Merger & acquisition with case study

Concept, Indian-Global Scenario, Failed M&A Cases, Reverse M&A

1. Current Trends in Management Presentation on: Mergers and Acquisitions By~ Praful Metange [email protected]

2. MERGER AND ACQUISITION WHAT IS MERGER? A merger is a combination of two or more companies where one corporation is completely absorbed by another corporation. WHAT IS ACQUISITION? Acquisition essentially means ‘to acquire’ or ‘to takeover’. Here a bigger company will take over the shares and assets of the smaller company. 4

3. HISTORY OF MERGER AND ACQUISITION IN INDIA The concept of merger and acquisition in India was not popular until the year 1988. The key factor contributing to fewer companies involved in the merger is the regulatory and prohibitory provisions of MRTP Act, 1969. (Monopolies and Restrictive Trade Practices Act,1969) The year 1988 witnessed one of the oldest business acquisitions or company mergers in India. As for now the scenario has completely changed with increasing competition and globalization of business. It is believed that at present India has now emerged as one of the top countries entering into merger and acquisitions. 5

4. MERGER AND ACQUISITION PROCESS   Preliminary Assessment or Business Valuation- In this process of assessment not only the current financial performance of the company is examined but also the estimated future market value is considered Phase of Proposal- After complete analysis and review of the target firm's market performance, in the second step, the proposal for merger or acquisition is given. Exit Plan- When a company decides to buy out the target firm and the target firm agrees, then the latter involves in Exit Planning. Structured Marketing- After finalizing the Exit Plan, the target firm involves in the marketing process and tries to achieve highest selling price. Stage of Integration- In this final stage, the two firms are integrated through Merger or Acquisition. 4

5. Different Types of Mergers A horizontal merger - This kind of merger exists between two companies who compete in the same industry segment. A vertical merger - Vertical merger is a kind in which two or more companies in the same industry but in different fields combine together in business. Co-generic mergers - Co-generic merger is a kind in which two or more companies in association are some way or the other related to the production processes, business markets, or basic required technologies. Conglomerate Mergers - Conglomerate merger is a kind of venture in which two or more companies belonging to different industrial sectors combine their operations. 9

6. Different Types of acquisitions Friendly acquisition - Both the companies approve of the acquisition under friendly terms. Reverse acquisition - A private company takes over a public company. Back flip acquisition- A very rare case of acquisition in which, the purchasing company becomes a subsidiary of the purchased company. Hostile acquisition - Here, as the name suggests, the entire process is done by force.

7. DIFFERENCE BETWEEN MERGER AND ACQUISITION: MERGER Merging of two organization in to one. It is the mutual decision. Merger is expensive than acquisition(higher legal cost). Through merger shareholders can increase their net worth. It is time consuming and the company has to maintain so much legal issues. Dilution of ownership occurs in merger. ACQUISITION Buying one organization by another. It can be friendly takeover or hostile takeover. Acquisition is less expensive than merger. Buyers cannot raise their enough capital. It is faster and easier transaction. The acquirer does not experience the dilution of ownership.

8. MERGER:WHY & WHY NOT WHY IS IMPORTANT Increase Market Share. Economies of scale Profit for Research and development . Benefits on account of tax shields like carried forward losses or unclaimed depreciation. Reduction of competition. PROBLEM WITH MERGER Clash of corporate cultures Increased business complexity Employees may be resistant to change 8

9. ACQUISITION:WHY & WHY NOT WHY IS IMPORTANT Increased market share. Increased speed to market Lower risk comparing to develop new products. Increased diversification Avoid excessive competition PROBLEM WITH ACUIQISITION Inadequate valuation of target. Inability to achieve synergy. Finance by taking huge debt. 9

