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Mergers & Acquisitions, Joint Ventures and Wholly Owned Subsidiaries

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1 Mergers & Acquisitions, Joint Ventures and Wholly Owned Subsidiaries
Name Roll No: Ashutosh Agarkar Fauzia Hasan Jane Nazareth Ankit Patel Rajitha Pillai

2 Roadmap M&A’s: Meaning Inbound & Outbound M&A’s Modes of Acquisitions
Types of Mergers M&A’s: Advantages & Failures Case study 1: Ranbaxy & Daichii Joint Ventures: Meaning, Benefits & Issues Case Study 2: Maruti & Suzuki Case Study 3: Hero & Honda Wholly Owned Subsidiary Valuation Methods Case Study 4: Dr Reddy & Betapharm Case study 5: Tata & Chorus Case study 6: Hindalco & Novelis

3 Mergers & Acquisitions
M&As are a type of inorganic growth paths Merger:- In the pure sense of the term, a merger happens when two firms agree to go forward as a single new company rather than remain separately owned and operated. This kind of action is more precisely referred to as a "merger of equals". Both companies' stocks are surrendered and new company stock is issued in its place. For example, in the 1999 merger of Glaxo Wellcome and SmithKline Beecham, both firms ceased to exist when they merged, and a new company, GlaxoSmithKline, was created. Acquisition:- When one company takes over another and clearly establishes itself as the new owner, the purchase is called an acquisition. From a legal point of view, the target company ceases to exist, the buyer "swallows" the business and the buyer's stock continues to be traded.

4 Inbound & Outbound M&As
Inbound M&A Inbound M&A are mergers or acquisitions where a foreign company merges with or acquires an Indian company Eg: Daichii acquiring Ranbaxy Outbound M&A Outbound M&A are mergers or acquisitions where an Indian company merges with or acquires an foreign company Eg: Tata steel acquiring Corus

5 Mode of Acquisitions Management Buyouts
A management buyout (MBO) is a form of acquisition where a company's existing management acquire a large part or all of the company Eg: in Sep’07 the UK arm of Virgin Megastores was to be sold off as part of a management buyout, and from Nov’07, was known by a new name, Zaavi Hostile Takeovers : A hostile takeover allows a suitor to take over a target company's management unwilling to agree to a merger or takeover. Eg Oracle –Peoplesoft India Cement- Raasi Cement

6 Mode of Acquisitions Leveraged Buyouts: A leveraged buyout occurs when an investor, typically financial sponsor, acquires a controlling interest in a company's equity and where a significant percentage of the purchase price is financed through leverage (borrowing) Eg: Tata Corus

7 TYPES OF MERGERS Based on Business Structures
Horizontal:- Two companies that are in direct competition and share the same product lines and markets. Vertical:- A customer and company or a supplier and company. Think of a cone supplier merging with an ice cream maker. Conglomerate:- Two companies that have no common business areas. Market-extension merger:-Two companies that sell the same products in different markets. Product-extension merger:- Two companies selling different but related products in the same market.

8 TYPES OF MERGERS Based of method of Financing
Purchase Mergers - This kind of merger occurs when one company purchases another. The purchase is made with cash or through the issue of some kind of debt instrument; the sale is taxable. Consolidation Mergers - With this merger, a brand new company is formed and both companies are bought and combined under the new entity. The tax terms are the same as those of a purchase merger.

9 Advantages of M&A Economy of scale Economy of scope
Increased revenue or market share Cross selling Synergy Taxation Geographical or other diversification Resource transfer Vertical integration Absorption of similar businesses under single management

10 Why M & A’s fail….. Research has conclusively shown that most of the mergers fail to achieve their stated goals. Some of the reasons identified are: Corporate Culture Clash Lack of Communication Loss of Key people and talent HR issues Lack of proper training Clashes between management Loss of customers due to apprehensions Failure to adhere to plans

11 Case study 1: Ranbaxy Daichi
Ranbaxy Overview

12 The DEAL Daiichi got to acquire a controlling stake ….51.62% in Ranbaxy for $ billion Singh family promoters of Ranbaxy sold entire stake 34.8% for Rs crs ($2.4 bio) at Rs 737/- Daiichi had to make an open offer to acquire 20% more from other shareholders. Japanese company was to acquire another 4.9% through preferential of share warrants Ranbaxy was to get $1bn via preferential allotment, funds were to be used to retire debt

