debt in con- nection with the M&A pro- cess would entail additional interest expenses for the consolidated entity. In light of the offer made as a consequence of the M&A due-diligence process, how would the M&A transac- tion per se be accounted for in the consolidated books of the combined entity? Further, what is the consequent impact of M&A accounting and the terms of this M&A transaction, when it comes to value accretion/ dilution of the original share- holders of the acquirer? Are the original shareholders of ABT better off because of this business combination transaction? If not, derive the offer premium at which this busi- ness combination makes economic sense to original shareholders of ABT. Dr Vinodh Madhavan Value Accretion/Dilution in Business Combinations: An Integrated Perspective On June 5, 2015, the Food Safety and Standards Authority of India (FSSAI) directed Nestlé India to recall all the nine approved vari- ants of Maggi noodles from the market after finding it unsafe and hazardous for human consumption as well as stop further production. Nestlé Maggi noodles had to be withdrawn from the market and huge quantities of the product recalled and destroyed leading to consid- erable losses for Nestlé India. It also gave a toehold to new rival brand — Patanjali, to launch its product in the vacuum created in the market. Nestlé India has worked in devel- oping its market base leveraging on the success of its most popular and credible brand ‘Maggi’ in the Indian market. The ‘nutritious and safe’ value perception of the brand as well as the ease of preparing the food had posi- tioned Maggi as an easy and nutritive alternative meal. Nevertheless, after the lab testing incidents and sub- sequent bans, the company changed its business strategy with primary focus on the Indian market only, even though its noodles were well accepted by the countries outside India. The code of conduct fol- lowed by Nestlé and the food safety laws administered by FSSAI is not well connected and the asymmetry between these two led to serious ethi- cal constraints for the com- pany. Nestlé also considered that as long as the business operation is unaffected by the legal authorities, busi- ness operation could be continued in order to gener- ate maximum profit from the highest market share. After the testing part and findings of MSG and lead above the minimum standard level, the business faced a setback from both the regu- latory authorities and the legal bodies with a strict ban on Maggi all over India and destruction of the stocks. This setback negatively af- fected the value perception of Nestlé’s customers about the brand and the company was seen as following unfair trade practices that can harm people. Challenging the ban was the legal retaliation that could result in bringing back the product in shelves but it could not win the customers’ trust. Nestlé India set up new quality control proce- dures for their product, testing in a worldwide basis and win- ning back the trust of the con- sumers by clearance from the legal bodies. The company also appointed a new Indian CEO for the busi- ness who knows the very basic preferences of Indian consumers and testing the product in nationally accred- ited labs as well as in its own labs with modified quality standards. Nestlé India ad- vertised the positive results and concern for customers through different com- munication medium to gain back the lost trust. Will these revival strategies work for Nestlé India in the long run? Will Maggi be able to regain its lost position and image in the market? The Debacle & Revival of Nestlé India’s Maggi Utkarsh Dr Susmita Mukhopadhyay DR SUSMITA MUKHOPADHYAY Assistant Professor, Vinod Gupta School of Management, Indian Institute of Technology, Kharagpur UTKARSH Research Scholar, Vinod Gupta School of Management, Indian Institute of Technology, Kharagpur DR VINODH MADHAVAN Assistant Professor, Institute of Management Technology Ghaziabad
Transcript of 16 Careers: The Fast Track
16�THE ECONOMIC TIMES | MUMBAI | TUESDAY | 26 JULY 2016Careers: The Fast Track
Case Library initiated by The Economic Times
For more insightful case studies rooted in the Indian context, log on to www.etcases.com
ABT and CGRAM are two com-bining companies undertak-ing corporate restructuring activity via acquisition route whereby the ABT serves as the acquirer and CGRAM serves as the acquiree. The effective date of acquisition happens to be April 1, 2002. As part of the due-diligence process in connection with this M&A, the existing man-agement of the ABT in gen-eral and ABT’s M&A Team in particular, analysed the his-torical performance of both ABT and CGRAM, and in turn derived the 5-year account-ing forecasts for the combining companies in their standalone capacity.
