MERGER AND ACQUISITIONSPresented to: Prof. M.P Rege

Presented by:Kunal Ramnani 79Lalit Sharma 80Lucky Luthra 81Mahesh Pawar 82

Mahmood Siddiqui 83

Introduction to Mergers and Amalgamations

• Mergers: selling and combining of different companies that can aid, finance, or help a growing company in a given industry grow rapidly without having to create another business entity

• Amalgamations: this is also a part of mergers where many businesses come together to form one consolidated entity

Types of Mergers

Horizontal Mergers: Two or more competing companies come together to form one company

Vertical Mergers: For assimilate the sources of supply backward integration or forward integration towards market outlets. A business strategy that seeks to own and control all the activities including production, transportation, and marketing of a product. Backward integration - a strategy when a company establishes subsidiaries to supply product inputs; forward integration - a strategy that tries to take control of distribution and marketing of a product.

Congeneric Mergers: Merger between firms in the same general industry but having no mutual buyer-seller relationship, such as a merger between a bank and a leasing company

Contd…

Conglomerate Mergers: Amalgamation between unrelated industries forms a conglomerate

Consolidation Merger: Merger of a subsidiary company with its parent company.

Cash Merger: Merger that is done with a consolidated cash transaction in it

Triangular Merger: A type of a merger that occurs when the subsidiary of the acquiring corporation merges with the target firm

Model of Mergers and AcquisitionsMNCs R and D

Expense

No clear nexus between Expenses

and Results

Generate positive Externalities

“INAPPROPRIABILITY”

Mergers and Acquisitions IPR’s

Contd..

• In appropriability is defined as a situation where a market as a whole gains much more than the inventing or the innovating Company would gain

• To limit or cap In appropriability there are two proven routes

• Mergers and acquisitions • IPR’s• The justifications of IPR’s such as trade secrets, patents,

copy rights and trademarks lies in the famous definition of I.T given by Bill Gates

• I.T = IQ + IP

Acquisitions, Joint Ventures and Demergers

• An acquisition or takeover is the purchase by one company of controlling interest in the share capital, or all or substantially all of the assets and/or liabilities, of another company

• A Joint Venture is coming together of two or more businesses for a specific purpose

• A Demerger is the splitting up of one entity into two or more entities. Demerged company means the company whose undertakings is transferred, pursuant to a demerger, to a resulting company

Joint Ventures

JOINT VENTURE

Financial

Organisational

Technical

Turn Key Projects

• BO – Build and Own

• BOO – Build, Own and Operate

• BOT – Build, Own and Transfer

• BT – Build and Transfer

Key Points Of Merger & Acquisition

Communication

Synergy The types of synergy are :

1) Operations synergy2) Technology synergies3) Marketing – Based synergies4) Management synergies

Managing Cultures

Modes of M&A in India

M&A

Amalgamations

Merger De-merger

Acquisitions

Asset Purchase

Stock Purchase

SlumpSale

ItemizedSale

Modes for acquisition of a company

Modes used for making an acquisition of a company with certain key provisions of the Companies Act are:• Share Acquisition: Acquisition of existing shares or

subscription to new shares so as to acquire a controlling stake in the target.

Transferability of shares New share issuance

• Asset Purchase: Purchase of the asset of the acquired company by the acquiring company

Merger and Acquisition Strategies

• Target company's market performance and market position

• Future market opportunities, recent market trends and customer's reaction to the company's products

• After deal finalisation Integration process of the companies should be started in time

• Restructuring plan of target company• Working environment and culture of the workforce of

the target company• Alternative plan

Benefits of Mergers and Acquisitions

• Greater Value Generation

• Tax gains and can even lead to a revenue enhancement

• Beneficial during tough times

• Gaining Cost Efficiency

• When a firm wants to enter a new market

• When a firm wants to introduce new products through research and development

Contd..

