Merger & Acquisition CSR

8/8/2019 Merger & Acquisition CSR

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MERGERS, ACQUISITIONS, AND

RESTRUCTURING


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OUTLINE

What is corporate restructuring

Types of transactions

Reasons for mergers

Mechanics of a merger

Costs and benefits of a merger

Terms of a merger

Purchase of a division or plant

Takeovers

Strategic alliance

Managing an acquisitions programme

Divestitures

Ownership restructuring

Privatizations

Organizational restructuring

Dynamics of restructuring


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WHAT IS CORPORATE RESTRUCTURING

Corporate restructuring refers to a broad array of activities that expand or

contract a firms operations or substantially modify its financial structure

or bring about a significant change in its organizational structure and

internal functioning. Inter alia, it includes activities such as mergers,

purchases of business units, takeovers, slump sales, demergers, leveraged

buyouts, organizational restructuring, and performance improvement

initiatives.


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RESEARCH PAPER

M&A\IBR_2010_mergers_and_aquisitions.pdf

M&A\ibr_m_and_a_v2_report_final.pdf

M&A\M&A_Report_Final.pdf

M&A\MAI0110.pdf

M&A\PwC_Asia_MA_2010.pdf

M&A\PwC_Asia_MandA_2009.pdf


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Takeover

The transfer of control from one ownership group toanother.Acquisition

The purchase of one firm by anotherMerger

The combination of two firms into a new legal entityA new company is createdBoth sets of shareholders have to approve the transaction.

AmalgamationA genuine merger in which both sets of shareholders must

approve the transactionRequires a fairness opinion by an independent expert on

the true value of the firms shares when a publicminority exists


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CLASSIFICATIONS MERGERS

AND ACQUISIT

IONS1. Horizontal A merger in which two firms in the same industry combine.

Often in an attempt to achieve economies of scale and/or scope.

2. Vertical

A merger in which one firm acquires a supplier or another firm that iscloser to its existing customers.

Often in an attempt to control supply or distribution channels.

3. Conglomerate

A merger in which two firms in unrelated businesses combine.

Purpose is often to diversify the company by combining

uncorrelated assets and income streams4. Cross-border (International) M&As

A merger or acquisition involving an Indian and a foreign firm.


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REASONS FOR MERGERS

Plausible Reasons

Strategic benefit

Economies of scale

Economies of scope

Economies of vertical integration

Complementary resources

Tax shields

Utilizations of surplus funds

Managerial effectiveness

Dubious Reasons

Diversification

Lower financing costs

Earnings growth


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COST AND BENEFITS OF A MERGER

Benefit = PVAB

(PVA

+ PVB

)

Cost = Cash PVB

NPV toA

= Benefit Cost

= [(PVAB

(PVA

+ PVB

)] [Cash PVB

]

= PVAB PVA Cash

NPV to B = Cash - PVB


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STOCK VS. CASH

FIXED

SHARES

STOCK

FIXED

VALUE

CASH

QUESTIONS

ARE THE ACQUIRING COMPANYS SHARES UNDERVALUED, FAIRLY VALUED,

OR OVER VALUED ?

WHAT IS THE RISK THAT THE EXPECTED SYNERGIES NEEDED TO PAY FOR

THE ACQUISN PREMIUM WILL NOT MATERIALISE ?

HOW LIKELY THE VALUE OF THE ACQUIRING COs SHARES WILL DROP

BEFORE CLOSING ?


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COMMONLY USED BASES FOR

DETERMINING THE EXCHANGE RATIO

Earnings per share Prima facie reflects earning power

Fails to consider differences in growth, risk, and quality of earnings

Market price per share

In an efficient market, prices reflect earnings, growth, and risk

The market may be illiquid or manipulated

Book value per share

Proponents argue that book values are objective

Book values reflect subjective judgments and often deviate

significantly from economic values. DCF value per share

Ideally suited when fairly credible business plans and cash flow

projections are available

It overlooks options embedded in the business


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The merger constitutes the second step of the

combination of Mittal Steel and Arcelor into a single

legal entity governed by Luxembourg law. In the first

step, Mittal Steel merged into ArcelorMittal, by way

of absorption by ArcelorMittal of Mittal Steel andwithout liquidation of Mittal Steel. After a vote of the

shareholders of Mittal Steel at an extraordinary

general meeting held on August 28, 2007 and a

resolution of the sole shareholder of ArcelorMittal onAugust 28, 2007, this merger became effective on

September 3, 2007 and the combined company was

named ArcelorMittal.


