M & A Session at MDI Date 310110

--Due Diligence --Deal Structuring

Manoj Mishra,CEO, Gen Next Business Consultants

Structure• Recap of last session for due diligence and Deal

structuring– Merger Motives and Drivers– Key Success Factors and contributors– Key aspects in M&A– Learning from International Researches

• Last sessions uncovered-– Indian examples and learning from each case– Other examples– Some Indian Deals

Merger Motives/ Drivers• Growth stagnating in home market• Accelerated Growth –revenue, price range, cost, mkt. share,

reach, Mfg. reach• Market Reach• Competitiveness• Buyer-Supplier power• R&D/ Technology• Product access, Cross selling• Diversification• Long term RM access• De-risk• Buy underperforming brands• Tax savings• Talent Pool• Exit• Asset Monetization

KSF & Success ContributorsKSF• Due diligence• Integration• Deal structuring • cost of acquisition• Profitable company• Size which you can swallow• Speed of integration• Risk Mitigation• Quick Turnaround• Management Bandwidth• War- chest: Funding, etcContributors to Success• Synergy Evaluation- 28%• Selecting Mgmt Team 26%• Integrating project planning 13%• Internal/External Communication 13%

Some Key aspects• Takeover-Acquisition, In-Out-CB acquisition• Deal Phases– Pre-During and Post• Deal Structuring- SPV, Subsidiary, Holding company,

Takeover, Reverse Merger • Deal Funding- LBO, Debt funding, Deferred Payout, Equity

Swap• Merger Motives/Drivers• Good will/IP• Valuation- Price, Brand, IP, Talent• Due diligence scope-Mkt., Product, Legal, IT, Environment,

HR, Taxes, Goodwill, IP• Legal and Tax regulations• Risk • Synergy assessment (Economic, Buying power,

Operations,Financial)• Integration- HR/Cultural/Legal/Environment• Degree of relatedness and speed of integration

Some Key aspects• Timing of deal• Agency problem – Manager and Stake holder• White Knight, • Platinum, Golden and Silver parachute• Poison Pill• Green mail– proposal to prohibit or restrict repurchase of

stocks/company by any other e.g. sale only to Manager• Competition Commissioner of India • Strategic Fit- Success and divestments are proportional to

degree of fit:– Related supplementary-similar product, new customer– Related complimentary-new product, similar customer)– Identical-similar product and customer– Unrelated-new product, new customer

• Integrative theory of M&A– Complimentary is proportional to success– Similarity attracts more resistance– Integration is most important for synergy realisation

Learning from International M&A researches• Divestment in 20 yrs period— New Business Entry done through USA,

n=2500) by Porter– Unrelated field 74%– Start ups 44%– JV 46%

• Higher the % of Acquirer’s value to acquired, higher chances of divestment/ un-success (n=1103)

• Reasons for Divestments:– Change in Strategic Focus 43%– Mistake/ Unprofitable 22%– Sale to finance further acquisition thru leveraged restructuring 29%

• Higher similarity =lower chances of divestment/un-success (n=271) ---86% success if highly related field acquisition

• Integration: – Market related integration reduces Financial Performance– Speed is proportional to success

• Serial M&A for face saving or Corp. strategist or Agency formation• For better deals (Premium ,Valuation, Payout, Deal Structure) M&A to be

cold blooded• Range of AssociationHostile Tender offer-Tender offerFriendly TenderAcquisitionFriendly Merger Amalgmn

Few Indian Cases and Learning• Sona-Thyssen- Growth, Integration, Synergy• M&M-Systech- Inorganic accelerated growth, Integration• BFL- Duel shoring, Growth-top line• Amtek- Duel Shoring, New business entry• Motherson Sumi- Top and Bottom line growth• GE– Invest-Divest-New areas, diversify• Tata Corus- Deal Heat, Gut feel, Global size aspiration, Long

term vision• Mico- Kill competitors• Kingfisher-Air Deccan- LCC Entry and Kill competitor• UB-Whitnet Scotch- Catch Them young, product range• LNM– Global and Areclor-Mittal- Low cost acquisition• RIL- preparing war chest• Eicher-Volvo, PTL,Mphasis- Asset Monetisation• Kinetic Mahindra- Low Entry gestation • Ranbaxy-Daichi- Asset Monetisation, Diversification• Rico auto- Global Reach, De-risk

