Mergers, Acquisitions

& Corporate
Restructuring
Deepak Bansal

Unit-1
Introduction in Mergers, Types of Mergers,
Merger
Strategy-Growth,
Synergy,
Operating Synergy, Financial Synergy,
Diversification, Other Economic Motives,
Hubris
Hypothesis of Takeovers, Other
Motives, Tax Motives Financial Evaluation,
Joint Venture and Strategic Alliances.

M&A Background & Scenario

In 1990, only six developing and transition

countries had made any outward investment.

In 2005, the number increased to 25.

Between 1987 and 2005, the share of global

M&As by MNCs from developing and
transition countries rose from 4% to 13% in
value terms, and their share in greenfield and
expansion projects exceeded 15 percent in
2005.

M&A : Background & Scenario...Contd.

A survey shows that 81% of the companies have considered

M&As and 30% have actually done a transaction in the past 3
years. Over 70% say that they expect to do a deal in the next
3 years. All this denotes that we are set for an M&A boom in
the years to come. Global M&A volumes of $20bn a day,
Indias $58bn for the year 2015 indicates that there is still a
long way to go. The trend is clearly on the way up.

M&A in 2016-17 - $ 5.6 Trillion

M&A in 2017-18 - $ 5.55 Trillion

October 2014 M&A deals - $ 562 Billion

The Asian M&A market saw 15792 deals worth $ 1255.07

billion

China alone was the largest market with 11862 deals worth
$154.76 billion

Indian Scenario - Major Deals

Corporate India has gone on an acquisition spree, powered

by the urge to go global, strong market fundamentals and
the drive to dish out cost-competitive products. Acquisitions
were not limited to the domestic market, but spread out in
the global arena also.

Though India's public sector took the lead in investing

abroad, especially looking for oil assets, the private sector is
now going full speed ahead, driving overseas investments
e.g.
Arcelor acquired by Mr. Lakshmi Mittal.
Mahindra & Mahindra's takeover of 90 percent stake in
Schoneweiss, a family-owned German company.
Tata's takeover of Corus & Tetley Tea Co.
Hutchison Whampoa of Hong Kong sold their controlling
stake in Hutchison - Essar to Vodafone for a whopping
$11.1 billion.

Indian Scenario - Major Deals .Contd. Swiss cement major, Holcim, which acquired a 67 per cent stake in
Ambuja Cement India Ltd (ACIL).
Videocon Group's acquisition of Thomson's colour picture tube
business in China, Poland, Mexico, and Italy for a total of $290
million.
The other large overseas deal was by pharmaceuticals Matrix
Laboratories, which acquired 100 per cent of the Belgian Pharma
Co., Docpharma for $263 million).
Birla-Hindalco Indian business conglomerate Aditya Birla groupowned flagship company Hindalco Industries Ltd. Took over Atlantabased aluminum giant Novelis Inc. for US$ 6.4 billion
Indian firms concluded 70 M&A deals between April and September,
spending $14 billion and would have saved as much as Rs.6500
crore ($1.66 billion) because of the over 10% rupee appreciation
against the greenback, an Assocham Eco Pulse study said.

Corporate Structuring
Any change in the business capacity or
portfolio that is carried out by an inorganic
route or a change in the capital structure of
a company that is not a part of its ordinary
course of business or any change in the
ownership
of
or
control
over
the
management of the company or a
combination thereof.

Forms of Corporate
Restructuring
Mergers
Consolidation
Acquisition
Divestiture
Demerger (Spin off/split up/split off)
Carve out
Joint venture
Reduction of capital
Buy-back of securities
Delisting of securities/company

Why M & A ?
Quicker way to growth.
Accessing new markets.
Taking on the global competition.
Improving operating margins and efficiencies, and
Acquiring visibility and international brands.
Buying cutting-edge technology rather than importing it
Developing new product mixes
Objective behind M&A Transaction

Responses (in%)

To improve revenues & profitability

33%

Faster growth in scale quicker time to market

28%

Acquisition of new technology or competence

22%

To eliminate competition & increase market share

11%

Tax shields & investment savings

3%

Any other reason

3%

Determinants of M & A
Ever-growing appetite of entrepreneurs to strike deals across sectors.
Availability of financing options both in Debt as well as in Equity due
to low interest-regime of recent years and high stock-market
valuations.
Barriers Surmountable? And Legal System.
Liberal approach of Anti-trust authorities / regulators in recent years.
Availability of the unit / business.
Strategy, planning & environment.
Corporate Governance.

Acquisition
An attempt or a process by which a
company or an individual or a group of
individuals acquires control over another
company called target company.
Acquiring control over a company means
acquiring
the
right
to
control
its
management and policy decisions.
In acquisition, unlike merger, the target
companys identity remains intact.