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In this second and final step, ArcelorMittal (the

surviving entity in the Mittal Steel and ArcelorMittal

merger) will merge into Arcelor and shareholders of

ArcelorMittal will become shareholders of Arcelor,which will be renamed ArcelorMittal.


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MERGER CONSIDERATION

In the merger, a holder of ArcelorMittal shareswill receive one newly-issued Arcelor share forevery one ArcelorMittal share, which is

referred to as the Exchange Ratio. ThisExchange Ratio assumes the prior completionof a share capital restructuring of Arcelorpursuant to which each 7 pre-capital

restructuring shares of Arcelor would beexchanged for 8 post-capital restructuringshares of Arcelor.


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FINANCIAL CALCULATION

M&A\Arcelor Mittal\Excel\Arcelor mittal.xls

M&A\Arcelor Mittal\Excel\CopyOf09-07-

29ArcelormittalModelQ209Final.xls


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TAKEOVERS

A takeover generally involves the acquisition of a certain

block of equity capital of a company which enables the

acquirer to exercise control over the affairs of the

company

A takeover may be done through the following ways

Open market purchase

Negotiated acquisition

Preferential allotment


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VALUAT

ION OF FIRMS INMERGERS AND ACQUISITIONS


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Acquisition valuations are complex, because the valuation often

involved issues like synergy and control, which go beyond just

valuing a target firm. It is important on the right sequence,

including

When should you consider synergy? Where does the method of payment enter the process.

Can synergy be valued, and if so, how?

What is the value of control? How can you estimate the value?

ISSUES IN ACQUISITION VALUATION


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(1) Simplest rationale is undervaluation, i.e., that firms that are undervalued

by

financial markets, relative to true value, will be targeted for acquisition bythose who recognize this anomaly.

(2) A more controversial reason is diversification, with the intent of stabilizing

earnings and reducing risk.

(3) Synergy refers to the potential additional value from combining two firms,

either from operational or financial sources. Operating Synergy can come from higher growth or lower costs

Financial Synergy can come from tax savings, increased debt capacity or cash

slack.

(4) Poorly managed firms are taken over and restructured by the new owners,

who lay claim to the additional value.

(5) Managerial self-interest and hubris are the primary, though unstated,reasons

for many takeovers.


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Equity Valuation Models

- Balance Sheet Valuation Models

Book Value: the net worth of a company as

shown on the balance sheet.

Liquidation Value: the value that would bederived if the firms assets were liquidated.

Replacement Cost: the replacement cost of its

assets less its liabilities.


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Dividend Discount Models

31 20 2 3 .......1 (1 ) (1 )

DD D

V k k k!

Where Vo = value of the firm

Di = dividend in year I

k = discount rate


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The Constant GrowthDDM

2

0 0

0 2

(1 ) (1 )......

1 (1 )

D g D g V

k k

!

And t i equati n can be si lified t :

0 10

(1 ) D g DV

k g k g

! !

where g = gr wth rate ofdi idends.


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Price-Earnings Ratio

0

1

11

/

P PVGO

E k E k

!

-

here = resent alue o ro th pportunity

0 1

1

(1 )P E b

E k ROExb

!

Implying / ratio

0

1

1P b

E k ROExb

!

here = eturn n quity


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Forecast Performance- Evaluate the companys strategic position, companys

competitive advantages and disadvantages in the industry.This will help to understand the growth potential and abilityto earn returns over WACC.

- Develop performance scenarios for the company and theindustry and critical events that are likely to impact theperformance.

