M&A by Rishi Chourasia

Mergers, Acquisitions, and Corporate Restructuring

I. Corporate Restructuring
This is an umbrella term, which covers different types such as merger,
acquisition, takeover etc.

Corporate Restructuring can be defined as any change in the operations, or
capital structure, ownership etc. that is not a part of the company’s
ordinary course of business.

II. Various Forms of Corporate / Capital Structuring

a. Merger
b. Consolidation
c. Acquisition
d. Divestiture
e. De-merger (Spin Off /Split Up / Split Off)
f. Carve Out
g. Joint Venture
h. Reduction of Capital
i. Buyback of Securities
j. Variation of the Shareholders’ Rights

III. Definitions

a. Merger
Involves combination of two (or more) companies such that one of
them survives.

A1) Reverse Merger:-

b. Consolidation
Involves creation of an altogether new company owning assets and
liabilities of two or more companies, none of which survives.

c. Acquisition
An attempt or a process by which a company or companies or an
individual or a group of individuals acquires majority or controlling
interest in another company called ‘target company’.

d. Divestiture
Out and out sale of all or substantially all the assets of the company
usually for cash. (But could also be for a combination of cash and
debt).

e. De-merger (Spin Off /Split Up / Split Off)

Prof Rishi Chourasia
www.managementvikalp.co.in Page 1

 1.Spin Off :-
Involves transfer of some of assets and liabilities of a
company – normally of one of the business divisions- to
a new company whose shares are allotted to the original
shareholders of the company on a proportionate basis.
 2.Split Up:-
Involves transfer of assts and liabilities of 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.

 3.Split Off:-
It is a spin off with the difference that some of the
shareholders of the original company get shares in the new
company in exchange of their shares in the original company.

f. Carve Outs
Is a hybrid of divestiture and spin off. In this case, a company spins
off some the assets and liabilities to a new company and then sells a
part or all of the equity of a new company to a set of shareholders
which may or may not be the shareholders of the original company.

g. Joint Venture
It is an arrangement in which two or more companies contribute to the
equity capital of a new company.

h. Reduction of Capital
This is a legal process U/s 100 to 105 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.

i. Buyback of Securities
This is a legal process U/s 77A, 77AA, and 77B of the Companies
Act, 1956 by which a company is allowed to buy back its shares or
other securities.

j. Variation of the Shareholders’ Rights
This is a legal process U/s 106 and 107 of the Companies Act, 1956
by which a company is allowed to vary the rights attached to any class
of its shares.


IV. *M & A is basically a Growth Strategy.

Philip Kotler has spelt out broad classes of growth opportunity as follows:

a. Intensive Growth
 Market Penetration
Involves a company seeking increased sales for its present
products in the present markets through more aggressive
marketing efforts.

 Market Development
Consists of a company seeking increased sales by taking its
existing products into new markets.

 Product Development
Consists of a company seeking increased sales by developing
improved products for its present markets.

b. Integrative Growth
 Backward Integration
Consists of a company seeking ownership or increased
control of its supply system.

 Forward Integration
Consists of a company seeking owership or increased
control of its distribution system.

 Horizontal Integration
Consists of a company seeking ownership or increased
control of its competitor(s).

c. Diversification Growth
 Concentric Diversification
Consists of a company seeking to add new products that
have technological or marketing synergies with the existing
products. These products would normally appeal to new
classes of customers.

 Horizontal Diversification
Consists of a company seeking to add new products that
could appeal to its present customers though technically
unrelated to its present product line.

 Conglomerate Diversification
Consists of a company seeking to add new products for new
classes of customers , with no relationship to the company’s
current technology, products or markets.

V. The above growth opportunities can be achieved either by Organic Route
or Inorganic Route.

Intensive Growth has to be always by Organic Route.
Backward or Forward Integration could be either Organic or Inorganic.
Horizontal Integration is always Inorganic.
Diversification Growth can be either Organic or Inorganic.

This will clarify why most of the acquisitions are of Horizontal Type,
followed by Backward or Forward Integration types.

VI. Pros and Cons of Organic and Inorganic Routes

Organic Route:
a. Pros:
 Choice of Technology
 Choice of Location
 Milestone based consolidation
 Overhead Control

b. Cons:
 Slow Process
 Does not eliminate or reduce competition immediately
 Can involve disproportionate marketing expenditure
 Regulatory hurdles
 Registration hurdles
 Image / Brand hurdles
 Funding for capacity expansion or marketing may be
difficult to obtain but relatively easy for acquisition.

