Ashish Project of Summer

7/31/2019 Ashish Project of Summer

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INTERNATIONAL INSTITUTE OF MANAGEMENT SCIENCE

SUMMER PROJECT

ON

RATIONALE BETWEEN MERGERS & ACQUISITIONS IN THE

CURRENT MELTDOWN AND ITS FUTURE

BY

ASHISH SHUKLA

PGMP2008 10 (FINANCE SPECIALISATION)

ROLL NO 310

Project Director

Prof. K. M. Joshi

(Director & Sr. Faculty)


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The research provides an opportunity to a student to demonstrate application his/her

knowledge , skill and competencies required during technical session . Research also

helps the student to devote his/her skill to analyze the problem to suggest alternative

solution , to evaluate them and to provide feasible recommendation on the provided

data .

Although I have tried my level best to provide this an error free report has been

made to offer the most authentic position with accuracy .

ACKNOWLEDGEMENT


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First of all I take this opportunity to thank Telco Water Technology Pvt. Limited, for giving

me a chance to work for them as a Summer Trainee on this project.

I hereby express my gratitude to Miss Joyti Khare, project guide, for his precious guidance,

without which this project would never have taken off.

I am also obliged towards, Mr. Prashant & Mr. Kamlakar from Telcos M&A department,

for his suggestions, which he has offered from time to time. His precious inputs have helped

me to understand this topic of Mergers & Acquisitions much better.


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DECLARATION

I Ashish shukla declare that the project report entitle Study Of Merger & Acquisition

Special aspect of Indian Economy at Telco Water Technology Ltd. original work based on the

summer training.

Ashish Shukla

Student IIMSc

Project Trainee Telco water Technology Pvt. Ltd.


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EXECUTIVE SUMMARY

The structure of the project and the rationale behind it are penned in this section Executive

Summary. This section summarizes the complete project as to how project was planned,

structured and carried out.

The project is regarding Mergers and Acquisitions (M&A) done by the corporations across the

world. Generally M&A comes under the corporate finance function in most of the companies.


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The project was structured in such a way that one gets complete knowledge about M&A activityfrom an elementary level to the actual deal happenings.

THE 4 MODULES: -

In order to achieve the objective the project was segregated into following 4 modules: -

1) Basic elements of M&A

2) Tata-Corus deal

3) Vodafone-Hutchison Essar deal

4) Daiichi-Sankyo Ranbaxy deal

As one can see the project started with elementary study of M&A then proceeding to 3 actual deals

that took place. The complete design of the project is such that one gets complete knowledge of

M&A. This is the aim of the project.

SELECTION OF DEALS: -

The choice of the deals was also a very strategic one. Tata-Corus deal was an example of an Indian

company acquiring a foreign entity. On the other hand, Vodafone-Hutchison Essar deal was an


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example of a deal between two foreign entities involving Indian assets. Further, the third deal of

Daiichi-Sankyo Ranbaxy dealt with a foreign company enquiring an Indian company.

In this way the 3 deals gave an opportunity to understand M&A from 3 different perspectives. In

addition all the three deals involve different sectors.


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Company Profile

The word PUROCOM is derived from the word "Puro" which means pure like dew and

"Com" which signify modern computerized technology.Purocom came into existence since

1992.

We are from the last 16 years in the field of water industry realizing the need of Indian

customers.Our product is designed for the Indian market and suits the climate and the

quality of water present in various region of India.Purocom is concerned about the socialresponsibility and that is the reason for entering the field of water purification with the

revolution technology of Reverse Osmosis.

Water being a key component in determining the quality of our lives and considering the

fact that drinking water quality in India is worse as compared to the developed nations of the

world.

Purocom has been able to develop the RO Water Purifier as per the Indian market demand


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with double protection technology to provide safe and pure water with an added advantage

of advance system to keep all parts of RO Water purifier system safe and long lasting.

Pure water free from bacteria and viruses as it will be purified through Multi Stage

Purification.

Free from dissolved impurities like salts and heavy metals as it will be purified byReverse Osmosis process.

Water comprising of all the essential natural minerals as it will be purified with

Reverse Osmosis Technology.

Reverse Osmosis (RO) plants provide an excellent combination of quality and services for all

your commercial and industrial requirements. Every system is manufactured with world

class components achieving the highest-quality standards.