Ways in which control over a

company can be acquired

By acquiring, i.e. purchasing a substantial percentage

of the voting capital of the target company
By acquiring voting rights of the target company
through a power of attorney or through a proxy
voting arrangement
By acquiring control over an investment or holding
company, whether listed or unlisted, that in turn
holds controlling interest in the target company
By simply acquiring management control through a
formal or informal understanding or agreement with
the existing person(s) in control of the target
company.

Disinvestment
It
refers
to
the
transfer
of
the
assets/shares/control from the government
to the private sector.
The concept of pubic sector undertakings
disinvestment takes different forms i.e. from
minimum
government
investment
(privatization) to partnership with private
sector, where the government is the
majority shareholders.

Joint venture
It is a strategic business policy whereby a
business enterprise for profit is formed in
which
two
or
more
parties
share
responsibilities in an agreed manner, by
providing risk capital, technology, patent,
trademark, brand names and access to
markets.
Example
Unitech and Telnor by joint
ventures make a new company called
Uninor.

Demerger
It is not defined in the companies act 1956.
It is often used to describe division or
separation of different undertakings, of a
business functioning hitherto under a
common corporate umbrella.
A scheme of demerger is in effect a
corporate partition of a company into two
undertakings,
thereby
retaining
one
undertaking with it and transferring the
other undertaking to the resulting company.

Forms of demerger

Spin-off
It involves transfer of all or substantially all the
assets, liabilities, loans and business (on a going
concern basis) of one of the business division or
undertakings to another company whose shares
are allotted to the shareholders of the transferor
company on a proportionate basis.

Split-up
It involves transfer of all or substantially all assets,
liabilities, loans and businesses (on a going concern
basis) of the company to two or more companies in
which, again like spin-off, the shares in each of the
new companies are allotted to the original
shareholders of the company on a proportionate
basis but unlike spin-off, the transferor company
ceases to exist.

Split-off
It is a spin-off with the difference that n split-off, all
the shareholders of the transferor company dont get
the shares of the transferee company in the same
proportion in which they held the shares in the
transferor company.

Carve-out

It is a hybrid of divestiture and spin-off.

In it, a company transfers all the assets, liabilities,
loans
and
business
of
one
of
its
divisions/undertakings
to
its
100
percent
subsidiary.
Thus at the time of transfer, the shares are issued
to the transferor company itself and not to its
shareholders.
Later on, the company sells the shares in parts to
outsiders-whether institutional investors by private
placement or to retail investors by offer for sale.

Reduction of capital
This is a legal process u/s 100 to 104 of the
companies act, 1956 by which a company is
allowed to extinguish or reduce liability on
any of its shares in respect of share capital
not paid up or
is allowed to cancel any paid-up share
capital which is lost or
is allowed to pay off any paid-up capital
which is in excess of its requirement.

Buy-back of securities

It is yet another very important tool of capital

restructuring.
When a company is holding excess cash, which
it does not require in the medium term (3 to 5
years), it is prudent for the company to return
this excess cash to its shareholders.
Buy-back of securities is one of the methods
used in such circumstances to return the excess
cash to the shareholders.
This legal process is governed by the sections
77A, 77AA and 77B of the companies Act, 1956.

Types of Merger

Horizontal merger
It occurs when two competitors combine, for eg. In
1998, two petroleum companies, Exxon and Mobil
combined in a $78.0 billion megamerger.
Another eg. In 2009 Pfizer acquired Wyeth for $68
billion.

Vertical merger
These are combinations of companies that have a
buyer-seller relationship. For eg. In 1993 Merck, one
of the largest drug companies, acquired Medco
Containment services Inc., the largest marketer of
discount prescription medicines, for $6 billion.

 The transaction enabled Merck to go from being

the largest pharmaceutical company to also being
the largest integrated producer and distributor of
pharmaceuticals.

conglomerate merger
It occurs when the companies are not competitors
and do not have a buyer-seller relationship.
One example would be Philip Morris, a tobacco
company, acquiring General Foods in 1985 for
$5.6 billion, Kraft in 1988 for $13.44 billion, and
Nabisco in 2000 for $18.9 billion.
Another major example of a conglomerate is
General Electric (GE).

Merger Strategy

There are two motives for M&As:

Faster Growth
Synergy

Growth
One of the most fundamental motives for
M&As is growth.
Companies seeking to expand are faced
with a choice between internal or organic
growth and growth through M&As.
Internal
growth may be a slow and
uncertain process.
Companies may grow within their own
industry or they may expand outside their
business category.

Expansion outside ones industry means

diversification.