10. Types of M&A

11. Motives for Mergers &acquisitions Economies of large scale business large-scale business organization enjoys both internal and external economies. Elimination of competition I t eliminates severe, intense and wasteful expenditure by different competing organizations . Desire to enjoy monopoly power M&A leads to monopolistic control in the market. Adoption of modern technology corporate organization requires large resources Lack of technical and managerial talent I ndustrialization , scarcity of entrepreneurial, managerial and technical talent

12. Benefits of Mergers and Acquisitions Greater Value Generation. Mergers and acquisitions generally succeed in generating cost efficiency through the implementation of economies of scale. It is expected that the shareholder value of a firm after mergers or acquisitions. Gaining Cost Efficiency. When two companies come together by merger or acquisition, the joint company benefits in terms of cost efficiency. As the two firms form a new and bigger company, the production is done on a much larger scale. Increase in market share - An increase in market share is one of the plausible benefits of mergers and acquisitions. G ain higher competitiveness - The new firm is usually more cost-efficient and competitive as compared to its financially weak parent organization. 12

13. Problems of Merger and Acquisitions Integration difficulties Large or extraordinary debt Managers overly focused on acquisitions Overly Diversified

14. Impact of Mergers and Acquisitions Employees: Mergers and acquisitions impact the employees or the workers the most. It is a well known fact that whenever there is a merger or an acquisition, there are bound to be lay offs. Impact of mergers and acquisitions on top level management Impact of mergers and acquisitions on top level management may actually involve a "clash of the egos". There might be variations in the cultures of the two organizations. Shareholders of the acquired firm: The shareholders of the acquired company benefit the most. The reason being, it is seen in majority of the cases that the acquiring company usually pays a little excess than it what should. Unless a man lives in a house he has recently bought, he will not be able to know its drawbacks. Shareholders of the acquiring firm: hey are most affected. If we measure the benefits enjoyed by the shareholders of the acquired company in degrees, the degree to which they were benefited, by the same degree, these shareholders are harmed

15. Strategies of Merger and Acquisition Then there is an important need to assess the market by deciding the growth factors through future market opportunities, recent trends, and customer's feedback. The integration process should be taken in line with consent of the management from both the companies venturing into the merger. Restructuring plans and future parameters should be decided with exchange of information and knowledge from both ends.

16. Reverse merger and Reverse acquisition A reverse acquisition occurs when the entity that issues securities (the legal acquirer) is identified as the acquiree for accounting. The entity whose equity interests are acquired (the legal acquiree ) must be the acquirer for accounting purposes for the transaction to be considered a reverse acquisition. One way for a company to become publicly traded, by acquiring a public company and then installing its own management team and renaming the acquired company. A reverse merger refers to an arrangement where private company acquires a public company, usually a shell company, in order to acquire the status of a public company. Also known as a reverse takeover, it is an alternative to the traditional initial public offering (IPO) method of floating a public company. It is an easier way that allows private companies to change their type while avoiding the complex regulations and formalities associated with an IPO. Also, the degree of ownership and control of the private stakeholders increases in the public company. It also leads to combining of resources thereby giving greater liquidity to the private company.  To ensure a smooth reverse merger, the public company should be a shell company, that is, the one which simply has an organization structure but negligible business activity. It is only an organizational entity on paper with no significant existence in the market.  Reverse merger is a speedy and cheaper way of becoming a public company within a maximum period of 30 days. Alternatively, the IPO route takes almost a year. Moreover, public companies normally have greater valuation due to the greater investor confidence enjoyed by them. Hence acquiring one will push the private company up the growth ladder.  However, it faces stability risk because the owners of the shell company might sell their stakes once the new company decides to raise the market price of its shares. This may lead to a complete operational chaos because the management of private companies have negligible experience of running a public company.

17. Top 11 M&A DEALS…

18. 1. T ata Steel-Corus: $12.2 billion January 30, 2007 Largest Indian take-over After the deal TATA’S became the 5 th largest STEEL co. 100 % stake in CORUS paying Rs 428/- per share Image: B Mutharaman , Tata Steel MD; Ratan Tata, Tata chairman; J Leng , Corus chair; and P Varin , Corus CEO.