Highly compact

Easy to maintain

Easy to operate Standard and Modular

Available in ranges and sizes from 25lph to 10000lph

Purocom in commercial way is best suited for:

Offices

Apartments & Societies

Beverages Industries

Pharmaceutical Industries

Dialysis

Bottle Water Plant Industrial Water Treatment

Cooling Tower

Textile Industry

Swimming Pool

Green House

Farm Houses

Testimonials

Tested by recognized laboratories and claims certifies.

ISO: 9001-2000 certified company with highest quality standard. Premium brand of RO water purifiers since the last 12 years with trouble-free

performance observed by million of customers.

Prompt after-sale service from a wide network across the country.

Wall mounted with in-built water storage tank. No space wastage on a below the

kitchen counter.

Modern styling with elegant transparent tank to protect from the dust and moisture.

Purified water capacity of liters/hour with a duty cycle of 75 liters/day.


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8 liters water storage capacity with purified water available on demand, even during

load shedding.

Fully automatic with auto-start and auto-o

Commercial Products

Large RO System RO

with SOFTNER

R.O. 50 LPH R.O. 100 to 150 LPH

Softner


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Introduction of M&A


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A merger is a combination of two companies to form a new company, while an acquisition is the

purchase of one company by another in which no new company is formed

.

One plus one makes three: this equation is the special alchemy of a merger or an acquisition. Thekey principle behind buying a company is to create shareholder value over and above that of the

sum of the two companies. Two companies together are more valuable than two separate

companies - at least, that's the reasoning behind M&A.

This rationale is particularly alluring to companies when times are tough. Strong companies will

act to buy other companies to create a more competitive, cost-efficient company. The companies

will come together hoping to gain a greater market share or to achieve greater efficiency. Because

of these potential benefits, target companies will often agree to be purchased when they know they

cannot survive alone.

Merger is a financial tool that is used for enhancing long-term profitability by expanding their

operations. Mergers occur when the merging companies have their mutual consent as different

from acquisitions, which can take the form of a hostile takeover.

Acquisitions or takeovers occur between the bidding and the target company. There may be either

hostile or friendly takeovers. Reverse takeover occurs when the target firm is larger than the

bidding firm. In the course of acquisitions the bidder may purchase the share or the assets of the

target company.

Definition of M&A


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Mergers- A merger is a combination of two companies into one larger company, which

involves stock swap or cash payment to the target.

Merger means merging of 2 entities to form a combined new entity.

An example of merger is that of the deal between Arcelor and Mittal, which combined to form

ArcelorMittal

Acquisition - When one company takes over another and clearly established itself as the

new owner, the purchase is called an acquisition.

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

business and the buyer's stock continues to be traded.

Acquisition means a firm acquiring a controlling stake in a target firm, post-which only the former

exists while the latter ceases to exist.


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An example of an acquisition is that of the deal between Tata and Corus, wherein Tata acquired a

100% stake in Corus.


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Types of M&A

Types of M&A Key feature Example

Horizontal M&A Both firms have similar products /services in the same market.

Exxon and Mobil

Vertical M&A The relationship between the twofirms is that of a buyer-supplier.

Time Warner and The TurnerCorporation

Market extension Both firms have similar products /services but in different markets.

Tata Steel Ltd. & Corus GroupLtd. PLC.

Product extension Both firms have differingproducts / services in the samebusiness.

ICICI and Madura Bank

Conglomerate Both firms are in differentindustries.

Another Criteria of Classification


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Objective of M&A

Gain market share

Economies of scale

Enter new markets

Acquire technology

Utilization of surplus funds

Managerial Effectiveness

Strategic Objective

Vertical integration


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Merger

Nokia- Siemens

A new 50-50 joint venture company is formed.

This new company will instantly become the third largest communications equipment

provider in the world with annual revenues of over 15 billion Euros or more than US $30

billion

The new entity is 50-50 joint venture, called Nokia Siemens Networks and will encompass

both fixed-line and mobile networking products as well as managed services offered to

carriers.

Nokia Siemens Networks would have annual sales of close to 16 billion Euros (20 billion

dollars) and a workforce of 60,000, making it number three in the sector behind Ericsson

and Alcatel/Lucent;

Nokia and Siemens aim to save cash through the marriage, predicting cost reductions of

1.5bn per year by 2010.

The integration of the two businesses would also lead to job cuts mainly in Germany, with

10-15% of the combined 60,000-strong workforce - or 9,000 jobs in all - to be axed over

the next four years .