Synergy

The term synergy is often associated with the

physical sciences rather than with economics or
finance.
It refers to the type of reactions that occur when
two substances or factors combine to produce a
greater effect together than that which the sum of
the two operating independently could account for.
For eg., a synergistic reaction occurs in chemistry
when two chemicals combine to produce a more
potent total reaction than the sum of their
separate effects.

Simply stated, synergy refers to the

phenomenon of 2+2=5.
In mergers this translates into the ability of
a corporate combination to be more
profitable than the individual parts of the
firms that were combined.
The anticipated existence of synergistic
benefits allows firms to incur the expenses
of the acquisition process and still be able
to afford to give target shareholders a
premium for their shares.

Operating synergy

Operating synergy comes in two forms:

Revenue enhancements
Cost reduction

These
revenue
enhancements
and
efficiency gains or operating economies
may be derived in horizontal or vertical
mergers.

Financial synergy
It refers to the possibility that the cost of
capital may be lowered by combining one or
more companies.
The extent to which financial synergy exists
in corporate combinations, the costs of
capital should be lowered.

Diversification

It means growing outside a companys current

industry category.
This motive played a major role in the acquisitions
and mergers that took place in the third merger
wave (1965-1969).
During the late 1960s, firms often sought to expand
by buying other companies rather than through
internal expansion.
This outward expansion was often facilitated by
some creative financial techniques that temporarily
caused the acquiring firms stock price to rise while
adding little real value through the exchange.

Diversification and the acquisition of leading

industry positions
Diversification to enter more profitable
industries
Related versus unrelated diversification

Other economic motives

In addition to economies of scale and

diversification benefits, there are two other
economic motives for M&As:
Horizontal integration
Vertical integration

Horizontal integration refers to the increase in

market share and market power that results
from acquisitions and mergers of rivals.
Vertical integration refers to the merger or
acquisition of companies that have a buyerseller relationship.

Horizontal integration

Combinations that result in an increase in market

share may have a significant impact on the
combined firm's market power.
Whether market power actually increases depends
on the size of the merging firms and the level of
competition in the industry.
Economic theory categorizes industries within two
extreme forms of market structure.
On one side of this spectrum is pure competition,
which is a market that is characterized by
numerous buyers and sellers, perfect information,
and homogenous, undifferentiated products.

Given these conditions, each seller is a price

taker with no ability to influence market price.
On the other end of the industry spectrum is
monopoly, which is an industry with one seller.
The monopolists has the ability to select the
price-output combination that maximizes profits.
The monopolists is not guaranteed a profit
because it is insulated from direct competitive
pressures.
The monopolists may or may not earn a profit,
depending on the magnitude
of its costs
relative to revenues at the optimal profit
maximization price-output combination.

Horizontal integration involves a movement

from the competitive end of the spectrum
toward the monopoly end.

Vertical integration

Vertical integration involves the acquisitions of

firms that are closer to the source of supply or
to the ultimate consumer.
An example of a movement toward the source
of supply was Chevrons acquisition of Gulf oil
in 1984.
Chevron bought Gulf primarily to augment its
reserves,
a
motive
termed
backward
integration.
In the same year, Mobil bought superior oil for
similar reasons.

Mobil was strong in refining and marketing

but low on reserves, whereas Superior had
large oil and gas reserves but lacked
refining and marketing operations.
An example of forward integration would be
if a firm with large reserves bought another
company that had a strong marketing and
retailing capability.

HUBRIS Hypothesis of
takeovers

An interesting hypothesis regarding takeover

motives was proposed by Roll.
He considered the role that hubris, or the
pride of the managers in the acquiring firm,
may play in explaining takeovers.
The hubris hypothesis implies that managers
seek to acquire firms for their own personal
motives and that the pure economic gains to
the acquiring firm are not the sole motivation
or even the primary motivation in the
acquisition.

Roll and others who have researched this

hypothesis to explain why managers might pay
a premium for a firm that the market has
already correctly valued.
Managers have superimposed their own
valuation
over
that
of
an
objectively
determined market valuation.
Their position is that the pride of management
allows them to believe that their valuation is
superior to that of the market.
Implicit in this theory is an underlying
conviction that the market is efficient and can
provide the best indicator of the value of a firm.

Other motives
Improved management
Improved research and development
Improved distribution

Tax motives
Whether tax motives are an important
determinant of M&As has been a muchdebated topic in finance.
Certain
studies have concluded that
acquisitions may be an effective means to
secure tax benefits.
Gilson, Scholes, and Wolfson have set forth
the theoretical framework demonstrating
the relationship between such gains and
M&As.

Unit-4
Defence Against Hostile Takeover,
Poisson Pill, Bear Hug, Greenmail, Pacman.
Post Merger H.R. and Cultural Issues.