Mergers, Demergers, Acquisition and Transaction Advisory By Ramakrishnan.S PKF S&S 1.
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Transcript of Mergers, Demergers, Acquisition and Transaction Advisory By Ramakrishnan.S PKF S&S 1.
Mergers, Demergers, Acquisition and Transaction Advisory
By
Ramakrishnan.S
PKF S&S
1
Overview of modes of M&A in India
2
Merger
3
• Consolidation of two or more entities• Involves transfer of assets and
liabilities from transferor companies to the transferee company and in consideration, transferee company issues shares
• Lengthy process under the Companies Act 2013
• Largely, tax neutral• Generally, losses can be carried
forward and set-off by the transferee company
Demerger
4
• Transfer of identified business from one company to another
• As a consideration, such acquiring company issues shares to the shareholders of the selling company
• Lengthy process under the Companies Act 2013
• Largely, tax neutral• Generally, losses can be carried
forward and set-off by the transferee company
Slump Sale / Hive-off
5
• Involves transfer of business undertaking on a comprehensive basis from one company to another. Values are not ascribed to each item of asset / liability
• Consideration is lump sum and most often is by way of cash settlement between the companies
• Simpler process compared to merger / demerger
• Capital gains arises in the normal course
• Stamp duty implications are an area to watch out
Itemised Sale
6
• Involves transfer of business where consideration is measured against each asset
• Transfer may be selective and some assets / liabilities may not be transferred
• Consideration, is largely, by way of cash settlement• Process could be simpler compared to merger / demerger• Capital gains arise in the normal course• Stamp duty implications arise• Indirect Tax implications are to be keenly considered
Share Purchase
7
Legal Impact on Transactions
8
Changes in Companies act 2013-1
Good and welcome changes– Fast track restructuring of Holding and WOS and
small cos- NO NCLT, no auditor certificate , only prior notice to ROC, OL –quick and easy
– More time bound –hence faster (for instance: even Govt authorities have to respond within 30 days –else it is presumed they have no objection!)
9
Changes in Companies act 2013-2
Good and welcome changes ( contd.)– Yearly reporting on progress of implementation till
completed will ensure proper follow up– Amalgamation/demerger of Indian co into foreign
co made easier in NFJ (Notified foreign jurisdiction)
– More disclosures in notices to shareholders/creditors –more transparency
– Postal ballot mandatory and combined results of postal ballot and in person meeting will decide
10
Changes in Companies act 2013-3
Good and welcome changes (contd.)– Person wanting to object should have at least
10% of shareholding or 5% debt- so one cannot just scuttle the scheme for the sake of it-create trouble
– Auditor certificate stating the scheme is as per AS is required for all cos (as against listed cos only now)
11
Changes in Companies act 2013-4
Good and welcome changes (contd.)– Possible back door delisting possible? As new law says
when transferor listed co amalgamates into unlisted transferee co , unlisted co can continue to remain unlisted in both Merger and Demerger (SEBI may still object to this)
– Purchase of minority shareholders by persons holding 90% or more of equity at price determined by registered valuers
– Even purchase offer by minority to purchase majority possible
12
Changes in Companies act 2013-5
Issues and problems:– Restructuring will require more approvals– Amalgamation/demerger from foreign co into
Indian co more restrictive– Uncertainty as to transitional provisions– If buy back of shares or variation of rights
involved in scheme –the specific provisions to be complied with
13
Changes in Companies act 2013-6
Issues and problems (contd.)– Problems arising out of share capital definition
including preference shares – In view of Free reserves definition which says it
would not include changes in carrying amount of asset or liability recognised in equity –amalgamation reserves created on fair valuing assets and liabilities would not be available for issue of bonus shares, buy back and dividend payment etc
14
Changes in Companies act 2013-7
Issues and problems (contd.)– Cross holdings –treasury shares to be canceled
and no shares can be issued against these; (what about existing ones?)
– Positive confirmation by shareholders and creditors having 90% value required
15
Professional Opportunities
Advisory on inorganic growth strategy / business diversification Dilution advisory to sell side customers Scouting for potential targets Preliminary evaluation of targets Pre-deal evaluations Negotiation support Commercial term sheet finalisation Structuring the deal Financial, Commercial, Business and Legal Due Diligences Transaction documentation support Funding options and structures
16
Professional Opportunities
Valuation for– Making proposals– Consummating the deal – Fairness opinion on valuation– FEMA regulatory purposes– Purchase price Allocation
Closing computations and settlement computations Post deal integration support Business synergy and management strategies Accounting advisory on merger / amalgamation Post deal, effectiveness evaluation Advisory services to investor protection groups
17
Expertise to mitigate the top ten reasons for M&A failures
1. Unrealistic price
2. Poor Due Diligence
3. Over-rated synergies
4. Poor business fit
5. Inconsistent Strategy
6. Integration difficulties
7. Cultural Integration issues
8. High leverage
9. Boardroom mis-fit
10. Regulatory hurdles
18
OVERVIEW OF M&A
19
Overview of Global M&A
20
Overview of Indian M&A
21
Lets look at some actual deals…
22
Facebook - whatsapp…
23
Lets look at Whatsapp acquisition!