- Forecast income statement and balance sheet line itemsbased on the scenarios.

- Check the forecast for reasonableness.


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Estimating The Cost Of Capital

- Develop Target Market Value Weights

- Estimate The Cost of Non-equity Financing

- Estimate The Cost Of Equity Financing

(1- )b c p s

B P SWACC k T k k

V V V!

where

kb the pretax market expected yield to maturity on non-callable, non convertible debt

Tc the marginal taxe rate for the entity being valued

B the market value of interest-bearing debt

kp the after-tax cost of capital for preferred stock

P market value of the preferred stock

ks the market determined opportunity cost of equity capital

S the market value of equity


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The Arbitrage Pricing Model (APM)

1 1 2 2( ) ( ) ....

s f f f k r E F r E F r F F !

- -

here ( k) = the expected rate o return on a port olio that mimics the kth actor and is

independent o all others.

eta k = the sentivity o the stock return to the kth actor.


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Synergy a Quest for Holy Grail

October 24 2002 Synergy in Mergers & Acquisitions 40

Lessons from history:Lessons from history:

Quaker Oats boughtQuaker Oats bought in 1994in 1994 Snapple for $ 1,7 bn.Snapple for $ 1,7 bn.

$ 500 mil. lost on announcement, $ 100 mil. a year later$ 500 mil. lost on announcement, $ 100 mil. a year later

Snapple was spun off 2 years later at 20% of priceSnapple was spun off 2 years later at 20% of price

AnheuserAnheuser--BuschBusch bought in 1982bought in 1982 CampbellCampbell--TaggartTaggartat $ 560 milat $ 560 mil

closed down after 13y of struggling for survivalclosed down after 13y of struggling for survival

IBMIBM boughtbought LotusLotus for $ 3,2 bn. (more than 100% premium)for $ 3,2 bn. (more than 100% premium)

probably never to be recoupedprobably never to be recouped


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Drivers of Synergy

October 24 2002 Synergy in Mergers & Acquisitions 41

INITIAL FACTORS INTERNAL FACTORS

SYNERGY

Strategy

Operations

Contested

vs.

Uncontested

Acquisition

Premium

System

Integration

Strategic

Relatedness

Managerial

Risk Taking

Relative

Size

Method of

Payment

Control and

Culture

Time


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SEBI TAKEOVER CODE

Disclosure

Trigger point

Merchant banker

Public announcement

Offer price

Obligations of the acquirer

Obligations of the board of the target company

Competitive bids

Provision of escrow

Creeping acquisition


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TAKEOVER DEFENCES

MAKE PREFERENTIAL ALLOTMENTS

EFFECT CREEPING ENHANCEMENTS

SEARCH FOR A WHITE KNIGHT

GESCO MAHINDRA . . DALMIAS

SELL THE CROWN JEWELS

AMALGAMATE GROUP COMPANIES

RESORT TO BUYBACK OF SHARES LOBBY WITH GOVT AND SEBI

BOMBAY DYEING . . BARJORIA


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BUSINESS ALLIANCES

Business alliances such as joint ventures, strategic alliances,

equity partnerships, licensing, franchising alliances, and

network alliances have grown significantly. In many situations,

well-designed business alliances are viable alternatives to

mergers and acquisitions


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COMMON FORMS OF BUSINESS ALLIANCES

Joint ventures

Strategic alliances

Equity partnership

Licensing

Franchising alliance

Network alliance


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RATIONALE FOR BUSINESS ALLIANCES

Sharing risks and resources

Access to new markets

Cost reduction

Favourable regulatory treatment

Prelude to acquisition or exit


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COLLECTIVE WISDOM ON MERGERS AND

ACQUISITONS

The extensive research on mergers and acquisitions suggests the

following:

Mergers and acquisitions thrive during periods of stock market buoyancy.

Acquirers usually pay too much. This benefits the shareholders of the target

company but hurts the shareholders of the acquiting company.

CEOs fall in love with deals and dont walk away when they should.