Acquisition

Structure

Asset Purchase

Business Purchase

Share Purchase

A Mixture

Apportionment of Risk


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No Hidden matters

Remedy warranty

Indemnity


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Tata-Corus


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Tata acquired Corus, which is four times larger than its size and the largest steel producer in the

U.K. The deal, which creates the world's fifth-largest steelmaker, is India's largest ever foreign

takeover and follows Mittal Steel's $31 billion acquisition of rival Arcelor in the same year.

Tata acquired Corus on the 2nd of April 2007 for a price of $12 billion. The price per share

was 608 pence, which is 33.6% higher than the first offer which was 455 pence.

Particulars Corus

Currency: Rupee Millions

TATA Steel Ltd

Currency: Rupee Millions

Year 2006 2005 2004 2006 2005 2004

ASSETS 582750.00 533925.00 467775.00 205,450.70 177,033.10 147,988.70

DEBTS 98100.00 105525.00 96000.00 45,932.70 42,073.10 39,982.90

LIABILITIES 231300.00 178425.00 155475.00 30492.10 33146.80 32665.90

REVENUE 760500.00 699900.00 596475.00 202,444.30 159,986.10 111,294.40

NETINCOME

33900.00 33450.00 -22875.00 37,346.20 36,032.60 17,887.80

Process of Acquisition

Finding A Target Business

Appointing Advisers

Negotiating terms

Due Diligence

Exchange of Contracts

Completion


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Appointing Advisers

The Right Chemistry

The Right Experience

Size is not Everything

Talk Your Language

CORUS TATA

J P MORGAN ABN AMROCAZENOVE DEUTSCHE BANK

HSBC STANDARD CHARTERED

Negotiating Terms

The nature of the fit

Commonality of client base

Financial strength

Strategic intent

Sharing of resources

Applicable Benefits

Negotiation By Tata

September 20, 2006: Corus Steel has decided to acquire a strategic partnership with a

Company that is a low cost producer


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October 5, 2006: The Indian steel giant, Tata Steel wants to fulfill its ambition to Expand

its business further.

October 6, 2006: The initial offer from Tata Steel is considered to be too low both by

Corus and analysts.

October 17, 2006: Tata Steel has kept its offer to 455p per share.

October 18, 2006: Tata still doesnt react to Corus and its bid price remains the same.

October 20, 2006: Corus accepts terms of 4.3 billion takeover bid from Tata Steel

October 23, 2006: The Brazilian Steel Group CSN recruits a leading investment bank to

offer advice on possible counter-offer to Tata Steels bid.

October 27, 2006: Corus is criticized by the chairman of JCB, Sir Anthony Bamford, for

its decision to accept an offer from Tata.

November 3, 2006: The Russian steel giant Severstal announces officially that it will not

make a bid for Corus

November 18, 2006: The battle over Corus intensifies when Brazilian group CSN

approached the board of the company with a bid of 475p per share

December 18, 2006: Within hours of Tata Steel increasing its original bid for Corus to

500 pence per share, Brazil's CSN made its formal counter bid for Corus at 515 pence per

share in cash, 3% more than Tata Steel's offer.

January 31, 2007: Britain's Takeover Panel announces in an e-mailed statement that after

an auction Tata Steel had agreed to offer Corus investors 608 pence per share in cash

April 2, 2007: Tata Steel manages to win the acquisition to CSN and has the full voting

support from Corus shareholders

Legal Documentation

Share sale Agreement

The shares being sold

The Price

Restrictive Agreements


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Warranties

Conditions to the Deal

Transferring tangible assets

Transferring Intangible assets

Transferring Liabilities

Transferring Employees

The Tax Deed

The Disclosure Letter

Synergy In M&A

Synergy refers to the ability of 2 or more units/companies to generate greater value

working together than they could working apart.

An important point to note here is, synergy should be such that it difficult for competitors

to replicate.

Quantifying Synergy in M&A


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Major Reasons for failure of M&A

Failure to anticipate foreseeable events

Acquirer paying too much premium

Synergies non-existent or their overestimation

Adverse economic conditions / external events

Incompatible cultures

Due Diligence In M&A


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Due diligence in simple term means a process of getting information of the target firm from

all aspects.

Inadequate or non-performance of due-diligence is mostly responsible for failure of M&A.

