Merger & Acquisition of Hdfc Ronak

8/4/2019 Merger & Acquisition of Hdfc Ronak

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Ronak – 87Sahil – 26

Rajendra – 23 Ankush – 67

Sudhanshu –16

Ankit – 36 Avinash - 48



Introduction

Merger is a tool used by companies for the purpose of expanding their

operations often aiming at an increase of their long term profitability.

Mergers and acquisitions are almost a daily occurrence in the life

sciences. Competition is fierce, and companies must team up tosurvive in an industry where specialized knowledge is king. One of the

largest, most critical, and most difficult parts of a business merger is the

successful integration of the enterprise networks of the merger

partners. The prime objective of a firm is to grow profitably. The

growth can be achieved either through the process of introducing ordeveloping new products or by expanding or enlarging the capacity of

existing products. This wave was driven by globalization, liberalization

and technological changes.



Meaning of Mergers and

Acquisitions

A complete combination of two separate corporations involving in abusiness is referred as business merger. A merger in the official sense issaid to be worth when both businesses dissolve and double their assets andconvert into a newly created third unit. This requires a creation of a new

corporation. Most of the mergers are friendly rather being a forcedaffair. Acquisitions on the other hand are take-over. In this case onecompany actually buys another company. In take-over or acquisitiongenerally a larger company buys a smaller one.



Reasons for Mergers and

Acquisitions

o CapacityCapacity refers to the amount of output that a firm is capable of producinggiven its existing assets. Acquiring another business might enable it to beable to increase its capacity relatively quickly.

o Economies of Scale Economies of scale are the advantage of large scale production that resultin lower cost per unit produced.

o Accessing technology or skills

A firm may be targeted for acquisition because it has specific skills withinits staff or has a particular technology that would be useful to another

business.o Tax reasons

Businesses are always looking for ways to reduce their tax exposure. Afirm has large sums of money lying idle, using these sums to acquireanother business that would not only enhance its operations but would also

reduce its tax liability



Benefits of Mergers and

Acquisitions

Benefits of Mergers and Acquisitions are the main reasons for thecompanies enter into these deals.

o Greater Value Generation

Companies go for Mergers and Acquisition from the idea that, the joint

company will be able to generate more value than the separate firms. Whena company buys out another, it expects that the newly generated shareholdervalue will be higher than the value of the sum of the shares of the twoseparate companies. Mergers and Acquisitions can prove to be reallybeneficial to the companies when they are weathering through the toughtimes.

o Gaining Cost Efficiency

When two companies come together by merger or acquisition, the jointcompany benefits in terms of cost efficiency. A merger or acquisition is ableto create economies of scale which in turn generates cost efficiency.

Mergers and Acquisitions may generate tax gains, can increase revenue

and can reduce the cost of capital



Mergers and acquisitions of

Hindalco- Novels



THE PROBLEM CHILD NOVELIS



THE INHERITANCE OF LOSS Novelis inherited huge debt

Financial losses

High debt equity ratio of 7.23:1 Chaos in financial reporting

Loss of credibility

Constant restructuring

Search for CE



HINDALCO… Two strategic businesses-Al, Cu

Asia's largest integrated primary producer of

aluminum and among the most cost-efficientproducers globally

Hindalco has operated at the lower end of the value chain



“ Novelis is a global leader with presencein four continents. It is very rare to beable to acquire a global leader in anyindustry.”



WHY NOVELIS? Entry into new markets.

40% of Al consumed is in the form of rolled products.

Will become 5th largest Al company in the world.

Entry into list of Fortune 500 Co.

Access to high technology

Move up to the high end of the value chain

Access to new customer base



Gains for Novelis…. Good value for share holders

Increase in credibility.

Reduction in debt equity ratio.



FUNDING A MEGA-DEAL:2007

$2.4 billion will be raised on the balance sheet of Novelis AV Minerals (Netherlands) a indirect subsidiary of Hindalco

raised bridge loans of $2.13 billion [CR @ 7.2%] & 900 million

Hindalco raised a debt of $2.8 billion. $450 million from its cash reserves

Essel Mining, another A V Birla group company, chipped in with $300 million from its reserves.

Tied up with ABN Amro Bank, Bank of America and UBS forthe Asian leg of the transaction,

The non-recourse debt raised on Novelis' books fundedthrough ABN Amro and UBS



THE COMPETITIVE ADVANTAGE Market Share.

Expanding it’s wings.

Perfect Synergy. The Fusion Technology.

Forward Integration.



THE STORY THAT NUMBERS TELL……

JAN-SEPT 2006 JAN-SEPT2005

FY2005 FY2004 FY2003

Net sales 7,3777 6,337 8,363 7,755 6,221

Operatingexpenses

7,224 5,938 7,962 7,145 5,737

EBITDA 153 399 401 610 484

Interest 149 148 194 48 33

NetIncome

-170 32 90 55 157



THE WORLD OF NOVELIS…..

