INTRODUCTION

Merger refers to the process of combining two or more companies, generally by offering the stockholders of one company securities in the acquiring company in exchange for the surrender of their stock. An acquisition is a corporate action in which a company buys most, if not all, of the target company's ownership stakes in order to assume control of the target firm. The main idea behind mergers and acquisition is one plus one makes three - Two companies together are more valuable than two separate companies

DISTINCTION BETWEEN MERGER AND ACQUISITION

Acquisition
One company takes over another and establishes itself as the new owner

Merger
Two firms agree to go forward as a single new company rather than remain separately owned and operated.

From a legal point of view, the target company ceases to exist

Both companies' stocks are surrendered and new company stock is issued in its place

FINANCING MERGERS

Purchase Mergers In this merger, one company purchases

another with cash or through the issue of some kind of debt instrument; the sale is taxable.

Acquiring companies of ten prefer this type of merger because it can provide them with a tax benefit. Acquired assets can be written -up to the actual purchase price, and the dif ference between the book value and the purchase price of the assets can depreciate annually, reducing taxes payable by the acquiring company.

Consolidation Mergers - With this merger, a brand new company is

formed and both companies are bought and combined under the new entity. The tax terms are the same as those of a purchase merger.

T YPES OF MERGERS

Horizontal merger - Two companies that are in direct competition and share the same product lines and markets. Vertical merger - A customer and company or a supplier and company. Think of a cone supplier merging with an ice cream maker.

Market-extension merger - Two companies that sell the same products in different markets.
Product-extension merger - Two companies selling different but related products in the same market. Conglomeration - Two companies that have no common business areas

FINANCING ACQUISITIONS
All acquisitions involve one firm purchasing another - there is no exchange of stock or consolidation as a new company. Acquisitions could be congenial or hostile. A company can buy another company with cash, stock or a combination of the two . Another possibility, which is common in smaller deals, is for one company to acquire all the assets of another company. Another type of acquisition is a reverse merger , a deal that enables a private company to get publicly -listed in a relatively short time period. It occurs when a private company that has strong prospects and is eager to raise financing buys a publicly -listed shell company, usually one with no business and limited assets. The private company reverse merges into the public company, and together they become an entirely new public corporation with tradable shares

MOTIVATION FOR MERGER OR ACQUISITION

Taking Advantage of Economies of Scale Economies of scale arise when one firm can perform a function more efficiently than two. The combined firm may be able to economize on management costs, including accounting and corporate finance functions and corporate management
Improving Target Management A firm is likely to be a target if it has systematically underperformed its industry. It could also be due to the firms managers making poor investment and operating decisions, or deliberately pursuing goals which increase their personal power but cost stockholders.

MOTIVATION FOR MERGER OR ACQUISITION

Combining Complementary Resources Firms may decide that a merger will create value by combining complementary resources of the two partners. For example , a merger between a firm with a strong R&D unit, and a firm with a strong distribution unit could combine resources through a merger. Capturing Tax Benefits - If acquiring firm does not expect to earn sufficient profits. to fully utilize operating loss carry forward benefits, it may decide to buy another firm which is earning profits. Also the second tax benefit is the tax shield that comes from increasing leverage for the target firm.

MOTIVATION FOR MERGER OR ACQUISITION

Providing Low-Cost Financing to a Financially Constrained Target In the case of newly formed, high-growth firms, outside investors face difficulty to value since they have short track record. And, since they typically rely on external funds to finance their growth, capital market constraints affect their ability to undertake new projects. An acquirer that is willing to provide a steady source of finance may therefore be able to add value. Increasing Product-Market Rents By merging and becoming a dominant firm in the industry, two smaller firms can collude to restrict their output and raise prices , thereby increasing their profits.

VEDANTA CAIRN ACQUISITION

ABOUT VEDANTA
Diversified metals and mining company with revenues in excess of US$6 billion. First Indian manufacturing company to be listed on the London Stock Exchange. Operating locations in India, Zambia and Australia. Group Structure

STRATEGIC DIVERSIFICATION

Company Sterlite Industries MALCO

Year 1988 1995

Resource Copper Aluminium

BALCO
Hindustan Zinc Limited Konkola Copper Mines

2001
2002 2004

Aluminium
Zinc Copper

Sesa Goa
Cairn India

2007
2010

Iron
Oil

ABOUT CAIRN INDIA

Cairn India is a subsidiary of Cairn Energy plc which is a global oil and gas exploration company based in Edinburg, UK . Proven Commercial Reserves of 247.4 million Barrels of Oil. Operational Interests in Albania, Greenland, India, Nepal and Tunisia. 95% of revenue from its Indian operations. Cairn India Ltd. Formed in 2006. with 62.36% stake of Cairn Energy. Listed on BSE and NSE on January 9, 2007. Market Capitalization of 63,257 crores.

