Modes of growth.pptx

7/29/2019 Modes of growth.pptx

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Modes of growth

Basically, there can be three ways it:

(i) the formation of a new company;

(ii) The acquisition of an existing company;

(iii) Merger with an existing company.

Decision ---companys assessment of variousfactors including in particular:

(i) the cost that it is prepared to incur;

(ii) the likelihood of success that is expected; (iii) the degree of managerial control that it

requires to retain.


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Joint Venture

JV-Marriage of convenience-concept of

complementary capabilities

Need for international technology (Mahindra &

Renault)

Sharing of costs

When assets are difficult to separate (differentdivisions-saddled with the assets not needed)

Has lesser regulatory constraints


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Joint venture

Reduced financial risks-spreading the riskbetween partners(ONGC and Chinese oilcompanies)

Easier to enter new markets with an existingpartners presence

JV-Real Options-scale up if industry goes up or

exit if it is other way.Best quality with least cost: NEC(Japan) with

HCL Technologies


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Joint Venture

Protection of sensitive business information:

Enter into NDA

JV susceptible to: misappropriation of

knowledge, hold up by the partner

Prisoners dilemma: lack of trust , cultural

differences

Godrej-P & G, JM Financial -Morgan Stanley


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Merger

Merger is a fusion between two or moreenterprises, whereby the identity of one ormore is lost and the result is a single

enterprise.Merger is restricted to a case where the assets

and liabilities of the companies get vested inanother company, the company which ismerged losing its identity and its shareholdersbecoming shareholders of the other company.


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Acquisition

An acquisition, also known as a takeover, is the buyingof one company (the target) by another.

An acquisition may be friendly or hostile.

In the former case, the companies cooperate in

negotiations; in the latter case, the takeover target isunwilling to be bought or the target's boardhas noprior knowledge of the offer.

Acquisition usually refers to a purchase of a smaller firm

by a larger one. Sometimes, however, a smaller firmwill acquire management control of a larger or longerestablished company and keep its name for thecombined entity. This is known as a reverse takeover.


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Why to merge

Mergers take place to:

diversify the areas of activities;

achieve optimum size of business;

remove certain key factors and otherbottlenecks of input supplies;

improve the profitability;

serve the customer better;

achieve economies of scale and size, internaland external;


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Why to merge

acquire assets at lower than the market price;

bring separate enterprises under single

control; grow without any gestation period;

and nurse a sick unit and get tax advantages

by acquiring a running concern


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Decision on Merger

For a firm desiring immediate growth and quickreturns, mergers can offer an attractive opportunity asthey obviate the need to start from scratch andreduce the cost of entry into an existing business.

However, this will need to be weighed against the factthat part of the ownership of the existing businessremains with the former owners.

Merger with an existing company will, generally, havethe same features as an acquisition of an existing

company. However, identifying the right candidate for amerger or acquisition is an art, which requiressufficient care and caliber.


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Types of mergers

Horizontal mergers

Vertical mergers

Conglomerate mergers Reverse mergers


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Takeover Terminologies

Friendly Takeover:

Friendly take over, the acquirer first approaches

the promoters/ management of the target

company for negotiating and acquiring the

Shares. Friendly takeover is for the mutual

advantages of acquirer and acquired

companies.


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Hostile takeover

Hostile Takeover is against the wishes of the

target companys management. Acquirer

makes a direct offer to the shareholders of the

target company, without the prior consent of

the existing promoter / management.


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Black Knight

Black Knight: It is the company which makes a

hostile takeover bid on the target company.

White Knight:

It is the potential acquirer which is sought out

by a target companys management to take

over the company to avoid a hostile takeover

by an undesirable black knight.


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Grey knight:

A 'grey knight'is a third firm that is not welcomed by

the 'victim', seeking to exploit the situation totheir own advantage.

Yellow Knight

A'yellow knight'is a firm who originally seeks tolaunch a hostile takeover bid but then moderates

its stance and negotiates on the basis of a merger

-the 'yellow' being used to imply some element of

'cowardice' in the behaviour of the bidding firmwho may begin to appreciate that it will not be

able to 'bully' its 'victim' into submission.


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White Squire

Such a firm may not be big enough to be able to takecontrol of another firm but may well seek to buy intothe 'victim' firm to prevent the 'black knight' frombeing able to achieve its takeover plans.

Crown Jewels

The precious assets in the Company are called as CrownJewelsto depict the greed of the acquirer under thetakeover bid. These precious assets attract the raider tobid for the Companys control.


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Defensive Mechanism

Poison Pill: It is the strategy to make the companyunattractive to the acquirer. One of the strategies is toincrease the debt component in the capital structure ofthe Company i.e increasing the Debt Equity Ratio.

Shark Repellent:The Companies change and amend theirbyelaws and regulations to be less attractive for thecorporate raider company which strategy is called sharkrepellent Strategy. e g. shareholders.