360 Due Diligence


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Valuating an M&A

Objective of M&A Value of Target Firm

Operating Synergy V + Synergy value

Tax Benefits V + PV of Tax Benefits

Debt Capacity V + Increase in value of debt that can be carried

Cash Slack V + NPV of Projects / Target

Undervaluation V

Diversification V

Control Value of target firm run optimally

Managers hubris V

Note: At a time more than one objective will be present

and hence all such factors must be factored in for valuation.

Assume: Value of Target Firm on stand-alone basis = V

PV = Present Value

NPV = Net Present Value


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Financing an M&A

Features of financing

Cash offer Stock Offer

Lower premiums paid Higher premiums paid

Cash receipts create tax liabilities for targetfirms

Acquiring firms resort this way when they feeltheir stock is overvalued


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Cash offer can be made by a mix of debt andequity

There is dilution of ownership when stockpayment is done

Here goodwill is created and hence it amortizedwhich is non-tax deductible

Here no goodwill is created.

Due amortization of goodwill EPS of acquiringfirm gets hit.

EPS is greater than than that reported when a cashoffer is made.

Benefits of Mergers and Acquisitions

Merger refers to the process of combination of two companies, whereby a new company is formed.

An acquisition refers to the process whereby a company simply purchases another company. In this

case there is no new company being formed. Benefits of mergers and acquisitions are quite a

handful.

Mergers and acquisitions generally succeed in generating cost efficiency through the

implementation of economies of scale. It may also lead to tax gains and can even lead to a revenue

enhancement through market share gain.

The principal benefits from mergers and acquisitions can be listed as increased value generation,

increase in cost efficiency and increase in market share.

Mergers and acquisitions often lead to an increased value generation for the company. It is

expected that the shareholder value of a firm after mergers or acquisitions would be greater thanthe sum of the shareholder values of the parent companies.

An increase in cost efficiency is effected through the procedure of mergers and acquisitions. This

is because mergers and acquisitions lead to economies of scale. This in turn promotes cost

efficiency. As the parent firms amalgamate to form a bigger new firm the scale of operations of the

new firm increases. As output production rises there are chances that the cost per unit of

production will come down.

An increase in market share is one of the plausible benefits of mergers and acquisitions. In case a

financially strong company acquires a relatively distressed one, the resultant organization can

experience a substantial increase in market share. The new firm is usually more cost-efficient and

competitive as compared to its financially weak parent organization.

It can be noted that mergers and acquisitions prove to be useful in the following situations:


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Firstly, when a business firm wishes to make its presence felt in a new market. Secondly, when a

business organization wants to avail some administrative benefits. Thirdly, when a business firm is

in the process of introduction of new products. New products are developed by the R&D wing of a

company.

Terminologies used in M&A

Asset Stripping

When a company acquires another and sells it in parts expecting that the funds generated would

match the costs of acquisition, it is known as asset stripping.

Black Knight

The company that makes a hostile takeover is known the Black Knight.

Dawn Raid

This is a process of buying shares of the target company with the expectation that the market prices

may fall till the acquisition is completed.

Demerger or Spin off

During the process of corporate restructuring, a part of the company may beak up and set up as a

new company and this is known as demerger. Zeneca and Argos are good examples in this regard

that split from ICI and American Tobacco respectively.

Carve out

This is a case of selling a small portion of the company as an Initial Public Offering.

Greenmail

Greenmail is a situation where the target company purchases back its own shares from the bidding

company at a higher price.


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Grey Knight

A grey knight is a company that takes over another company and its intentions are not clear.

Hostile Takeover

Hostile bids occur when acquisitions take place without the consent of the directors of the targetcompany. This confrontation on the part of the directors of the target company may be short lived

and the hostile takeover may end up being friendly. Most American\n and British companies like

the phenomenon of hostile takeovers while there is some more which do not like such unfriendly

takeovers.

Management Buy In

When a company is purchased and the investors bring in their managers to control the company, it

is known as management buyout.

Management Buy Out

In a management buy out, the managers of a company purchases it with support from venture

capitalists.

Poison Pill or Suicide Pill Defense

This is a strategy that is taken by the target company to make itself less appealing for a hostile

takeover. The bondholders are given the right to redeem their bonds at a premium should a

takeover occur.


