Assignment No.

1 Of Investment Banking
Topic: Mergers & Acquisition

Submitted to: Prof. Raj Rani Bhalla

Submitted By: Pulkit Arora 11BSP1969

Mergers & Acquisition The process of mergers and acquisitions has gained substantial importance in today's corporate world. This process is extensively used for restructuring the business organizations. In India, the concept of mergers and acquisitions was initiated by the government bodies. Some well known financial organizations also took the necessary initiatives to restructure the corporate sector of India by adopting the mergers and acquisitions policies. The Indian economic reform since 1991 has opened up a whole lot of challenges both in the domestic and international spheres. The increased competition in the global market has prompted the Indian companies to go for mergers and acquisitions as an important strategic choice. The trends of mergers and acquisitions in India have changed over the years. The immediate effects of the mergers and acquisitions have also been diverse across the various sectors of the Indian economy. Definition of Merger

Merger is a fiscal instrument that is used by a business entity for improving the long-standing productivity by escalating their operations. Mergers generally take place when the merging entities mutually agree. This mutual consent is unlike acquisition and can result in a hostile subjugation.

Generally, the business rules and regulations differ across the states providing restrained alternatives to the companies to safeguard themselves from hostile subjugation. A business entity can safeguard itself from such takeovers by allotting privileges for the shareholders.

It is commonly seen that very few mergers have been successful in appending to

the share worth of the acquiring firm. Instead, they endorse monopolistic attitude by trimming down the prices, taxes, etc. which can work against the public interests. This is the reason why mergers are controlled and managed by the government.

Definition of Acquisition

Acquisition refers to purchasing of one business entity by another. It is also known as a merger or a takeover and can be either mutual or hostile subjugation.

In a merger the business entities collectively bargain to arrive at a final cost, but in an acquisition either the buyout target is unaware of the offer or is against being purchased.

Generally, acquisition refers to the buyout of a smaller business identity by a bigger one, but sometimes even a smaller business identity can takeover the administration control of a bigger and well established firm, usually referred to as a reverse takeover.

Reverse merger is another kind of acquisition. It is an agreement which allows a private firm to get listed in a short duration and generally takes place when the firm is willing to elevate its monetary strength by purchasing a firm which has restrained assets.

The acquisition process is very complicated and attaining success in acquisition is a rather tough. According to different studies more than 50% of acquisitions were considered as ineffective.

Foremost Mergers and Acquisitions in India

Hindalco obtained Canadian company Novelis through a deal amounting to $5,982 million.

Corus Group plc was obtained by Tata Steel acquire through an agreement worth $12,000 million.

Dr. Reddy's Labs acquired Betapharm through an agreement amounting $597 million.

Ranbaxy Labs obtained Terapia SA and the transaction involved $324 million.

Suzlon Energy merged with Hansen Group through an agreement worth $565 million.

Videocon acquired Daewoo Electronics Corp. through a transaction involving $729 million.

HPCL obtained Kenya Petroleum Refinery Ltd. through a deal worth $500 million.

VSNL obtained Teleglobe through an agreement of $239 million.

Among the different Indian sectors that have resorted to mergers and acquisitions in recent times, telecom, finance, FMCG, construction materials, automobile industry and steel industry are worth mentioning. With the increasing number of Indian companies opting for mergers and acquisitions, India is now one of the leading nations in the world in terms of mergers and acquisitions.

Possible Impact of Mergers and Acquisitions

Have a look at the impact of Mergers and Acquisitions on different segments of business.

Impacts on Employees Mergers and acquisitions may have great economic impact on the employees of the organization. In fact, mergers and acquisitions could be pretty difficult for the employees as there could always be the possibility of layoffs after any merger or acquisition. If the merged company is pretty sufficient in terms of business capabilities, it doesn't need the same amount of employees that it previously had to do the same amount of business. As a result, layoffs are quite inevitable. Besides, those who are working, would also see some changes in the corporate culture. Due to the changes in the operating environment and business procedures, employees may also suffer from emotional and physical problems.

Different Types of M&A Types of M&A by functional roles in market The M&A process itself is a multifaceted which depends upon the type of merging companies. - A horizontal merger is usually between two companies in the same business sector. The example of horizontal merger would be if a health cares system buys

another health care system. This means that synergy can obtained through many forms including such as; increased market share, cost savings and exploring new market opportunities. - A vertical merger represents the buying of supplier of a business. In the same example as above if a health care system buys the ambulance services from their service suppliers is an example of vertical buying. The vertical buying is aimed at reducing overhead cost of operations and economy of scale. - Conglomerate M&A is the third form of M&A process which deals the merger between two irrelevant companies. The example of conglomerate M&A with relevance to above scenario would be if health care system buys a restaurant chain. The objective may be diversification of capital investment.

