Acquisitions 1

Acquisitions presented by: Neha Aggarwal 16-MBA-05

Growth and Expansion • Internal Expansion • External Expansion or Business Combination

External Expansion • Mergers • Acquisitions • Takeovers • Joint Ventures • Strategic Alliances

Merger A merger is a combination of two or more companies into one company. It may be in the form of one or more companies being merged into an existing company or a new company may be formed to merge two or more existing companies. The Income Tax Act, 1961 of India uses the term ‘Amalgamation” for merger. [Section 2(1A)] • The Property • The Liabilities • Shareholders

Forms of Merger • Absorption A

B

A

B

C

• Consolidation A

Acquisition Acquisition may be defined as an act of acquiring effective control over the assets or management of a company by another company without any combination of businesses or companies. Acquisition (Friendly Takeover). Takeover (Unwilling or Forced takeover) Under the MRTP Act, takeover means acquisition of not less than 25% of the voting power in a company.

Takeover Vs. Acquisition

Reasons/Economics/Motives • Accelerated Growth Expanding its existing markets Entering in new markets

• Enhanced Profitability Economies of Scale Operating Economies Synergy

• Diversification of risk

• Reduction in Tax Liability • Financial Benefits Eliminating the Financial Constraint Deploying surplus cash Enhancing debt capacity Lowering the financing costs

• Increased Market Power

Rationale for Acquisitions Acquiring Company

Acquirer Company

• Diversification to achieve economic protection • Adding new products faster • Acquiring management or technical personnel • Acquiring profitable operations

• Major stockholders wishing to retire • Need for further financing • Means of survival • Prospect of technological or marketing change • Attractive purchase or exchange offer

Types of Acquisitions • Horizontal Acquisition Book Publisher

Book Publisher

A

B

• Vertical Acquisition TV Manufacturing company

(Forward and Backward Acquisition)

TV Marketing company

• Concentric or Congeneric Acquisition Machine Tool Mfr.

Industrial Conveyor System

• Conglomerate Acquisition Cement Company

Electronics Company

Corporate Strategy and Acquisitions Planning - Acquisition Strategy - Assessment approaches and criteria

Search and Screening Financial Evaluation Integration

Statutory procedures involved in Acquisition 1. 2. • • • • 3. • • •

Appoint a registered Merchant Banker (MB), PA is required to be made through the said MB, What is public announcement? Disclosures required Objective of PA Timing of PA Documents are to be filed with SEBI, Hard and soft copy of PA Draft letter of offer within 14 days from the date of PA Filing fee of Rs.50,000 per letter of offer

•

2. 3. • •

Due diligence certificate as well as registration details as per SEBI circular no. RMB (G-1) series dated June 26, 1997. SEBI approves the draft letter of offer Letter of offer send to the shareholders. Within 45 days from the date of PA Offer remains open for 30 days.

Why do Acquisitions Fail? • Excessive Premium • Faulty Evaluation • Lack of Research • Failure to manage Post-Merger Integration

Fighting Acquisitions Different strategies adopted by target firm’s management are:

• • • • • •

White knight Poison pills Greenmail Leveraged Recapitalisation Golden Parachutes Shark Repellents

Value Creation through Acquisitions Acquisition will create an Economic Advantage when the combined present value of the merged firm is greater than the sum of their individual present values as separate firms.

Value:

P

Q

PQ

Vp

Vq

Vpq

•

EA will occur if,

•

And

Vpq > ( Vp + Vq ) EA = Vpq – ( Vp + Vq )

•

Cost of Acquisition = Price (Say cash paid) - Vq

Net Economic Advantage is positive if Economic Advantage exceeds the cost of Acquisition. •

Therefore,

NEA = EA - Cost of Acquisition

or

NEA = [ Vpq - ( Vp + Vq ) ] - ( Cash Paid - Vq )

Illustration • Firm P has a total market value of Rs.18 Crore (12 lakh shares of Rs.150 market value per share). Firm Q has a total market value of Rs. 3 Crore (5 lakh shares of Rs. 60 market value per share).firm P is considering the acquisition of firm Q. the value of P after merger is expected to be Rs. 25 Crore due to the operating efficiencies. Firm P is required to pay Rs. 4.5 Crore to acquire firm Q. what is the NEA to firm P if it acquires firm Q?