Green Mail:This is where a large block of shares is held byan unfriendly company, which forces the target companyto repurchase the stock at a substantial premium toprevent the takeover. In a takeover bid this could prove tobe an expensive defense mechanism.


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Others

Window ShopperLikes to look, but rarely buys

Bottom Fisher-Constantly hunting for bargains.Active buyer.

Market Share/Product Line Extender-Mostcommon buyer category, because feweroperating risks are involved.

Strategic Buyer-seeking to diversify andredeploy assets.

Leveraged BuyoutVery active sector. Financiallyoriented buyers.


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Strategy


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Meanings of Strategy

Five meanings of strategy

Plan,consciously elaborated direction of actions

Pattern,clear basic line in the operation of an

Organization

Position, certain place or location in the markets or/

And environment

Perspective, point of view or certain way to examine

the organization or its environment

Plot, sequence of conducted activities which aim to

Improve the competitive advance


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Corporate Strategic Planning

Define Corporate Mission

Analyze, Evaluate Current Business Portfolio Identify New Business Arenas to

Enter/Business to exit.


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BCG Approach

Build -Objective is to increase the market

share

Hold Objective is to preserve market share

Harvest Objective is to increase short term

cash flow regardless of long term effect

Divest Objective is to sell/liquidate the

business


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General Electric Approach

The Industry attractiveness index is made up of such factors as

market size, market growth

industry profit margin

amount of competition

seasonally and cyclically of demand

industry cost structure

Business strength is an index of factors like

relative market share

price, competitiveness

product quality customer and market knowledge

sales effectiveness

geographic advantages


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SWOT

SWOT ANALYSIS

HOLD SELL ACQUISITIONS


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History


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M & A

Merger Waves

Wave I (1897-1904)

Consisted mainly of horizontal mergers-

monopolistic market structure

Major changes in economic infrastructure andproduction technologies

Financial factors led to the end of the wave


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M & A

Wave II (1916-1929)

Consolidation of industries-oligopolistic

industry

Banking and public utilities were most active

industries

Formation of many prominent companies

General Motors, IBM etc.,

Wave ended due to stock market crash


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Wave III (1965-1969)

Conglomerate merger

Diversification into business activities outside

traditional areas.

Did not result in increased industrialconcentration

Acquisitions followed poor financialperformance-lack of knowledge aboutdifferent industries


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Wave IV (1981-1989)

Hostile takeover played significant role

Value greater than numbers

A period of mega mergers

Oil & gas, drug & medical equipment industries

Role of investment bankers and law firms

Emergence of leveraged buy outs, innovativeacquisition techniques


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M & A

Licensing era-indulge in unrelated diversifications

Could surviverestriction on industry capacity

Hostile takeovers

Liberalization in 1991-opening up of the economy

Greater competition, deregulation, freer imports, -newareas of concern

Hence, restructuring of India Inc became a majortheme

Consolidation in core competent areas Mergers and acquisitions emerging as key corporate

strategy


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Theories of Mergers

Efficiency Theory-asset redeployment haspotential for social benefits

Information Theory Signaling Theory

Agency & Managerial

Market Power HUBRIS HYPOTHESIS( mergers happen even if the

current market value reflects true value)


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Targets


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Identification

Cold Calling-

discrete findings -research,customers,bankers,

common forum,

Social Gatherings

Investment Bankers


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Due Diligence

What is & Why DD?

Process by which information is gathered about targetcompany, its business and the environment in which itoperates

Objective: to ensure that an informed decision istaken

Determine the advisability of the transaction

Formulate a proposal for the transaction Minimize risk exposure

Identify weak areas and commercially resolve them


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Approach

Sign Non Disclosure Agreement/Letter of

Intent

TimingNeed to understand the issues

Materiality threshold for Risk Assessment

Background research

Verification of the documents Executive Summary & final Report


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EFFECTIVE DUE DILIGENCE

The Effective Due Diligence Process will

address:

Strategy Assumptions

Identify operational, legal, financial and other

significant issues

Assessment of Risks

Effect of assessment on valuation (e.g. Fair

Price for the Target Company)


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MATERIAL CONTRACTS AND

AGREEMENTS

Issues under each Agreement:

Onerous obligations/ covenants

Payment of ongoing fee/ royalty

Restriction on activities Rights of first refusal/put/call option

Penal provisions/ any liability which flows through

Exclusivity provisions

Confidentiality

Assignability/ change of control/ consent of thecounter party for transactions


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Term Sheet

Condensed version of the transaction

Binding/non-binding

Termination and its effects

No shop clause and binding confidentiality

Signing of detailed agreements within a

specified period


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TO CONCLUDE

DueDiligenceplaysanimportantroleinidentifyin

g,quantifyingandreducingtherisksofanacquisition.