Cross-border M&A In a study conducted in 2000 by Lehman Brothers, it was found that, on average, large M&A deals cause the domestic currency of the target corporation to appreciate by 1% relative to the acquirer's local currency. The rise of globalization has exponentially increased the necessity for MAIC Trust accounts and securities clearing services for Like-Kind Exchanges for cross-border M&A. In 1997 alone, there were over 2333 cross-border transactions, worth a total of approximately $298 billion. Due to the complicated nature of cross-border M&A, the vast majority of cross-border actions have unsuccessful as companies seek to expand their global footprint and become more agile at creating highperforming businesses and cultures across national boundaries. Even mergers of companies with headquarters in the same country are can often be considered international in scale and require MAIC custodial services. For

example, when Boeing acquired McDonnell Douglas, the two American companies had to integrate operations in dozens of countries around the world (1997). This is just as true for other apparently "single country" mergers, such as the $29 billion dollar merger of Swiss drug makers Sandoz and Ciba-Geigy (now Novartis).

Mergers and Acquisitions: Valuation Matters

Investors in a company that are aiming to take over another one must determine whether the purchase will be beneficial to them. In order to do so, they must ask themselves how much the company being acquired is really worth.

Naturally, both sides of an M&A deal will have different ideas about the worth of a target company: its seller will tend to value the company at as high of a price as possible, while the buyer will try to get the lowest price that he can. There are, however, many legitimate ways to value companies. The most common method is to look at comparable companies in an industry, but deal makers employ a variety of other methods and tools when assessing a target company. Here are just a few of them: 1. Comparative Ratios - The following are two examples of the many comparative metrics on which acquiring companies may base their offers:
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Price-Earnings Ratio (P/E Ratio) - With the use of this ratio, an acquiring company makes an offer that is a multiple of the earnings of the target company. Looking at the P/E for all the stocks within the

same industry group will give the acquiring company good guidance for what the target's P/E multiple should be.
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Enterprise-Value-to-Sales Ratio (EV/Sales) - With this ratio, the acquiring company makes an offer as a multiple of the revenues, again, while being aware of the price-to-sales ratio of other companies in the industry.

2. Replacement Cost - In a few cases, acquisitions are based on the cost of replacing the target company. For simplicity's sake, suppose the value of a company is simply the sum of all its equipment and staffing costs. The acquiring company can literally order the target to sell at that price, or it will create a competitor for the same cost. Naturally, it takes a long time to assemble good management, acquire property and get the right equipment. This method of establishing a price certainly wouldn't make much sense in a service industry where the key assets - people and ideas - are hard to value and develop. 3. Discounted Cash Flow (DCF) - A key valuation tool in M&A, discounted cash flow analysis determines a company's current value according to its estimated future cash flows. Forecasted free cash flows (net income + depreciation/amortization - capital expenditures - change in working capital) are discounted to a present value using the company's weighted average costs of capital (WACC). Admittedly, DCF is tricky to get right, but few tools can rival this valuation method.

Merger & Acquisition Valuation: The New Normal CFO insights: A newsletter from Deloittes CFO program

As CEOs and Boards look to renew growth in an anemic economic recovery, many CFOs are being called upon to facilitate successful Merger & Acquisition (M&A) driven growth strategies. With over a trillion dollars of cash on corporate balance sheets in the U. S., and improving capital markets, many companies are seizing the moment to become strategic buyers while others divest non-core assets. A key to successfully realizing value from M&A transactions is valuation, and CFOs and the finance function are vital to the valuation process. Since the financial crisis of 2008 there has been renewed emphasis on valuation practices that add greater clarity and insight into deal decisions. At the behest of corporate boards, deal valuation is evolving beyond a perfunctory, static exercise focused on deriving a point estimate of value and where acquirers sometimes lose focus on strategies and actions that drive value at the target. Instead, acquirers are increasingly focusing on valuation as a basis for developing a dynamic operating plan to drive value post-closing by maximizing strategic flexibility and developing contingency plans to help actively minimize risk. This article looks into emerging considerations for deal valuation and ways that CFOs can effectively address the enhanced expectations of their boards. Increasing expectations It should come as no surprise after the last two years of economic turmoil and recovery that those charged with corporate oversight would scrutinize deals more thoroughly. Today we observe boards are much more participative throughout the

