An Insight into Mergers and Acquisitions (eBook)

Preface 5
Acknowledgements 7
Contents 10
About the Authors 11
List of Figures 13
List of Tables 15
Chapter 1 Introduction to Merger, Acquisition, and Corporate Restructuring 16
1.1 Introduction 16
1.2 Corporate Restructuring 18
1.2.1 Amalgamation/Combination 18
1.2.1.1 Combination Through Merger 19
1.2.1.2 Combination Through Acquisition/Purchase 20
1.3 Types of Mergers and Acquisitions 20
1.3.1 Horizontal Merger 20
1.3.2 Vertical Merger 21
1.3.3 Co-generic Merger 21
1.3.4 Conglomerate Merger 21
1.3.5 Domestic Merger 21
1.3.6 Inbound Merger 22
1.3.7 Outbound Merger 22
1.3.8 Friendly Takeover 22
1.3.9 Hostile Takeover 22
1.3.10 Leveraged Buyout 23
1.3.11 Management Buyout 23
1.4 Other Forms of Corporate Restructuring 23
1.4.1 Demerger 23
1.4.2 Reverse Merger 23
1.4.3 Divestiture 24
1.4.4 Spin-Off 25
1.4.5 Split-Off 25
1.4.6 Split-Up 25
1.4.7 Equity Carve Out 26
1.4.8 Assets Sale 26
1.4.9 Slump Sale 27
1.4.10 Joint Ventures 27
1.4.11 Franchising 27
1.4.12 Strategic Alliance 28
1.4.12.1 Delhi Aviation Fuel Facility Pvt. Ltd 28
1.5 Historical Developments of Mergers and Acquisitions 28
1.5.1 M& A in US Economy: Merger Waves
1.5.2 The First Wave Turn of the Last Century (1895–1904) 29
1.5.3 Second Wave (1916–1929) 30
1.5.4 Third Wave (1965–1969) 31
1.5.5 Fourth Wave (1981–1989) 32
1.5.6 Fifth Wave (1990–2000) 34
1.5.7 Sixth Wave (2003–Till Present) 35
1.6 Merger and Acquisition Trends in India 36
1.6.1 Pre-Liberalization Era 37
1.6.2 Post-liberalization Phase 38
1.6.2.1 Slow Growth Period (1991–2000) 38
1.6.2.2 Rapid Growth Period (2000–2007) 40
1.6.2.3 Global Recession and Recovery 41
1.6.2.4 Ongoing Phase (2011 Onwards) 42
Chapter 2 Motives of M& A and Deal Synergies
2.1 Theories of M& A
2.1.1 Value Creating Theories 45
2.1.1.1 The Synergy Theory 45
Economies of Scale 46
Economies of Scope 47
Market Power 47
2.1.1.2 The Market for Corporate Control Theory 47
Free Cash Flows and Cash Consideration for M& A
2.2 Value Reducing Theories 48
2.2.1 Agency Costs of Free Cash Flow 48
2.2.1.1 Managerial Entrenchment 49
2.3 Value Neutral Theory 49
2.3.1 The Hubris Hypothesis of “Corporate Takeovers” 49
2.4 Motives Behind Mergers/Acquisition 49
2.4.1 Financial Nature 50
2.4.2 Management Intention 50
2.4.3 Fear of Loss of Market Share 50
2.5 Evaluation of Deal Synergy 51
2.5.1 Some Common Forms of Synergies 51
2.5.1.1 Economies of Scale 51
2.5.1.2 Access to Cheaper Credit 52
2.5.1.3 Increased Market Share 52
2.5.1.4 Diversification 53
2.5.1.5 Tax Savings 53
2.5.1.6 Acquisition of Crucial Resource 53
2.5.1.7 Vertical Integration 54
2.6 Valuation of Synergy 54
2.6.1 Discounting Benefit Method 55
Chapter 3 M& A Process and Defensive Strategies
3.1 M& A Process
3.1.1 Step 1: Formulation of Strategy for M& A and Identification of Target
3.1.2 Step 2: Target Evaluation and Analysis 60
3.1.3 Step 3: Reaching Out to Target and Negotiations 60
3.1.4 Step 4: Due Diligence 61
3.1.4.1 Operational Due Diligence 61
3.1.4.2 Financial Due Diligence 62
3.1.4.3 Legal Due Diligence 62
3.1.4.4 Organizational Due Diligence 62
3.1.5 Step 5: Final Negotiations and Closing the Deal 63
3.2 Concentration Measures 64
3.3 Hostile Acquisitions 65
3.3.1 Defensive Strategies in Case of Hostile Takeovers 65
3.3.1.1 Preventive/Preemptive Defense Strategies 66
3.3.1.2 Preventive Pre-offer Measures 66
Control Over the Register 66
Differential Voting Rights Shares (DVRs) 67
Employee Stock Ownership Plan (ESOP) 67
Poison Pill 67
These Poison Pills Can Be of Various Types Like 68
Flip-In 68
Flip-Over 68
Poison Puts 68
People Pill 69
Jonestown Defense 69
Staggered Board 69
Supermajority Voting for Mergers 69
Fair Price Amendment 70
Golden Parachute 70
3.3.1.3 Lobster Trap 70