N.AMERICA EUROPE ASIA S.AMERICA

ASSETS 1,487 2,3912 1,021 814

NET SALES 2,841 2,688 1,235 626

REGIONALINCOME

64 208 70 122

DESCRIPTION

OF ASSETS

10 PLANTS

2 RECYCLINGFACILITIES

14 PLANTS

1 RECYCLINGFACILITY

3 PLANTS 2 PLANTS

2 SMELTERS

1 REFINERY

2 BAUXITEMINE



FUTURE PERFECT-POST 2010 Expiry of can contracts

Business integration

Sourcing of raw material from Hindalco at low cost Geographical proximity to Malaysian production

facility of Novelis.

Expiry of Hindalco’s supply contracts



Deal structure

Divided into 2 parts-

1)100% of Novelis equity @44.93$ per share whichadd up to $3.6b

2)$2.4b debt on Novelis balance sheet

- No Option of Leverage buyout unlike TATA Corus



Deal Financing :2008

Hindalco issued equity shares of Re. 1 each onrights basis @ Rs. 96 per share

Ratio of 3:7 in September,

Aggregating to 525,802,403 shares. Total Amount receivable of Rs. 5,047.70 Cr

Company has received Rs. 4,545 Cr

Rs. 124.90 Cr spent on related expenses of therights issue

Balance amount utilized to repay the bridgeloan taken for acquisition of Novelis.



Banks involved

2007 :Hindalco-Novelis deal, UBS (along with ABN AMRO & Bank ofAmerica) threw the Birla company a $2.8 billion debt lifeline.

2008: waiver due to default in Debt/EBITA ratio for novelis

2008: $1-billion loan was taken on Hindalco’s books, and the banks

that participated in the exercise included ABN Amro, Barclays Capital,Bank of Tokyo-Mitsubishi UFJ, Calyon, Citigroup, Deutsche Bank,HSBC, Mizuho Financial and Sumitomo Mitsui Financial.

2009:Hindalco took a syndicated loan of $982 million (Rs 4,910 crore

at current rate) from 11 foreign banks to repay the bridge loan takentwo years ago for the Novelis acquisition.



Valuation @ Premium “If we earn $10 for every $100 of aluminum we sell, we will now be able to earn

another $10 for every $100 worth of aluminum that Novelis processes into rolledproducts.”

• --Debu Bhattacharya. MD

"Acquisitions are not geography dependent. They depend on value-creation and will have to be in sync with existing businesses”

• Kumar Mangalam Birla, 2007

“The valuation depends on the intrinsic capability of an asset. He points out

that it would have taken Hindalco at least 10 years to create that kind of capacity on the downstream front. The acquisition is a good strategic fit and the way we seeit, there is a lot of upside potential in aluminum as a commodity. He speaks of areas like transportation, architecture, packaging and pharmaceuticals which willbe big markets in the future for aluminum.”

• Sunirmal Talukdar, CFO, Hindalco

Why pay 44.36$ a share for a 30$ share• Analysts



Business Process Integration

Plain and simple techniques to manage business.

It set up a company to manage IT functions of Novelisdue to availability of inexpensive engineers.

Hindalco has set Novelis a target of seven to 12 stockturns per year by 2010,which could free around $300million in working capital



Benefits:

Post acquisitions, the company will get a strong global footprint. After full integration, the joint entity will become insulated from

the fluctuation of LME Aluminium prices The deal will give Hindalco a strong presence in recycling of

aluminium business. Novelis has a very strong technology for value added products and

its latest technology ‘Novelis Fusion’ is very unique one Novelis being market leader in the rolling business has invested

heavily in developing various production technologies. One of suchtechnology is a fusion technology that increase formability of aluminium.(Useful in designing products like car)



THANK YOU



BIBLIOGRAPHY

www.bnknetindia/com/banking/finance

http://en.wikipedia.org/wiki/bankingfinancialcompan y

www.hdfcbank.com

www.hdfcbank/products/finance

www.google.com

Bank brochures and products folders.

http://www.bnknetindia/com/banking/finance

http://en.wikipedia.org/wiki/bankingfinancialcompany


http://www.hdfcbank.com/

http://www.hdfcbank/products/finance

http://www.google.com/









Background In 2008, RBI sanctioned merger of CBoP with HDFC

All branches of CboP => branches of HDFC Bank

Nationwide network of 1,167 branches • Deposit baseof around Rs. 1,22,000

Net advances of around Rs. 89,000 crores • Balancesheet size would be over Rs. 1,63,000 crores



History - CBOP 30 June ‘94 – Incorporation of Centurion Bank

JV - Century Finance and Keppel Group

2005 - Bank of Punjab merges with Centurion bank -Centurion Bank of Punjab

2006 - CBOP acquires Lord Krishna Bank



History-HDFC BANK

August 1994 – Incorporation of HDFC Bank

2000- Times Bank Limited

2008- Centurion Bank of Punjab Limited



HDFC Strategy Increase market share in India

Maintain low cost of funds

Strong asset quality

Disciplined risk management

High earnings growth with low volatility



Environment Despite the economic crunch worldwide Indian

banking houses had managed to show positive growth

While banks in the developed economies were on acost cutting spree Indian banks were on a growthphase

Metro licenses were hard to come by for most banks.