Other Examples (## learning)• Biocon• M&M-Aircraft parts mfg• Renault- Nissan• Tata Docomo 2.7 Bn• Vodafone-Essar• Amtek-KTM castings Rs 1700 Crs• M&M-VCST Belgium Gr Mfg 275 Mn Euro• ONGC Videsh- Imperil Energy 2.8 Bn• Bharti –MTN• Sterlite-Asarco, US 1.7 Bn (Cash 1.1 Bn and

Deferred Payout 9 yrs 0.6 Bn)• ## Examples from Participants

Big Indian Deals• Tata -Corus 12.7 Bn $• AB Nuvo-Novelis 6.1 Bn $• Ranbaxy -Terepia Romania 372 Mn $• Dr Reddy-Betaform Germany 571 Mn $• Tata Motors-JLR 2.4 Bn

Due diligence• Objective:

– Assess Legal/Techno/Economic/Cultural/Political/ Environmental/IP/Financial/Marketing/Supplier

– Find data for base and help in valuation, deal structuring– Sources of value– Integration issues expected – Assess time-resources-strategy needed for integration and post

integration– Restructuring & way ahead for combined entity– Strategic Fit assessment– Performance projections– Valuation– Synergy evaluation– Assets– Capabilities– Competencies– Business stats.– Fund requirement assessment– Data for Business Plan post merger– Divesture potential

Due diligence• Scope:

NPV of future cash flows Profit Asset Human CapitalNetwork values Mkt. Share Potential to expandCapacities Capabilities CompetenciesIP Bond value GoodwillExpected synergy benefits to Acquirer and Target(80% goes to target)MIS & System

• Pitfalls: Serial M&A, Mgr. Hubris, Integration problem, Incomplete DD• Legal issues:

Corporate entity CapitalisationEnvironmentEmployee agrmt. IP Taxes Real estate Consent for Share transferEmployee benefits Litigation(retirement plans/welfare/deferred benefit plans)

• Synergy evaluation:Production capacity sharing Knowledge sharingUmbrella branding of products Market channel

sharingResource sharing Network sharing

Due diligence• Essentials of DD

Thoroughness Integrity FocusedConclusive Expose illegal/unethical/ineffective practices

• Examples of DD– Sona Thyssen– Renault selling AMC to Chrysler– Daimler aborting Nissan buy– Renault –Nissan alliance– Daimler-Chrysler acquisition– Kraft-Cadbury

Deal Structuring• Financing Options:

– Cash: 35% (Avg 20 Yrs) -----60%(1986) ----55%(1997) – Stock swap: 40 15 35– Combination– Debt: Normal, LBO– Pooling of interests (in proportion to shares value of joint entity)– Earn-outs-pay from future earnings to seller ,exit when paid in full– ESOP– in case of employee buyout (borrow from lender, pay to mgmt)– Tax shelters– Government guarantees– Distributor/supplier/franchisee financing– Strip financing: When Manager and VC hold disproportionate equity

• Large deals—stock swap or combination to reduce burden--- better if cash due to low cost

• Consideration for option:Tax Accounting Managerial ControlFinancial return to share holder Free cash avl.

• Tax- If >50 % is in stock transfer, it is taken a sbusiness continuity thus no tax (e.g. 83Bn City-Traveller deal or 5.3 Bn UHC-Humana Deal –no tax)

Deal Structuring• Why share swap: Cover over valuation Loss offset-tgt .with bidder PATNo cash outflow Tax benefit to Target co. share holderRisk assurance of future cash-flows Can buy high value acquisitions with less funds