Having gone through a tortu-ous and not-so-amusing negotia-tion phase, ABT’s management made an offer for 100% of out-standing com-mon shares of CGRAM at a premium of 30% vs CGRAM’s recent closing share price in the market.
Further, ABT intends to fund the total purchase con-sideration for the M&A deal through a combination of cash (30%), new issuance of debt (30%) and new issuance of equity of the combined entity (40%). Such a financ-ing structure would come with direct and indirect costs that need to be accounted at the time of preparing the consolidated financial state-ments.
To be specific, the 30% cash component would imply lesser cash on the books of the consolidated entity, which in turn would lead to foregone interest income.
Further, apart from the forecasted interest expenses of ABT and CGRAM in their standalone capacity, the issuance of new debt in con-nection with the M&A pro-cess would entail additional interest expenses for the consolidated entity.
In light of the offer made as a consequence of the M&A due-diligence process,
how would the M&A transac-tion per se be accounted for in the consolidated books of the combined entity? Further, what is the consequent impact of M&A accounting and the terms of this M&A transaction, when it comes to value accretion/
dilution of the original share-holders of the acquirer? Are the original shareholders of ABT better off because of this business combination transaction?
If not, derive the offer premium at which this busi-ness combination makes economic sense to original shareholders of ABT.
Dr VinodhMadhavan
Value Accretion/Dilution in Business Combinations: An Integrated Perspective
On June 5, 2015, the Food Safety and Standards Authority of India (FSSAI) directed Nestlé India to recall all the nine approved vari-ants of Maggi noodles from the market after finding it unsafe and hazardous for human consumption as well as stop further production. Nestlé Maggi noodles had to be withdrawn from the market and huge quantities of the product recalled and destroyed leading to consid-erable losses for Nestlé India. It also gave a toehold to new rival brand — Patanjali, to launch its product in the vacuum created in the market.
Nestlé India has worked in devel-oping its market base leveraging on the success of its most popular and credible brand ‘Maggi’ in the Indian market. The ‘nutritious and safe’ value perception of the brand as well as the ease of preparing the food had posi-tioned Maggi as an easy and nutritive alternative meal. Nevertheless, after the lab testing incidents and sub-sequent bans, the company changed its business strategy with primary focus on the Indian market only, even though its noodles were well accepted by the countries outside India.
The code of conduct fol-lowed by Nestlé and the food safety laws administered by FSSAI is not well connected and the asymmetry between these two led to serious ethi-cal constraints for the com-pany. Nestlé also considered that as long as the business operation is unaffected by the legal authorities, busi-ness operation could be continued in order to gener-ate maximum profit from the highest market share.
After the testing part and findings of MSG and lead
above the minimum standard level, the business faced a setback from both the regu-latory authorities and the legal bodies with a strict ban on Maggi all over India and destruction of the stocks.
This setback negatively af-fected the value perception of Nestlé’s customers about the brand and the company was seen as following unfair
trade practices that can harm people.
Challenging the ban was the legal retaliation that could result in bringing back the product in shelves but it
could not win the customers’ trust. Nestlé India set up new quality control proce-dures for their product, testing in a worldwide basis and win-ning back the trust of the con-
sumers by clearance from the legal bodies. The company also appointed a new Indian CEO for the busi-ness who knows the very basic preferences of Indian consumers and testing the product in nationally accred-ited labs as well as in its own labs with modified quality standards. Nestlé India ad-vertised the positive results and concern for customers through different com-munication medium to gain back the lost trust. Will these revival strategies work for Nestlé India in the long run? Will Maggi be able to regain its lost position and image in the market?
The Debacle & Revival of Nestlé India’s Maggi
Utkarsh
Dr SusmitaMukhopadhyay
DR SUSMITA MUKHOPADHYAY Assistant Professor, Vinod Gupta School of Management, Indian Institute of Technology, Kharagpur
UTKARSHResearch Scholar, Vinod Gupta School of Management, Indian Institute of Technology, Kharagpur
DR VINODH MADHAVAN Assistant Professor, Institute of Management Technology Ghaziabad
