Académique Documents
Professionnel Documents
Culture Documents
Internal Evaluation
Internal
Assessment Test
: 15
marks
Assignments/Presentations : 15
marks
Class participation
: 10
marks
Total
: 40 marks
Assignments/Presentations : 15
marks
Assignment
: 5 marks
Presentation
10 marks 10
minutes
I restructuring story
(Merger/acquisition/takeover..)
Type, motivation, parties involved
Financing
Results of restructuring; current status
..\..\..\Project
on.xlsx
Management\Presentati
Module I
Restructuring
different methods
Mergers:
Corporate Restructuring
Any
Common
forms
into two
Operational restructuring
Financial restructuring
Operational Restructuring
Process
of increasing economic
viability of the underlying business
model.
e.g. Mergers, spin offs, cost cutting
measures
Financial Restructuring
Relates to improvements in the capital structure of
the firm.
Involves restructuring assets and liabilities of
companies including their debt to equity
structures to
Promote efficiency
Support growth; Maximise value to stakeholders
e.g. Add debt to lower overall cost of capital; share buy back
Bankrupt firms financial restructuring as a plan of reorganisation
Expansion
Corporate Control
Contraction
Changes in ownership
structures
Divestitures
Spin -offs
Split - ups
Equity carve outs
Assets sale
Expansion
Form
of restructuring which
results in an increase in size of
the firm.
Restructuring - Expansion
Mergers:
oTwo firms join and integrate operations as co-equals.
oE.g. Daimler-Benz (German)-Chrysler(US) (1998)
Merger came to an end on 2007.
oRIL & RPL merger (2009);
oCenturion Bank & bank of Punjab Centurion Bank
of Punjab (2005)
oCBOP with HDFC (2008)
Restructuring - Expansion
o
Acquisitions
Restructuring - Expansion
o Takeovers:
o Acquisition bid is unsolicited.
o Generally results in incumbent
management being removed.
o e.g. UB group Shaw Wallace
(Chhabria group) (2005);
o Hindujas Ashok Leyland (1987);
o Reliance IPCL (2002)
Restructuring - Expansion
o Tender offers
o Making a public offer for acquiring the shares
of the target company with a view to acquire
management control in that company.
o Asset Acquisition
o Buying assets of another company- tangible
assets and intangible like brands
o Cement division acquisition of TISCO (Tata steel)
by Laffarge (France) (1998)
o Coca Cola Parle (Thums Up; Gold Spot; Limca)
(1993)
o HLL (now HUL)- Lakme (1998)
Restructuring - Expansion
o Joint ventures
o Two companies enter into an agreement to
provide certain resources for a specific
business purpose and a limited duration.
o e.g. Hindustan Motors & Mitsubishi to produce
Lancer & Pajero
o JV between Maruti Udyog and Suzuki of Japan
Now Maruti Suzuki India Ltd
o Sony Corporation (Japan) And Erricsson
(Sweden) (Split the JV after 10 years recently
Oct 2011)
Restructuring - Contraction
o Reduction in size of the firm
o Divestiture
o Selling assets, divisions, subsidiaries to
another corporation or combination of
corporations or individuals, generally
resulting in an infusion of cash.
o Types
o Spin - offs
o Split - ups
o Equity carve - outs
o Assets sale
Restructuring - Contraction
Spin-offs
A new, independent company created by detaching
either a division of a parent companys assets and
operations or a subsidiary.
Shares in the new company are distributed to the
parent companys shareholders on a pro rata basis.
e.g. IT division of Wipro was spun off as Wipro Infotech
in 1980s;
Godrejs Retail division Natures basket (Feb, 2009)
Pantaloon Retail spin off Big Bazaar and Food bazaar
into a new entity Future value retail (March, 2009)
L&T spun off its cement business (2002)
Restructuring - Contraction
o Split-ups
o The entire company is broken up into two or more
companies, parent company no longer exists
o With one or more spin-offs
o New class of stock for each company
o e.g. Cendant (US) 4 cos real estate; travel; hospitality,
vehicle rental business in 2005 ;
o APSEB into APGENCO & APTRANSCO (1999)
o L&T is planning for Split up 9 independent companies
(Jan 2012)
o Power,hydrocarbon,machinery & product,switchgear,heavy
engineering,infrastructure,building & factories,metals & minerals
and electrical businesses make up the nine independent companies.
Restructuring - Contraction
o Equity carve-out
o Offering of full or partial interest in a subsidiary to the
investment public OR IPO of a corporate subsidiary OR to a
strategic partner
o Asset sale
o Sale of tangible or intangible assets of a company to
generate cash
o Cash to shareholders and go out of existence/continue to do
business
o Takeover defenses
o To prevent a sudden, unexpected hostile takeover and
gaining control of the company
o Pre offer defenses and post offer defenses
Restructuring Corporate
Control
Exchange offers
On or more classes of securities the right or option to
exchange a part or all their holding for a different class of
securities of the firm
Exchanging debt for equity (increases leverage) or Equity
for debt (decreases leverage)
Proxy contests
Attempt by a single or a group of shareholders to
Take control in a company
Expel the board or management
Source : ICFAI material, p.9. begi.