Serial acquirers are likely to succeed more than infrequent buyers.

Compared to purchase of public companies, acquisition of private companies is a

more reliable way of adding value and generating superior returns for buyers.

Related acquisitions are likely to generate higher returns than unrelated purchases.

Integration is hard to pull off.


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DIVESTITURES

Mergers, asset purchases, and takeovers lead to

expansion in some way or the other. They are based

on the principle of synergy which says 2 + 2 = 5!

Divestitures, on the other hand, involve some kind ofcontraction. It is based on the principle of anergy

which says 5 3 = 3!

PARTIAL SELL OFF


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PARTIAL SELL-OFF

A partial selloff, also called slump sale, involves the sale of a business

unit or plant of one firm to another. It is the mirror image of a

purchase of a business unit or plant. From the sellers perspective, itis a form of contraction; from the buyers point of view it is a form

of expansion..

Motives for Sell off

Raising capital

Curtailment of losses

Strategic realignment

Efficiency gain


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DEMERGERS

A demerger results in the transfer by a company of one or more of its

undertakings to another company. The company whose undertaking is

transferred is called the demerged company and the company (or the

companies) to which the undertaking is transferred is referred to as the

resultingcompany.

A demerger may take the form of a spinoff or a split-up. In a

spinoff an undertaking or division of a company is spun off into anindependent company. After the spinoff, the parent company and the spun

off company are separate corporate entities. In a split-up, a company is

split up into two or more independent companies. As a sequel, the parent

company disappears as a corporate entity and in its place two or more

separate companies emerge.


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EQUITY CARVEOUT

In an equity carveout, a parent company sells a portion of its

equity in a wholly owned subsidiary. The sale may be to thegeneral investing public or to a strategic investor.

An equity carveout differs from a spin off in the

following ways: (a) In a spinoff the shares of the spun off company are distributed to the existing shareholders of the

parent company, whereas in an equity carveout the shares

are sold to new investors. (b) An equity carveout brings cash

infusion to the parent company, whereas a spin off does not.

Equity carveouts are undertaken to bring cash to the

parent and to induct a strategic investor in a subsidiary.


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LEVERAGED BUYOUT

A leveraged buyout involves transfer of ownership consummated

mainly with debt. While some leveraged buyouts involve a company

in its entirety, most involve a business unit of a company. Often the

business unit is bought out by its management and such a transaction is

called management buyout (MBO). After the buyout, the company (or

the business unit) invariably becomes a private company.


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SUMMING UP

Mergers, takeovers, divestitures, spinoffs, and so on, referred to

collectively as corporate restructuring have become a major forcein the financial and economic environment all over the world

Corporate restructuring can occur in myriad ways. Business firms

resort to a variety of activities that lead to expansion, selloffs, and

changes in ownership and control.

Mergers represent a very important form of corporate

restructuring. Mergers, as used in financial literature, subsume

both absorption and consolidation.

A takeover generally involves the acquisition of a certain block of

equity capital of a company which enables the acquirer to exercise

control over the affairs of the company.


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ETHICAL ISSUE IN MEREGER AND ACQUISISTION

What Does Poison PillMean?

A strategy used by corporations to discourage hostile

takeovers. With a poison pill, the target company attempts to

make its stock less attractive to the acquirer. There are two

types of poison pills:

1. A "flip-in" allows existing shareholders (except the acquirer)

to buy more shares at a discount.

2. A "flip-over" allows stockholders to buy the acquirer's

shares at a discounted price after the merger.


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What Does ScorchedEarth PolicyMean?

An anti-takeover strategy that a firm undertakes by

liquidating its valuable and desired assets and assuming

liabilities in an effort to make the proposed takeover

unattractive to the acquiring firm

What Does Suicide PillMean?

A defensive strategy by which a target company engages in an

activity that might actually ruin the company rather thanprevent the hostile takeover. Also known as the "Jonestown

Defense."


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What Does Share Purchase Rights Mean?