• To increased market share

• To lower cost of operation and/or production

• To gain higher competitiveness

• For industry know how and positioning

• For Financial leveraging

• To improve profitability and EPS

Failure of M and A1. Size Issues2. Excessive premium3. Lack of research4. Diversification5. Previous Acquisition Experience 6. Unwieldy and Inefficient 7. Poor Cultural Fits 8. Poor Organization Fit9. Poor Strategic Fit 10. Striving for Bigness 11. Faulty evaluation 12. Poorly Managed Integration 13. Failure to Take Immediate Control 14. Failure to Set the Pace for Integration 15. Incomplete and Inadequate Due Diligence

Contd..16. Ego Clash 17. Merger between Equals 18. Over Leverage 19. Incompatibility of Partners 20. Limited Focus 21. Failure to Get Figures Audited 22. Failure to Get an Objective Evaluation of the ‘Target Company' 23. Failure of Top Management to Follow-Up 24. Mergers between Lame Ducks 25. Lack of Proper Communication 26. Failure of Leadership Role 27. Inadequate Attention to People Issues 28. Strategic Alliance as an Alternative Strategy 29. Loss of Identity 30. Diverging from Core Activity

The Companies Act, 1956• Section 391: Power to compromise or make arrangements with

creditors and members• Section 392: Power of High Court to enforce compromise and

arrangement• Section 393: Information as to compromises or arrangements with

creditors and members• Section 394: Provisions for facilitating reconstruction and

amalgamation of companies• Section 395: Power and duty to acquire shares of the shareholders

dissenting from, contract or scheme approved by the majority• Section 396: Power of the central government to provide for the

amalgamation of the companies in the national interest

Competition law

• Monopolies and Restrictive Trade Practices Act, 1969 (‘MRTP’) -object of controlling monopolies, prohibiting monopolistic and restrictive trade practices and unfair trade practices.

• Competition Act, 2002 (‘Competition Act’)was enacted to replace the existing MRTP

-Prohibit anti-competitive agreements including cartels -Prohibit abuse of dominant position -Regulate Combinations

Anti competitive agreements

Two kinds of anti competitive agreements

• Horizontal agreements Agreements between entities engaged in similar trade of

goods or provisions of services

• Vertical agreements Agreements between entities in different stages / levels of

the chain of production, in respect of production, supply, distribution

Abuse of Dominance

• Competition Act prohibits an entity from abusing its dominant position

• Abuse of dominance Includes :• Imposes unfair or discriminatory conditions in

the purchase or sale of goods or service• Imposes unfair or discriminatory prices in

purchase or sale (including predatory price) of goods or services.

Combinations under Competition Act• Combination includes acquisition of control, shares, voting rights

or assets, acquisition of control• Mergers and amalgamations between enterprises where they

exceed the thresholds specified in the Act in terms of assets or turnover

• If a combination is likely to cause an AAE within the relevant market in India, it is prohibited and scrutinized by CCI taking some factors into account like:

• The extent of effective competition likely to sustain in a market• The extent of barriers to entry to the market• The level of combination in the market

Stock Market Regulation• SEBI has framed stringent regulations to protect the interest of all

the concerned parties including the shareholder interest.• Regulations 10, 11 and 12 of the SEBI code deal with takeovers • All deals have to be publicly announced within 4 days on entering

into agreement or on a decision to acquire voting rights, whichever may be the case

• All shareholders must also be sent a letter of offer within 45 days from the date of the public announcement, as a shareholder protection measure

• Stock Markets usually react in a very bizarre way to an M&A deal • depending on a number of factors like:• Size of the Transaction• Market Mood• Shareholder Value

Takeover code as per SEBI Regulations

• Pricing of the offer• Mode of payments of offer price• Non-compete payments• Pricing for indirect acquisition or control• Restrictions on the target company• Competitive bidding/revision of offer/bid• Exemptions from the applicability of the regulations 10,11 and

12 of the takeover code

New Takeover Code

• The Takeover Regulations Advisory Committee—an advisory body set up by SEBI came up with recommendations

• Some of the factors that prompted it to fast-track the recommendations are:

– Increasing M&A activity – Rapid sophistication in the takeover market – The need to unify the code with global standards

Contd..

• The threshold to trigger an open offer be increased from 15 per cent to 25 per cent.

• The size of such an open offer should be hiked from 20 per cent to 100 per cent, ensuring equal opportunity to large and small shareholders.