19. 2. V odafone-Hutchison Essar : $11.1 billion TELECOM sector 11 th February 2007 2 nd largest takeover deal 67 % stake holding in hutch Image: The then CEO of Vodafone Arun Sarin visits Hutchison Telecommunications head office in Mumbai.

20. 3. Hindalco-Novelis : $6 billion June 2008 Aluminium and copper sector Hindalco Acquired Novelis Hindalco entered the Fortune-500 listing of world's largest companies by sales revenues Image: Kumar Mangalam Birla (center), chairman of Aditya Birla Group.

21. 4. R anbaxy-Daiichi Sankyo: $4.5 b Pharmaceuticals sector June 2008 Acquisition deal largest-ever deal in the Indian pharma industry Daiichi Sankyo acquired the majority stake of more than 50 % in Ranbaxy for Rs 15,000 crore 15 th biggest drugmaker Image: Malvinder Singh (left), ex-CEO of Ranbaxy, and Takashi Shoda , president and CEO of Daiichi Sankyo.

22. 5. O NGC-Imperial Energy:$2.8billion January 2009 Acquisition deal Imperial energy is a biggest chinese co. ONGC paid 880 per share to the shareholders of imperial energy ONGC wanted to tap the siberian market Image: Imperial Oil CEO Bruce March.

23. 6. NTT DoCoMo -Tata Tele: $2.7 b November 2008 Telecom sector Acquisition deal Japanese telecom giant NTT DoCoMo acquired 26 per cent equity stake in Tata Teleservices for about Rs 13,070 cr. Image: A man walks past a signboard of Japan's biggest mobile phone operator NTT Docomo Inc. in Tokyo.

24. 7. H DFC Bank-Centurion Bank of Punjab: $2.4 billion February, 2008 Banking sector Acquisition deal CBoP shareholders got one share of HDFC Bank for every 29 shares held by them. 9,510 crore Image: Rana Talwar (rear) Centurion Bank of Punjab chairman, Deepak Parekh, HDFC Bank chairman.

25. 8. T ata Motors-Jaguar Land Rover: $2.3 billion March 2008 (just a year after acquiring Corus) Automobile sector Acquisition deal Gave tuff competition to M&M after signing the deal with ford Image: A Union flag flies behind a Jaguar car emblem outside a dealership in Manchester, England .

26. 9. S terlite -Asarco: $1.8 billion May 2008 Acquisition deal Sector copper Image: Vedanta Group chairman Anil Agarwal .

27. 10. S uzlon-RePower : $1.7 billion May 2007 Acquisition deal Energy sector Suzlon is now the largest wind turbine maker in Asia 5 th largest in the world. Image: Tulsi Tanti, chairman & M.D of Suzlon Energy Ltd.

28. 11. R IL-RPL merger: $1.68 billion March 2009 Merger deal amalgamation of its subsidiary Reliance Petroleum with the parent company Reliance industries ltd. Rs 8,500 crore RIL-RPL merger swap ratio was at 16:1 Image: Reliance Industries' chairman Mukesh Ambani .

29. Why I ndia? Dynamic government policies Corporate investments in industry Economic stability “Ready to experiment” attitude of Indian industrialists

30. Amongst BRIC Nations, India second most targeted country for Mergers & Acquisitions(2010):

31. MERGER & ACQUISITION(2010-11) :

32. PROCESS OF MERGER & ACQUISITION IN INDIA: The process of merger and acquisition has the following steps : A pproval of Board of Directors Information to the stock exchange Application in the High Court Shareholders and Creditors meetings Sanction by the High Court Filing of the court order Transfer of assets or liabilities Payment by cash and securities Maximum Waiting period:210 days from the filing of notice(or the order of the commission - whichever earlier).

