A REPORT

ON

“A STUDY INTO THE FINANCIAL SCENARIOS AND VARIOUS OTHER ASPECTS

RELATED TO SELECTED COMPANIES – PRE AND POST MERGERS AND
ACQUISITIONS”

By

Shivika Arora

18BSP2012

Ernst and Young Global Limited

 REPORT

ON

“A STUDY INTO THE FINANCIAL SCENARIOS AND VARIOUS OTHER ASPECTS

RELATED TO SELECTED COMPANIES – PRE AND POST MERGERS AND
ACQUISITIONS”

By

Shivika Arora

18BSP2012

Ernst and Young Global Limited

A report submitted in partial fulfilment of

the requirements of

PGPM Program of

IBS Gurgaon

Date of Submission:
 Table of Contents

S.No. Title Page No.

1. Abstract 1

2. Introduction
About the company 2
Mergers and Acquisition 3

3. Main Text
Motives behind M&A 5
Types of M&A 7
M&A Process 9
Deal Analysis 11

4. Annexure 18
 Abstract

As part of my SIP, I am working with Ernst and Young Global Limited for a period of 14
weeks starting from “February 19’2019 till May 24’2019”. The main purpose of the project is
to “A Study into the financial scenarios and various other aspects related to selected
companies – Pre and Post mergers and acquisitions”

During my SIP I would be studying and carrying out a comparative analysis of the operating
performance of the acquiring company pre and post-merger and acquisition and the
operating performance of the merged entity and in some major cases I would also be
comparing the performance of the target company as well.

The analysis of the various deals is done using tables, charts and pie diagrams. The main
source of information is secondary data.

I have been working on my project as per my proposed schedule. And till 12 th of April’2019 I
have covered following areas of knowledge according to my pre-described timeline for the
respective areas:

Week 1: Understanding various terms related to M&A

Week 2-3: Understanding the process and motives behind M&A

Week 4-7: Analysing top deals of M&A in recent years

Week 8-9: Analysing various benefits and synergies generated post the merger and
comparing company’s financial statements wherever possible

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 Introduction

About the company

Ernst & Young (doing business as EY) is a multinational professional services firm
headquartered in London, England, United Kingdom. EY is one of the largest professional
services firms in the world. Over the recent years, as a firm, EY has shifted its historical
business focus from traditional audit profile towards consulting. In particular, EY advanced
its market presence in strategic consulting and entered into direct competition with what
has been a traditional field of "Big Three" companies, namely Bain, McKinseyand BCG. By
series of acquisitions and shift of market focus, EY expanded its market share in areas
including operations services consulting, strategy services consulting, HR services consulting,
financial services consulting & technology services consulting.

EY operates as a network of member firms which are separate legal entities in individual
countries. It has 270,000 employees in over 700 offices around 150 countries in the world. It
provides assurance (including financial audit), tax, consulting and advisory services to
companies.

The firm dates back to 1849 with the founding of Harding & Pullein in England. The current
firm was formed by a merger of Ernst & Whinney and Arthur Young & Co. in 1989. It was
known as Ernst & Young until 2013 when it underwent a rebranding to EY. The acronym
"EY" was already an informal name for the firm prior to its official adoption.

In 2018, Fortune magazine ranked EY 52nd on the 100 Best Companies to Work For list. In
2017, EY was the 9th largest privately owned organization in the United States.

The firm is geographically organised as follows:

 EMEIA: Europe, Middle East, India and Africa

 Americas
 Asia-Pacific
 Japan

Each area has an identical business structure and a management team, which is led by an
Area Managing Partner who is part of the Global Executive board. In 2018, the company has
undergone transformation of some of its regions, primarily CIS region (with offices operating
in former Soviet Union) and the region of CEE (vastly Eastern Europe) have merged to form
CESA block.