Inorganic Route:
Cons:
 Valuation of target company may be difficult
 Acquirer may end up paying higher price
 Post acquisition integration may pose serious problems in
terms of cultural integration, retrenchment or redeployment
of employees, software integration, acceptance by
customers and suppliers.

VII. Takeover Tactics
Friendly Takeover
Hostile Takeover


Tactics of Hostile Takeover:
a. Dawn Raid :-
In this tactic brokers acting on behalf of predator / raider swoop down
on stock exchange(s) at the time of its opening and buy all available
shares before the target / prey wakes up.

b. Bear Hug
Raider / Predator sends a very attractive tender offer meant for the
target / prey’s shareholders to the target’s / prey’s management and
asks them to consider the same in the interest of the shareholders.

c. Saturday Night Special
This is the same tactic as bear hug, but made on the Friday or Saturday
night asking for a decision by Monday. This is also called ‘Godfather
Offer’.

d. Direct Offer to the Shareholders of the Target Company
Raider makes a straight open offer to shareholders of the target
company without giving chance to the existing management to
evaluate the same.

Defence Tactics:--
a. Crown Jewels
Target company sells its highly profitable or attractive business /
division to make the takeover bid less attractive to the raider

b. Blank Cheque
Target company makes a preferential allotment to existing promoters
or friendly shareholders to increase the control of promoter group.
This may involve issuing a new class of shares also.

c. Shark Repellents
The target company amends its charter i.e. MOA or AOA to make the
takeover expensive or impossible. E.g. stipulating a certain minimum
educational qualification for directors or stipulating that a
supermajority would be required to approve a merger

d. Poison Pill:-
Target company issues such securities to its shareholders that, if the
raid succeeds, make the takeover prohibitively expensive and
economically unviable. E.g. Target company may issue to its
shareholders, securities which become immediately repayable in cash
if the takeover happens, at times with hefty redemption premium. Or it
may raise high quantum of money through junk bonds which become
immediately repayable on takeover and use this cash raised to


distribute heavy dividend. This is sometimes called as ‘leveraged
recap’ or ‘leveraged cash outs’ or ‘poison puts’ also.

e. Scorched Earth Strategy
This is extreme form of Poison Pill that can endanger the viability of
the target immediately upon takeover being successful.

f. Pacman
Target company or its promoters start acquiring sizable holding in
raider, threatening to acquire the raider itself, making it run for cover
and forcing it to hammer out a truce.

g. Green Mail
The target company or existing promoters arrange through friendly
investors to accumulate large stock of its shares with a view to raising
its market price high to make the takeover very expensive to the
raider.

Some times ‘green mail’ is used to describe an arrangement called
‘target block repurchase with standstill agreement’.
This means that the target company or its present promoters
agree to buyback the shares being accumulated by the raider at a
substantial premium and in return the raider enters into
agreement that neither he nor any of his associates shall acquire
any sizable stake in the target company for a stipulated period of
time.

h. White Knight
In this, the target company or its existing promoters enlist the services
of another company or group of investors to act as white knight and
takeover the target thereby foiling the bid of the raider and retaining
the control of existing promoters

i. Grey Knight
In this, the services of a friendly company or group of investors are
engaged to acquire shares of the raider itself to keep the raider busy
defending himself and eventually force a truce.

j. Golden Parachute
The contractual guarantee of a fairly large sum of compensation to top
and / or senior executives of the target company whose services are
likely to be terminated in case the takeover by the raider succeeds.

k. Refusal to Transfer Shares

VIII. M&A Theories (Motives behind M&A)
Though primary motive is ‘growth’, there are other motives such as
various synergies etc. Also the ‘growth’ motive has different dimensions


Let us look at the theoretical framework

Friedrich Trautwein has propagated the following theory. He classifies
Merger (incl. Acquisition) Motives or Theories as follows:

a. Merger as Rational Choice
1. Mergers that benefit the bidder’s / raider’s shareholders
 Monopoly Theory
(Wealth transfer from the target’s customers)

 Efficiency Theory
(Net gains through synergies)
 Valuation Theory
(Wealth transfer through private information)

 Raider Theory
(Wealth transfer from the target’s shareholders)

2. Mergers that benefit the bidder’s / raider’s managers
 Empire Building Theory

b. Merger as Process Outcome
 Process Theory
c. Merger as Macroeconomic Disturbances
 Disturbance Theory

Monopoly Theory
This theory explains M&A as being planned and executed to achieve Market
Share and Market Power including at times Pricing Power. In other words it
confirms that M&A is primarily used as growth strategy.