13 The DEAL

14 Reasons for Takeover Daiichi Ranbaxy
A complementary business combination An expanded global reach Strong growth potential Cost competitiveness by optimizing usage of R&D and manufacturing facilities Ranbaxy The R&D pipeline was not delivering enough products, the generic market was not generating adequate returns. Ranbaxy had three choices It could spend lot of money in acquiring a big generic company to grow inorganically Merge with a global player Sell-out The sell out option was most profitable

15 Conclusion

16 Joint Ventures (JV) JV is an entity formed between two or more parties to undertake economic activity together. The parties agree to create a new entity by both contributing equity, and they then share in the revenues, expenses, and control of the enterprise. The venture can be for one specific project only, or a continuing business relationship such as the Sony Ericsson joint venture. This is in contrast to a strategic alliance, which involves no equity stake by the participants, and is a much less rigid arrangement. Project Based JV: These are Joint Ventures entered into by companies in order to accomplish a specific project. Functional JV: These are Joint Ventures wherein, companies agree to share their functions and facilities such as production, distribution, marketing, etc. to achieve mutual benefit

17 JV- Goals, Benefits Goals Synergies Transfer of technology/skills
Diversification Benefits Complementary Benefits Acquiring and Sharing Expertise New Business / Product Development Capacity Expansion

18 JV- Issues Issues in Joint Ventures Due Diligence Business Strategy
Development of HR Strategies Implementation

19 Case Study 2: Maruti Suzuki Joint Venture
HISTORY Maruti Udyog Ltd was established in February 1981 Actual Production commenced in 1983 with Maruti 800 Project Maruti started by Indira Gandhi & Sanjay Gandhi Indian experts started search for collaborators Negotiated with – Toyota, Nissan, Honda & Suzuki After rounds of negotiation Suzuki was selected Joint venture of Govt of India & Japanese Company Suzuki Motors Corp Previously Govt of India owned 80% equity & Suzuki had 20% Now Indian Financial Institute has 18.28%, Suzuki has 54.24% & 25% equity is public offering

20 SWOT Analysis STRENGTHS Goodwill of Suzuki Brand
Contemporary Technology Market Share & reliability WEAKNESS Japan for technical support OPPORTUNITIES Infrastructure Innovation THREATS Govt’s Policies, taxes etc

For Maruti Suzuki Motor Corporation, the parent company, is a global leader in mini and compact cars for three decades Suzuki’s technical superior Lightweight engine that is clean and fuel efficient Nearly people are employed directly by Maruti Suzuki and its partners For Suzuki Large Indian Market Monopolistic trade in the Indian automobile market Availability of resources

22 Case Study 3: Hero Honda Joint Venture
The Market before JV The license raj that existed prior to economic liberalization (1940s-1980s) in India did not allow foreign companies to enter the market. In the mid-’80s when the Indian government started permitting foreign companies to enter the Indian market through minority joint ventures. The entry of these new foreign companies transformed the very essence of competition from the supply side to the demand side.

23 The Deal Is Done.(June 1984) Honda agreed to provide tech. know-how to HHM and setting up manufacturing facilities. This included the future R & D efforts. Honda agreed for a lump sum fee of $500,000 & 4% royalty on SP. Both Partners held 26% of the equity with other 26% sold to the public and the rest held to financial institutions.

24 Success Story HHM had grown consistently, earning the title of the world’s largest motorcycle manufacturer World’s largest two-wheeler manufacturer with annual sales volume of over 2 million motorcycles. Owns world’s biggest selling motorcycle brand – Hero Honda Splendor. Over 9 million motorcycles on Indian roads. Deep market penetration with 5000 outlets.

25 Reasons for success The deep penetration network of hero largely benefited the sales. Absence of major competitors in initial years. Sound and proven technical capabilities of Honda and the reliability of Hero. Increased market for motorcycles Better Fuel efficiency. Change in people’s perception. Decrease in price difference with scooters.

26 Wholly Owned Subsidiary
What Does Wholly Owned Subsidiary Mean? A subsidiary whose parent company owns 100% of its common stock. In other words, the parent company owns the company outright and there are no minority owners.