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Presentation of deal

Tata Corus


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Manufacturing Facilities

Tata Steel

Company Country Capacity (MT)

Tata Steel Limited Jamshedpur, India 5

Tata Steel Thailand (MilleniumSteel)

Thailand 1.7

NatSteel Asia Singapore 2

Total Capacity 8.7

Key facts of Tata Steel Ltd


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Parameter (2007-08) Tata Steel Limited Tata Steel Thailand NatSteel Asia

Revenues (USDmillion)

5,005 1,020 1,915

Production (MTPA) 4.78 1.43 2.49

EBIDTA (USD million) 2,139 126 57

EBIDTA Margin 43 % 12 % 3 %

Tata Steel has a strong resource tie-up. It meets 100% of its iron ore

requirements and 60% of its coal requirements from its captive mines.

The cost of production of per tonne of steel for Tata Steel is USD 247.

Key facts of Tata Steel Ltd.

Resource Location Approximate Distance (kms

Iron ore Jharkhand and Orissa 150


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Coal West Bokaroand Jharia (Jharkhand)

150

ManganeseChrome/ Dolomite

Orissa

Worlds

one of the most

cost-effective

producers of iron

and steel.

Consolidated figures for

Tata Steel Ltd

Parameter Tata Steel (2007-08)

Revenues (USD million)) 33,011

Production (MTPA) 31.99

EBIDTA (USD million) 4,640

EBIDTA Margin 14 %

PBT (USD million) 4,091

PBT margin 12%


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PAT (USD million) 3,086

PAT margin 9%

Post-Deal

Company Capacity (MPTA)

Arcelor - Mittal 110

Nippon Steel 32

Posco 30.5

JEF Steel 30.0

Tata Steel Corus 27.7

Bao Steel China 23

US Steel 19

Nucor 18.5


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Riva 17.5

Thyssen Krupp 16.5

Tata steel will be the 5th largest producer of steel

Planned Capacity Expansion of

Tata Steel

Company Country Capacity (MTPA)

Tata Steel Limited Jamshedpur, India 10

Jharkand, India 12

Orissa, India 6

Chattisgarh 5

Tata Steel Thailand (MilleniumSteel)

Thailand 1.7

NatSteel Asia Singapore 2

Tata Steel Netherlands B.V U.K and Netherlands 19

Total planned Capacity 55.7


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Features of the Deal

Value of deal - $12.9 billion

100% buyout of Corus

Leveraged buyout (LBO)

All cash deal

Deal routed through a S.P.V

SWOT For Tata Steel

Strength

Lowest cost steel producer

Weakness

Corus was triple the size of Tata Steel

Opportunity

Exposure to global industry

In line with consolidation trend in steel industry

Threats

CSN was the rival bidder.

Non-materialization of the anticipated synergies.

SWOT For Corus


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Strength

High technology of steel manufacturing

Weakness

High operating costs

Opportunity

To get access to highly efficient cost structure of Tata Steel

Threats

Huge pension liability might have led to collapse of the deal

Valuation of Corus

No. of outstanding Corus shares 946,090,659

Price/per share paid by Tata 608 pence

Total value of Corus equity 5.75 billion GBP

Net debt of Corus assumed by Tata Steel 850 million GBP

Total Enterprise value of Corus 6.6 billion GBP

EBIDTA (737 million GBP for 12 monthsSepc2006) multiple paid by Tata

9 times

Critical facts in Valuation of Corus

The bid-price of 608 pence / share was at a premium of approximately 68.7 % to the

average closing mid-market price of 360.5 pence per Corus Share for the twelve months

ended 4 October 2006.


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The bid-price of 608 pence / share was at a premium of approximately 33.6 % to the first

bid-price of 455 pence / share by Tata Steel on 20th Oct 2006.

Arcelor-Mittal merger was at 4.5 times EBITDA of Arcelor.

MEANS OF FINANCING

In January 2007 when the acquisition was approved then the a large amount

of funding was through bridge loans. The funding structure as on April 2, 2007

was: -

Bridge Funding $10.56 billion

Cash from Tata Steel $1.09 billion

Long term debt $ 1.66 billion

TOTAL $ 13.3 billion

The following structure was approved at the Board Meeting of Tata Steel on 17 th April 2007

Equity Capital from Tata

Steel Ltd.