• To minimize speculative interest, the overall timeline for an open offer has been brought down from 95 calendar days to 57 business days.

• The pricing of the offer has also undergone a lot of rationalization, reducing the scope for arbitrage.

Advantages & Disadvantages of the new Takeover code

Promoters:• Advantage - The limit for an open offer trigger going up from 15 to

25 per cent, it gives promoters a good opportunity to hike their stakes without initiating an open offer

• Disadvantage - The control premium on a per share basis that they will get will also shrink, because the offer is for all the shareholders

Shareholders:• Advantage - The minority shareholders who largely benefit from

these recommendations since they would be treated at a par with the large shareholders

• Disadvantage - Foreign and domestic institutional investors who have noticeable stakes in listed companies could take this chance to hike their shareholding by resorting to creeping acquisitions

Contd..

Acquirers:Advantage - The proposed amendments would bring in only the serious players as the cost of acquiring target companies would increase

It will increase overall activities in the M&A field if Indian promoters are at a level playing field as far as funding is concerned

Disadvantage - Impact the cost of acquisition, the banking sector is prohibited from lending money against purchase of shares. So, funding will be a huge challenge for Indian promoters

Inbound Cross Border M&A

Conditions for a non resident:a) The offer on right basis does not result in

increase in the percentage of foreign equity already approved

b) The existing shares or debentures against which shares or debentures are issued by the company on right basis were acquired and are held by the person resident outside India in accordance with FEMA 20

c) The offer on right basis to the persons resident outside India is at a price which is not lower than that at which the offer is made to resident shareholders

Investment categories in India by a Non-Resident

• Investment under the Foreign Direct Investment Scheme (“the FDI Scheme”).

• Purchase and sale of shares by NRIs/OCBs on non-repatriation basis.

• Purchase and sale of securities other than shares or convertible debentures of an Indian company by non-residents.

Outbound Cross Border M&A

• Ways an Indian Company can invest in a foreign Company:• Direct Investment in a Joint Venture/Wholly Owned

Subsidiary• Investment in a foreign company by ADR/GDR share swap

or exchange• RBI approval in special cases• Transfer by way of sale of shares of a JV/WOS• Pledge of Shares of Joint Ventures and Wholly Owned

Subsidiaries• Obligations of the Indian Party

TATA STEEL & CORUS

Cross Border Merger

• “There are not many opportunities for producers in emerging low cost market to gain access to the market of Europe other than by acquiring a company like Corus”

- John Quigley( Editor, Industry Publication Steel Week)

• Tata acquired Corus which is 3 times larger than its size and largest Steel producer in UK

•The deal which creates world’s 5th largest steel maker is India’s largest foreign takeover worth US $ 12.11 billion. Previous best being US $ 1 bn by ONGC

Introduction

About the Deal

• TATA Acquired CORUS on 2nd April 2007 • The deal price was US $ 12.11 Billion• On 17 Oct, 2006 TATA’s bided at 455 pence per share and

price per share was 390 pence at that time• TATA Steel, the winner of the auction for CORUS declares a

bid of 608 Pence per share• TATA Surpassed the final bid from Brazilian steel maker

‘COMPANHIA SIDERURGICA NACIONAL’ (CSN) of 603 pence per share

• The combined entity has become the world’s fifth largest steelmaker after the deal

Financing the Deal

• Total Tata – Corus deal - US $13.7 billion• Equity component – US $ 7.56 billion• Debt Component - US $ 6.14 billion• Acquisition was completed through Tata Steel’s UK

Special Purpose vehicle(SPV) named Tata Steel UK• This SPV raised US $ 6.14 billion through a mix of high

yield mezzanine and long term debt funding• For immediate financing Tata Steel UK raised US $ 2.66

bn through bridge loans

•Immediate takeover was required.• Share Swap deal would have been less attractive to the Corus shareholders• Share Swap would have meant FDI and that brings a lot of regulatory hassles which might not have been accepted by Corus shareholders• Share Swap would have diluted Tata Steel’s Equity base which was not in favor of Tata shareholders•And moreover cost of equity at around 15% is higher than that of debt of around 8%, so paying in cash brings down the cost of acquisition

Why Cash Deal????

