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Merger & Acquisitions

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Presentation on Merger & Acquisitions

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Merger & Acquisitions

  1. 1. Merger & Acquisitions Pallav Kumar ©2013 GlobalLogic Inc. CONFIDENTIAL
  2. 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… 2 CONFIDENTIAL
  3. 3. Types 3 CONFIDENTIAL
  4. 4. M&A Lifecycle 4 CONFIDENTIAL
  5. 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. 5 ` CONFIDENTIAL
  6. 6. What motives lie behind? − Economy of scale − Economy of scope − Cross selling − Taxation − Geographical or other diversifications − Resource transfer − Vertical integration − Absorption of similar businesses under single management − Manager’s hubris 6 CONFIDENTIAL
  7. 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: − − − − 7 By purchase of asset. By purchase of common share. By exchange of share for asset. Exchange of shares for shares. CONFIDENTIAL
  8. 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 8 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. CONFIDENTIAL
  9. 9. De-Merger − A single business is broken into components, either to operate on their own, to be sold or to be dissolved. − Example : − − 9 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. CONFIDENTIAL
  10. 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. 10 CONFIDENTIAL
  11. 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: − − 11 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. CONFIDENTIAL
  12. 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. 12 CONFIDENTIAL
  13. 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. 13 CONFIDENTIAL
  14. 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: − − 14 Buy all the shares of the smaller company. Buy the assets of the smaller companies. CONFIDENTIAL
  15. 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. 15 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 CONFIDENTIAL ownership.
  16. 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. 16 PROBLEM WITH MERGER i. Clash of corporate cultures ii. Increased business complexity iii. Employees may be resistant to change Reduction of competition. CONFIDENTIAL
  17. 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. 17 Avoid excessive competition CONFIDENTIAL
  18. 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. 18 CONFIDENTIAL
  19. 19. ©2013 GlobalLogic Inc. CONFIDENTIAL