Althoughduediligencefocusesonnegativeinformation,theaimisnottoraiseobstaclestotransactions,butrathertofacilitatetransactionsbyidentifyingproblemsandrisksandbydevisingsolutionst

oproblemsordevicestoreduceormanagetherisksvolvedincorporateacquisitions


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Interest of stakeholders

Shareholders

Creditors

Employees

Suppliers & Customers


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Dos & Donts-

Golden Rules for success

Why M & A fails?

Make the buyer comfortable with what they

are buying

Conditions precedent should be minimal


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Six golden rules for successful

acquisitions

Transaction

Pick the right target

Strategic fit Capabilities fit Ease of execution,relative to experience

Negotiate the right price, don't overpay Apply high-definition valuation Multiples within

comparable ranges Reasonable synergyexpectations Friendly, not hostile

Lay the groundwork for swift approval No major regulatory delays No unexpected

regulatory givebacks


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IntegrationManage the integration well

Maintain core business growth

Maintain momentum in target business

Achieve synergies above announced levels

Manage organizational change effectively

Communication

Retention of employees

Cross-pollination

Cultural assimilation

Do your homework : avoid disruptions

Technology

Government

Competitors


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Measuring success

Increase in

Stock Price

Revenue

Profits

dividend

customer base


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Measuring success

Actual realization of the synergy contemplated

Reduction in the attrition rate

Recognition by the new customers

Trend setter for emulation by others


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Time Frame for completion

Nature of Transaction (including bid/auction)

Regulatory compliance

Transaction structure

Give & Take

Cultural issues

Trade Union

Economy-MTN-Bharti/RComm


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Financing M&A

Various methods of financing an M&A deal exist: Payment by cash. Such transactions are usually

termed acquisitions rather than mergers because theshareholders of the target company are removed from

the picture and the target comes under the (indirect)control of the bidder's shareholders alone.

A cash deal would make more sense during adownward trend in the interest rates.Anotheradvantage of using cash for an acquisition is that there

tends to lesser chances of EPSdilution for the acquiringcompany. But a caveat in using cash is that it placesconstraints on the cash flow of the company.


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Financing M&A

Financing capital may be borrowed from a bank, orraised by an issue of bonds. Alternatively, theacquirer's stock may be offered as consideration.Acquisitions financed through debt are known asleveraged buyoutsif they take the target private, andthe debt will often be moved down onto the balancesheetof the acquired company.

An acquisition can involve a combination of cash anddebt, or a combination of cash and stock of the

purchasing entity. Factoringcan provide the necessary extra to make a

merger or sale work.


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Underlying Principle for M&A Transactions

1 + 1 2

Additional Value of Synergy


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Why M&A fail

dominant reason ----not failing in doing the deal orstructuring the deal or negotiating. -----,,what does ordoesn't happen post-agreement and post-closing andthe failure to manage the combined entity in a superiorway.

'culture.-failure of

leadership, failure of integration, communicationfailures, failure to populate the new organization withsufficient talent.

poor strategic moves such as overpayment, tounanticipated events, (a particular technologybecoming obsolete)


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Why M&A fail

"Culture integration is certainly important," "but it'salways the excuse when something doesn't work out.

Negative outcomes --such as employee layoffs for thetarget company --are "invariable" and "must be handledhumanely." (For example, companies can help these

individuals to find other jobs and provide acceptableseverance.)

Immediate and clear communication on the part ofmanagement with regard to any problematic issues. "Youneed to create a good impression," he says. "Goodemployees will quit if they feel their fellow workers aretreated poorly."


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Safeguards

The customer should perhaps be viewed as the biggeststakeholder and treated as such. ("If the customer is a largeone, they should hold hands with top executives throughthe transition, At the end of the day, that's the cash." ) Amerger between two tech firms in Silicon Valley, both of

whom had IBM as a leading customer. When the mergerwas announced, they both lost IBM's business. "IBMwanted to know why they were not told of the change," hesays.

Using sales forces to keep customers informed and havingcommunications ready for all customers, with a keymessage that answers the question, "What is this mergergoing to do for you?"


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PRE-DEAL

During the pre-deal phase, growth objectives and anacquisition strategy are defined. Target companies areidentified and assessed for potential fit and duediligence is conducted.

Due diligence should consider commonalties anddifferences in areas such as

company culture, leadership models, organisationstructure, performance management systems andworkforce development approaches.

will indicate the potential cost of realising deal value,particularly where a high degree of cultural integrationis required


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Deal

In the emotion and momentum of the

negotiate phase of the deal, obvious areas

of risk identified through due diligence are

often ignored by deal makers.


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Post Deal

This is often the stage at which a deal fails--excessive focuson the financial aspects at the expense of integratingpeople from the two organizations.

Disciplined enterprise-wide integration coordinatedsimultaneously and speedily across all functional

departments and business units will ensure bothorganizations are integrated smoothly into a single cohesiveentity.

A single infrastructure should be used to coordinate allintegration efforts and communications across the

combined companies and rigorous project management,process consulting and tactical problem solving will beessential to your success.

Modes of growth.pptx

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