27 VALUATION METHODS Valuation means assigning a value to underlying assets The value should be a fair value Valuation is not a science; more of an art Valuation is largely influenced by Valuer’s judgment, knowledge of business, analysis and interpretation and the use of different methods Valuation varies with purpose Valuation is time sensitive

28 Steps in Valuation Obtaining information Reviewing data provided
Selecting a method Applying Method Conducting sensitivities on assumptions Assigning Weights Merger - Exchange Ratio Reporting 28 28

29 Principal Methods of Valuation
Asset Based Approach Net Assets Method Replacement Value/Realisable Value Earning based approach Price Earnings Capitalisation Method Discounted Cash Flow Market Approach Market Price Market Comparables 29 29

30 Net Assets Method The Value as per Net Asset Method is arrived as follows: Net Asset Value = Total Assets (excluding misc. expenditure and debit balance of Profit & Loss Account) – Total Liabilities OR Net Asset Value = Share Capital + Reserves (excluding Revaluation Reserve) – Misc. Expenditure – Debit Balance of Profit & Loss Account Following adjustments may be called for: 1) Accounting Policies 2)Contingent Liabilities 3) Sales Tax Deferment Loan 4)Investments & Surplus Assets 5) Inventory & Debtors 6) Contingent Assets 7) Preference Shares 8) ESOPs / Warrants 30 30

31 Net Assets Method Where this method is used STRENGTHS LIMITATIONS
Start up Companies Traditional method Service/knowledge based Investment Companies Investment companies Brand driven companies No sustainable track record of profits Capital Intensive Companies Intangibles/human resources value not captured Manufacturing companies where fixed assets have greater relevance for earning revenues Transparent and easy to compute Errors/misstatements in financial statements Companies with no reliable evidence of future profits due to violent fluctuations/disruption of business Dependent on accounting policies followed by company Earnings Potential ignored 31 31

32 Price Earnings Capitalisation Method (PECV)
Based on past performance and /or projections Non-recurring & extraordinary items excluded Profits of various years are averaged (simple or weighted). Current profit is accorded the highest weight Projected profits discounted for inflation By applying effective tax rate, arrive at maintainable profit Finally appropriate capitalisation rate is applied to arrive at the value PECV – Parameters Future Maintainable Profits Appropriate Tax Rate Capitalisation Rate 32 32

33 Price Earnings Capitalisation Method (PECV)
STRENGTHS LIMITATIONS Traditional method Knowledge based companies Brand Driven companies Best used for a matured company Most widely - quoted valuation method in equity markets Investment/Property company Company in liquidation Ignores time value of money Based on book earnings, cash generation not considered Dependent on accounting policies followed by company Lack of comparable firms No revenues/Negative earnings 33 33

34 Discounted Cash Flow Method
DCF – Parameters Cash Flows Discounting Factor When to use? Most appropriate for valuing firms Limited life projects Large initial investments and predictable cash flows Regulated business Start-up companies 34 34

35 Discounted Cash Flow Method
STRENGTHS LIMITATIONS Conceptually sound and widely used method Projections are highly subjective hence could be inaccurate Values the cash generated and not just the earnings Inapplicable where projections cannot be made for the horizon period Not dependent on accounting policies Difficulties in measuring risks (calculation of ) Determination of Values for all fund providers Has not been specifically examined by the Court though many mergers where DCF was used as one of the method of valuation has been approved Captures Capital Expenditure needs and Working Capital requirements Sophisticated enough to deal with complexity of most situations

36 Other Earnings-Based Methods
EBITDA Multiple Method: Involves determination of maintainable EBITDA Based on projections or past performance. Weights may be assigned to various years’ EBITDA Not affected by the pattern of Funding adopted by Company/ Comparable Companies Sales Multiple Method: Compares Enterprise value to Company’s Sales

37 Market Price Approach Evaluates the value on the basis of prices quoted on the stock exchange Thinly traded / Dormant Scrip – Low Floating Stock Significant and Unusual fluctuations in the Market Price Weighted Average of quoted price for past 6 months Regulatory bodies often consider market value as important basis – Preferential allotment, Buyback, Takeover Code

38 Market Comparables Generally applied in case of unlisted entities
Estimates value by relating an element with underlying element of similar listed companies. Based on market multiples of Comparable Companies Book Value Multiples Industry Specific Multiples Multiples from Recent M&A Transactions.