SOME FINANCIALS

SOME FINANCIALS
Equity Holdings Asset Base

15.61%

2.29% 1.83%

10.59%
62.36% 5.01%

2.31%

Others Corporate Bodies Banks, Fis, Insurance Cos. Promoters

Retail FIIs Mutual Funds and UTI

CHALLENGES & HURDLES

Counter bids from GAIL and ONGC Oil Ministry approval under two cases

Challenges
Government concerns

Information to Govt on change in shareholding pattern

TRANSACTION HIGHLIGHTS
Cairn to sell 51% at a consideration of INR 405 per Cairn India share

Retained cash to ensure financial flexibility to CAIRN

A premium of approximately 32% to the 90 days prior closing price

Intended to return maximum wealth to Cairns shareholders

Put & Call excercisable after July 2012 and 2013

DEAL STRUCTURE

Retained cash will provide Cairn with financial flexibility to pursue an active exploration programme in its leading acreage position in Greenland and future growth opportunities. Continued exposure to Rajasthan through the retained shareholding in Cairn India. For each Cairn India share subject to the Proposed Transaction, Vedanta to pay Cairn US $8.66 (INR 405) in cash on completion, comprising: US $7.59 (INR 355) (pursuant to the sale and purchase agreement) US $1.07 (INR 50) (pursuant to the non-compete arrangements)

FUNDING

Vedanta Resources: bank debt facilities of up to US$6.5bn, 2 year tenure. Sesa Goa: US$3bn, primarily from cash resources

SOME FINANCIALS VALUATION RATIOS (CAIRN)

Year End Net Sales (Rs mm) PAT (Rs mm) EPS (Rs) P/E (x) EV/Sales (x) EV/EBITDA (x) 2009 2010 2011E 2012E 14,326 16,230 83,802 133,479 8,802 10,511 46,418 83,358 4.3 5.5 24.5 43.9 78.1 60.1 13.6 7.6 42.9 39.5 7.6 4.4 66.1 65.3 8.9 5

SYNERGIES

Creating an Indian natural resources champion: comprehensive footprint across Indias resources sector World class asset and management team. Leverages Vedantas core skills. Common operating philosophy: focus on delivery and costs Enhances and diversifies Vedantas strong growth profile Financial flexibility retained and no impact on existing expansion programmes Immediately EPS accretive for shareholders

SYNERGIES
The Cairn Board believes that the Proposed Transaction delivers positive benefits in line with Cairns strategic goals. The IPO of Cairn India in 2007 provided a return of cash to shareholders and created sufficient financial flexibility to allow the fast-track development of Cairns world -class discoveries in Rajasthan. The completion of the first phase of the Rajasthan development represents a significant milestone for the Cairn Group, with the project now producing approximately 125,000 barrels per day. The Cairn Board therefore believes that now is an appropriate time to realise further value from its shareholding in Cairn India, whilst at the same time maintaining exposure to the ongoing business through a significant retained shareholding

PRE ACQUISITION IMPACT

Stock prices of Vedanta fell on the speculation of deal.

PRE ACQUISITION IMPACT

Shares in Cairn India ended up 1.7% up after falling sharply when the deal was announced.

POST ACQUISITION IMPACT

Cairns strategy is to establish commercial reserves from strategic positions in high -potential exploration plays in order to create and deliver shareholder value.
Cairn has focused on gaining early entry into frontier basin plays such as in India and Greenland. Following completion of the Proposed Transaction, the Cairn Group's principal focus will be to advance its exploration programme in its frontier basin positions in Greenland and continue to pursue its proven strategy of building shareholder value from growth opportunities.

FUTURE PLANS OF VEDANTA

Vedanta now looks to expand into the refinery business Has found new reserves in Sri Lanka and looks to entering into the gas production as well to take on its competitor RIL well

TATA JAGUAR LAND ROVER DEAL

OVERVIEW OF AUTOMOBILE INDUSTRY IN INDIA

India is among the top 10 players in the global automobile industry. The industry contributes 6% of the countrys GDP and provides direct and indirect employment to around 13 million people . India is now an established hub for the global small car market and a number of players have launched passenger vehicles targeting this segment with innovative designs and interesting features. A number of well-established global automobile companies have also ventured into the Indian market either through direct subsidiaries or through tie -ups with domestic manufacturers.