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Operations in India

In India, since ICAI regulations do not permit foreign firms to carry out company audits,
Ernst and Young carries them out through SR Batliboi & Co, an accountancy firm
headquartered in Mumbai. They carry out audits for large companies such as Vedanta
Limited and V-Guard under partnerships called S.R.Batliboi & Co LLP and S.R.Batliboi & Co
Associates.

Services

Over the course of its operations, EY has transformed its business model and diversified
pool of its offered services. Conventionally known as a Big 4 accounting firm over the course
of 2010-2019, EY has substantially altered its business approach towards more
comprehensive scope of services. This is mainly attributed to an intensified competition in
the existing market of professional services and competition in new markets: investment
banking and strategic consultancy. According to latest data published, the company has the
following four main service lines:

 Assurance: comprises Financial Audit (core assurance), Financial Accounting Advisory

Services and Forensic & Integrity Services.
 Tax includes Transfer Pricing, International Tax Services, Business Tax Compliance,
People Advisory, Global Trade, Indirect Tax, Tax Accounting & Risk Advisory Services,
Tax Technology and Transformation, Transaction Tax.
 Advisory: consisting of four subservice lines: Actuarial, IT Risk and Assurance, Risk,
and Performance Improvement.
 Transaction Advisory Services (TAS): deals with companies' capital transformation –
including Business Valuation and Economics, Due Diligence, Real Estate Advisory
Services, Project Finance and Infrastructure, M&A, Restructuring (financial and
operational).

Mergers and Acquisition

WHAT IS MERGER?

Merger is defined as combination of two or more companies into a single company where
one survives and the others lose their corporate existence. The survivor acquires all t h e
assets as well as liabilities of the merged company or companies.
G e n e r a l l y , t h e surviving company is the buyer, which retains its identity, and the
extinguished company is the seller.

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Merger is also defined as amalgamation. Merger is the fusion of two or
m o r e existing companies. All assets, liabilities and the stock of one company stand
transferred to Transferee Company in consideration of payment in the form of:

 Equity shares in the transferee company,

 Cash, or
 A mix of the above modes

WHAT IS ACQUISITION?

Acquisition in general sense is acquiring the ownership in the property. In the

context of business combinations, an acquisition is the purchase by one
company of a controlling interest in the share capital of another existing company.

Takeover

A ‘takeover’ is acquisition and both the terms are used interchangeably. Takeover differs
from merger in approach to business combinations i.e. The process of takeover,
transaction involved in takeover, determination of share exchange or cash price
and the fulfilment of goals of combination all are different in takeovers than in
mergers. For example, process of takeover is unilateral and the offeror company decides
about the maximum price. Time taken in completion of transaction is less in
takeover than in mergers, top management of the offeree company being more co-
operative.

Friendly and Hostile Acquisitions

Acquisitions can be either friendly or hostile. Friendly acquisitions occur when the target
firm expresses its agreement to be acquired. Hostile acquisitions don't have the same
agreement from the target firm, and the acquiring firm must actively purchase large stakes
of the target company to gain a majority.

Friendly acquisitions often work towards a mutual benefit for both the acquiring and target
companies. Unfriendly acquisitions, commonly referred to as hostile takeovers, occur when
the target company does not consent to the acquisition. In this case, the acquiring company
must gather a majority stake to force the acquisition.

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 Main text

Motives behind M&A

The following are the motivations behind any merger that occurs between the companies:

SYNERGIES

This is the most common reason for a merger. It is expected that when two companies
merge to form a new bigger company, the value of the new entity will be more than the
combined value of two separate companies. Generally, there are two types of synergies that
are aimed for:

COST SYNERGIES

Synergies that reduce costs through the economies of scale in various divisions of the
company, viz. research and development, procurement, sales and marketing,
manufacturing, distribution and general administration.

REVENUE SYNERGIES

Synergies that increase the overall revenue through expanded markets, products cross-
selling and an increase in prices.

