MERGERS &

ACQUISITIONS
Dr. Raghuvir Singh

5 VIEWS/ASPECTS OF AN
ORGANIZATION

As an Economic Actor
As a Legal entity
Collection of people
Accumulation of Knowledge and Learning
Bundle of Resources
If you fully want to understand an
organizations strategy and why it succeeds
or fails ,you need to understand these
aspects

Assessment

(Strategy)

(Where are we?)

a

Strategic
Assessment

(How to go there?)

Vision/Objectives
(Where we want to go?)

(Way to go there)

Strategic Choice

Strategic intent
Strategic
Option

Strategic
Strategic
Choice
Assessment
Strategic
Intent

STRATEGIC ANALYSIS (ENVIRONMENTAL

ANALYSIS)

o
o

Macro(External) and Micro(Internal)

In Analyzing the Macro-Environment, we are
trying to identify the things that will influence
an org.s supply and demand levels and its cost
Macro Environmental factors affect a whole
population and organizations that serve it
Factors are Known as: SLEPT or PESTLE or SWOT
These are non-controllable, dynamic, complex
and affect in long run hence organizations must
adapt to the changes in macro- environment
Outcomes : Opportunities and Threats

MICRO ENVIRONMENTAL
ANALYSIS
Outcomes : strengths and weaknesses
Helps the company make choices in strategic
landscape
o Tool for Internal Analysis (1) Resourced
based view of the of the organization
(2) Corporate Value Chain Analysis
(3) SWOT

RESOURCED- BASED VIEW OF

THE ORGANIZATION (RVB)

Resources are the basis of the competitive

strength if exploited well
Orgs. Cant achieve sustainable competitive
advantage by just selecting right target
market, selecting right combination of products
and their positioning but these are not
sufficient by themselves because they are too
easy for the competitors to notice and copy
Over a period of time orgs. built human and
physical resources and the capability to use
them to provide the org. a sustainable
advantage.

CHARACTERISTICS OF
RESOURCES

For a resource to be strategic ,it must meet

4 needs: VRIO( VIRUS)
VALUABLE
RARE
INIMITABLE
Organization (ability to exploit the resource)
OR UNSUBSTITUTABLE

LIFE CYCLE STAGE OF INDUSTRY

The macro-environment ,in the form of

technological advances or social trends often
trigger changes in an industrys life cycle
Different stages of the industry life-cycle
tend to be linked to different types of
industry structure and also the variations in
the balance between the industrys six forces
The life cycle of an industry influences the
strategic decisions

INDUSTRY ANALYSIS

Assesses industry level profitability and

performances or attractiveness of the
industry
1. Bargain power of suppliers
2. Bargaining power customers/buyers
3. The threat of substitution
4. The threat of new entrants
5. The power of complementors
6.The intensity of rivalry between firms

Influences on Strategic Intent

Inspired Guesses
of the future

Stakeholder
Groups

Strategic Intent
Goals
Vision
Survival
Growth
Profit
Shareholder
value

Leadership

Context
History
Culture
Ownership
Structure
Corporate
value

Unique for an
Enterprise

Strategy formulation
process
Strategy Assessment
Strategic Choice

Why a decision maker begin to think about the need to

make a strategic change ?
Gap analysis is a good way to begin with strategic.
Desired outcome
New Strategy

Past Strategy

T1

Existing Strategy

Performance gap

T2

Expected outcome

LEVELS OF STRATEGY

Corporate
Business
Operations

CORPORATE STRATEGY

Growth
Stability
Decline

GROWTH STRATEGY
Organic

Inorganic

International or Domestic

Horizontal & Vertical

Green Field
or
Brown Field
Joint venture

Mergers
Acquisitions
Take overs

INORGANIC GROWTH STRATEGY

Fundamental differences among:

MERGERS
ACQUISITIONS
JOINT VENTURES
SPIN-OFFS/SPLIT -OFF
DIVESTITURES/Carve-out
SPLIT-UP
MBOs
LBOs

WHY MERGERS HAPPEN ?