$4.10 billion Rs.17,850 crores

Long term debt fromconsortium of banks takenby Tata Steel U.K

$6.14 billion Rs.26,730 crores

Quasi-equity funding at TataSteel Asia Singapore

$ 1.25 billion Rs.5,440 crores

Long term capital funding atTata Steel Asia Singapore

$ 1.41 billion Rs.6,130 crores

TOTAL $ 12.9 billion Rs.56,150 crores


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Corus Shares

As per terms of the deal Tata acquired 100% equity of Corus

Also, post the deal the shares of Corus were delisted from the stock exchanges of London, New

York and Amsterdam in April 2007


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VODAFONE & HUTCHISON ESSAR

DEAL


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HUTCHISON ESSAR Ltd. (HEL

Established in 1992 as Hutchison Max by Hutchison Whampoa and Max Group

Offered both prepaid and postpaid GSM cellular services in India

Owns brands like Orange, Hutch and 3

Presence in 16 telecom circles. It increased its presence though Essar acquisition.

Known for its presence in metros, hence enjoyed higher ARPUs in the industry

Had approx. 22.2million subscribers

Contributed more than 45% to the total revenues of HTIL

Vodafone Group Plc

Established in 1991 as Racal Telecom and now it is headquartered in Berkshire, England

U.K

Offers both fixed line and mobile services across the world.

Revenues in 2007 were 31.1 GBP billion with operating loss of 1.564 GBP billion.

Presence in Europe (incl. Eastern Europe), Middle East, Africa, Asia Pacific and the USA.

Had over 200 million subscribers

Controversial shareholding

It is alleged that Asim Ghosh, Analjit Singh and IDFC were mere front

entities acting on behalf of Hutchison, as it could not own more than 74% in HEL.

Hutchison always said that 15% holding by these 3 entities was Indian and

hence not to be classified as FDI.


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But, there are transactions showing loans and financial support provided to

Asim Ghosh, Analjit Singh and IDFC for forming myriad chain of companies.

Also, HTIL had options to buy trios stake at par value.

VODAFONE HUTCHISON DEAL

Vodafone acquired 52% direct and indirect stake in Hutchison Essar Ltd on 8 th May 2007.

It paid $11.1 billion for 52% stake and other loans of HTIL (the 15% stake).

Vodafone owns only 52% stake in HEL even today.

Essar had the first right of refusal but didnt exercise it.

It was an all cash deal.

The deal gave HEL and enterprise value of $18.8 billion

Vodafone beat rival bidders like RCom, Hindujas and Ruias.

Vodafone simultaneously sold its 5.6% direct stake in Bharti Airtel.

Factors for justifying the premium

Mobile penetration in India was then just 14%

India was adding highest number of subscribers per month only next to China. Today it

beats China as well.

Hutchison-Essar enjoyed by the highest ARPU in Indian telecom market, thanks to its stron

hold in metros.

Vodafone itself was posting losses in saturated European and US markets. Therefore, its

keeness to enter high potential emerging markets can also be factor in the premium.


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Enterprise Valuation of

Hutchison Essar Ltd. (HEL)

Market Value (GBP

miilions)

Net Consideration paid by Vodafone 5,438

Gross debt assumed by Vodafone 1,483

Enterprise value of complete Hutchison Essar $18.8 billion

Enterprise value/subscriber for HEL as per deal $794

Enterprise value/subscriber for Bharti Airtel (FY 2007) $614

Financing of Deal

Vodafone to fund the acquisition through debt and existing cash reserves.

Vodafone would have to take on a debt of USD 3.5 billion to fund this deal.

Post- Deal HTIL

At EV of $18.8 billion represents 77% of HTILs total EV based on the net debt of

HK$33bn as at the end of June 2006.

It also implies that the remaining businesses were valued at just 5x of 2006 EV/EBITDA.

The company will be facing start-up losses in Indonesia and Vietnam over the next few

years.

The stock of HTIL was predicted in all likely hood to lose its appeal to those who regard

HTIL as an Indian proxy and would command lower multiples.


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DAIICHI SANKYO-RANBAXY DEAL


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RANBAXY LABORATIES LTD

A family controlled pharmaceutical business. Malvinder Singh is from the 3rd generation.

Its main business is generic non-proprietary drugs.

Presence in 56 countries including Mexico, Russia, East Europe, where Daiichi Sankyo is

not present.

Revenues in 2008 were Rs.4,472 crores with operating loss of Rs.571 crores.