RAPID GROWTH

Generally, any company has two options to grow, viz. organic growth and external growth.
Organic growth is achieved by an increase in sales by making internal investments. External
growth is achieved by an increase in sales by buying external resources through mergers and
acquisitions. Often, companies prefer to grow externally, especially the ones in a mature
industry as the industry offers limited opportunities for growth. It is less risky to have
external growth.

MARKET POWER

A horizontal merger in a small industry will definitely help in increasing the market share. An
increased market share will, in turn, give the power to influence prices. In fact, monopoly is
an extreme example of a horizontal merger. A vertical merger can also increase the market
power by reducing the dependence on external suppliers.

UNIQUE CAPABILITIES

Not every company can have all the resources or strengths required for a successful growth.
There will come a time when the company wants to acquire the competencies and

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resources that it lacks. This can easily be done through mergers and acquisitions in a very
cost-effective way as compared to developing the capabilities internally.

DIVERSIFICATION

Diversification of the company’s total cash flows is a reason argued by managers for the
mergers. However, shareholders are not convinced by this reason as they can easily
diversify their investments themselves at the portfolio level. This is cheaper and less painful
than the company going through the process of merging with another company to achieve
synergies created by diversification.

BOOTSTRAPPING EPS

A merger deal might have a bootstrapping effect on the company’s EPS. This occurs when
the acquiring company’s shares are trading at a higher P/E ratio than the P/E of the target
company and the P/E does not decrease even after the merger. Such an effect increases the
current EPS of the company at the expense of decreased future EPS and decreased growth
prospects.

PERSONAL INCENTIVES FOR MANAGERS

The executives of a company might want the merger to satisfy their personal goals rather
than maximize the shareholder value. A post-merger bigger company translates into more
prestige and greater power for them. Even the compensation increases in a bigger company.
Thus, the managers will prefer the merger to increase the size of their company.

TAX ISSUES

A company with a large taxable income will look at merging with a company with large carry
forwards tax losses. By doing so, the acquiring company can lower the tax liability. A merger
purely for reducing tax liabilities will not be approved by regulators, however, companies
can hide this reason under other strong motivations to merge.

UNLOCKING HIDDEN VALUE

A struggling company may be bought by an acquirer to unlock its hidden value. The
acquiring company may believe that by making some improvements in management and
organizational structure and adding more resources, it can make the company perform
better. Of course, the acquirer will pay a lower price than the market price.

INTERNATIONAL GOALS

International mergers and acquisitions have become more common and important in
today’s business world. Like with mergers in one’s own country, these international deals
are also motivated by the above-mentioned reasons. However, there are several reasons
specifically for international mergers as follows:

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  Unique products can be marketed in new markets.
 Transfer of technology to new markets.
 Exploiting market inefficiencies.
 Overcoming disadvantageous policies of the government.
 Continued support to international clients.

Types of Mergers and Acquisitions

There are six commonly-referred to types of business combinations known as mergers:
conglomerate merger, concentric merger, horizontal merger, market extension merger,
vertical merger and product extension merger. The term chosen to describe the merger
depends on the economic function, purpose of the business transaction and relationship
between the merging companies.

Types of M&A

CONGLOMERATE CONCENTRIC VERTICAL HORIZONTAL MARKET EXTENSION PRODUCT

EXTENSION

Vertical Merger

A merger between two companies producing different goods or services for one specific
finished product. A vertical merger occurs when two or more firms, operating at different
levels within an industry's supply chain, merge operations. Most often the logic behind the
merger is to increase synergies created by merging firms that would be more efficient
operating as one.

Horizontal Merger

A merger occurring between companies in the same industry. Horizontal merger is a

business consolidation that occurs between firms who operate in the same space, often as
competitors offering the same good or service. Horizontal mergers are common in

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industries with fewer firms, as competition tends to be higher and the synergies and
potential gains in market share are much greater for merging firms in such an industry.

Conglomerate Merger

A merger between firms that are involved in totally unrelated business activities. There are
two types of conglomerate mergers: pure and mixed. Pure conglomerate mergers involve
firms with nothing in common, while mixed conglomerate mergers involve firms that are
looking for product extensions or market extensions.