SYNERGY
FINANCIAL STRATEGY
DIVERSIFICATION
STRATEGIC REALIGNMENT
REGULATORY CHANGE
TECHNOLOGICAL CHANGE
HUBRIS AND THE WINNERS CURSE
BUYING UNDERVALUED ASSETS
MISMANAGEMENT & AGENCY PROBLEM)

WHY MERGERS ???

MANAGERIALISM
TAX CONSIDERATIONS
MARKET POWER
MISVALUATION

CONTI.

OPTIONS FOR A FOREIGN COMPANY

TO SET UP BUSINESS IN INDIA

1. As incorporated company under companies act

(I) JV (II) Wholly owned subsidiary
2. As an office of a foreign entity as any of the of
following mode:
(i) Liaison office/representative office
(ii) Project office (iii) Branch office
3. BUYING INDIAN COMPANY
4. ACQUIRING STAKE IN INDIAN COMPANY

M&A TRENDS

Volume & Value (y-o-y growth or decline)

Inbound, outbound and domestic deals
Global trends, local trends ,BRICS trends
Performance of deals (EBITDA & ROCE)
Types of deal. Horiz./vertical/conglomerate
Deals by Sectors for inbound, outbound and
domestic
Analysis of deals sector wise
Major firms involved in inbound, outbound and
domestic
Deal Analysis by pvt. & public companies and PE

M&A TRENDS-----

More than three-fourths corporate

combinations fail to attain projected
business results. Most produce higher- thanexpected costs and lower- than- acceptable
returns.
More than 65% of major strategic M&As have
been failures resulting in dramatic losses of
value for shareholders of the acquiring
company
According to a PWC Survey, up to 80% of
M&As destroyed or failed to create value

M&A TRENDS----

30 years of evidence demonstrates that most

acquisitions do not create value for the
acquiring co.s shareholders
Numerous studies demonstrate that ,on
average, M&As consistently benefit the
targets shareholders but not the acquirers
shareholders
M&As are inherently risky investment
decisions. One factor to this risk is acquirers
lack of detailed knowledge about the
business they pursue

M&A TRENDS----

US had about 46,000 M&As during 2002-07

WHY SO MANY M&A activities ??
Because corporations compete to provide
shareholders with a superior ROI
Earnings growth is derived from 3 main
sources --------1. Revenue from existing & newly developed
products and services
2. Productivity increases and cost reduction
3.Mergers & acquisitions

GEATEST DEALS IN THE WORLD

1. Vodafone acquired Mannesmann(German
Telcom) for & 230 Bn in 2000
2. AOL Acquires Time Warner (media co.) for
$182 Bn. Jan, 2001
3.Verizon(US ,broadband & telcom)
communications agrees to pay $130 Billions
to Vodafone(wireless business in US)
4. Altria buys Philip Morris(Cigarette ) for $113
Bn. in March 2008
5. RFS holdings acquires ABN Amro for $98 Bn,
in Nov. 2007

GREAT DEALS.
6. AT&T ACQUIRES Bell South for $ 89 in 2006
7. Pfizer acquires Warner Lambert for $89
Billion in Jun, 2000
8. Exxon acquires Mobil for $85 Billion in 1999
9. Royal Dutch acquires Shell for $ 80 Billion in
July ,2005
10. Glaxo Wellcome acquires SmithKline
Beecham for $79 Bn. In 2000.

M & A TRENDS----Deals by Indian companies.