• Benefits: – For target– tax, cash, synergy, goodwill (premium)– For Acquirer: Depreciation, Losses accounting in consolidation of

business post complete integration• Tips for successful acquisition

– Don't be white knight unless strategic(Nippon-Posco)– Keep cool, No deal heat– Keep low premium for Viability and Avoiding devaluation of acquirers

stock– Keep low advisor fee– Debt and share swap reduce agency cost and improve efficiency– Seek Private company as target– Keep eye on accounting manipulation– Plan large post acquisition expenses– Keep debt at Manageable levels(##Tata Corus )– Consider cash purchases if free cash is available

Tata Corus Example• Tata #56 with 5.3 Mn Ton, 5 Bn $ sales• Corus #9,18.2Mn Tons ,18Bn $ sales• Combined entity will be #5 globally, 27.7 Mn Ton with just 5 Mn gap to be

#2• Tata preparing for 55 Mn ton by 2015 with organic/domestic and inorganic• Strategic fit-Long term focus, Long growth cycle, R&D, Market• Tata Group sales 2 Bn $ with 50 Bn $ assets• EBIDTA Tata 30%, Corus 8%, Savings of 1300 Mn $ in 3 yrs to Corus, 2/5

mfg facilities sold• Why Corus sold—High Debt 18Bn $,Low EBIDTA (626Mn PAT of 18.6Bn

sales while Tata is 824mn$ PAT on 4.8Bn sales)• Why Tata buy- Deintegration, R&D access, Mkt access, High end

products, Size and scale, Speed of growth, Low value deal 1.2-1.4 Bn/Mn Ton new plant v/s acquired at 75- Mn $/Ton), Ready to meet global demand of 3.2 Tn Ton from 1.5 Tn now and 2.3 Tn in 2010

• Price @9 multiple to EBIDTA of 2006 and 7 times of 2005 v/s Mittal-Arcelow 4.5-6 multiple

• EV/ton of Corus deal 710$/ton= Mittal-Arcelor• Nippon-Posco has White night agreement• CSN involvement – deal at 608pence v/s CSN 605 pence

Tata Corus Example• Deal structure– 12.5 Bn $-- 4.1 Bn equity, 9.4 Bn debt– All Cash, no equity SWAP– Refinancing of debt and cash available– Deferred payout of retiral benefits of 200Mn– Debt servicing @ 7% interest, is 1.5 Bn $/yr for 10 yrs(650 Mn $ interest and 10

yrs repayment)– 25% combined EBIDTA expected will serve debt well– Additional funds for up-gradation– Funding by Tata sons through SPV –Tata Steel UK– Junk Bond debt to SPV– Tax breaks of approx 725 Mn $/yr– Current EBIDTA of Corus of 1.45 Bn to cover the payout need of interest and

repayment– 4.1 Bn equity funding by Tata—2.3 from TISCO reserve and balance 1.8 Bn from

Tata sons through options like a)Tata sons equity b)TISCO borrowing but has own green field project need of 20 Bn $ c)TISCO diluting equity to Tata sons

– Valuation-• 710 Mn$/Mn Ton against 1100-1300 Mn $/Ton capacity• 9* EBIDTA • DCF @ 7% for 11 yrs payback• D/E of 0.25 thus can be LBO or seek more debt• Huge synergy benefits expected to raise combined EBIDTA to 25%• Payout 12.5 Bn $ +200 Mn $ • Debt transfer of 18Bn

M & A Session at MDI170110

Manoj Mishra,CEO, Gen Next Business Consultants

Structure• M&A Scenario- Indian and Global• Merger Motives and Drivers• Assessing performance of M&A • Success Rates• Key Success Factors and contributors• Key aspects in M&A• Learning from International Researches• Indian examples and learning from each case• Some Indian Deals• Other examples• Valuation methods-brief

Industry Verticals Transportation

– Automobile- OEM, Assembly/aggregates and Component manufacturer– Earth moving and construction equipments

Engineering, Metal & Infrastructure– Metal ( Ferrous-Non Ferrous)– Capital Goods, Machines – Consumer durable-home appliances– Infrastructure

Retail – Space design– Facility/fixture/infrastructure support– Franchisee support-identification (MBO/EBO), contract, setting up, Software & IT,