Concentric Merger

Concentric mergers are between firms that serve the same customers in a particular
industry, but the products and services offered are different. Their products may be
complements. For example, if a company that produces Computer systems mergers with a
company that produces UPS, this would be termed as a concentric merger.

Market Extension Merger

A market extension merger takes place between two companies that deal in the same
products but in separate markets. The main purpose of the market extension merger is to
make sure that the merging companies can get access to a bigger market and that ensures a
bigger client base.

Product Extension Merger

A product extension merger takes place between two business organizations that deal in
products that are related to each other and operate in the same market. The product
extension merger allows the merging companies to group together their products and get
access to a bigger set of consumers. This ensures that they earn higher profits.

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M&A Process
Merger and acquisition process is the most challenging and most critical one when it comes
to corporate restructuring. One wrong decision or one wrong move can actually reverse the
effects in an unimaginable manner. It should certainly be followed in a way that a company
can gain maximum benefits with the deal.

A typical 10-step M&A deal process includes:

1. Develop an acquisition strategy – Developing a good acquisition strategy revolves

around the acquirer having a clear idea of what they expect to gain from making the
acquisition – what their business purpose is for acquiring the target company (e.g.,
expand product lines or gain access to new markets)
2. Set the M&A search criteria – Determining the key criteria for identifying potential
target companies (e.g., profit margins, geographic location, or customer base)
3. Search for potential acquisition targets – The acquirer uses their identified search
criteria to look for and then evaluate potential target companies
4. Begin acquisition planning – The acquirer makes contact with one or more
companies that meet its search criteria and appear to offer good value; the purpose
of initial conversations is to get more information and to see how amenable to a
merger or acquisition the target company is
5. Perform valuation analysis – Assuming initial contact and conversations go well, the
acquirer asks the target company to provide substantial information (current
financials, etc.) that will enable the acquirer to further evaluate the target, both as a
business on its own and as a suitable acquisition target

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6. Negotiations – After producing several valuation models of the target company, the
acquirer should have sufficient information to enable it to construct a reasonable
offer; Once the initial offer has been presented, the two companies can negotiate
terms in more detail
7. M&A due diligence – Due diligence is an exhaustive process that begins when the
offer has been accepted; due diligence aims to confirm or correct the acquirer’s
assessment of the value of the target company by conducting a detailed examination
and analysis of every aspect of the target company’s operations – its financial
metrics, assets and liabilities, customers, human resources, etc.
8. Purchase and sale contracts – Assuming due diligence is completed with no major
problems or concerns arising, the next step forward is executing a final contract for
sale; the parties will make a final decision on the type of purchase agreement,
whether it is to be an asset purchase or share purchase
9. Financing strategy for the acquisition – The acquirer will, of course, have explored
financing options for the deal earlier, but the details of financing typically come
together after the purchase and sale agreement has been signed.
10. Closing and integration of the acquisition – The acquisition deal closes, and
management teams of the target and acquirer work together on the process of
merging the two firms

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Deal Analysis
As part of my SIP I have selected 10 M&A deals from the past two years and have presented
my analysis in the presentation form. Following are the screenshots of the structure of each
deal:

1. Walmart-Flipkart

Transaction overview

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2. Vodafone-Idea

3. UPL-Arysta

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4. PVR-SPI

5. ONGC-HPCL

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6. INDUSIND BANK-BFIL

7. HUL-GSK

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8. FLIPKART-EBAY

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9. AXIS BANK-FREECHARGE

10. AIRTEL-TTSL

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17
 Annexure

Shareholding Pattern and Financial Performance

1. Walmart-Flipkart

2. Vodafone-Idea

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3. UPL-Arysta

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4. PVR-SPI

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5. ONGC-HPCL

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6. INDUSIND BANK-BFIL

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7. HUL-GSK

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8. AIRTEL-TTSL

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9. Axis Bank-Freecharge

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