Indian Companies had (listed & unlisted) 1995
acquisitions during 2000-2012 valued $116 Bn.
Out bound deals by Indian companies have far
exceeded Inbound deals since 2000 and these were
at peak in 2007 and 2008.
WHY SO?????
They want to be globally competitive
Search for research and technology or get
intellectual property
Seeking established markets
Wish to be global players by scale

M & A TRENDS
TOTAL NO. OF DEALS
YEARS

VOLUME

VALUE

2013
480
$ 27.4 Bn.
2012
598
$ 35.4 Bn.
2011
644
$ 44.6 Bn.
2010
282
$51.4 Bn.
There was a jump of about 166.6% in 2010
than in 2009

M & A TRENDS..
PE DEALS IN INDIA
The major picks were in real estate(22%),
IT/ITES(34%) and pharma and health
sector(26%),retails(7%), Media &
Entertainment (4%)
YEARS
VOLUME
VALUE
2013
360
$ 8.9 Bn.
2012
345
$ 6.7 Bn.

M & A TRENDS.
COUNTRYWISE DEALS
COUNTRY
Japan
UAE
Mauritius
Singapore
Australia
Switzerland
USA

Inbound($)
1227 Million
1050 ,,
681
,,
483
,,
21
,,
30
,,
1041 ,,

Outbound($)
0
42 Million
0 ,,
05 ,,
592 ,,
357 ,,
1551 ,,

RECENT TRENDS-OUTBOUND
DEALS
Years

Value (in $)

2012

0.7

2011

10.84 Billion

2010

22.50 Billion

2009

1.38

2008

13.2 Billion

2007

32.8 Billion

2006

9.91 Billion

Billion

Billion

Buyer

Target

Year

Enterprise Change
in
EBITDA
%

Current
ROCE %

TATA
STEEL

CORUS

JAN 2007

$13.3 Bn.

-54

Hindalco
(AB Birla)

Novelis

Feb, 2007 $13.3 Bn.

238

TATA
Motors

JLR

Mar,2008

$3.2 Bn.

93

79

Bharti
Airtel

Zain
Africa

Feb,2010

10.7 Bn.

-5

Target Industries in India 2008-12

Energy & Power
Telecom
Consumer
Stables;
Retail;
1% 3% 3%
Consumer
Products;
Media & Entertainment; 3%
Technology; 5%
Energy & Power; 26%

Health care

Real Estate; 5%

Materials
Industrials

Industrials; 8%

Materials; 8%

Financial

Real Estate
Technology
Telecom; 16%

Financial; 10%
Health care; 12%

Media &
Entertainment
Consumer Products
Retail
Consumer Stables

Who is investing in India

By deal volume 2008-12

US; 26%
Others; 34%

Countries
US
Mauritius
UK

Mauritius; 10%
Africa;
Russia;1%
1%
France; 5%
UK; 8%
Japan;
7%
Singapore;
8%

Singapore
Japan
France
Russia
Africa
Others

Who is investing in India

By deal value 2008-12

Countries

Others; 25%
UK; 32%

Africa; 1%
Russia;
1%
Singapore; 6%

US; 17%

Japan; 18%

Source: Thomson Reuters

UK
Japan
US
Singapore
Russia
Africa
Others

Where Indian Companies are investing

By Deal value 2008-12

Countries
Others; 25%

Nigeria; 25%

S.Russia;
Africa;1%
1%
Brazil; 2%
Turkey; 6%

US; 16%

Australia; 4%
UK; 9%
Venezuala; 11%

Nigeria
US
Venezuala
UK
Australia
Turkey
Brazil
Russia
S. Africa
Others

Where Indian Companies are investing

By deal volume 2008-10
Countries
US; 22%
Others; 39%

UK; 12%

Australia; 6%
Indonesia; 3% Singapore; 6%
S. Africa;
3%
Brazil;
1%
China;
1%4% 5%
Germany;
Canada;

US
UK
Australia
Singapore
Germany
Canada
China
Brazil
S. Africa
Indonesia
Others

Source: Thomson Reuters

Source of Highest FDI inflows to

India
Mauritius
Singapore

WHY?????

