Mergers and Acquisitions

Test Your Knowledge

• AT & T Acquired
• A) Disney
• B)Texas Instruments
• C) Seagate
• D) Time Warner
• Essar Oil was acquired by
• a) Zee Group
• B) Rosneft Oil
• C) British Oil
• D) Oil India Ltd
• Aircel was acquired by
• Airtel
• Idea
• Reliance Communications
• TATA Docomo
• Sony Pictures recently acquired
• A) Big Pictures
• B) Zee Entertainment
• C) ETV
• D) Star TV
• BlueAir, a air purifying machine making
company acquired by
• A) Procter & Gamble
• B) TATA
• C) Unilever
• D) Aquafina
• Alcatel – Lucent was acquired by
• A) NOKIA
• B) LG
• C) SAMSUNG
• D) Oppo
• Wipro Acquired
• A) Practo Technologies
• B) B- C Technologies
• C) HealthPlan
• D) Max Bupa
• Recently Dell acquired technology based
company, which make to one of the complex
merger in technology industry.
• A) Zomato
• B) Acer
• C) EMC Corporation
• D) NetSafe Corporation
• ITC Holdings merged with
• A) Britannia
• B) Jyoti Labs
• C) Wokhardt
D) Fortis
• Berger International Acquires
• A) Asian Paints
• B) Nerolac Paints
• C) Surya Cements
• D) CauseWay Paints
 Mergers and Acquisitions
Definition of Merger
Combining of two business entities under
common ownership
Or
Two firms collate and share resources in order to
realise a common goal
But
One party almost always dominates
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 Mergers and Acquisitions
Acquisition
One firm buys the assets or shares of another

Takeover implies the acquiring firm is larger than

the target
Reverse takeover if the target is larger than the
acquirer

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 Why Mergers and Acquisitions?
• Horizontal growth for enlarged markets & optimum utilization
• Vertical combination to economize cost and reduce tax
burden
• Diversification of Business
• Combination of management, financial and human resources.
• Synergies
• Improve dividend yield, earnings, book value of entities and
cash flow of the entities.
• Attraction to foreign investors
• Financial Restructuring and
• Tax Planning
 Terminologies
• Blending of two or more existing undertakings: “Amalgamation”
• Sale of business
- As a going concern – “Slump Sale”
- Individual assets - “Itemised sale”
• Merger / Amalgamation of existing business – “Merger”
• Sell to a subsidiary – “Subsidiarisation”
• Demerger
• Secondary market / negotiated purchase of shares – “Share Purchase”
• Issue of fresh shares (preferential issue) – “Fresh Issue”.
 Mergers and Acquisitions
Period Events coinciding with beginning of wave Events coinciding
with end of wave
Wave 1 1890’s- Economic expansion; industrialisation processes; Stock market crash;
1903 introduction of new state legislations on incorporations; economic stagnation;
development of trading on NYSE; radical changes in beginning of First World
technology War
Wave 2 1910’s – Economic recovery after the market crash and the First Stock market crash;
1929 World War; strengthen enforcement of antimonopoly law beginning of Great
Depression
Wave 3 1950’s – Economic recovery after the Second World War; Stock market crash; oil
1973 tightening of anti-trust regime in 1950 crisis; economic
slowdown
Wave 4 1981 – Economic recovery after recession; changes in anti-trust Stock market crash
1989 policy; deregulation of fin. services sector; new financial
instruments and markets (e.g. junk bonds); technological
progress in electronics
Wave 5 1993 – Economic and financial markets boom; globalization Stock market crash; 9/11
2001 processes; technological innovation, deregulation and terrorist attack
privatisation
New 2003 - ? Economic recovery after the downturn in 2000–2001
wave ?
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 Types of Mergers
• Horizontal Mergers
• Vertical Merger
• Conglomeration merger
• Product extension merger
• Market extension merger
• Purchase mergers
• Consolidation mergers
 Take-Over and Acquisitions
• Differences in Take-overs and Acquisitions
• Defensive Tactics
– Divestitures
– Sale of Asset
– Spin-off
– Tracking Stock
• The Corporate Charter
• Repurchase Stand Still Agreements
• Exclusionary self-tenders
• Going Private and leveraged buy-out
 Valuation Models
• Replacement Cost Method
• Discounted Cash Flow Method
• Economic Profit Model
– Economic Profit = Invested Capital * (Return on
invested capital-WACC)
– Economic Profit = Net Operating Profit Less
Adjusted Taxes – (Invested Capital * WACC)
• Price-Earnings Ratio
• Enterprise-Value-Sales Ratio
Impact on EPS (Merger & Acquisitions)
• Company X is contemplating the purchase of Company Y. Company
X has 3,00,000 shares having a market price of Rs 30 per share,
while company Y has 2,00,000 shares selling at Rs 20 per share.
The EPS are Rs 4.00 and Rs 2.25 for company X and Company Y
respectively. Managements are discussing two alternative
proposals for exchange of shares as indicated below.
(i) In proportion to the relative earnings per shares of two
companies.
(ii) 0.5 share of Company X for one share of Company Y (0.5:1)
Determine
• a) EPS after merger under two alternatives
• B) Impact on EPS for the shareholders of two companies under
both the alternatives.
Determining Exchange Ratio (SWAP Ratio)
• XYZ Ltd is considering a merger with ABC Ltd. XYZ Ltd shares
are currently traded at Rs 20. It has 2,50,000 shares
outstanding and its Earnings after taxes amount to Rs
5,00,000. ABC Ltd has 1,25,000 shares outstanding; its current
market price is Rs 10 and its EAT is Rs 1,25,000. The merger
will be effected by means of a stock swap(exchange). ABC Ltd
has agreed to a plan under which XYZ Ltd will offer the current
market value of ABC Ltd’s shares.
A) What is the pre-merger EPS and P/E Ratios of both the
companies?
B) If ABC Ltd’s P/E ratio is 6.4, what is the current market
price? What is the exchange ratio? What will XYZ Ltd’s post-
merger EPS be?
C) What should be the exchange ratio; if XYZ Ltd’s pre-merger
and post-merger EPS are to be the same?
• As a financial manager of Firm A, you have been asked to
analyse the proposal of acquiring Firm B by Firm A. Using the
information given below,
• (i) determine the market price if merger of Firm B into A based
on exchange of equity shares.
• (ii) determine optimum share exchange ratio from the point of
view of Firm B.

