Trends in Merger

 1890-1905 – Consolidation of small firms. E.g., GE,

American Tobacco, Dupont
 1920s- product extension mergers (IBM, General
Motors) and market extension mergers (in food
retailing, department stores, motion picture theatres)
and vertical mergers in mining and metal industries
 1960s – conglomerate mergers
 1980s – LBOs (use of debt capital to finance a buyout)
 1990s – strategic mergers, core competencies
 Merger Activity in India

 Pre liberalization saw many unrelated diversification. Due to

licensing policy. Many family groups like Murugappa group,
Chabbria Group, RPG Group built industrial empires through
acquisitions.
 Post liberalization some were forced to sell non core businesses
(1992-1995)
 1997-2002 consolidation again with more of telecommunications
and IT sector, cement.
 2004-2006 has seen foreign acquisitions

 New Industrial Policy of 1991, FERA, SEBI, and its act Substantial
Acquisitions of Shares and takeover (SAST) Regulations Act
helped streamline mergers and acquisitions in India.

 After 1990s Acquisitions were more than mergers in India

 Value of M&A have also increased over a period of years (1998 –

Rs. 151 billion; 2007 – Rs. 1,576 billion)
 Sectoral Trends in M&A Activity in India
 2000 – Transport, Communication, Food Products
 2001 – Chemical, IT, Finance
 2002 – Services, Pharma, Automobiles, Electronics,
Power
 2003 and 2004 - Food and Beverages, Textiles,
Chemicals, Electronics, Automobiles
 2005 – Telecom, Energy, IT& ITES, Steel, Chemicals
and plastics
 2006 - Telecom, Energy, IT& ITES, FMCG, Media
 2007 - Telecom, IT& ITES, Finance, Cement, building
materials, oil and gas
 …. IT, Cross border deals ---
 Factors influencing Cross Border Acquisitions

 Barriers to Cross Border Acquisitions

 Cross Border and Domestic Deals

 Number of Inbound and Outbound deals in other

years

 Why Indian Companies go Global

 Sectoral Review of M&A
 Cement
 Banking
 Food and beverages
 Oil and Energy
 Media and Entertainment
 Telecommunication Industry
 Chemical Industry
 IT and ITES
 Steel industry
 Automotives Industry
 Financial Services
 Other Services Industry
 Metal Industry
 Textiles Industry
 Consumer Goods
 Machinery
 Factors driving Indian companies to go in for M&A
 Some M&As have gone dismal while some have
succeeded
 1984 to 1994 acquisitions earned more returns (above
cost of capital)
 This was despite of acquisition prices higher which was
due to increase in prices by competitive bidders
 Corporate acquirers delegate the deal management
process to outside experts., whereas financial
investors treat it as a core part of their business.
- Well established process
- They adjust the negotiating postures and objectives as
the deal evolves
- Coordinate the different actors – mgrs., lawyers,
investment bankers
Five distinct stages
 Screening potential deals
 Reaching an initial agreement
 Conducting due diligence
 Setting the final agreement
 Closing
Screening potential Deals
 Acquisition possibilities pop up without warning and need to be
evaluated quickly.
 Think strategically and act opportunistically
1. Look at everything
- New york based Cypress Group (Finance company) completes
average three deals a year, but looks at 500 possibilities and
closely examines 25 of them.
The Cypress Group is a private equity company focused on
leveraged buyout investments in companies across a range of
industry sectors. At its peak in the late 1990s and early 2000s.
- Good Corporate acquirers like Cisco also looks at three
markets and atleast five to ten companies in every market and
value each prospect with relative to others
 2. Keep a strategic focus
LBO firms and good corporate acquirers stick to strict
guidelines.
_ GTCR Golder Rauner (US based finance company)
backs people who can acquire and operate companies.
They focus on service companies and not
manufacturing companies
Reaching an initial agreement

From talking to planning

It can be through structured process or less formally
through conversations between senior executives
1. Don’t get bogged down over price
 As parties don’t have complete information
 2. Identify Must-Haves
 Management team’s experience
 Management incentive structure
 Role that the top executives will play
(American Home Product merger with Monsanto
collapsed because of the clash between the CEOs as who
is number one)
- Aware of potential liabilities such as environmental
issues, retiree health care liabilities, etc. that could affect
materially the price of the transaction
 3. Get friendly
 Management team of target might feel nervous,
suspicious
 Flexible and respectful
 Help target company managers see the career
opportunities in the new organization
 Cypress group builds relationships with partners
(Build relationship capital from the initial stage so that it
will help in the later stage)
Conducting Due Diligience

Gearing up for Negotiations

 This stage of due diligence is most time consuming and
least creative and more of fact checking
 Boredom is dangerous which might cause failures in due
diligence than any other part of deal process
 Same detailing and effort is required for M&A as you
would put for starting a company from scratch
1. Turn over all the Rocks
A deal that dies at due diligence always dies for right reasons
A deal goes until the closing stage but fails as the buyer comes to know
that there is no adequate financial control system. This raises
concern and competence and even integrity

2. Size up the Other Side

- Due diligence to deepen the knowledge about the links of the target
management
- This helps in assessing people’s abilities
- Do the managers have knowledge about the operational details
- Do they work well as a team?
- Are they enthused by the transaction
- Are they flustered or hostile when challenged
- Are they worried about their personal future?
(Eg. A significant role in the combined entity has brought about a
significant reduction in price)
 3. Feed Due Diligence into Business Planning
 It is not just a break between initial and final
negotiations or just an information gathering exercise
 One has to formulate strategy
 Build valuation model
 Cover investment thesis, capital structure, sensitivity
analysis and third party due diligence
Getting to final terms
 Most sensitive as it involves price and strategy
 It is bad to come with large number of issues and try to
get solved in no particular order.
 One should maintain momentum of talks and be
aware of external threats
 Use multiple negotiation channels
 Managers
 Lawyers
 Investment Bankers
And do parallel processing
 2. Cultivate Alternatives
 Best Alternatives to negotiated agreements (BATNA)
 Inform in the middle that there are other alternatives.
 3. Anticipate Competition
 Target also has a choice
 Acquirers should assess advantages and disadvantages relative
to other potential bidders (Like cost of losing the company.
 (IBM’s unsolicited bid for Lotus Development, was made at
twice the target’s prebid stock price.)
 Most of them don’t participate in competitve auctions. Cisco
wants substantive conversations to be carried out on an
exclusive basis