OVERVIEW OF AUTOMOBILE INDUSTRY IN INDIA

Apart from a strong presence in passenger vehicle manufacturing, India is also a leading manufacturer of tractors, two-wheelers and commercial vehicles . In the recent years, domestic automobile majors have ventured into international markets and exports of automobiles are on a growth path. As an of f-shoot of the automobile industry, indigenous automotive components industry has also grown significantly over the recent years . Going forward, with successful initiatives such as the Automotive Mission Plan (2006 -16), India is expected to be among the top 5 vehicle producing countries in the world by 2020.

GROWTH IN THE AUTOMOBILE INDUSTRY

The Indian automobile market is estimated to have reached around INR 2,420 billion (2010 -11) after registering a CAGR of 15.3% since 2006-07.

Automobile Industr y: Trends in gross turnover

Vehicle exports have grown 20 times over the last decade and account for roughly 13% of the vehicle production in India .

GROWTH IN THE AUTOMOBILE INDUSTRY

Automobile production (all categories) in 2010 -11 was 17.9 million units.

A u to m o b i l e i n d us t r y : Tr e n d s i n p r o d uct i o n , 2 0 07 - 2 01 1 ( m i l li o n n o s . )

Automobile production was stagnant during 2006 -08 primarily due to a fall in production in the commercial vehicles and in the three wheeler segments due to a slowdown in the global economy. The domestic sales volume registered a year -on-year growth of around 26% and was estimated at 15.5 million units in 2010 -11 .

GROWTH IN THE AUTOMOBILE INDUSTRY

India is among the leading exporters of automobiles and its exports grew at a CAGR of around 23.3% during 2006-10.
Financial Year
2006-07 2007-08 2008-09 2009-10 2010-11 CAGR 2006-10 (%)

000 nos.
1011.50 1238.30 1,530.60 1,804.60 2,339.30 23.3

GROWTH DRIVERS OF THE INDIAN AUTOMOBILE MARKET

Rising industrial and agricultural output. Rising per-capita income. Favourable demographic distribution with rising working population and middle class urbanization . Availability of a variety of vehicle models meeting diverse needs and preferences. Easy finance schemes. Favourable government policies.

COMPANY PROFILE: TATA MOTORS

TATA Motors is the flagship company of the TATA group and is Indias largest automobile player with consolidated revenues of $ 27 billion in 2010 -11 . With over 6.5 million vehicles plying the Indian roads, it is the leader in commercial vehicles in each segment, and among the top three in passenger vehicles . TATA motors is the first India engineering company to be listed on the NYSE and has overtime emerged as an international automobile company.

SOME FINANCIALS

Even though the volume graph looks impressive, TATA Motors market share has been under pressure due to increased competition in the domestic market.

SOME FINANCIALS

Although the topline increased by a healthy margin on the back of a balanced product mix, the EBITDA margins have remained subdued mainly due to slowdown in CV segment, decline in PV share and high commodity prices.

COMPANY PROFILE: JAGUAR

Jaguar was founded in 1922 in Blackpool as Swallow Sidecar Company. In 1945, the company was renamed Jaguar Cars Ltd. to reflect the speed, power, and sleek build of the vehicle . In 1984, as part of the British governments privatization moves, Jaguar was floated as a separate company on the London stock exchange. After the privatization, Jaguar witnessed better revenue growth and business development . In the late 1980s, with the market conditions turning difficult due to adverse exchange rates, Jaguar decided to collaborate with top car manufacturers to broaden its product range and have access to new technologies and world class components . As a part of this plan, it discussed the venture with Ford and was bought for $2.5 billion .

COMPANY PROFILE: LAND ROVER

Land Rover was founded in 1948 as a marquee of the Rover company. The sales of Land Rover reached the one million mark in 1976 . In 1988, the Rover Group was privatized and then taken over by British Aerospace, which renamed it Rover.

In 1994, British Aerospace sold the Rover Group to BMW. Though BMW invested millions of pounds on turning the brand around, it made little progress in this endeavor and decided to sell it off .

In 2000, BMW split the Rover Group into two and Land Rover was sold to Ford for US$ 2.7 billion.

WHY DID FORD SELL?

After Ford acquired Jaguar, adverse economic conditions worldwide in the 1990s led to a significant decrease in the demand for luxury cars. However, Ford still continued to invest in bringing out better interiors, styling and features in the Jaguar vehicles, and launched several new vehicles. In March 1999, Ford established the Premier Automotive Group (PAG) with Aston Martin, Jaguar, and Lincoln. During the year, Volvo was acquired for US$ 6.45 billion, and it also became a part of the Premier Automotive Group. Ford bought Land Rover in 2000 for US$ 2.7 billion from BMW, and this joined the PAG.