deal process and are demanding deeper levels of detail into the business case supporting the transaction and the valuation of targets. We also find a marked increase in board advisory assignments where, in a given buy- or sell-side transaction, the board, or a special committee, engages its own advisors independent of those used by management. Sometimes this involves working along-side management and their advisory team and other times it might be vis-a-vis providing a fairness opinion or other similar independent analysis. Either way, boards are inserting themselves as active and independent players in the transaction oversight process. As boards insert themselves into the process, they are demanding more from management and the finance team. It has become common practice for acquirers to conduct commercial, operational and financial diligence prior to the transaction. However in the past, this analysis rarely extended to the evaluation of posttransaction operations vital to unlocking the potential value from a deal. Indeed, a few years ago there was often a clear delineation between deal teams and integration teams. In contrast, today we find the lines between pre- and posttransaction are blurring. Often, valuation is now diving deeper into what drives value and risk and how these factors behave under changing conditions. Increasingly, the insights gleaned through the valuation process pre-closing are being used to inform and focus day one operating plans to increase the probability of realizing the expected value of the deal post-closing. In order to increase the likelihood of achieving the expected transaction results, boards are putting pressure on CFOs and other C-suite executives to provide them with two things:

1. A clear financial vision and roadmap on how to drive value from the deal 2. Greater depth of detail in their valuation analysis and plans to manage uncertainties and contingencies These changes are shifting valuation from a static quantification and estimate of expected value to a form with greater inherent consideration of flexibility and the management of risk that can undermine value. These considerations require finance to undertake a deeper and more detailed level of analysis than what perhaps was previously common practice. Clear vision and roadmap for driving value from the deal Prior to closing, Boards are asking company management for more detailed plans and explanations of how value will be realized and over what timeframe. For starters, CFOs increasingly need to deliver a perspective on value and a financial plan that is actionable and aligned with company strategy. The CFO should be prepared to explain how the transaction is accretive to the company with some degree of granularity. Instead of keying in strictly on financial returns, CFOs now need to consider the mechanics of the operations post-transaction. Beyond a projection of value, they have to clearly articulate what key assumptions and metrics they are measuring and tracking and the likelihood of achieving stated goals. As part of their holistic big-picture approach, the CFO should be thinking about the ability to manage the acquired business for value, and then examining the choices, options and decisions that go into that. If these factors are contemplated during the deal making process, it can create more strategic flexibility and options for the CFO and company downstream as business conditions change and the management team adapts.

Boards are increasingly interested in the sustainability of the targets business model and competitive advantage and post-merger requirements to make the deal a success. Astute boards increasingly want a clear delineation of key risk considerations and avenues for hedging that risk or de-risking a transaction as completely as possible. A comprehensive valuation analysis should provide insight to help the board navigate these considerations during their deliberations of a transaction. Deeper analysis focused on insight: The devil is in the details Previously, an acquiring companys focus in developing a valuation was to determine a point of view on the expected value of the transaction. Now boards not only want to know the expected value, but they want to know the shape of the distribution around that expected value. In other words, what is the likelihood of realizing the expected value of the deal and what can be done to increase the probability of realizing the expected value? The change in valuation practices is not just about increasing the level of detail for measuring value; it is an evolution of the tools, techniques, approaches and theory that we have to do so. Leading valuation practice is no longer just calculating the Net Present Value (NPV) or expected return on a deal, but applying probabilistic modeling, decision analysis and other advanced techniques to analyze value. This includes finding ways to measure and accelerate capture of deal synergies under different scenarios and could include the design and evaluation of different real options to hedge against alternate risk scenarios. Companies are dedicating more resources to pre-transaction analysis - not just for the board, but to gain greater insights into alternatives on how management can actually deliver on the value promises of the transaction while minimizing risk.

The emerging valuation process is keenly focused on gleaning insights into the decisions that the acquired company must make, and utilizing these insights to create flexibility through the deal making process and in post-merger operations. This flexibility is fundamental to navigating future uncertainties and managing risk. As the line between pre- and post-transaction blurs, more is being demanded of the CFO and the finance organization in the valuation process. In many companies CFOs will need to build, buy or borrow capabilities for deeper and more insightful analysis. They may also have to consider non-conventional sources of information as inputs into their deal models when, for example, evaluating targets in emerging markets where market or comparable performance data may not be readily available. Furthermore, the finance organization will have to team more effectively with business units and functional leaders involved in a transaction - as well as deal teams - to effectively model out different scenarios for value creation and risk from the deal.

Merger and Acquisition Strategies

Merger and acquisition are the corporate strategies that deal with buying, selling or combining different companies with a goal to achieve rapid growth. However, the decisions on mergers and acquisitions are taken after considering a few facts like the current business status of the companies, the present market scenario, and the threats and opportunities etc. In fact, the success of mergers and acquisitions largely depend upon the merger and acquisition strategies adopted by the organizations.