Biggest outbound Investment

Opportunities for Indian Companies

Natural Resources & Core Sector

IT / Telecom
Financial Services

Greatest Challenges for Indian

Investors in outbound deals
1. Post Merger Integration

Integrating new business lines, products or

services
Supervising a new workforce
Harmonizing employee benefits
Compliance risk management

2. Running Global Operations

Conflicting local rules & regulations

Whether Co.'s policies & practices are
complying with respective countries.

Tips for increasing chances of M&A success

for Indian outbound deals

1. Keep existing management in place

for 2-3 years or longer post
acquisition
2. Make sure the acquired Co. is
incorporate into your global
compliance program.

LEGAL IMPLICATIONS FOR

OUTBOUND M&A FOR INDIAN CO.

SEBI,CCI,FEMA, & IT ACT

Asset transfers in amalgamations are currently
exempted from IT ACT only where transferee is an
Indian Company
In March 2003 ,GOI REVISED AUTOMATIC ROUTE
FOR OVERSEAS INVESTMENT thus enabling Indian
companies to fund 100% of their net worth abroad
The net worth amount was raised to 400% in
2010. To calculate it the overseas subsidiary
were included

RBI PROVISIONS

Indian companies have inability to pledge

Indian assets for guarantees or for debt
financing without the approval of RBI
Stock SWAP is very complex, since it
requires approvals from various regulators.
This brings uncertainty in the deal
Under the RBI regulation Capital Market
Exposure any financing given for buying
shares is prohibited(since asset purchase is
rarely done)

TAKE OVER CODE

It does not directly apply to outbound deals

but has indirect effect
Laws tend to be promoter centric or
protective
It means there are general restrictions on the
ability of Indian firms to do hostile takeover
since they do not have experience

COMPANY ACT 1956 AND 2010

1956 act had restrictions on the Indian company to do M& A deals
in terms of structure of outbound deals
The merger of a foreign company with an Indian company is
allowed, but an Indian company cant be merged into a foreign
co.
However, 2010 act do permit the merger of a foreign co. with an
Indian co.& vice versa
With two limitations
1. Foreign co. must be located in a country that is being notified
by central Govt.
2. Prior approval to be obtained from RBI
3. An Indian co. have to incorporate a subsidiary to merge an
Indian company in a foreign company. It may prefer to have
the financing outside India than to finance in India. For
guarantees, the Indian can only guarantee the entity in which
it has an equity interest

COMPETITION COMISSION ACT

The process of doing large scale outbound

transactions is going to face some resistance
from CCI ,especially if the deal has a
significant impact on competition in India

SEBI
SEBI HAS NO OBJECTIONS. IF IT IS A LISTED
COMPANY ,IT HAS TO COMPLY WITH LISTING
AGREEMENTS AND MAKE APPROPRIATE
DISCLOSURES AT APPROPRIATE TIME

ENVIRONMENT ,HEALTH AND

SAFETY

In developed countries ,it is over regulated

which means a lot of costs and lot of
settlement damages

IT ACT
All repatriations are taxed @ 33%
There are no credits for the taxes paid abroad.

M & A CORPORATE
GOVERNANCE

Requirement for Independent directors

-------- ,,,,,------------------- Audit committee
Board involvement in risk management is in focus
across the globe
Transparency in reporting and decision making
Promoter controlled nature of Indian firms & the
relative weakness in the proper governance
standards play a role in actually making Indian stocks
relatively unattractive to investors from countries
with better corporate governance standards
Domination by a particular controlling stockholders,
a much more flexible decision making process

M & A PROCESS
4 STAGES in M& A
1. Identification and Target selection
2. Evaluation ,negotiation and structuring
the deal
3. Financing the deal
4. post merger Integration

STEP BY STEP PROCESS OF M&A

Develop strategic framework(inorganic growth

Compile the target list (consulting company)
Contact the target through (consultant)
Send /receive the teaser(executive summary)
Sign a confidentially agreement
Send /receive the confidential information
memorandum (CIM)
Submit / solicit an indication of interest(IOI)
Conduct management meetings
Ask /submit letter of intent(LIO)