Warehousing, Logistics support, Energy , Oil and Gas

– Energy audits and conservation– Downstream and retail operation establishing – Renewable energy (Solar, Wind, Thermal, Biomass, waste recycling)– CDMA, Carbon Credits– Bio fuel

Trading– LCC/ EEC, Global Sourcing ( In & Outbound), Export support, Global Foot print

Service domainsBusiness Strategy and GrowthNew Business/ Plant establishmentCompetitiveness Building, Performance excellence

and monitoringIT ConsultingMaterials and PurchasingStrategic HR and Support Recruitments-CxO, Senior- Middle and Junior mgmt.Business Intelligence and knowledge resourceCorporate TrainingWealth Management and Corporate Finance Advisory

Our Network and Locations• India: Gurgaon Indore Pune• Overseas: Singapore Malaysia• Opening soon: India: Chennai

Overseas: Dubai Kenya

Hong Kong

1) Corporate Office Gen Next Business Consultants-Gurgaon402, Ramses Tower, Omaxe The Nile,Sector 49, Sohna Road, Gurgaon(Haryana)122002Phone-+91-124-6787003, Cell:+919899996287Contact: Mr. Manoj MishraEmail-ceo@gennextconsultants.co.ingennextbv@yahoo.co.inmanoj_mishra_ind@yahoo.com

Structure• M&A Scenario- Indian and Global• Merger Motives and Drivers• Assessing performance of M&A • Success Rates• Key Success Factors and contributors• Key aspects in M&A• Learning from International Researches• Indian examples and learning from each case• Some Indian Deals• Other examples• Valuation methods-brief

M&A scenario-IndiaIndian M&A stats

2003 2004 2005 2006 2007 2008 2009Deals # 87 103 158 225 676 454 267Value, Bn$ 0.910 1.200 3.600 20.300 51.1 31 10

Inbound, Bn$ 15.5 12.6 3.1

Outbound,Bn$ 32.8 13.2 1.1Domestic, Bn $ 2.9 5.2 5.8

Sectors wise B/up-% 2009 IT/ITES 7Real estate 8Pharma 10Telecom 18Oil & Gas 25Others 32

M&A scenario-Global

Global M&A

2003 2004 2005 2006 2007 2008 2009

Deals # 22765 28884 31534 30109 30369 38000 22000

Value, Bn$ 996 1440 1908 2556 2825 5000 2400

USA Bn$/# 1432/13459 1445/12156

Europe 1162/11872 1491/12863

Asia-Pacific 458/8935 551/9340

Top 10 M&A Advisors and fees-2008• JP Morgqan 818 Bn $• Goldman Sachs 755• Citi Group 671• Marril Lynch 580• UBS 576• Morgan Stanley 543• Deutche Bank 503• Credit Suisse 453• Barclays 273• Lazard 266

Merger Motives/ Drivers• Growth stagnating in home market• Accelerated Growth –revenue, price range, cost, mkt. share,

reach, Mfg. reach• Market Reach• Competitiveness• Buyer-Supplier power• R&D/ Technology• Product access, Cross selling• Diversification• Long term RM access• De-risk• Buy underperforming brands• Tax savings• Talent Pool• Exit• Asset Monetization

Assessing performance of M&A• Share prices of acquirer• Joint Mkt. Cap• Combined revenue• Combined PAT• Combined EBIDTA• Combined Market Share

Success Rates• Overall 33%• EU 47%• US 49%• Asia Pacific 39%

• Value errossion in few big ticket M&A 40 to 79%– Vodaphone-Mannesman 190Bn– AOL-Time Warner 160Bn– Worldcom-Sprint 100Bn– Daimler-Chrysler 38Bn– Deutche Telecom-Voice stream 51Bn– French Telecom-Orange 37Bn

KSF• Low cost of acquisition• Profitable company• Size which you can swallow• Speed of integration• Risk Mitigation• Quick Turnaround• Management Bandwidth• War- chest: Funding, etcContributors to Success• Synergy Evaluation- 28%• Selecting Mgmt Team 26%• Integrating project planning 13%• Internal/External Communication 13%

Some Key aspects• Takeover-Acquisition, In-Out-CB acquisition• Deal Phases– Pre-During and Post• Deal Structuring- SPV, Subsidiary, Holding company,