Weston, Mitchell & Muherin. (2006). Takeovers, restructuring, and corporate governance, 4 th ed., New Delhi :
Ross, Westerfield & Jordan (2006). Fundamentals of Corporate Finance, 7th ed. New York:McGraw -Hill Irwin,
pp.804-810
o Strategic benefits
o Procter Gambles acquisition of Charmin Paper Co
o Market power
o E.g. HP Compaq; Glaxo (New Zeland) & Smithkline (UK) (in
2000)
Ross, Westerfield & Jordan (2006). Fundamentals of Corporate Finance, 7th ed. New York:McGraw -Hill
Irwin, pp.804-810
o Complementary resources
o such as a firm that is very good at distribution and
marketing merging with a very efficient producer
o Merger bw HDFC and Times Bank in 1999
HDFC branches in metro and Times in non-metro
urban
o ICICI bank and Bank of Madurai (South Indian
Market)2000
Ross, Westerfield & Jordan (2006). Fundamentals of Corporate Finance, 7th ed. New York:McGraw -Hill
Irwin, pp.804-810
Diversification
Mergers:
Acquisitions:
One firm buys a controlling interest in another firm with the inten
make the other firm a division or subsidiary of the acquiring firm
In general these agreements are friendly but do not result in a co
relationship.
Oracle acquires Sun Micro systems, HP - Compaq
Takeovers:
Mergers or Amalgamations
In India, mergers are called
amalgamations in legal parlance.
A merger is the combination of two
or more companies into one
company.
M&A
by
HLL
(HUL)
Food and Beverages
Mar 1993 Acquisition of Kothari General Foods (by Brooke Bond India, BBIL)
Jun 1993 Merger of Doom Dooma India (Tea Plantations) (BBIL)
Jun 1993 Merger of Tea Estates India (Tea Plantations) (BBIL)
Jun 1993 Merger of Brooke Bond India and Lipton India to form Brooke Bond
Lipton India (BBLIL)
Jun 1993 Acquisition of Kissan Products (BBLIL)
Jul 1993 Acquisition of Cadburys Dollops (Ice creams) (BBLIL)
Mar 1994 Acquisition of Tata Oil Mills Company (TOMCO) (HLL)
May 1994 Acquisition of Merryweather Food Products (BBLIL)
Dec 1994 Acquisition of Kwality Ice Creams (BBLIL)
Apr 1995 Acquisition of Milkfood Ice Creams (BBLIL)
Jan 1996 Merger of BBLIL into HLL
Jan 1998 Acquisition of Kwality Frozen Foods
Dec 1999 Acquisition of Rossell Industries Ltd. (Tea plantations) (Unilever)
Jan 2000 Acquisition of Modern Foods Industries
Impact of M&A
Segment
Market
share
199293
Market
share
1997-98
Nil
63.54
Ice creams
Nil
74.06
Tea
Nil
22.52
Coffee
Nil
5.90
Soaps
19.66
26.01
Detergents
33.12
46.72
Cosmetics
Nil
56.49
o Merger can be
o Absorption
o Consolidation
o A merger in which an entirely new firm is
created and both the acquired and acquiring
firm cease to exist.
Ross, Westerfield & Jordan (2006). Fundamentals of Corporate Finance, 7th ed. New York:McGraw -Hill
Irwin, p.798-799
Types of Mergers/Strategies
o Horizontal mergers
o Merger between two firms competing in the same
industry
o Increases firms market power.
o e.g. Bank of Punjab and centurion Bank;
o Vertical mergers
o Merger between firms that are in different stages of
production or value chain.
o Combination of companies that usually have a buyer
seller relationship backward /forward integration
o e.g. Tata tea buying tea gardens
o Conglomerate mergers
o Merger between firms that are not related to each
other or unrelated business activity.