Formation of Daiichi Sankyo

Formed in 2005 by merger of Daiichi Pharmaceutical Co., Ltd. and Sankyo Company,

Limited

Its business is R&D, manufacturing, import and sales & marketing proprietary drugs.

Revenues in 2008 were USD 8.8 billion with operating income of USD 1.568 billion.

Business operations in 21 countries.

SYNERGY

Presence in emerging markets for Daiichi-Sankyo Geographical diversification .

Entry into non-proprietary drugs for Daiichi-Sankyo Product Extension .

Realization of sustainable growth through a complementary business model.

Acceleration of innovative drug creation by optimizing value chain efficiency.


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DAIICHI SANKYO RANBAXY DEAL

On June 11, 2008 the Daiichi agreed to purchase more than 50.1 percent of the voting right

of Ranbaxy at a price of Rs737 per share with the total transaction value expected to bebetween 368.5 billion (Rs147 billion) to 495 billion (Rs198 billion: Rs1 = 2.5) by its

own fund and borrowing.

It was an all cash deal.

Daiichi Sankyo acquired 63.92% direct stake in Ranbaxy on November 2008.

On a fully diluted basis, the deal values Ranbaxy at $8.5bn.

The deal leads to the emergence of 15th largest pharmaceutical company

The deal infused US $ 736 million into Ranbaxy's Balance Sheet.

How did Daiichi acquire Ranbaxy?


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How much did Daiichi pay?

Nature of transaction Acquisition consideration (in million yens)

Open market share purchases 169,407

Share purchases from founding family 230,970

Share purchases by issuance of new shares 85,001

Direct acquisition related expenditures 2,974

Total 488,354


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How did Daiichi value Ranbaxy?

Assets and Liabilities Value attributed (Yen billions)

Book value of assets and liabilities(Cash, Inventory etc.)

78.8

Inventories(Increase in inventories to fair value)

2.0

Tangible assets (Land) 10.0

Intangible assets (Leasehold land) 5.9

Intangible assets (Increase in current products, etc. tofair value)

41.0

In-process R&D expenses 6.9

Deferred tax liability (20.0)

Minority Interests (45.0)

Goodwill 408.7

Total consideration 488.3


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Valuation of Ranbaxy Laboratories Ltd.

Price paid per share by Daiichi Rs.737

52 week high / low as on 11th June 2008 for Ranbaxy

share

Rs. 593 / 300

Valuation of 63.92% stake by Daiichi 19804 crores

Valuation of 100% equity of Ranbaxy as per the

deal

30982 crores

Enterprise valuation of Ranbaxy (on a fully diluted

basis)

$ 8.5 billion

EV / EBIDTA on CY 2009E 24.7 times

Weighted avg EV / EBIDTA for Indian

pharmaceutical companies for CY2009 E

14.7 times

Market capitalization of Ranbaxy as on 30th May

2009 (conclusion of deal)

10434 crores

Global down turn due to the financial crisis has made Daiichi take a huge

hit on its balance sheet due to the acquisition of Ranbaxy.

Impact of Ranbaxy deal on Daiichis Balance Sheet

In Yens billion Reason


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Net profit / (loss) for Daiichi-Sankyoin FY2008

97.6 Recording of 351.3 billion in extraordinarylosses due to a one-time write-down ofgoodwill pertaining to theinvestment in Ranbaxy.Net profit / (loss) for Daiichi-Sankyo

in FY2009(351.3)

Net cash used in investing activitiesin FY2008

49.4 It is due to the cash acquisitions of shares inU3 Pharma and Ranbaxy, which entailed cashoutgos.

Net cash used in investing activitiesin FY2009

413.8

Short term bank loans in FY2008 0.1 Borrowings for the acquisition of Ranbaxy'sshare +240.0 billionIncrease by consolidation of RanbaxyShort term bank loans in FY2009 264.3

In Yens billion Reason

Loss on valuation of derivatives inFY 2008

0.7 Consolidation of Ranbaxy: +14.8billion

Loss on valuation of derivatives inFY 2009

20.5

Foreign exchange losses in FY 2008 0 Consolidation of Ranbaxy: -10.6billion

Foreign exchange losses in FY 2008 17.5

Purchases of investments inconsolidated subsidiaries in FY 2008

0.8 Acquisition of Ranbaxy: 387.0billion

Purchases of investments inconsolidated subsidiaries in FY 2008

411.3

Financing of Deal

Daiichi funded the acquisition through debt and existing cash reserves.