Global Footprints Tata Steel Tata Tea Suzlon Energy Tata Steel Tata Tea Tata Steel Ranbaxy VSNL Tata Coffee

Corus Energy Brands Inc Eva Holdings NatSteel Tetley Millennium Steel Terapia Teleglobe Eight O’Clock Coffee

$ 8.04 bn $ 677 mn $ 570 mn $ 486 mn $ 407 mn $ 404 mn $ 324 mn $ 239 mn $ 220 mn

• • • •

• •

Other Examples are: Marico acquired Egyptian Hair Care Brand Fiancee (September, 2006). IDBI acquired UWB (September, 2006). Videocon has acquired South-Korea’s Daewoo Electronics for Rs.3,220 crore jointly with Belgian Holding Company RHJ Internetional. Ashok Leyland has acquired the Avia Truck Business Unit in Europe for $ 35 million. Dr.Reddy's acquired Betafarm in Germany- $570 million.

Some Facts • • •

• •

In the first 10 months this year a host of Indian companies have already made 112 foreign acquisitions worth 9.8 billion dollars. It is not only the Tatas, Wipros and Ranbaxy who are on the prowl, many mid-sized companies are also in action. But acquisitions have picked up only recently. During 2002 Indian companies acquired foreign assets worth only 202 million dollars. It inched up to little less than a billion dollar in the subsequent year. During 2004 the acquisition were worth 1.5 billion dollars. In the whole of last year, the acquisitions totalled 4.5 billion dollars. Growth is 40 % as compared to the last year. Historically, Japanese companies were considered to be the biggest acquirers of foreign companies. Then companies from Taiwan, Singapore and China became aggressive in foreign acquisitions. Now India is all set to join the bandwagon. Investment bankers say that whenever a company is on the block, Indian companies are considered stronger contender than others.

The Final Blueprint (TataCorus) Tata Steel, post-acquisition, will emerge as world’s 5th largest Steel company from its current rank of 56.

SHARE PRICE: •

Tata Steel UK, which has been formed to make the Acquisition, will offer 4.55 pounds ($ 8.54) per share, valuing Corus at 4.3 Billion Pounds.

•

The price of 4.55 pounds per corus share represents a multiple of 7.9 times the EBITDA for a year prior to July 1,2006, and a premium of about 26.2 % to the average closing mid-market price of 3.605 pounds per share for the 12 months ended October 4,2006, the last business day prior to the announcement of Tata Steel’s bid.

FINANCIAL DETAILS: •

TATA Steel UK has arranged a loan of € 1.6 billion, a €350 million revolving credit facility and a €1.35 billion mezzanine bridge loan through credit Suisse, ABN AMRO and Deutsche Bank.

•

The rest of the bid will be funded by a cash contribution of €1.836 billion from Tata Steel UK. Also, standard Chartered Bank has provided €196 million of subordinated debt financing to Tata steel UK.

OPERATIONAL DETAILS: •

TATA Steel will safeguard all the existing contractual and statutory employment and pension rights of all directors and employees of Corus Group on completing the acquisition.

•

Tata Steel has offered to pay upfront the deficit on the Corus Engineering Steels Pension Scheme with 126 million pounds and to increase the contribution rate on the British steel Pension Scheme from 10 to 12 % until March 31, 2009.

•

Tata Steel’s Chairman Ratan Tata will be Chairman of the new board of Corus to be formed after the acquisition

•

Tata Steel will not change any principal locations of Corus Group’s business and Tata Steel will continue to be headquartered in India.

Bibliography • Financial Management By I M Pandey • Financial Management and Policy By V.K.Bhalla • Cross-Border mergers and Acquisitions By S Shiva Ramu • Business Standard (13,14 September; 3,5,6,18,20,21,22,23,24 October) • www.Google.com