STEP BY STEP -------------- Conduct due diligence

Write the purchase Agreement

Structure the deal
Close the deal
Arrange the finance and make payments
Prepare the post Merger plan(integration
plan)

DUE DILIGENCE

Purpose of due diligence is risk avoidance and value

creation
A closer look at the target company by the potential
buyer is called due diligence
A thorough examination of the target company by the
acquirer to reduce risk.
Determining potential for prospective M& A
to create share holder value
To gain comfort that a target business is what it is
represented to be, to validate key assumptions, and
to mitigate the risk that an acquisition will bring
unwelcome surprises.

DUE DILIGENCE ENCOMPASSES

THE FOLLOWING ACTIVITIES

It is performed by internal experts and outside

advisors
Performed during a specified period of time to
discover about the true state and future
prospects of the target company
Provide inputs to management to make informed
decisions
Validates key assumptions, search for previously
undisclosed risks
Support or alter the valuation
Provide inputs for negotiation of the definitive
agreements

COMPOSITION OF TEAM

Legal experts
Accounting & finance professionals
Tax experts
Corporate managers
Business development managers
Outsider advisors(M & A Specialists)

DUE DILIGENCE SCRUTINIZES

THE FOLLOWING ASPECTS

1. organization documents:
MOA & AOA, Appointment of CS, Statement
of share capital and return of allotment,
particulars of directors, minutes of BOD
meetings, Annual returns, shareholder buy/sell
agreements, voting rights agreements , voting proxy,
registration rights agreements

2. Financial Documents:
financial statements for last 3 years (including notes
and schedules), explanation for changes in
accounting standards, tax returns, debt and credits,
financial performance(ratios), assets & liabilities,
bank accounts, credit agreements .

DUE DILIGENCE ASPECTS------3. Regulatory & govt. documents

contracts & agreements, ongoing/pending
or potential litigation, environmental
issues, legal & regulatory compliances, all
material reports /forms/other documents
filed with any government or regulatory
authority for last 5 years, records of
violations, fines and actions taken against or
investigations of the company for last 5 years

DUE DILIGENCE-------------4. LICENCES

There is a need to ensure that the licences

upon which the companys operations are
based are still valid.
For some companies possession of licenses
(for telco. and mining ) is critical to the
survival of such firms.

DUE DILIGENCE ----------------5. Properties

Documents related to ownership, lease or use of
personal property including all deeds, bills of
sale, leases, grants ,licenses and titles which
includes date of acquisition, occupancy and
disposition, schedule of material tangible
personal property or equipment owned by
company including depreciation(cumulative)
A review of the above will assist in teams
actual asset valuation of the target company

DUE DILIGENCE-----------6. Loan documents

For estimating actual financial liabilities and
obligations, it is important to review all loan agreements
to which the company is a party,
guarantor or surety including bank credit documents
,promissory notes or any documents representing
indebtness for money borrowed and any security
agreements, mortgages, pledges etc.
Similarly, all correspondences with any lender relating to
amendments or waivers regarding such agreements,
documents relating to any loans or guarantee made by
the company to or in favor of any officer, director,
shareholder,
partner, or manager should be reviewed

DUE DILIGENCE-----------6. LITIGATIONS

The threat of litigations or damages that may be
awarded against a company has the potential to make
or mar the company or whittle down the value of the
company.
Review all pending or threatened civil legal
proceedings and any legal settled or resolved
within last 5 years to which the company was a party
The inspection should be widened to cover all orders,
writs, decrees, injunctions, or rulings
judgements, or rulings by any courts or agency which
may bind the company.

DUE DILIGENCE-------7. CONSENTS

The team should inspect all contracts, leases,
security agreements, license, authorisation etc.
that may require the consent of any third party
to the proposed transaction
The role of the team is not to ensure the
correctness of documents or compliance with
any laws by the company rather role is to give
a report to the intending buyer the true state
of affairs of the target company as it relates to
what has been inspected