Whatsapp has been acquired at a whooping $ 19 Billion!!!– $15 Billion in Facebook stocks and $4 Billion in
cash
Existing user base ~ 450 Million– ~70% are active daily on this platform
It charges 99 cents per year for each subscriber, after the initial first year
24
Whatsapp – Investor / Value view…
Valuation of $ 19 Billion at– Implied return on equity (at higher risk) – 10%
US Market - Risk free rate 3% + Equity Risk Premium 5% + Additional Risk 2%– Valuation for the deal - $19 Billion– Waiting period of 5 years to reach steady state
Translates to a pre tax income of $4.37 Billion!! This really means that
– At say even a 50% pre-tax cost outflow from gross revenue– And $0.99 per annum revenue changed to $5 per annum– It requires 1.75 Bn users for Whatsapp to generate this kind of a revenue
stream!– A near 4 fold increase in current number of users
Source: Ashwath Damodaran
25
Whatsapp – Trader’s view…
26
Number of users is a dominant driver in this industry Measure of depth of engagement has an effect on the valuation Predictable revenue models are higher priced Making bottomline money seems to be secondary at least as at present…
EV / EBIDTA though correlated, ranges from 23 to +2000 – meaning a return at EBIDTA level of less than 5% - which is below even the risk free rate!
Market seems to be banking heavily on the future of users!!
If the Whatsapp acquisition drives Facebook users up by even 1/3rd of its users
– At $ 130 per user for Facebook– Value of Facebook is up by the price paid and more! Source: Ashwath
Damodaran
Point – Counter-Point…
27
• Deal is too large by all comparisons in this field• Lack of revenue model to justify the returns in due course
What it means to Facebook…
Not a very big risk!! For Facebook, this is a big deal, but not a killer
– Its own market cap is $ 180 Billion!!– As of Dec 2013, had $11 B in liquid funds– Had $4 Billion cash from operations in 2013…
Also, deal is structured at best to pay– Only $ 4 Bn by cash– Rest is by way of Facebook Stocks!!
28
Possible insight into Whatsapp revenue model…
Fastest growing– By the time of deal,
Whatsapp had 450 Mn users– Over 11 Billion messages
each day
Provides a goldmine to extract likes, dislikes, trends
– Huge possibilities for big firms to use data to tailor their offerings
29
Fundamentals of Valuation
Accountant’s valuation sans business knowledge…
– Mere arithmetical exercise
Business valuation sans accountant’s knowledge…
– Lead to investment oblivion!
30
Who can forget the Indiaworld Deal…
In 1999 - 2000, Sify bought Indiaworld at Rs.499 crores– It had a revenue of about INR 1.3 crores and a
bottom-line of about INR 25 lacs at that time!! This was justified only if revenue could double
year after year for one full decade!! Five years later
– Revenue was only Rs.10 Crores– Required to justify the valuation – Rs.42 crores– Revenue was 4 times less!!
Valuation without in-depth Business understanding linked with Financial Knowledge??31
Sify – Indiaworld vs Facebook - Whatsapp
Facebook SIFY
Market Cap $ 170 Bn $ 1.48 Bn (Dropped to $ 178 Mn
by Q4 2000)
Year 2014 1999
Liquid assets $ 11 Bn $ 0.2 Mn
Latest year cash from operations
$ 4 Bn -ve $ 4 Mn
Target Price $ 19 Bn $ 115 Mn #
- Cash Component $ 4 Bn $ 90 Mn #
- Equity component $ 15 Bn $ 25 Mn #
IPO happened in 2013 1999
# - Estimated amounts in $ terms32
Sun pharma – ranbaxy
33
Sun Pharma – Ranbaxy Deal
All stock deal Every 5 shares of Ranbaxy will fetch 4
shares of Sun Pharma What is in it for each of the parties involved –
lets try and make some educated guess…
34
Share
valuationShare
valuation
Sun Pharma – Ranbaxy Deal
For Daiichi Sankyo– Since it bought over Ranbaxy, as a parent has
been faced with Criticism of continuing FDA related issues Even, when this deal was made, there has been a
subpoena received (relating to Toansa facility) for which it has provided indemnity to Sun Pharma!