Takeover, Reverse Merger • Deal Funding- LBO, Debt funding, Deferred Payout, Equity

Swap• Merger Motives/Drivers• Good will/IP• Valuation- Price, Brand, IP, Talent• Due diligence scope-Mkt., Product, Legal, IT, Environment,

HR, Taxes, Goodwill, IP• Legal and Tax regulations• Risk • Synergy assessment• Integration- HR/Cultural/Legal/Environment

Some Key aspects• Integration- HR/Cultural/Legal/Environment• Insurance-Warranty-Liability• Timing of deal• Agency problem – Manager and Stake holder• White Night, • Platinum, Golden and Silver parachute• Poison Pill• Competition Commissioner of India • HHI -Harbinder Index– Industry concentration, sum of square

of market share of top 3, (In US, HHI of ,1000 is perfect competition, 1000-1800 Oligopoly and .1800 is monopoly/ highly concentrated

Learning from International M&A • HHI -Herfindhal Index– Industry concentration, sum of square

of market share of top 3, (In US, HHI of ,1000 is perfect competition, 1000-1800 Oligopoly and .1800 is monopoly/ highly concentrated

• Divestment stats-20 yrs period— New Business Entry done through USA, n=2500) Porter– Unrelated field 74%– Start ups 44%– JV 46%

• Strategic Fit- Success and divestments are proportional to degree of fit:– Related supplementary– Related complimentary– Identical– Unrelated

Learning from International M&A researches• Higher the % of Acquirer’s value to acquired, higher chances

of divestment/ un-success (n=1103)• Reasons for Divestments:

– Change in Strategic Focus 43%– Mistake/ Unprofitable 22%– Sale to finance further acquisition thru leveraged restructuring 29%

• Higher similarity =lower chances of divestment/un-success (n=271) ---86% success if highly related field acquisition

• Integration: – Market related integration reduces Financial Performance– Speed is proportional to success

• Serial M&A for face saving or Corp. strategist or Agency formation

• For better deals (Premium ,Valuation, Payout, Deal Structure) M&A to be cold blooded

• Range of AssociationHostile Tender offer-Tender offerFriendly TenderAcquisitionFriendly Merger Amalgmn

Few Indian Cases and Learnings• Sona-Thyssen- Growth,Integration, Synnergy• M&M-Systech- Inorganic accelerated growth, Integration• BFL- Duel shoring, Growth-top line• Amtek- Duel Shoring, New business entry• Motherson Sumi- Top and Bottom line growth• GE– Invest-Divest-New areas, diversify• Tata Corus- Deal Heat, Gut feel• Mico- Kill competitors• Kingfisher-Air Deccan- LCcEntry and Kill competitor• UB-Whitnet Scotch- Catch Them young, product range• LNM– Global and Areclor-Mittal- Low cost acquisition• RIL- preparing war chest• Eicher-Volvo,PTL,Mphasis- Asset Monetisation• Kinetic Mahindra- Low Entry gestation • Ranbaxy-Daichi- Asset Monetisation, Diversification• Rico auto- Global Reach, De-risk

Big Indian Deals• Tata -Corus 12.7 Bn $• AB Nuvo-Novelis 6.1 Bn $• Ranbaxy -Terepia Romania 372 Mn $• Dr Reddy-Betaform Germany 571 Mn $• Tata Motors-JLR 2.4 Bn

Other Examples• Biocon• M&M-Aircraft parts mfg• Renault- Nissan• Tata Docomo 2.7 Bn• Vodafone-Essar• Amtek-KTM castings Rs 1700 Crs• M&M-VCST Belgium Gr Mfg 275 Mn Euro• ONGC Videsh- Imperil Energy 2.8 Bn• Bharti –MTN• Sterlite-Asarco, US 1.7 Bn (Cash 1.1 Bn and

Deferred Payout 9 yrs 0.6 Bn)

Valuation methods for Payout• DCF• Mkt. based-competitors and bench mark co.• Budget• IRR• Multiple of PE/BV/Revenue/EBIDTA