Presentation on Merger & Acquisitions

1. Merger & Acquisitions
Pallav Kumar
©2013 GlobalLogic Inc.
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2. 01
Types
02
M & A Lifecycle
03
How the valuation is done
04
What motives lie behind?
05
Merger
06
Acquisition
07
Difference between Merger & Acquisition
08
Merger: Why & Why not
09
Acquisition: Why & Why not
10
Wrapping up…
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3. Types
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4. M&A Lifecycle
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5. How the valuation is done
− Asset valuation:
− Determined by calculating the fair market value of the assets, the improvement cost of all the assets held under
lease, and the value of inventory that includes finished goods, work-in-progress, and raw materials.
− Ideal for valuating manufacturing businesses because their maximum investment is in assets such as
machinery, equipment, power units, etc.
− Example: When Tata motors evaluated Jaguar Land Rover.
− Capitalization of income valuation:
− Suitable for valuating organizations like business consultancy firms, professional firms, etc. because they are
not asset-intensive in nature. The success of their business depends upon the quality of service and not on the
level of output produced and sold.
− Ideally, one can use the location of a business, client portfolio, technical expertise, profit and loss trends, and
portfolio of debtors and creditors.
− Example: SAP AG evaluated Sybase.
− Market valuation:
− A multiplier formula for every industry is calculated depending upon the average sales figures of various
companies in the industry. One can simply substitute figures in the formula to derive the value.
− Example: L&T evaluated Fidelity India.
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6. What motives lie behind?
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Economy of scale
−
Economy of scope
−
Cross selling
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Taxation
−
Geographical or other diversifications
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Resource transfer
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Vertical integration
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Absorption of similar businesses under single management
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Manager’s hubris
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7. Merger
− Transaction that results in transfer of ownership and control of a
corporation.
− Two firms agree to integrate their operations into a single company
because they have resources and capabilities that together may create
stronger competitive advantage.
− Either through consolidation or absorption.
− A merger can take place in following 4 ways:
−
−
−
−
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By purchase of asset.
By purchase of common share.
By exchange of share for asset.
Exchange of shares for shares.
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8. Types of Mergers
Consolidation of 2 firms that are direct rivals.
Horizontal
Expansion of a firm’s operation in a given line product line and at the same time
eliminates competitor.
e.g.: Staples-Office Depot.
Vertical
Conglomerate
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When 2 firms working in different stages of production or distribution of the same
product join together.
The firm’s increased control over the acquisition of raw material or the distribution
of finished goods.
e.g. Time Warner Inc. & the Turner Corporation.
Merger involves two firms in totally unrelated activities.
Expansion of a firm’s operations in different unrelated lines of business with an
increased sense of operating synergies.
e.g. PepsiCo-Pizza Hut.
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9. De-Merger
− A single business is broken into components, either to operate on their
own, to be sold or to be dissolved.
− Example :
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−
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British Telecom conducted a de-merger of its mobile phone operations, BT Wireless, in
an attempt to boost the performance of its stock.
British Telecom took this action because it was struggling under high debt levels from
the wireless venture.
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10. Reverse Merger
− The acquisition of a public company by a private company so that the
private company can bypass the lengthy and complex process of going
public. The transaction typically requires reorganization of capitalization
of the acquiring company.
− In 1970 Ted Turner completed a reverse merger with Rice Broadcasting,
which went on to become Turner Broadcasting.
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11. Amalgamation
− The combination of one or more companies into a new entity.
− An amalgamation is distinct from a merger because neither of the
combining companies survives as a legal entity. Rather, a completely new
entity is formed to house the combined assets and liabilities of both
companies.
− Two good examples of amalgamations are as follows:
−
−
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Tata Sons operating in India and AIA Group based in Hong Kong amalgamated to form
a new company called TATA AIG Life Insurance.
Maruti Motors operating in India and Suzuki based in Japan amalgamated to form a
new company called Maruti Suzuki (India) Limited.
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12. Spin-Off
− The creation of an independent company through the sale or distribution
of new shares of an existing business/division of a parent company.
− Businesses wishing to 'streamline' their operations often sell less
productive, or unrelated subsidiary businesses as spinoffs.
− Example: Expedia spin-off from Microsoft.
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13. Acquisition
− One company buying out another to combine the bought entity within
itself.
− The intent of transaction is more effectively using a core competence by
making the acquired firm its subsidiary within its portfolio of business.
− Generally, the firm which takes over is the bigger and stronger one. The
relatively less powerful, smaller firm loses its existence, and the firm
taking over, runs the whole business with its own identity.
− Unlike the merger, stocks of the acquired firm are not surrendered, but
bought by the public prior to the acquisition, and continue to be traded in
the stock market.
− Example: Microsoft acquired Skype, Mahindra acquired Satyam.
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14. Types of Acquisition
− Acquisitions can be either:
− Hostile - The company, which is to be bought has no information
about the acquisition. The company, which would be sold is taken by
surprise. Example: Oracle acquired PeopleSoft.
− Friendly - The two companies cooperate with each other and settle
matters related to acquisitions. Example: J&J acquired Crucell.
− There may be two ways of acquiring a company:
−
−
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Buy all the shares of the smaller company.
Buy the assets of the smaller companies.
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15. Difference between Merger & Acquisition
MERGER
i.
ACQUISITION
Merging of two organization in
to one.
ii. It is the mutual decision.
iii. Merger is expensive than
acquisition(higher legal cost).
iv. Through merger shareholders
can increase their net worth.
v. It is time consuming and the
company has to maintain so
much legal issues.
vi. Dilution of ownership occurs in
merger.
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i.
Buying one organization by
another.
ii. It can be friendly takeover or
hostile takeover.
iii. Acquisition is less expensive
than merger.
iv. Buyers cannot raise their
enough capital.
v. It is faster and easier
transaction.
vi. The acquirer does not
experience the dilution of
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ownership.

16. MERGER : Why & Why Not
WHY IS IMPORTANT
i.
Increase Market Share.
ii. Economies of scale
iii. Profit for Research and
development.
iv. Benefits on account of tax
shields like carried forward
losses or unclaimed
depreciation.
v.
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PROBLEM WITH MERGER
i.
Clash of corporate cultures
ii. Increased business complexity
iii. Employees may be resistant to
change
Reduction of competition.
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17. Acquisition : Why & Why Not
WHY IS IMPORTANT
i.
Increased market share.
ii. Increased speed to market
iii. Lower risk comparing to
develop new products.
PROBLEM WITH ACUIQISITION
i.
Inadequate valuation of target.
ii.
Inability to achieve synergy.
iii. Finance by taking huge debt.
iv. Increased diversification
v.
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Avoid excessive competition
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18. Wrapping up…..
− M& A is a strategic capability, can give companies an edge that their peers
will struggle to replicate.
− Companies need to realize and envision market factors.
− Plan for opportunity long before an opportunity arises.
− Companies are successful in M&As when they apply strong focus,
consistency, and professionalism.
− A growth strategy.
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19. ©2013 GlobalLogic Inc.
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