Daiichi has a taken a short and long term loans of 240 billion yens.


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Thats almost 50% of the total funding requirement of the deal.

Risks in the deal for Daiichi

Ranbaxys exposure to the US dollar

USFDA invocation may affect overall business in the country.

The anticipated synergies may fail to realize if Ranbaxy faces regulatory hurdles world

over.

Factors appearing in the trends

Companies from which country/region would be featuring as acquirers.

Companies from which country/region would be featuring as being acquired.

The factors on which the premium would be paid.

Sectors that will witness heightened M&A activity.

Objectives of merger i.e. product extension, geographical diversification etc.

Means of financing that will gain popularity i.e. cash / stock deals.

Role of intermediaries in the deal like that of investment bankers.

Role of taxation in the execution of deals.


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Data Analysis

Qu. 1] Do you know about merger &acquisition?

Yes No Cant Say

50 35 15


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0

20

40

60

80

100

1st Qtr 2nd Qtr 3rd Qtr 4th Qtr

East

West

North

Observation

Most of the employee are knowing about M&A.

Qu.2] Are you agree with M&A?

Yes No Cant say

55 27 18


55/713

Observation

This question could not able to give good answer.

Qu.3] Do you think M&A is beneficial for bidder company?

Yes No Cant say

83 2 15


56/713

Observation

In this Qu. Maximum employee is favor it.

Qu.4] Do you agree M&A is beneficial for target company?


57/713

Yes No Cant say

48 36 16

Observation

This Qu.is not able to get right answer.

Qu.5] Do you know about the process of M&A?


58/713

Yes No Cant say

21 67 12

Observation

In this answer maximum employee are unknown about the process of M&A.

Qu.6] Do you agree with the process of M&A?


59/713

Yes No Cant say

17 46 37

Observation

In this answer most of the employee are disagree.

Qu.7] Do you think M&A create monopoly?

Yes No Cant say


60/713

53 37 10

Observation

In this answer maximum are favor it.

Qu.8] Is M&A beneficial for employment?


61/713

Yes No Cant say

54 36 10

Observation

In this answer most of the employee are not favor it.

Qu.9] Is M&A beneficial for economy of country?

Yes No Cant say

65 22 13


62/713

Observation

In this answer maximum employee favor it that M&A is beneficial for economy.

Qu.10] Do you think M&A is the right solution for financial &

Administration,Weakness of target company.

Yes No Cant say


63/713

72 10 18

Observation

Maximum no. of employee are favor it.

Qu.11] Do you think M&A is the creator of competition?

Yes No Cant say

42 40 18


64/713

Observation

This Qu. Is not able to get right answer.

Qu.12] Do you think M&A related authority is playing great role in the

process of M&A?

Yes No Cant say


65/713

56 24 20

Observation

In this answer most of the employee are not satisfied this rule & regulation.


66/713

Finding

1. When I go to employee of Telco water technology for ask a question , they are in

some hesitation to give their answer .

2. Most of members have no knowledge about Merger & Acquisition.

3. The members do not know the basics of Merger & Acquisition.


67/713

4. Some employee are the combination of old and new member so some confusion arises

among them.

5. Most of the employee are able to give good answer.

6. By this research I find that M&A is beneficial for economy if related authority is

playing great role in the process of M&A.


68/713

Recommendation

.


69/713

1. Give proper training to the employee about M&A.

2. Give them brief knowledge about Target Company because they can easily adjust after

M&A.

3. During the M&A suggestion of employee should be taken.

4. Make sure that M&A is going to according to rules & regulation.

5. The process of M&A is slow make it fast as possible as both company can.


70/713

References & Bibliography


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1. A swath Damodaran, Damodaran On Valuation: Security Analysis For Investment

And Corporate Finance

2. Hitt, Harrison & Ireland, "Merger & Acquisitions" - A Guide To Creating Value For

Stakeholders.

3 . Shiva Ramu, "Corporate Growth through Mergers and Acquisitions".

4. KPMG, Mergers & Acquisitions, Global Research Report 1999.

5 . www.crisilresearch.com, Crisil Reports on Indian Steel, Pharmaceutical and

Telecommunications Industry.

6 . www.investopedia.com

Ashish Project of Summer

Documents

Transcript of Ashish Project of Summer