As mentioned earlier, the ‘growth’ motive / strategy itself has different
dimensions:

a. Market leaders trying to consolidate their position further
b. Profitable and Cash Rich companies trying to gain market leadership
c. India / Global entry Strategy

1. King Fischer Airlines acquiring Deccan Airways and
Jet Airways acquiring Sahara Airlines.
2. Mittal Steel acquiring Arcelor
3. Tata Steel acquiring NatSteel and then Corus
4. Idea Cellular acquiring Spice Communication
5. Tata Tea acquiring Tetley


6. Bharat Forge acquiring six companies in four countries
viz. Britain, Germany, Sweden China including an
aluminium forging company CDP in Germany
7. Tata Motors acquiring Daewoo’s commercial vehicle
unit
8. Star TV acquiring Balaji and Zee TV acquiring ETC
9. Reliance acquiring Trevira
10. Daiichi Sankyo acquiring Ranbaxy
11. Reliance acquiring IPCL
12. Merger of Hutch and Essar to form Hutchison Essar
13. Vodafone acquiring Hutchison Essar
14. Grasim acquiring L&T’s Ultratech Cement Division.
15. Monster Worldwide acquiring Jobsahead.com
16. DHL acquiring Blue Dart

Efficiency Theory
This theory explains M&A as being planned and executed to achieve
synergies thereby adding to enterprise valuation.
There are many types of synergies
a. Manufacturing Synergy
b. Operations Synergy
c. Marketing Synergy
d. Financial Synergy
e. Tax Synergy

Manufacturing Synergy :-
Manufacturing Synergies can be achieved not only through vertical
acquisitions but also through horizontal acquisitions. It essentially involves
combining core competence of the acquirer company and target company in
the different areas of manufacturing, technology, design and development etc.
It could also mean rationalising usage of the combined manufacturing
capacities.

1. Tata Motors acquiring Daewoo’s commercial vehicle unit
2. M&M acquiring Jiangling Motors in China
3. Daiichi Sankyo acquiring Ranbaxy
4. Tata Steel taking over Corus

Operations Synergy
Operations Synergy involves rationalising the combined operations in such a
manner that through sharing of facilities such as warehouses, transportation
transportation facilities, software, common services such as Acconts &
Finance, Tax, HR, Administration etc. duplication is avoided or logistic is
improved leading to quantum cost saving.
1. King Fischer Airlines acquiring Deccan Airways and Jet
Airways acquiring Sahara Airlines
2. Star TV acquiring Balaji and Zee TV acquiring ETC


3. VSNL acquiring Tyco
4. OBC acquiring GTB
5. Reliance acquiring FLAG

Marketing Synergy
Marketing synergy involves using either common sales force, or distribution
channel or media to push the products and brands of both the acquirer and
target companies at lower costs.
1. Dilip Piramal acquiring Universal Luggage
2. Voltas taking over Hyderabad Allwyn
3. HLL acquiring Lakme brand and its cosmetics business

Financial Synergy
Financial Synergy involves achieving either lower cost of capital or better
gearing ratio, or other improved financial parameters by combining both the
balance sheets.
Merger of Reliance Petrochemicals with Reliance Industries
in the year 1991-92.

As on 31-03-91 the RIL had following capital structure
PUC Rs. 152.12 Crore
Reserves Rs. 995.53 Crore
Net Worth Rs.1147.65 Crore

As on the same day RPL had PUC and Net Worth of
Rs. 749.28 Crore. Its refinery was just about to go on
stream. Ambanis merged RPL with RIL at a ratio of
10:1. This added only Rs. 74.93 Crore to PUC of RIL
and whopping Rs. 674.35 to its Reserves. Along with the
retained earnings of Rs. 40.87 Crore from 1991-92 operation
s RIL capital structure as on 31-12-92 became:
PUC Rs. 227.07 Crore
Reserves Rs. 1710.75Crore
Net Worth Rs. 1937.82 Crore

Ambanis repeated the same thing in 1994-95 when they
Merged Reliance Poly Ethylene Ltd. (RPEL) and Reliance
Poly Propylene Ltd. (RPPL) with RIL and added Rs. 99.58
Crore to PUC and Rs. 603.00 Crore to Reserves of RIL.

Tax Synergy
Tax Synergy involves merging loss making company with a profitable one
so that the profitable company can get tax benefit by writing off accumulated
losses of the loss making company.