Bharti Airtel Limited formerly known as Bharti Tele-Ventures LTD is an Indian company offering telcommunication services in 19 countries.

It is the largest cellular service provider in India, with more than 141 million subscriptions as of August 2010

Bharti Airtel is the world's third largest, single-country mobile operator and fifth largest telecom operator in the world with a subscriber base of over 180 million.

Bharti Airtel is the first Indian telecom service provider to achieve this Cisco Gold Certification.

The company also provides land-line telephone services and broadband Internet access (DSL) in over 96 cities in India.

The company is structured into four strategic business units - Mobile, Telemedia, Enterprise and Digital TV.

The mobile business offers services in 18 countries across the Indian Subcontinent and Africa.

INTRODUCTION

Bharti-Zain deal finally sealedPress Trust of India, March 30, 2010 (New Delhi)

In the largest ever telecom takeover by an Indian firm, Bharti Airtel on Tuesday signed a deal with Kuwait-based Zain Telecom to buy its African business for $10.7 billion (about Rs. 48,000 crore).

Announcing the deal, Sunil Mittal said, "This agreement is a landmark for global telecom industry and game changer for Bharti.

The acquisition, the second largest by an Indian entity after Tata’s Corus deal, would make Sunil Mittal-led Bharti the world's seventh largest mobile operator with a total subscriber base of about 179 million.

It would have estimated revenues of $13 billion

With this, Bharti has fulfilled its ambition of entering Africa, where it failed twice in the last two year's to forge a $23 billion merger deal with South African telecom giant MTN.

Zain has operations in 17 African countries and Bharti has acquired all, but those in Sudan and Morocco.

BHARTI – ZAIN DEAL

The acquisition, the second largest by an Indian entity after Tatas' Corus deal, would make Sunil Mittal-led Bharti the world's seventh largest mobile operator with a total subscriber base of about 179 million.

It would have estimated revenues of $13 billion

With this, Bharti has fulfilled its ambition of entering Africa, where it failed twice in the last two year's to forge a $23 billion merger deal with South African telecom giant MTN.

Zain has operations in 17 African countries and Bharti has acquired all, but those in Sudan and Morocco.

The top two deals in the first three months of this year were the $10.7-billion acquisition of Zain’s African operations by Bharti Airtel, followed by the $1.8 billion acquisition of tower assets of Aircel by GTL Infrastructure.

CONTD…

CHRONOLOGY OF AIRTEL'S EFFORTS TO ENTER AFRICAN MARKET May 5, 2008: Bharti announces exploratory talks with South Africa-based MTN

May 25, 2009: MTN and Bharti announce they have renewed talks for potential merger, a year after the first attempt fell through

July 31, 2009: First deadline for exclusivity talks period ends

August 3, 2009: Bharti says exclusivity period extended till August 31

August 20, 2009: Deadline for exclusive talks extended till September 30

September 30, 2009: Talks on the $23-billion merger deal between Bharti and MTN called off, on the last day of the third deadline for the exclusive discussions

February 14, 2010: Zain says its board would meet to discuss an offer for its African assets

February 15, 2010: Bharti enters into exclusive talks with Zain for acquiring its African operations based on an enterprise value of $10.7 billion. The discussions go on till March 25

March 21, 2010: Bharti Airtel says has tied up $8.3 billion from a clutch of foreign banks and State Bank of India to fund the acquisition of Zain telecom's African assets.

March 30, 2010: Bharti Airtel signs deal to buy African assets of Kuwait-based Zain Telecom for $10.7 billion.

Demerger-Bajaj Holdings

Demerger of Bajaj Holdings

• Stage1: Auto business transferred to Bajaj Holdings and Investment Ltd.(BHIL)

• Financial, insurance and wind power business transferred to Bajaj Finserv Ltd(BFL)

• Stage2: BHIL renamed as “Bajaj Auto Ltd.”(BAL)• Old BAL renamed as BHIL and would be an

investment company

Why Demerger?

• To focus and strengthen on core competencies

• Board of directors of Bajaj Auto Ltd. agreed to a demerger on 17th May, 2007

• Demerger effective date: 20 February,2008

THANKYOU