A type of security that gives the holder the option, but not the

obligation, to purchase a predetermined number of shares at

a predetermined price. This is similar to a stock option or

warrant. These rights are typically distributed to existingshareholders, who have the ability to trade these rights on an

exchange

What Does People PillMean?

A defensive strategy to ward off a hostile takeover.Management threatens that, in the event of a takeover, the

entire management team will resign


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What Does Shark RepellentMean?

Slang term for any one of a number of measures taken by a company to

fend off an unwanted or hostile takeover attempt. In many cases, a

company will make special amendments to its charter or bylaws that

become active only when a takeover attempt is announced or presented

to shareholders with the goal of making the takeover less attractive or

profitable to the acquisitive firm.

Also known as a "porcupine provision

What Does Macaroni Defense Mean?

An approach taken by a company that does not want to be taken over. Thecompany issues a large number of bonds with the condition they must be

redeemed at a high price if the company is taken over


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What Does Lobster Trap Mean?

A strategy used by a target firm to prevent a hostile takeover.

In a lobster trap, the company passes a provision preventing

anyone with more than 10% ownership from converting

convertible securities into voting stock.

What Does WhitemailMean?

A strategy that a takeover target uses to try and thwart an

undesired takeover attempt. The target firm issues a large

amount of shares at below-market prices, which the acquiringcompany will then have to purchase if it wishes to complete

the takeover


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What Does Sleeping BeautyMean?

A company that is prime for takeover but has not been

approached by an acquiring company.

A company may be considered a sleeping beauty because it

has large cash reserves, undervalued real estate, or huge

potential.

What Does Sandbag Mean?

A stalling tactic used by management to deter a company that

is showing interest in taking them over.


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What Does LadyMacbethStrategyMean?

A corporate-takeover strategy with which a third party poses as a white

knight to gain trust, but then turns around and joins with unfriendly

bidders.

What Does White KnightMean?

A company that makes a friendly takeover offer to a target company that

is being faced with a hostile takeover from a separate party.

What Does Black KnightMean?

A company that makes a hostile takeover offer on a target company.


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What Does GrayKnightMean?

A second, unsolicited bidder in a corporate takeover. A gray knight enters

the scene in order to take advantage of any problems between the first

bidder and the target company.

What Does Yellow KnightMean?

A company that was once making a takeover attempt but ends up

discussing a merger with the target company.

What Does Crown Jewels Mean?

The most valuable unit(s) of a corporation, as defined by characteristics

such as profitability, asset value and future prospects. The origins of this

term are derived from the most valuable and important treasures

that sovereigns possessed.


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What Does BankmailMean?

An agreement made between a company planning a

takeover and a bank, which prevents the bank from

financing any other potential acquirer's bid. What Does PacMan Mean?

A form of defence used in a hostile takeover

situation. The target firm turns around and tries to

take over the company that has made the hostile bid.


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What Does Safe HarborMean?

1. A legal provision to reduce or eliminate liability as long as

good faith is demonstrated.

2. A form of shark repellent implemented by a target companyacquiring a business that is so poorly regulated that the target

itself is less attractive. In effect, this gives the target company

a "safe harbor."

3. An accounting method that avoids legal or tax regulations

and allows for a simpler method (usually) of determining a tax

consequence than those methods described by the precise

language of the tax code.


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In the United States, the anti hostile takeover defences can be categorized into the following

types:Bankmail

Back-end

Flip-in

Crown Jewel Defense

Golden Parachute Flip-over

Greenmail

Gray Knight

Killer bees

Jonestown Defense

Lobster trap Leveraged recapitalization

MacaroniDefense

Lock-up provision

Non-voting stock

Nancy Reagan Defense


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Pension parachute

PacmanDefense

Poison pill

People Pill

Safe Harbor

Poison Put Shark Repellent

Scorched earth defense

Standstill agreement

Staggered board of directors

Targeted repurchase

Suicide pill

Treasury stock

Top-ups

Voting plans

Trigger

White Squire

Merger & Acquisition CSR

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