WHY DID FORD SELL?

Over the years, the activities of both Jaguar and Land Rover were fully integrated. But both started facing problems as the models launched under Ford failed to impress the customers, who were not in favor of some of the designs introduced. This adversely affected the demand for the vehicles.

WHY DID FORD SELL?

Reports said losses at Jaguar stood at USD 715 million in 2006 mainly on account of high manufacturing costs provided in the United Kingdom. Land Rover on the other hand was driven by record sales of 2.26 lakhs in the same year. a growth of 18% yoy. For the year ending December 2006, Ford reported losses of US$ 12.7 billion. In the aftermath of the credit crisis, Jaguar sales dropped 33% in the US and Europe and Land Rover sales fell 13% in the US and around 7.7% in Europe.

WHY DID FORD SELL?

Analysts suggested that bringing down production costs and turning around the company would be a challenge . The engineering, purchasing, distribution and production facilities of the two brands had become interdependent which further made it dif ficult to deal with the inef ficiencies . To sum, Ford acquired these businesses in a dilapidated state and even an injection of an estimated $10 bn over the years to improve manufacturing facilities did not yield any results . Strategic reviews conducted by the company on JLR ended in a recommendation for sale.

WHY DID TATA BID FOR JLR?

To strengthen its long term strategic commitment to automotive sector. An opportunity to participate in two fast growing auto segments (premium and small cars) and to build a comprehensive product portfolio with a global footprint immediately. To increase business diversity across markets and product segments. The brand would help shrug of f the image of a truck maker .

WHY DID TATA BID FOR JLR?

Unique opportunity to move into premium segment with access to world class iconic brands
Land Rover provides a natural fit above TATA Motors Utility Vehicles/SUV/Crossover offerings for the 4x4 premium category. Jaguar offers a range of Performance/Luxury vehicles to broaden the brand portfolio.

Long-term benefits from component sourcing, low cost engineering and design services .

Land Rover is estimated to clock ~$10 -11bn in revenues and is expected to be profit making .

DEAL PROCESS
2005: Ford starts facing problems with pension and health care costs and falling sales in North America. Starts reporting losses from the second quarter. 2006:Alan Mullaly takes over as chief executive and oversees a $12.7 billion loss, the largest in the company's history. Ford decides to sell its Aston Martin brand.

May, 2007: Ford closes the Aston Martin sale for $848 million
June, 2007: Ford indicates that it might look at buyers for Jaguar and Land Rover marquees. July, 2007: Ford receives preliminary bids for the brands. Reports say that TPG Inc., Cerberus Capital Management Lp. Ripplewood Holdings, One Equity Partners Llc are in the fray, along with Tata Motors Ltd and Mahindra & Mahindra August, 2007:Ratan Tata, chairman of Tata Motors Ltd, confirms that his company was bidding for the premium car makers

DEAL PROCESS Cont..

November, 2007: Investment bankers say that Apollo Alternative Assets is teaming up with Mahindra & Mahindra. Reports say that Ford has shortlisted three biddersTata, Mahindra and One Equityfor further negotiations with its trade unions Unite, the trade union representing Land Rover and Jaguar workers, says it supports Tata Motors' bid. December, 2007: The three bidders submit their bid. January, 2008: Ford names Tata as "preferred buyer". March, 2008:Tata, Ford sign deal for US$2.3bn, 54% higher than analyst valuations.

Plans to finance the acquisition

Tata Motor s planned to raise US$ 3 billion, about 30% more than the agreed acquisition price of US$ 2.3 billion . The amount required was to be obtained through a bridge loan raised by Tata Motor s UK, a special purpose vehicle, 100% subsidiar y of Tata Motor s. The lead advisors to the deal were JP Morgan and Citigroup. The bridge loan was under written by a consor tium of eight banks. The interest on the bridge loan was linked to LIBOR. On an average, the interest rate was about 5.5%, in terms of weighted cost of bridge finance.

What TATA got as a part of the deal:

100% Jaguar and Land Rover 3 Plants in UK Tata Motors to operate the businesses independently of the company. Most of the top management personnel are retained. Three plants with all the facilities

2 Advanced design and engineering centers

26 national sales companies

Centers at Gaydon and Whitley involved in testing, prototype building, design, engineering, and other related activities.
Worldwide network of national sales companies of Jaguar and Land Rover. Royalty-free license of all intellectual property rights on key technologies transferred to Jaguar Land Rover Minimum guaranteed capital allowances of US$ 1.1 billion Continued cooperation with Ford Motor Credit for providing finance for Jaguar, Land Rover vehicles for about one year Ford agreed to contribute US$ 600 million toward the pension fund of Jaguar Land Rover

Intellectual Property Rights

Capital Allowances Ford Motor Credit Support Pension contributed by Ford

Market reaction to the deal

Investors of Tata Motors were not too pleased with the deal. When Ford announced that Tata Motors was the preferred bidder, the share price of the company on the National Stock Exchange (NSE) was at Rs.794.25 The global economy was in the grip of an economic recession and investors expressed concern over how Tata Motors would finance the acquisition.