Merger and acquisition strategies are the roadmap for the corporate development efforts of an organization. The strategies on merger and acquisition are devised to transform the strategic business plan of the organization to a list of target acquisition prospects. The merger and acquisition strategies offer a framework, which evaluates acquisition candidates and helps the organization to identify the suitable ones.

Many big companies continuously look out for potential companies, preferably smaller ones, for mergers and acquisitions. Some companies may have their core cells, which concentrate on mergers and acquisitions. Merger and acquisition strategies are devised in accordance with the policy of the organization. Some may prefer to diversify or to expand in a specific field of business, while some others may wish to strengthen their research facilities etc.

Merger and Acquisition Strategy Process

The merger and acquisition strategies may differ from company to company and also depend a lot on the policy of the respective organization. However, merger and acquisition strategies have got some distinct process, based on which, the strategies are devised.

Determine Business Plan Drivers

Merger and acquisition strategies are deduced from the strategic business plan of the organization. So, in merger and acquisition strategies, you firstly need to find

out the way to accelerate your strategic business plan through the M&A. You need to transform the strategic business plan of your organization into a set of drivers, which your merger and acquisition strategies would address.

While chalking out strategies, you need to consider the points like the markets of your intended business, the market share that you are eyeing for in each market, the products and technologies that you would require, the geographic locations where you would operate your business in, the skills and resources that you would require, the financial targets, and the risk amount etc.

Determine Acquisition Financing Constraints

Now, you need to find out if there are any financial constraints for supporting the acquisition. Funds for acquisitions may come through various ways like cash, debt, public and private equities, PIPEs, minority investments, earn outs etc. You need to consider a few facts like the availability of untapped credit facilities, surplus cash, or untapped equity, the amount of new equity and new debt that your organization can raise etc. You also need to calculate the amount of returns that you must achieve.

Mergers and Acquisitions Laws in India

A business identity goes for mergers and acquisitions for strengthening a disjointed market and for elevating their functional competence in order to boost their competitive streak. Many countries have propagated Mergers and Acquisitions Laws to control the operations of the trade units within.

Most of the mergers and acquisitions have been successful in elevating the functional competence of companies but on the flip side this activity can lead to formation of monopolistic power. The anti-competitive results are accomplished either by synchronized effects or by one-sided effects.

An open and unbiased competition is ideal for capitalizing on the consumers' interests both in contexts of capacity and worth. Laws governing Mergers and Acquisitions in India

Mergers and Acquisitions in India are governed by the Indian Companies Act, 1956, under Sections 391 to 394. Although mergers and acquisitions may be instigated through mutual agreements between the two firms, the procedure remains chiefly court driven. The approval of the High Court is highly desirable for the commencement of any such process and the proposal for any merger or acquisition should be sanctioned by a 3/4th of the shareholders or creditors present at the General Board Meetings of the concerned firm.

Indian antagonism law permits the utmost time period of 210 days for the companies for going ahead with the process of merger or acquisition. The allotted time period is clearly different from the minimum obligatory stay period for claimants. According to the law, the obligatory time frame for claimants can either be 210 days commencing from the filing of the notice or acknowledgment of the Commission's order.

The entry limits for companies merging under the Indian law are considerably high. The entry limits are allocated in context of asset worth or in context of the company's annual incomes. The entry limits in India are higher than the European Union and are twofold as compared to the United Kingdom.

The Indian M&A laws also permit the combination of any Indian firm with its international counterparts, providing the cross-border firm has its set up in India.

There have been recent modifications in the Competition Act, 2002. It has replaced the voluntary announcement system with a mandatory one. Out of 106 nations which have formulated competition laws, only 9 are acclaimed with a voluntary announcement system. Voluntary announcement systems are often correlated with business ambiguities and if the companies are identified for practicing monopoly after merging, the law strictly order them opt for de-merging of the business identity.

Provisions under Mergers and Acquisitions Laws in India

Provision for tax allowances for mergers or de-mergers between two business identities is allocated under the Indian Income tax Act. To qualify the allocation, these mergers or de-mergers are required to full the requirements related to section 2(19AA) and section 2(1B) of the Indian Income Tax Act as per the pertinent state of affairs.

Under the Indian I-T tax Act, the firm, either Indian or foreign, qualifies for certain tax exemptions from the capital profits during the transfers of shares.

In case of foreign company mergers, a situation where two foreign firms are merged and the new formed identity is owned by an Indian firm, a different set of guidelines are allotted. Hence the share allocation in the targeted foreign business identity would be acknowledged as a transfer and would be chargeable under the Indian tax law.

As per the clauses mentioned under section 5(1) of the Indian Income Tax Act, the international earnings by an Indian firm would fall under the category of 'scope of income' for the Indian firm.