Valuation Theory
This theory explains that the M&A are planned and executed by the acquirer


who has better information about the valuation of the target than the stock
market as a whole and who estimates the real intrinsic value to be much higher
than the present market capitalization of the company. Therefore such an
acquirer is ready to pay premium to the present market price to acquire control
over the target company.

This theory is in sharp contrast to the ‘Efficient Markets’ theory.
What ‘Efficient Markets’ theory argues is that stock markets are perfect and
efficient when it comes to determining the right valuation of any company.
Then how is it possible that the market capitalization is much below the true
intrinsic value of the company? Also, is there anything like true intrinsic value
of any company?

Rather than going into theoretical debate, we can look at this from different
practical aspects:

1. Though, by and large, markets are perfect, there are information gaps, costs
and also critical inside information. If acquirer becomes privy to such
information before the stock market, he will find the intrinsic value of the
company to be much higher than the market capitalization.

2. The acquirer may have the same information about the company as stock
market, but a different view on the future cash flows based on his own
reading of the future course of the economy or the company.

3. In case of those companies that have substantial off balance sheet assets or
substantially undervalued non-operating assets, which are not being
encashed by the present management, the acquirer may have a game plan
to encash upon these assts and hence he would put much more value to the
company than the stock market.

4. Economies and stock markets always show a cyclical pattern. A boom is
followed by depression and vice-a-versa. During a phase of prolonged
depression in the economy and stock market, the market capitalizations of
companies go much below their replacement costs. This is known as Q
Ratio. Also, inflation reduces the real value of the debt appearing in the
balance sheets of the companies. When depression ends and economy starts
looking up, stock market starts valuing the company progressively higher
expecting better cash flows in the improved times. In this sense a cash rich
company planning to acquire competitors, can find undervalued companies
at the end of a prolonged depression – just before the boom picks up.

5. In case of underperforming companies having strong brand(s), the acquirer
may be confident of leveraging on such brands and generate higher growth
and cash flows and hence may put a much higher value to the company than
the stock market.

Raider Theory


Rider Theory explains the M&A activity in the specific context of PE Funds
who acquire controlling stake in cash needy companies at much lower
valuation than potential or even present valuation, just to transfer the wealth
from existing shareholders to themselves without any strategic intent of
running these companies themselves.

Empire Building Theory
Empire Building Theory tries to explain M&A as being planned and executed
by the managers for expanding their own empire rather than crating
shareholder wealth.

IX. Intents of Target Companies

1. Exiting Non Profitable Business
 Global Trust Bank being merged with OBC
 NOCIL selling out to RIL

2. Exiting Non Synergistic or Non Core Business
 L&T selling out Ultra Tech Cement Division to
Grasim

3. Generate Cash Flow for Other Business(es)
 India Cement selling 94.69% stake in Shri
Vishnu Cement to generate Rs. 385 Crore fot
funding its own expansion

4. Inability – real or perceived – to withstand competition
 Lakme selling out to HLL
 Ramesh Chauhan selling out Thumps Up, Gold
Spot to Coca Cola
5. Inability to achieve further growth
 Bazee.com selling to e-Bay
 Daksh e-Services selling to IBM
 Spice Telecom selling to IDEA

6. Inability to mobilize further resources for business
growth
 Investment by Warburg Pincus in Max Group to
fund Life Insurance and Healthcare businesses
 Notz Stucki investing in Camlin

 Deccan Airways selling out to King Fischer
Airlines

X. Typical Characteristics of Takeover Candidates

a. Low Market Capitalization vis-à-vis Intrinsic
(Present/Potential) Value
b. Low Market Capitalization vis-à-vis Replacement Cost of
Assets
c. Low Market Capitalization vis-à-vis Book Value
d. Cash Flows in excess of Debt Servicing Requirements
e. Lowly Geared Companies
f. Moderate or low growth vis-a-vis Industry growth
g. Underperforming Companies
h. Unexploited Brand Potential
i. Undervalued and Saleable non operating assets.
j. Large off Balance Sheet Assets

In all the above cases one basic requirement is low promoter holding or willingness of
Promoters or some of the promoters to sell their stake.


M&A by Rishi Chourasia

Recommandé

Recommandé

Contenu connexe

Tendances

Tendances (20)

En vedette

En vedette (20)

Similaire à M&A by Rishi Chourasia

Similaire à M&A by Rishi Chourasia (20)

Plus de Vikalp Education

Plus de Vikalp Education (6)

M&A by Rishi Chourasia