Firm A Firm B
Profit after tax 50,00,000 15,00,000
Equity shares 1.0= 1,00,000 0.3 = 30,000
outstanding (in shares shares
lakh)
Market Price 45 30
 Determining Exchange Ratio (SWAP Ratio)
• M Co Ltd is studying possible acquisition of N Co Ltd by way
of merger. The following data are available in respect of
companies.
• (i) If the merger goes through by exchange of equity and the
exchange ratio is based on the current market price, what is
the new earnings per share for M Co Ltd
• (ii) N Co Ltd wants to be sure that the earnings available to
its shareholders will not be diminished by the merger. What
should be the exchange ratio in the case?
Particulars M Co Ltd N Co Ltd
Earnings after tax (Rs) 80,00,000 24,00,000
No of equity shares 16,00,000 4,00,000
Market value of 200 160
shares (Rs)
 Determining Market Value
• Firm A acquires Firm B by exchanging 0.5 of its share for each share
of Firm B. Input available is given as follows.
• Determine
– The number of equity shares to be issued by Firm A for acquisition of Firm
B.
– EPS of firm A after acquisition.
– Equivalent EPS per share of Firm B
– If PE Ratio does not change by acquisition, expected share price of Firm A.
– Market Value of the merged firm.

Firm A Firm B
PAT (Rs) 20,00,000 5,00,000
Number of equity shares 5,00,000 2,00,000
EPS (Rs) 4 2.5
PE Ratio 10 8
Market Price per share (Rs) 40 20
 PROCESS OF MERGER & ACQUISITION IN INDIA
• Permission for merger
• Information to the stock exchange
• Approval of Board of Directors
• Application in High Court
• Meeting of shareholders and Creditors
• Sanction by High Court
• Filing of Court Order
• Transfer of Assets and Liabilities
• Payment by cash or securities.
 Investment Banking Perspectives in Mergers and
Acquisitions
• Determination of strategic objective
– Synergy
• ITC and ITC Bhadrachalam
– Increased broad spectrum
– Paper Segment (ITC Bhadra – 20% growth)
– Strategic intent of scaling up ITC Bhadra
– Enhanced profits (Rs 130-140 Cr) to additional Rs 25- 30 Crore
RIL and RPL Merger
– RIL is India’s biggest Petro chemical co.; RPL is single location
refinery in world.
– Merged co, become second next to HUL and Indian Oil Ltd
– Swap Ratio (1:11)
– Took Co to big league of Fortune 500 companies and largest
shareholder population in World.
Investment Banking Perspectives in Mergers and
Acquisitions
• Statutory Framework
• Companies Act, 1956
• TechMahindra – Mahindra Satyam Merger
– MS acquired by TM through a competitive bidding route
– SEBI
– CCI
– Section 372A
– FEMA and FDI Policy
• Bharti-Airtel-MTN
Investment Banking Perspectives in Mergers and
Acquisitions
• Securities Contract Regulation Act (SCRA)
• Atleast 25% of the paid-up share capital
• The Competition Act ,2002
• Threshold Limits:
• Acquisition:
– Acquirer and Acquired jointly own assets of Rs 1000 crore
or have a turnover of Rs 3000 crore.
– In case of business group, the corresponding figures are Rs
4000 crore and Rs 12,000 crore.
• Control:
– Group entities should be owned by atleast 26% by voting
rights.
 Out bound cross border M&A from
India
• Means the acquisition of foreign company by the
Indian Company
• Tata Tea acquired UK based Tetley Tea
• Here the Indian Companies have to apply the
regulations of:
• Indian Co. Act, 2013
• SCRA
• FEMA
• RBI regulations
Out bound cross border M&A from
India
 Cont…
• Presently FEMA allows Indian companies to acquire
or set up their wholly owned subsidiaries or to enter
into joint ventures abroad to the extent of 400% of
their net worth as per the last audited balance sheet.
• Investment above that level need the prior
permission of RBI.
• Overseas acquisitions can be funded through
ADRs/GDRs, ECBs, Foreign Currency Convertible
Bonds.