3.3.2 Responsive Takeover Defense Strategies Litigation 71
3.3.3 Greenmail 71
3.3.4 Buyback of Shares 71
3.3.5 Crown Jewel 71
3.3.6 Pac-Man Defense 72
3.3.7 Propaganda 72
3.3.8 White Knight Defense 72
3.3.9 Scorched Earth Policy 73
3.4 Conclusion 73
Chapter 4 Deal Structuring and Financing 74
4.1 Introduction 74
4.2 Deal Structuring Process 75
4.3 Why Deal Structuring Matters? 75
4.4 Deal Financing and Deal Structure 78
4.5 Deal Structuring and Financing 78
4.5.1 Asset Purchase 79
4.5.2 Stock Purchase 80
4.5.2.1 Example IGATE Acquires Majority Stake in Patni Computers 80
4.5.3 Merger 82
4.6 Other Structures 83
4.6.1 Two-Stage Stock Acquisition 83
4.6.2 Triangular Merger 84
4.6.3 Leveraged Buyout 84
4.6.4 Single-Firm Recapitalization: 85
4.7 Swap Ratio 85
4.7.1 Illustration 1 86
4.7.2 Solution 86
4.7.3 Illustration 2 87
4.7.4 Solution 87
Chapter 5 Deal Valuation 89
5.1 Introduction to Valuation 89
5.2 Valuation Methodologies 90
5.3 Market Value-Based Valuation Approach 90
5.4 Status Quo Valuation 91
5.5 Transaction Analysis 93
5.5.1 Comparable Company Analysis 94
5.5.1.1 Price Multiples 94
5.5.1.2 Enterprise Value Multiples 95
5.5.2 Transaction-Based Valuation 96
5.6 Discounted Cash Flow Model 98
5.6.1 Free Cash Flow Discount Model 99
5.6.1.1 Free Cash Flow to Equity (FCFE) 99
5.6.1.2 Free Cash Flow to Firm (FCFF) 99
5.7 Sum of Parts Approach 102
5.8 Case Study on Valuation 102
5.8.1 Acquisition of Myntra by Flipkart 102
5.8.2 Valuation of Myntra 103
5.8.3 Deal Overview 103
5.8.4 Process of Calculating the Intrinsic Value Through DCF (from Flipkart Point of View) 104
5.8.4.1 Projecting the EBIT 105
5.8.4.2 Ascertaining the Change in Working Capital 110
5.8.4.3 Discounted Cash Flow Calculation 112
5.8.4.4 Calculating Appropriate Rate for Discounting 113
5.8.4.5 Extended Forecast & Terminal Value
Chapter 6 Accounting for Mergers and Acquisition 118
6.1 Introduction to M& A Accounting
6.2 M& A Accounting as per Accounting Standard AS-14
6.2.1 Amalgamation in the Nature of Merger 119
6.2.2 Amalgamation in the Nature of Purchase/Acquisition 120
6.3 Pooling of Interest Method 120
6.4 Purchase/Acquisition Method 122
6.5 IFRS and IndAS 124
6.6 Provisions of IndAS 103—Business Combinations 125
6.6.1 Business Combination 125
6.6.2 Purchase/Acquisition Method 126
6.6.3 Pooling of Interest Method 129
6.6.3.1 Method of Accounting for Common Control Business Combinations 129
6.7 Difference Between AS 14 and IndAS 103 131
6.8 Difference Between Purchase Method and Pooling of Interest Method 132
Chapter 7 Performance Evaluation of M& A
7.1 Introduction 133
7.2 Who Says M& A Doesn’t Create Value—“Accenture Report 2012”
7.3 Evaluation of M& A Performance
7.3.1 Performance Evaluation: BootStrapping Effect 138
7.4 Empirical Evidence on Long-Term Financial Performance Evaluation of M& A
7.4.1 Study on Performance Evaluation of M& A in the USA
7.4.2 Indian Study 140
7.5 Performance Evaluation of a Sample of Indian Companies: An Empirical Research Work 141
7.5.1 Period of Study and Performance Measurement 141
Annexure-I: List of Sample Mergers and Acquisitions for Empirical Study 142
Chapter 8 Regulatory Insights for M& A in India
8.1 Overview of M& A Regulations
8.2 Companies Act 2013: Important Provisions Pertaining to M& A
8.2.1 Companies Act 2013 145
8.2.1.1 Procedural Changes 145
8.2.1.2 Special Cases 147
8.2.1.3 Cross-Border Mergers 147
8.2.1.4 Small Companies 147
8.2.1.5 Merger of Listed Company with Unlisted Company 148
8.2.1.6 Offer to Minority Shareholders 148
8.3 Regulatory Process for Mergers and Scheme of Merger 148
8.3.1 Example: Scheme of Merger Sun Pharma–Ranbaxy Merger 149
8.4 SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 151
8.4.1 Meaning of Acquisition 151