Nature and context of the merger Horizontal merger

The principal objectives: - Achieve economies of scale

– Widening the line of products

– To get more dominance on the market



Nature and context of the merger This merger was also important to face the

competition posed by foreign banks looking to enteron account of RBI’s liberal policies and the domestic

competition posed by ICICI bank

CBoP had traditionally been strong in high yieldingSME and retail segments, while HDFC Bank had anenviable retail deposit franchise

Both the banks had a strong foothold in vehiclefinancing, which formed the basis for a naturalsynergy



Intent of Merger Increase in scale of operations

Increase in geography

Management bandwidth Potential of Business synergy and cultural fit

HDFC’s Brand leverage and increased utilization of CBOP Branches

CBOP’s SME focus complement HDFC’s Corporatefocus



Deal Size and Structure CBOP was valued at $2.63 billion (Rs 9510 crores)

All stock deal

Swap ratio was fixed at 1:29

26,200,220 warrants convertible into an equivalentnumber of equity shares to HDFC Limited on apreferential basis at a rate of Rs. 1,530.13 each.



Deal Size and Structure Principal shareholders of CBoP – Bank Muscat, Sabre

Capital and the Kephinance Investment (Mauritius)decided to move away from this partnership.

No single lay off of employee

Pooling of interest method used for accounting



Roadblocks Technological Issues – Finacle Vs Finware

HR Issues – Mapping of Employees

Operational Issues – Account opening, cheque bookissue, net banking, Recurring Deposits



Roadblocks Infrastructural Issues – Multiplicity of branches, ATMs

Risk Issues – NPA , cost of funds, CASA

Ongoing agitation by unions of public sector banksagainst consolidation of SBI



Regulatory & Legal Frame Work1. SEBI (substantial Acquisition of shares &Takeovers) Regulations 19972. The Securities and Exchange Board of India Act,1992 .3. Security Contract Regulation Act ,1956 .4. RBI Mergers & Acquisition Approval

5. The Depositories Act,1956.6. SEBI Disclosure and Investor Protection Guidelines 2000.7. Securities and Exchange Board of India (Prohibition of Insider Trading

Regulation ),1992.8. Securities and Exchange Board of India (Merchant Bankers)

Rules/Regulation 1992.9. SEBI (Delisting of Securities )Guidelines,2003.10. Foreign Exchange Management Act,1999.

11. Companies Act,1956.



Impact of the Merger Increased footprint and metro presence

7th largest bank with asset size of Rs.1097 billion

Recorded growth figures as follows

– Net profit by 44.6% to Rs. 4.6 billion

– Net Interest Income by 74.9% to Rs.17.2 billion

– Advances grew by 79.8% & deposits by 60.4%

High level of write-offs due to bad asset quality of CBoP in personal loans and 2 wheeler loans

Net interest margins and CASA were impactedadversely



Gains to ShareholdersThe combined entity would have a nationwidenetwork of 1167 branches; a strong deposit base of around Rs.1,22,000 crores and net advances of around

Rs.89,000 crores. The balance sheet size of thecombined entity would be over Rs.1,63,000 crores.



On March 27, 2008, the shareholders of the Bank accorded theirconsent to a scheme of amalgamation of Centurion Bank of PunjabLimited with HDFC Bank Limited. The shareholders of the Bankapproved the issuance of one equity share of Rs.10/- each of HDFCBank Limited for every 29 equity shares of Re. 1/- each held in

Centurion Bank of Punjab Limited. This is subject to receipt of Approvals from the Reserve Bank of India, stock exchanges and

Other requisite statutory and regulatory authorities. The shareholders

Also accorded their consent to issue equity shares and/or warrantsconvertible into equity shares at the rate of Rs.1,530.13 each toHDFC Limited and/or other promoter group companies on preferentialbasis, subject to final regulatory approvals in this regard. TheShareholders of the Bank have also approved an increase in theauthorized capital from Rs.450 crores to Rs.550 crores.



Key Learning Integrating of IT systems without disrupting customer

service

Mapping of Employees

Customer communication

Elimination of redundancies

Top management vision

Coordination between different functions Structuring of the deal and tax implications



BIBLIOGRAPHY

www.bnknetindia/com/banking/finance

http://en.wikipedia.org/wiki/bankingfinancialcompan y

www.hdfcbank.com

www.hdfcbank/products/finance

www.google.com

Bank brochures and products folders.















THANK YOU

Merger & Acquisition of Hdfc Ronak

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