2011

Merger & Acquisition Assignment

Selecting a candidate for M&A | M&A Strategy of Godrej Consumer Products Ltd.

SARANG GAIKWAD
ITM BUSINESS SCHOOL | PGDM-IB (2009-11) | Roll No. 22

Submitted to: Prof. Bharat Shah

1/6/2011

How to select a Candidate (Target Company)/ Target Screening

Merger and Acquisition Process is probably the most important thing in a merger or acquisition deal as it influences the benefits and profitability of the merger or acquisition. Merger and Acquisition Process is a great concern for all the companies who intend to go for a merger or an acquisition. This is so because, the process of merger and acquisition can heavily affect the benefits derived out of the merger or acquisition. So, the Merger and Acquisition Process should be such that it would maximize the benefits of a merger or acquisition deal. The Merger and Acquisition Process is carried out in some steps which are discussed in the following fig. (Merger and Acquisition Process, 1999-2009):

Fig. Merger and Acquisition Process (Merger and Acquisition Library | Deloitte Merger & Acquisition Services, 2011) Process of selecting a candidate/ Target Screening 1. Determine Business Plan Drivers Merger and acquisition strategies are deduced from the strategic business plan of the organization. So, in merger and acquisition strategies, firm firstly need to find out the way to accelerate the strategic business plan through the M&A. Firm needs to transform the strategic business plan of its organization into a set of drivers, which the firm merger and acquisition strategies would address. While chalking out strategies, company needs to consider the points like the markets of its intended business, the market share that they are eyeing for in each market, the products and technologies that they would require, the geographic locations where they would operate their business in, the skills and resources that would require, the financial targets, and the risk amount etc. 2. Determine Acquisition Financing Constraints Now, the firm needs to find out if there are any financial constraints for supporting the acquisition. Funds for acquisitions may come through various ways like cash, debt, public

and private equities, PIPEs, minority investments, earn outs etc. They need to consider a few facts like the availability of untapped credit facilities, surplus cash, or untapped equity, the amount of new equity and new debt that your organization can raise etc. They also need to calculate the amount of returns that you must achieve. 3. Develop Acquisition Candidate List

The next step is to identify the specific companies (private and public) that the firm is eyeing for acquisition. Identifying those companies by market research, public stock research, referrals from board members, investment bankers, investors and attorneys, and even recommendations from employees. The firm also needs to develop summary profile for every company.

4.

Build Preliminary Valuation Models

This stage is to calculate the initial estimated acquisition cost, the estimated returns etc. Many organizations have their own formats for presenting preliminary valuation. 5. Rate/Rank Acquisition Candidates Rate or rank the acquisition candidates according to their impact on business and feasibility of closing the deal. This process will help the acquiring in understanding the relative impacts of the acquisitions. 6. Review and Approve the Strategy This is the time to review and approve your merger and acquisition strategies. You need to find out whether all the critical stakeholders like board members, investors etc. agree with it or not. If everyone gives their nods on the strategies, you can go ahead with the merger or acquisition. (Merger and Acquisition Strategies, 1999-2010) Criteria while acquiring a target company When looking for a company to buy, how do we begin the search? In most cases, we may begin by screening likely acquisition candidates. Screens are like resume reviews. Using a Screening Process to Pinpoint Likely Candidates is the favourable option to evaluate the candidates. They are used to eliminate companies but rarely result in a clear first choice. The screening process is intended to narrow the field of candidates to those companies that match the requirements. 1. Refining the Screen It is likely to increase your chances of finding a good acquisition candidate more quickly if a company is willing to work with the chosen advisor to design and implement the screening process. While screening potential acquisition candidates can be complex, a good advisor tailors the process to the buyers needs. Here are some of the criteria which can individualize to reflect to firms preferences:

Below-average performance due to poor management. A company may perform below par and therefore sell for a significantly lower price because it is poorly managed. Acquirer may want to seek companies with weak performance that can be revitalized with new management. Poor performance due to cyclical economic factors. Either the company or the entire industry may have been hit by unfavorable economic conditions. When these conditions are cyclical, then the screening process should be able to identify those firms at the trough of the wave. Then, buying at a lower price and riding the wave up to higher value. Hidden cash balances. Undervalued companies may have excess cash reserves or marketable securities. Or investment in inventory may be too high. By managing working capital properly, representing the acquiring company, can boost income significantly for greater profits. Market niche or other market advantages. It is desirous to acquire a company that occupies a special market niche, holds substantive patents or trademarks or is protected from competition in other ways. Synergy. If looking for a merger candidate, firms that complement the acquiring company can have greater value than their value in the general marketplace. For example, if a firm is strong in new product development, then they may want to find a company in the relevant field that has a large sales force. If a firm manufactures a seasonal product, such as skis, then it may acquire a complementary company, such as a manufacturer of lawn mowers, to balance the cash flow and level out your seasonal selling cycle. Reinforcement. A merger candidate that reinforces the acquirer companys strengths can also be advantageous. For example, consider a company that has compatible services, product lines, sales force or management. Price comparisons. Consider anticipated price adjustments in comparing acquisition candidates. If a firm anticipates opposition either from shareholders or in the form of competition from other buyers, then they can expect to pay a premium. If taxes on the transaction are high, then firm will also be paying a hidden premium to the Internal Revenue Service.

2. Uncover the Dangers The screening process should not only identify potential acquisition candidates, it should also pinpoint the risks. Here are some of the danger signs:

Customer dependence. Is the company vulnerable because it depends on only a few customers for most of its sales volume? Supplier dependence. Does the company rely on only a few suppliers for its raw materials or other goods? Are alternative suppliers available if these regular suppliers are unable to continue providing materials?

