Mergers & Acquisitions
Rajendra Mishra School of Engineering
Entrepreneurship
References:
Mergers and Acquisitions Business Strategies
for Accountants by William Gole and Joseph Morris,
Willey India Pvt. Ltd.
Mergers, Acquisitions And Corporate Restructuring by
Rabi Narayan Kar, Willey India Pvt. Ltd.
Mergers and Acquisitions
Mergers and acquisitions have become highly
prevalent in todays corporate world
The aggregate value of such deals in a country
is now referred to as an economic indicator
May unlock value for shareholders
Helps acquirer to avoid the pain of starting up
a production line or a new product and find
synergy
For such company, one plus one makes more
than two.
2
Concept
Merger involves combining two
independent companies into one new
company.
Mahindra Satyam Ltd. was merged with Tech
Mahindra Ltd.
Acquisition is the purchase of one
company by another in which no new
company is formed.
Tech Mahindra took over or acquired Satyam
Computers Services Ltd.
Some Direct Advantages of Merger
Each becomes a business unit of merged
entity - one registered office, one set of
board of directors, and one set of financial
statements.
It facilitates centralized decision making.
It reduces administrative overhead.
Trims down requirement of regulatory
compliances.
Integrates logistics.
The single company works for focused
growth.
4
Advantages of acquisition are
transaction specific.
Scope of Transactions under the Broader
Areas of Mergers and Acquisitions
Purchase a company that is available
for sale.
Purchase one or more of the business
units of a company (referred to as
slump sale).
Merge another company with itself.
The reverse is true from the
perspective of the company on sale.
Corporate restructuring.
Special Circumstances
Forced Merger
The government has made a draft
order to merge National Spot
Exchange Ltd (NSEL) with its parent
firm Financial Technologies (India) Ltd
(FTIL) in 'public interest'.
The cases of Satyam Computer
Services and Multi-Commodity
Exchange also resulted out of
Government interventions.
Steps in Mergers and
Acquisitions
Strategic planning and decision making
Identification of the target company
Due diligence
Valuation and negotiation
Financial closure
Approval of shareholders and legal
clearance
Contract, payment, and Close
Integration
8
Strategy Planning
Need discovery / strategic objectives
Analyze build versus acquire decisions
Preparedness of the management
Own financial position
Discussion with banks and financial
institutions
Assess other sources of fund
9
Need Discovery /Strategic
Objectives
Investment of surplus fund for inorganic
growth
Increase market share pricing power
Get larger market access
Acquire technologies
Acquire skills
(Design lab by Mahindra)
Acquire distribution network
(Ranbaxy by SUN)
To avoid the pain in starting a new company
10
Need Discovery /Strategic
Objectives contd.
To gain tax advantage (Ispat by JSW)
To get access to raw-materials or market
(JSW and Gujarat NRE)
Global reach (Tata Jaguar Land Rover)
Forward and backward integration
(RIL and
RPL)
Acquire brand
Leverage on unique knowledge and
expertise
Asset stripping
11
Identification of Target
Company
Create core acquisition team
Search for potential target
Preliminary screening
Establish contact with the target
company
12
Due Diligence
Understand unique strength of the company
and synergy with the acquirer company.
Assessment of real prospect of meeting the
desired outcome of the acquisition.
Make a realistic assessment of the financial
health of the company and potential growth
after integration with the acquirer.
Analyze remaining useful life of plant and
machinery. This is more important in industry
segments where technology life is short.
13
Due Diligence
contd
Analyze intangible assets (patents,
trademark, brand, copyright), their
protection status, any infringement
on others assets.
Understand quality of human capital.
Identify hidden liabilities and assets.
14
Due Diligence
contd
Understand possibility of synergy in
terms of technology, market,
knowledge, finance, distribution,
culture and broader mission.
Understand the reality as regards
strategic assets owned by the
company coal block.
Understand implication of present and
future legal disputes.
15
Due Diligence
contd
Assess quality of investment in its
books.
Understand key issues in favor and
against post-acquisition integration.
Quality of debtors.
16
Composition of Due Diligence
Team
Finance and Accounting
Outside accountant
Business development
Legal
Human resource
Information technology
Sales and marketing
Product marketing
Production and operation
R&D
Taxation expert
17
Development of the Due
Diligence Program
Management presentation highlighting the value
proposition
Interviews with key members of the target company
to elicit their views on the prospect of the company
Data review to make meaningful assessment of the
present status
Follow-up discussion
Tour of the facility
Conduct unscheduled meetings so as to get a
realistic picture
Make enquiries with regulatory authorities
18
External Data Source
Annual reports
Analyst reports
Disclosures made in the stock
markets where the equity of the
company is listed
Trade and business periodicals
19
External Data Source
contd.
Industry market research report
Credit rating of the debt issued by
the company
Online news media
Company website
Reports on industrial outlook in the
market to be catered
20
Valuation, negotiation, and
structuring the deal
Approaches of valuation
Income approach
Cost approach
Market approach
21
Valuation
Methods of valuation
Capitalization of earnings
Discounted earnings method
Method of multiple
Price to earnings ratio
Price to book value ratio
Dividend discounting method
Method of Net Asset
22
Structuring the Deal
All cash deal and takeover of debt or
no debt
All stock deal and takeover of debt or
no debt
Mix of stock and cash and/or debt
Mergers usually involve share swap
23