Why was the market reacting like this?

Overdependence on JLR to generate revenue: It was estimated that JLR would add $15billion in revenues to the company. Thus, around 60% of the revenues for Tata Motors would accrue from outside India, thereby making the companys valuations hinge on the turnaround of JLR.

Different products profile: Passenger vehicles are for the masses. Its highest priced passenger vehicle costs GBP16150 whereas the cheapest Land Rover costs GBP 18670 and Jaguar costs GBP 21500.There were no apparent short term visible synergies between the two companies.

 Recession in key markets:

North America accounted for about 30% of JLRs revenue and Western Europe contributed about 50%. In both these markets car sales were under pressure. The US recession would have a contagion effect on Europe and China posing a challenge to the turnaround.

Testing times back home High inflation and fuel costs along with a possibility of a slowdown in the domestic economy was to impact profitability. Increased competition from new players made life difficult for TATA Motors Indica and Indigo had seen a loss in volumes of 12.6% YTD in FY08, with declining market share Single product strategy was becoming difficult to sustain in a competitive market, Indica and Indigo were to get increasingly marginalized in the coming period

 Nano: While the Nano had huge potential, profitability with a 100,000 price tag remained uncertain. Turning around JLR could be difficult: Given the lack of synergy it could be difficult to share resources and bring down costs in the short to medium term and impending recessions in key markets would make the task even more difficult. No plan to downsize or shift production from England raised doubts about possible improvements in productivity and profitability. Different product architecture and technology: Because of differences in product profile, it would be difficult to share the product platform as a way to cut costs. Also, it was uncertain how TATA Motors was to use its technology for premium products to produce low cost cars. Different target market and customers: One of the synergies being talked about was the access to different regions through JLR, as Jaguar had a presence in 80 countries through 859 dealers and Land Rover in 147 countries through 1397 dealers. However, the majority of JLRs sales were in the US and Western Europe, and JLR dealers would find it difficult to sell low cost products. JLR targeted affluent customers and it would be difficult to use the same dealer network to push TATA vehicles. Improving productivity difficult: (no. of cars per employ)
40
20 0 Toyota Audi JLR BMW

Low productivity - a concern

Toyota
Audi

JLR BMW

DCF valuation for TATA Motors

(based on consolidated figures) from 2009-2020.

The cash flows have been discounted to reflect the PV as in 2008.

The cash flows are end of year cash flows. This is a perpetual growth model with the perpetual growth rate as per broker reports estimated to be 3%. The cost of capital is taken to be 18.04%. Working Capital is assumed to grow at the rate of 3.8%, as per Broker report.

Cost of sales, SG&A, Capex, Depreciation and Amortization and Net Interest are assumed grow at the rate of revenue growth.
Assuming zero deferred tax liability in the future years, beyond 2013. Assuming an Income Tax rate of 25% in the projections, beyond 2013.

As it can be clearly seen from the DCF valuation, the JLR acquisition has significantly added value to the company. The merged entity is estimated to yield a value of Rs. 1162.779 billion i.e. $ 23 billion. The calculations indicate that even though there may not be immediate synergies arising from the acquisition but in the long run, this deal will turn out to be a profitable proposition

POST MERGER ANALYSIS

Some of the factors on basis of which the post acquisition performance can be analyzed are discussed below:
MARKET CAPITILISATION Two months before it acquired JAGUAR AND LANDROVER (JLR) in March 2008, TATA MOTORS had a market capitalization of Rs 24,000 crore. Five months after the deal, it had plunged to Rs 6,500 crore. However there was an opportunity hidden in exploring the strong brand value and research and development hidden behind both the companies and its market capitalization now stands at Rs.85000 crore which is more than a tenfold rise from the initial post acquisition low. BRAND VALUE Recently TATA MOTORS drove past Reliance Industries to top the 2010 edition of Indias Most Valuable Brands survey with a valuation of $8.45 billion. A major part of this success can be attributed to the JAGUAR AND LANDROVER brands.. TATA MOTORS-JLR brand soared 172% in one year to $8.45 billion from only $3.1 billion in 2008-09. CASH FLOWS AND BOTTOMLINE