Market Comparables STRENGTHS LIMITATIONS Easy to understand and quick to complete Involves few explicit assumptions Basic data for publicly traded entities readily available Easy to explain and present to others May not capture Intrinsic value Value gets affected by value of Peers Difficulty in identifying comparable companies Short term volatility in markets

40 Industry Best measure of value Auto Price to Earnings (PE) multiple Banking PE and Price to Book Value (PBV) or Adjusted PBV multiple Cement PE, Enterprise Value to Earnings before interest, tax, depreciation & amortization (EV/EBITDA), EV/tonne Engineering Forward PE, which reflects the order book position of the company

41 Industry Best measure of value FMCG PE, Return on Equity (RoE) and Return on Capital Employed (RoCE) ratios Real Estate Net asset value (NAV), which is book value at market prices. Also look at debt levels Telecom PE and DCF, because there is a future stream of cash flows for upfront heavy investment Oil & Gas Residual reserves of energy assets Technology Trailing PE and its growth

42 Case Study 4: Dr Reddys & Betapharma
- The Acquirer Among the largest domestic pharma companies in India Annual turnover of over INR 4900 Cr. Annual PAT of INR 438 Cr. Approved by USFDA, MHRA (UK) Formulations make 37% of company’s product mix; generic products account for 13% Mitalee 42

43 - The Target Fourth largest generic pharma company in Germany
EBITD margins between 24 – 26% Portfolio of over 145 products Mitalee 43

44 - The Target Turnover Eur 186 million 3.5 market share in Germany
Breakup of products Mitalee 44

45 - The Target Valuations
Sticker Price of €480 mn. from PE firm 3i Revenues of € 165 mn. 2.9X revenues and 12X EBITDA The transaction was funded using a combination of DRL’s internal cash reserves and committed credit facilities Dr Reddy's buys 100% equity of German Co Betapharm for Rs 2,250 cr (Euro 480 mio) — Biggest overseas acquisition by an Indian pharma co Mukul 45

46 Goodies for DRL Access to lucrative German generic drug market
Enhanced portfolio Leverage its product development skills and low-cost manufacturing in India to boost Betapharm’s EBIT margins Help DRL realize its ambitions of becoming a $1 billion mid-size global pharma company

47 Side Effects for DRL Betapharm booked losses in 08 & 09
Raw materials problems in Mexico The German market underwent significant changes after it acquired the company, shifting to a tender-based model wherein the insurance companies called for tenders from drug makers and the lowest bidder got the order for supply of drugs Absence of upsides (revenues arising out of marketing exclusivity of authorized generics)

48 Present Scenario for DRL
DRL has long been bleeding under the impact of Betapharm’s losses Decline in German sales by 26 per cent Dr Reddy's Laboratories (DRL) is currently restructuring German subsidiary Betapharm Fierce competitive bidding from various generic companies has increased the acquisition cost for DRL and extended the payback period

49 Case Study 5: Tata Corus Merger
'Tata Steel', formerly known as TISCO (Tata Iron and Steel Company Limited), was the world's 56th largest and India's 2nd largest steel company with an annual crude steel capacity of 3.8 million tonnes. Post Corus merger, Tata Steel is India's second-largest and second-most profitable company in private sector with consolidated revenues of Rs 1,32,110 crore and net profit of over Rs 12,350 crore during the year ended March 31, 2008

50 Corus Overview Corus was formed from the merger of Koninklijke Hoogovens N.V., a Dutch steel producer with British Steel Plc on 6 October It has major integrated steel plants in UK and Netherlands. Group turnover for the year to 31 December 2005 was £ billion. Profits were £580 million before tax and £451 million after tax.