– The transaction would make it a 9% owner of Sun Pharma, which it could offload at a later date…
35
Valuation
and
Strategic
advisory
Valuation
and
Strategic
advisory
Sun Pharma – Ranbaxy Deal
For Ranbaxy’s other Shareholders– The subpoena having been received, though was a
material issue, was not in public domain until recently
– The other shareholders are likely to have benefited, as this subpoena information could have subdued the valuation…
– This may be the end of the road for Ranbaxy as it was – but, maybe its for the best to company and its shareholders, given the circumstances
36
Fairness
opinion to
the BoardFairness
opinion to
the Board
Sun Pharma – Ranbaxy Deal
37
Consolidatio
n, PPA
valuation and
Structuring
Consolidatio
n, PPA
valuation and
Structuring
Sun Pharma – Ranbaxy Deal
For Sun Pharma– A significant challenge to the MD of Sun Pharma,
who has earned a reputation for acquiring companies in trouble at a good price and then turning around operations
– The merged numbers show a challenge in the near term due to pressure on bottomline returns
– However, Sun Pharma is looking at ~Rs.1,500 crores of merger related synergies by three years
38
Acquisition
advisory,
Due
Diligence
Acquisition
advisory,
Due
Diligence
Sun Pharma – Ranbaxy Deal
For Sun Pharma– In the Indian market, the combined entity’s portfolio
becomes much larger, covering more therapeutic areas
– Margins on Ranbaxy products are low, but Sun plans to work on improving them
– In the US market, the priority will be to resolve all of Ranbaxy’s FDA-related troubles to ensure that every major generic product in Ranbaxy’s pipeline makes it to market
39
Impact
analysis
of
synergies
Impact
analysis
of
synergies
FLIPKART - MYNTRA
40
About Flipkart
41
• Has raised ~ $2.5 Billion in capital till date
• Current valuation is about 2.5 – 2.7 times annual Gross Merchandise Value (in the likes of the valuation of Amazon)
• No one is even thinking of EBIDTA / Profits as the basis…
• The company is looking to become the first $100 billion value company from India
Structuring advisory…Structuring advisory…
Flipkart – essence of e-tailing growth
Focus on delivery and prompt service– In Flipkart 7,000 out of total 12,000 work on last mile delivery
Cash on Delivery – a big hit Liberal return policies / low pricing by discounts / free delivery FDI hurdles for retail giants whilst free FDI into ecommerce
companies is also helping Increased penetration of smart phones is also adding to e-
tailing in a big way Moving towards market place model from inventory and
delivery control model
42
Business modeling …
Business modeling …
E-commerce Industry - expectations
China has been ahead by 6-7 years on ecom– From $ 4 billion in 2003, have grown to $ 230
billion now– Applying similar template to India– Just listed companies market cap could be $40
billion by 2017 and $ 90 Billion by 2020
43
Valuation advisory…Valuation
advisory…
Flipkart – flipping the cart…
Flipkart Online Services Limited, an Indian entity was the apex company in Flipkart until a few years back– Three rounds of funding were received by this entity
only until 2011 In 2012, to avoid regulatory complications and for
better structuring– FOSL sold its whole business operations to FIPL– FIPL is owned by Flipkart Private Limited (of Singapore)
44
Cross Border Structuring advisory…
Cross Border Structuring advisory…
Flipkart – fund raise…
Flipkart has become one in the top tier of privately held internet ventures in the likes of Uber, Airbnb and Dropbox…
Just in Jul 2014, the company did a fund raise at a $7 Billion valuation
– Which was a doubling of the valaution post acquisition of Myntra!!
In Nov 2014, again another round of fund raise has happened at a valuation of $11 Billion!!
– A further jump!!
45
Valuation and PE funding
services
Valuation and PE funding
services
Flipkart – Myntra Deal
Business case for the deal– Flipkart’s technology and marketplace model– Myntra’s significant grasp of fashion and
consequent market leadership in fashion e-tailing– Potential to exploit mutual synergies
Promoters– Sanjay and Binny Bansal (not related) of Flipkart– Mukesh Bansal (again not related) of Myntra
46
1 + 1 = 31 + 1 = 3
Flipkart – Myntra Deal
Flipkart saw– Future of 30% GMV coming from fashion
Flipkart was weak in this area
– Had a well established technology backbone for the e-tailing
– Saw Myntra, as a great threat to its growth
Myntra saw– Opportunity to grow faster– Retain its leadership in fashions with more investments
instead of competition
47
1 + 1 = 31 + 1 = 3
Flipkart – Myntra Deal
PE investors were broadly the same set– Tiger Global and Accel Partners (key investors) in
both the entities
Stated to be a 100% buy out deal– But, expected to continue to operate under two
brands and websites etc.,– Collective decision on moving forward with the
backend and integrating the same
48
Integration issues and solutions
Integration issues and solutions