8.4.2 Mandatory Open Offer in Case of Acquiring More Than 25% Shareholding of a Company 153
8.4.3 Mandatory Open Offer in Case of Consolidation of Holding 154
8.4.4 Mandatory Open Offer in Case of Acquiring Control 154
8.4.5 Direct and Indirect Acquisition 155
8.4.6 Example for Calculation of Offer Price 157
8.4.7 Open Offer Price 157
Annexure I 159
Annexure II 166
Chapter 9 Overview of Select M& A Deals
9.1 Accenture and the Confederation of Indian Industry (CII) Report 171
9.1.1 Operating Profits 172
9.1.2 Cost of Capital 173
9.2 Overview of Select Deals 173
9.2.1 Fortis and Escorts Heart Institute and Research Centre 173
9.2.1.1 Overview 173
9.2.1.2 Escorts Ltd. 174
9.2.1.3 Fortis Healthcare 174
9.2.1.4 Rationale for the Deal 174
9.2.1.5 Post-deal Outcome 175
9.2.2 P& G and Gillette
9.2.2.1 Overview 176
9.2.2.2 Proctor and Gamble 176
9.2.2.3 Gillette 176
9.2.2.4 Rationale for the Deal 177
9.2.2.5 Post-deal Outcome 177
9.2.2.6 Market Reaction 177
9.2.2.7 Value Gap 178
9.2.3 Vodafone–Hutch Acquisition: “A Way to Grow……Bigger May Be Beautiful” 178
9.2.3.1 Deal Structuring & Financing &
9.2.3.2 Success of the Deal 179
9.2.4 GlaxoSmithKline Merger: Mergers and Acquisitions—“A Way to Grow……Bigger May Not Be Better” 182
9.2.4.1 Synergies Which Were Expected from Merger 183
9.2.4.2 Stock Price Performance 184
9.2.5 Tata-Corus Acquisition—“A Way to Grow……Bigger May Be Burden” 186
9.2.5.1 Rationale of Deal 186
9.2.5.2 Reaction to the Deal 186
Chapter 10 Why Mergers and Acquisitions Fail? 191
10.1 eBay Skype 192
10.2 Daimler Chrysler 192
10.3 America Online and Time Warner 192
10.3.1 Sprint/Nextel 193
10.4 HP and Compaq 193
10.4.1 Kmart and Sears 193
10.5 M& A Failures in India
10.5.1 Sun Pharma and Taro 193
10.5.2 Apollo’s Failed Deal 194
10.5.3 Tata Motors Jaguar 194
10.6 Important Reasons for Failures 194
10.6.1 Owner’s Involvement 195
10.6.2 Exaggerated Valuation and Overpayment 195
10.6.3 Cultural Differences 196
10.6.4 High-Cost Debt 196
10.6.5 Flawed Intentions 197
10.6.6 Shareholders and Employees Interests Overlooked 197
10.6.7 Lack of Common Vision 197
10.6.8 Poor Communication 198
10.6.9 Weak Leadership 198
10.6.10 Due Diligence 198
10.6.11 Irrational Exuberance: It’s Always About Money 199
10.6.12 Poor Integration Management 199
10.6.13 Dubious Reasons 200
10.7 The Indian Scenario 200
10.8 Success Mantra of Mergers and Acquisitions 201
10.9 Conclusion 202
Chapter 11 Case Discussions of Mergers and Acquisitions 204
11.1 Hindalco–Novelis Acquisition 204
11.1.1 Background of Hindalco 205
11.1.2 Background of Novelis 206
11.1.3 Rationale for the Deal 206
11.1.4 Expected Synergies from the Acquisition 207
11.1.5 Problem Areas 208
11.1.6 Acquisition Process—Deal Structure and Financing 209
11.1.7 Funding the Deal 210
11.1.8 Valuation and Issues 210
11.1.9 Valuation Based on Peer Company Analysis 211
11.1.10 Valuation Based on Precedent Transactions 211
11.1.11 Valuation Based on DCF Analysis 212
11.1.12 Stock Market Reaction to the Deal 212
11.1.13 Hindalco: (for the Year 2007) 213
11.1.14 Novelis Stock Performance 213
11.1.15 Post-Deal Outcomes 213
11.1.15.1 Year Ended 2008 213
11.1.15.2 Year Ended 2009 214
11.1.15.3 Year 2010 214
11.1.16 Stock Performance 215
11.1.16.1 Since the Date of Acquisition 215
11.1.17 Some Facts 215
11.1.18 Questions for Discussion 216
11.1.18.1 Hindalco Plant Locations 218
11.1.19 Domestic Market Share 218
11.2 Hewlett-Packard Company (HP) and Compaq Computer Corporation (Compaq) 219
11.2.1 A Megamerger 220
11.2.2 Background Note 221
11.2.2.1 HP 221
11.2.3 The Rationale for the Merger 222
11.2.4 The Merger Integration 223
11.2.5 Does the Merger Make Business Sense 223
11.2.6 Does the Merger Make Economic Sense 224
References 227