51 Synergies from the deal
Some of the prominent synergies that could arise from the deal were as follows : Tata was one of the lowest cost steel producers in the world and had self sufficiency in raw material. Corus was fighting to keep its productions costs under control and was on the look out for sources of iron ore. Tata had a strong retail and distribution network in India and SE Asia. This would give the European manufacturer a in-road into the emerging Asian markets. Tata was a major supplier to the Indian auto industry and the demand for value added steel products was growing in this market. Hence there would be a powerful combination of high quality developed and low cost high growth markets There would be technology transfer and cross-fertilization of R&D capabilities between the two companies that specialized in different areas of the value chain There was a strong culture fit between the two organizations both of which highly emphasized on continuous improvement and ethics. Tata steel's Continuous Improvement Program ‘Aspire’with the core values :Trusteeship,integrity,respect for individual, credibility and excellence. Corus's Continuous Improvement Program ‘The Corus Way’ with the core values : code of ethics, integrity, creating value in steel, customer focus, selective growth and respect for our people.

52 Valuation On 20 October 2006 the board of directors of Anglo-Dutch steelmaker Corus accepted a $7.6 billion takeover bid from Tata Steel, the Indian steel company. Tata Steel's bid to acquire Corus Group was challenged by CSN, the Brazilian steel maker. In November 2006,Brazilian steel marker Companhia Siderúrgica Nacional (CSN) challenged Tata Steel's proposal for acquisition. They countered Tata Steel's offer of 455 pence per share by offering 475 pence per share of Corus. Finally , on January 30, 2007, Tata Steel purchased a 100% stake in the Corus Group at 608 pence per share in an all cash deal, cumulatively valued at USD Billion. The deal is the largest Indian takeover of a foreign company and made Tata Steel the world's fifth-largest steel group.

53 Funding the deal – TATA Corus merger
$3.5–3.8bn infusion from Tata Steel ($2bn as its equity contribution, $1.5–1.8bn through a bridge loan) $5.6bn through a LBO ($3.05bn through senior term loan, $2.6bn through high yield loan) The funding structure of this deal is the leveraged buyout model that Tata Steel used to fund the Corus buy. Effectively, the Tatas are paying only a third of the acquisition price. This was possible because Corus had relatively low debt on its balance sheet and was able to borrow more.

Indian aluminium giant Hindalco acquired Atlanta based company Novelis Inc, a world leader in aluminium rolling and flat-rolled aluminium products in May 2007. Novelis processes around 3 million tonnes of aluminium a year and has sales centers all over the world. In fact, it commands a 19% global market share in the flat rolled products segment, making it a leader. Strategically, the acquisition of Novelis takes Hindalco onto the global stage as the leader in downstream aluminium rolled products. The transaction made Hindalco the world's largest aluminium rolling company and one of the biggest producers of primary aluminium in Asia, as well as being India's leading copper producer.

55 Novelis - Background World leader in the recycling of used aluminium beverage cans Recycles more than 35 billion used beverage cans annually. No. 1 rolled products producer in Europe, South America and Asia, and the No. 2 producer in North America. Produces the highest-quality aluminium sheet and foil products for customers in high -value markets including automotive, transportation, packaging, construction and printing. customers include major brands such as Agfa -Gevaert, Alcan, Anheuser-Busch, Ball, Coca-Cola, Crown Cork & Seal, Daching Holdings, Ford, General Motors, Lotte Aluminium, Kodak, Pactiv, Rexam, Ryerson Tull, Tetra Pak, ThyssenKrupp, etc.

56 Financing Structure put in place by Hindalco
Novelis Enterprise Value ~ USD 6 billion All cash deal HINDALCO NOVELIS Figures in USD Millions Recourse Financing by banks on Corporate Guarantee of Hindalco 3100 Liquidation of Treasury 450 TOTAL 3550 Non Recourse Debt at Novelis Term Loans 1000 High Yield Bonds 1400 TOTAL 2400

57 Benefits to Hindalco establish Hindalco as a global integrated aluminium producer with low-cost alumina and aluminium production facilities combined with high -end aluminium rolled product capabilities. emerge Hindaloc as the biggest rolled aluminium products maker and fifth -largest integrated aluminium manufacturer in the world. The acquisition will give the company immediate scale and strong a global footprint. Hindalco's position as one of the lowest cost producers of primary aluminium in the world is leverageable into becoming a globally strong player. Novelis is a globally positioned organization, operating in 11 countries with approximately 12,500 employees. Novelis will work as a forward integration for Hindalco as the company is expected to ship primary aluminium to Novelis for downstream value addition. Novelis has a rolled product capacity of approximately 3 million tonne while Hindalco does not have any surplus capacity of primary aluminium.


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