33. Why Mergers and Acquisitions Fail? Cultural Difference Flawed Intention No guiding principles No ground rules No detailed investigating Poor stake holder outreach

34. How to Prevent the Failure Continuous communication – employees, stakeholders, customers, suppliers and government leaders . T ransparency in managers operations Capacity to meet new culture higher management professionals must be ready to greet a new or modified culture. Talent management by the management

35. MERGER BETWEEN AIR INDIA AND INDIAN AIRLINES The government of India on 1 march 2007 approved the merger of Air India and Indian airlines. Consequent to the above a new company called National Aviation Company of India limited was incorporated under the companies act 1956 on 30 march 2007 with its registered office at New Delhi.

36. Objectives of this Merger Create the largest airline in India and comparable to other airlines in Asia. Provide an Integrated international/ domestic footprint which will significantly enhance customer proposition and allow easy entry into one of the three global airline alliances, mostly Star Alliance with global consortium of 21 airlines. Enable optimal utilization of existing resources through improvement in load factors and yields on commonly serviced routes as well as deploy ‘freed up’ aircraft capacity on alternate routes. The merger had created a mega company with combined revenue of Rs 150 billion ($3.7billion) and an estimated fleet size of 150. It had a diverse mix of aircraft for short and long haul resulting in better fleet utilization. Provide an opportunity to fully leverage strong assets, capabilities and infrastructure. Provide an opportunity to leverage skilled and experienced manpower available with both the Transferor Companies to the optimum potential. Provide a larger and growth oriented company for the people and the same shall be in larger public interest.

37. Potential to launch high growth & profitability businesses (Ground Handling Services, Maintenance Repair and Overhaul etc.) Provide maximum flexibility to achieve financial and capital restructuring through revaluation of assets. Economies of scale enabled routes rationalization and elimination of route duplication. This resulted in a saving of Rs1.86 billion, ($0.04 billion) and the new airlines will be offering more competitive fares, flying seven different types of aircraft and thus being more versatile and utilizing assets like real estate, human resources and aircraft better. However the merger had also brought close to $10 billion (Rs 440 billion) of debt. The new entity was in a better position to bargain while buying fuel, spares and other materials. There were also major operational benefits. Traffic rights - The protectionism enjoyed by the national carriers with regard to the traffic right entitlements is likely to continue even after the merger. This will ensure that the merged Airlines will have enough scope for continued expansion, necessitated due to their combined fleet strength. Objectives of this Merger

38. 39

39. 40

40. POST MERGER SCENAREO NACIL's employee-to-aircraft ratio : at 222:1 (the global average is 150:1), resulting in a surplus employee strength of almost 10,000. Fleet Expansion: NACIL's fleet expansion seems out of sync with the times. Most airlines are actually rounding their fleet and cancelling orders for new planes. While NACIL plans to induct around 85 more aircrafts which means their debt going forward. Mutual Distrust and strong unions : Strong opposition from unions against management’s cost-cutting decisions through their salaries have led to strikes by the employees. Increased Competition : Air India’s domestic market share dropped from 19.8% in August 2007, when the merger took place, to 13.9% in January 2008 before rising to 17.2% in February 2009. Lower load factor : The company’s load factor is decreasing year by year, in 2005- 06 load factor is 66.2% which is more than present load factor. Air India load factor is likely to be low because of the much higher frequency operated on each route. Lower load factor could decrease the company’s margins.

41. 42

42. Reasons for Failure The merger coincided with a flurry of increased domestic and international competition. Weak management and organization structure. More attention to non-core issues such as long term fleet acquisitions and establishing subsidiaries for ground handling and maintenance, than to addressing the state of the flying business. Bloated workforce Unproductive work practices Political impediments to shedding staff

43. Conclusion Learn from mistakes of others Define your objectives clearly Complete strategy to achieve goal. SWOT analysis for the merged business - a must Conservative attitude necessary at evaluation deskstrong arguments to support project Pick holes in strategy to get the best Will merged units be able to work at efficient / ideal level? Acquire expertise to interpret changes

44. Thank you for your patience…