o Product extension or geographic market
extension/pure conglomerate mergers
Board of Editors. (2003). Mergers and acquisitions. Vol 1, New Delhi : ICFAI University Press, pp.91-95
37
Ross, Westerfield & Jordan (2006). Fundamentals of Corporate Finance, 7th ed. New York:McGraw
Strategic benefit
Market power
Economies of scale
Economies of vertical integration
Complementary resources
Tax shields
Utilisation of surplus funds
Managerial Effectiveness
Diversification
Lower financing costs
Earnings growth
Chandra, P. (2004). Financial Management, 6th ed. New Delhi: Tata McGraw Hill, pp.918-922
M&A Process/Organisation of
Mergers/Acquisitions
1. Develop a strategic plan (Business plan)
2. Develop a merger plan
3. Search candidates for merger
4. Screening process
5. Initiate contact with the target
6. Negotiation
7. Integration plan
8. Closing
9. Post closing integration
10.Post closing evaluation
Board of Editors. (2003). Mergers and acquisitions. Vol 1, New Delhi : ICFAI University Press, pp.95-125
Merger/acquisition Process
1. Developing the business plan
2. Merger Plan
Merger/acquisition Process
4. The Screening Process
5. First Contact
Merger/acquisition Process
6. Negotiation
Refining valuation
Structuring the Deal
Due diligence
Total consideration
Total purchase price/Enterprise value
Net purchase price
Merger/acquisition Process
7. Developing the Integration Plan
8. Closing
Purpose of acquisition
Price
Allocation of price
Payment mechanism
Assumption of liabilities
Representations and warranties
Covenants
Conditions for closing
Indemnification
Other documents AoA; litigations; contracts; loan
agreements; stock option schemes; insurance policies
Merger/acquisition Process
9. Post closing integration
Combining resources, processes, and
responsibilities of the merged companies
Participants in merger
Activity
Investment
banks
Lawyers
Accountants
Valuation Experts
Institutional investors
Arbitrageurs
Board of Editors. (2003). Mergers and acquisitions. Vol 1, New Delhi : ICFAI University Press, pp.113-116
th
Century.
Acquisition
An Act of acquiring effective control over assets
or management of a company by another
company without any combination of businesses
or companies.
One firm buys a controlling interest in another
firm with the intent to make the other firm a
division or subsidiary of the acquiring firm.
Acquisition classifications
Horizontal acquisition
Vertical acquisition
Acquisition of firms that are in different stages of
production or value chain.
Combination of companies that usually have a buyer
seller relationship backward /forward integration
e.g. Tata tea buying tea gardens; e.g. Oracles (Hardware)
Acquisition of Sun Microsystems (software) (April, 2009)
Conglomerate acquisition
When the bidder and the target firms are not related to
each other or unrelated business activity.
48
Board of Editors. (2003). Mergers and acquisitions. Vol 1, New Delhi : ICFAI University Press, pp.91-95
Top Acquisitions
Rank
Year
Purchaser
Purchased
2000
Time Warner
2000
2004
2006
2001
2004
2000
2002
2004
SmithKline
Beecham Plc.
Royal Dutch Petroleum Shell Transport
Co.
& Trading Co
BellSouth
AT&T Inc.
Corporation
AT&T
Comcast Corporation
Broadband &
Internet Svcs
Sanofi-Synthelabo SA
Aventis SA
Spin-of: Nortel
Networks Corporation
Pharmacia
Pfizer Inc.
Corporation
JP Morgan Chase & Co Bank One Corp
Transaction
value (in mil.
USD)
164,747
75,961
74,559
72,671
72,041
60,243
59,974
59,515
58,761
Target
Company
Corus Group
plc
Novelis
Daewoo
Electronics
Corp.
Country
targeted
Deal value ($
Industry
ml)
UK
12,000
Steel
Canada
5,982
Steel
Korea
729
Electronics
Betapharm
Germany
597
Pharmaceutica
l
565
Energy
Kenya
Petroleum
Refinery Ltd.
Kenya
500
Terapia SA
Romania
324
Natsteel
Thomson SA
Singapore
France
293
290
Pharmaceutica
l
Steel
Electronics
Acquisition
Two or more companies may remain
independent, separate legal entity
but there may be change in control
or ownership of companies.
Revenue enhancement
Marketing gains
ads, distribution, product mix
E.g. Daimler-Chrysler; HDFC CBoP; Tata Tetley Pfizer
Warner Lambert
Strategic benefits
Procter Gambles acquisition of Charmin Paper Co
Market power
E.g. HP Compaq; Glaxo & Smithkline
Ross, Westerfield & Jordan (2006). Fundamentals of Corporate Finance, 7th ed. New York:McGraw -Hill Irwin,
pp.804-810
Merger as
a rational
choice
Merger
benefits
bidders
shareholders
Efficiency
theory
Wealth transfer
from targets
customers
Monopoly
theory
Wealth transfer
from targets
shareholders
Raider theory
Valuation
theory
Empire building
theory
Process theory
Disturbance
theory
Efficiency theory
o Explains M&A planned and executed to achieve
synergies adding to enterprise valuation.
o Revenue generating synergies
o Merger of ICICI with ICICI bank
o Synergies
o Manufacturing
o Ranbaxy & Daiichi Sankyo; Tata Motors--->Daewoo
o Operational
o Kingfisher ----> Deccan Airways; Jet airways ---> Sahara
Airlines
o Marketing
o HLL----> Lakme
Valuation theory
o Explains M&A planned and executed
by the acquirer because of better
private information abt valn of the
target company
o Acquirer is ready to pay premium
over the present market price
o Disturbance Theory
o M&A waves are caused by economic disturbances:
Economic disturbances cause changes in individual
expectations and increase the general level of
uncertainty, thereby changing the ordering of
individual expectations. Previous non-owners of assets
now place a higher value on these assets than their
owners and vice versa. The result is an M&A wave.