Employee dependence. Does the companys success depend on only a few key employees? Will these employees remain with the firm after an acquisition? Litigation problems. Is any litigation pending or threatened against the company because of: o The acquisition attempt itself? o Product liability? o Alleged discrimination? o Environmental pollution or other environmental problems?

Screening is only the start of the long and arduous process of buying a business. But a competent screening program can greatly simplify the initial steps. 3. Meeting firms Needs After the firm and its advisor identify the best candidates, then they look forward to participating in the intensive due diligence process with a solid base. When the advisor individualizes the screening and evaluation process for the firm, they will be more likely to find the company that best fits their needs. (Choosing the Right Company To Acquire: Use a Screening Process To Pinpoint Likely Candidates - CBIZ Valuation Group, LLC, 2011)

M&A Strategy of Godrej Consumer Products Ltd (GCPL)

3x3 strategy for acquisition Godrej Consumer Products Ltd (GCPL) has chalked out a new plan for focusing on the international market. It is concentrating on a 3x3 strategy to penetrate deeper into Asia, Africa and South America, with three product segmentspersonal wash, hair care and insecticides. It is part of the companys globalization strategy where they are concentrating on three categories and three continents. Focus on these continents to understand the market better. The strategy is to focus on developing countries, because they have high populations. Even consumption of our products is high in these places.

Fig. 3X3 Strategy (GCPL - M&A Strategy, 2010)

Acquisition Summary The company spent Rs100 crore-Rs125 crore to acquire Tura, a Nigerian beauty products company. This is the companys third acquisition in Africa. In April 2010, GCPL acquired Megasaria leading consumer products company in Indonesia, which has notched up revenues of $120 million in the past fiscal with estimated profit-after-tax margins of 11%-12%. It is also the second-largest player in the insecticides market, enjoying 35% market share of Indonesias household insecticides market (with a total size of $150 million, growing at 20%). It also has 45% market share (of a total $68 million market, growing at 45%) in the air-care segment and 80% market share of the $21-million wipes market (growing at 45%). Megasari has 15% share of the breakfast cereals market. Earlier in October 2005, GCPL had acquired UK-based Keyline for approximately 13 million. During the same year in September, it acquired the South African business of British company Rapidol for Rs50 crore. South Africa-based Kinky Group was bought out for around $34 million in April 2008. Last year, GCPL acquired a 49% stake in Godrej Sara Lee and is looking to buy out the remaining stake. It has passed an enabling resolution to raise Rs30 billion in order to fund inorganic growth (India and other emerging markets would be key focus areas). All the big players in the FMCG market are now eyeing Africa. Marico Ltd acquired the Fiancee hair care brand owned by Egypt-based Ready Group; Emami is looking at buying an FMCG firm in Egypt. Emami is also looking at buying several other personal care firms in the region and the company is almost certain of having its first manufacturing facility up and running in Africa this year. Emami also has plans to set up three more manufacturing bases in

Africa over the next two-three years. (Godrej Consumer Products to focus on new 3x3 strategy, 2010) Focus on growing core business and brands

Fig. Core Focus (GCPL - M&A Strategy, 2010) Knowledge and exposure to these markets will also help strengthen the technology and product development funnel in India. At the same time, the acquisition represents another important step towards GCPL becoming leading emerging markets multinational and dovetails well with its strategy. Over the last few years, firm has been following a very disciplined and focused approach to identifying acquisitions that represent a strong fit with our business, both strategically and operationally. (GCPL active on its three-by-three strategy, 2010)

Gameplan The company's gameplan in making these many overseas acquisitions has basically been three-fold. One, each acquisition has given the company a distribution network and a toehold in a new geographic region where it may find new markets for its existing brands. The South African Rapidol, for instance, has been used by Godrej as a launch-pad for its Indian brands such as Renew and Godrej No. 1 soap in that market. Two, given that India is a low-cost manufacturing base for several FMCG products, local manufacturing has been used to feed the overseas marketing arms. The use of an Indian manufacturing base has enabled Godrej to lift the profitability of its overseas arms significantly for some of its past buyouts. With the Indian marketplace for FMCGs getting quite crowded, overseas markets such as South Africa, Nigeria and now Indonesia also seem to offer Indian FMCG companies better growth opportunities, with superior pricing power. Three, a narrow product portfolio with just two key categories soaps and hair colour has for long been an impediment to Godrej's growth prospects even within the Indian market. But the company's recent buyouts (including that of a controlling stake in Sara Lee) do much to resolve this problem. By adding diverse product categories such as household insecticides, baby care, toiletries and skin care to its fold, the company may be able to reduce its heavy reliance on soaps and hair colour for revenues. It also expands the scope for Godrej to scale up in size and improve its product mix in the process. As with its other overseas buys, the Megasari buy too seems to fit neatly into Godrej's portfolio much like the piece of a jigsaw puzzle. Megasari's leading market position in household insecticides in Indonesia, an evolved market for this product, may strengthen the company's insecticide product pipeline in India. At the same time, the fast growing Indonesian market may also be a good testing ground for brand launches from Godrej's other product categories such as hair care, toiletries or personal care. New business But by snapping up so many new businesses, is the company biting off more than it can chew? Its track record with its previous buyouts certainly offers some comfort on this score. Godrej's international operations have managed a superior growth to its Indian operations in recent times. Sales growth from the international business (which houses all the overseas operations) at 26 per cent, outpaced the growth from its Indian operations (at 16 per cent) in the latest quarter ended December 2009. The international operation also managed a much stronger profit growth than the Indian one, given that the company's profits at the consolidated level more than doubled, while its Indian arm saw just a 44 per cent growth. (Godrej acquisition: Yet another piece in the jigsaw , 2010)

Bibliography
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