Presentation on theme: "Mergers & Acquisitions, Joint Ventures and Wholly Owned Subsidiaries"— Presentation transcript:
1Mergers & Acquisitions, Joint Ventures and Wholly Owned Subsidiaries Name Roll No:Ashutosh AgarkarFauzia HasanJane NazarethAnkit PatelRajitha Pillai
2Roadmap M&A’s: Meaning Inbound & Outbound M&A’s Modes of Acquisitions Types of MergersM&A’s: Advantages & FailuresCase study 1: Ranbaxy & DaichiiJoint Ventures:Meaning, Benefits & IssuesCase Study 2: Maruti & SuzukiCase Study 3: Hero & HondaWholly Owned SubsidiaryValuation MethodsCase Study 4: Dr Reddy & BetapharmCase study 5: Tata & ChorusCase study 6: Hindalco & Novelis
3Mergers & Acquisitions M&As are a type of inorganic growth pathsMerger:-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.
4Inbound & Outbound M&As Inbound M&AInbound M&A are mergers or acquisitions where a foreign company merges with or acquires an Indian companyEg: Daichii acquiring RanbaxyOutbound M&AOutbound M&A are mergers or acquisitions where an Indian company merges with or acquires an foreign companyEg: Tata steel acquiring Corus
5Mode 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 companyEg: 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, ZaaviHostile Takeovers : A hostile takeover allows a suitor to take over a target company's management unwilling to agree to a merger or takeover.EgOracle –PeoplesoftIndia Cement- Raasi Cement
6Mode of AcquisitionsLeveraged 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
7TYPES 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.
8TYPES 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.
9Advantages of M&A Economy of scale Economy of scope Increased revenue or market shareCross sellingSynergyTaxationGeographical or other diversificationResource transferVertical integrationAbsorption of similar businesses under single management
10Why 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 ClashLack of CommunicationLoss of Key people and talentHR issuesLack of proper trainingClashes between managementLoss of customers due to apprehensionsFailure to adhere to plans
12The DEALDaiichi got to acquire a controlling stake ….51.62% in Ranbaxy for $ billionSingh 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 warrantsRanbaxy was to get $1bn via preferential allotment, funds were to be used to retire debt
14Reasons for Takeover Daiichi Ranbaxy A complementary business combinationAn expanded global reachStrong growth potentialCost competitiveness by optimizing usage of R&D and manufacturing facilitiesRanbaxyThe R&D pipeline was not delivering enough products, the generic market was not generating adequate returns.Ranbaxy had three choicesIt could spend lot of money in acquiring a big generic company to grow inorganicallyMerge with a global playerSell-outThe sell out option was most profitable
16Joint 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
17JV- Goals, Benefits Goals Synergies Transfer of technology/skills DiversificationBenefitsComplementary BenefitsAcquiring and Sharing ExpertiseNew Business / Product DevelopmentCapacity Expansion
18JV- Issues Issues in Joint Ventures Due Diligence Business Strategy Development of HR StrategiesImplementation
19Case Study 2: Maruti Suzuki Joint Venture HISTORYMaruti Udyog Ltd was established in February 1981Actual Production commenced in 1983 with Maruti 800Project Maruti started by Indira Gandhi & Sanjay GandhiIndian experts started search for collaboratorsNegotiated with – Toyota, Nissan, Honda & SuzukiAfter rounds of negotiation Suzuki was selectedJoint 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
20SWOT Analysis STRENGTHS Goodwill of Suzuki Brand Contemporary TechnologyMarket Share & reliabilityWEAKNESSJapan for technical supportOPPORTUNITIESInfrastructureInnovationTHREATSGovt’s Policies, taxes etc
21BENEFITS OF JOINT VENTURE For MarutiSuzuki Motor Corporation, the parent company, is a global leader in mini and compact cars for three decadesSuzuki’s technical superiorLightweight engine that is clean and fuel efficientNearly people are employed directly by Maruti Suzuki and its partnersFor SuzukiLarge Indian MarketMonopolistic trade in the Indian automobile marketAvailability of resources
22Case Study 3: Hero Honda Joint Venture The Market before JVThe 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.
23The 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.
24Success StoryHHM had grown consistently, earning the title of the world’s largest motorcycle manufacturerWorld’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.
25Reasons for successThe 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 motorcyclesBetter Fuel efficiency.Change in people’s perception.Decrease in price difference with scooters.
26Wholly 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.
27VALUATION METHODSValuation means assigning a value to underlying assetsThe value should be a fair valueValuation is not a science; more of an artValuation is largely influenced by Valuer’s judgment, knowledge of business, analysis and interpretation and the use of different methodsValuation varies with purposeValuation is time sensitive
28Steps in Valuation Obtaining information Reviewing data provided Selecting a methodApplying MethodConducting sensitivities on assumptionsAssigning WeightsMerger - Exchange RatioReporting2828
29Principal Methods of Valuation Asset Based ApproachNet Assets MethodReplacement Value/Realisable ValueEarning based approachPrice Earnings Capitalisation MethodDiscounted Cash FlowMarket ApproachMarket PriceMarket Comparables2929
30Net Assets MethodThe 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 LiabilitiesORNet Asset Value = Share Capital + Reserves (excluding Revaluation Reserve) – Misc. Expenditure – Debit Balance of Profit & Loss AccountFollowing adjustments may be called for:1) Accounting Policies 2)Contingent Liabilities3) Sales Tax Deferment Loan 4)Investments & Surplus Assets5) Inventory & Debtors 6) Contingent Assets7) Preference Shares 8) ESOPs / Warrants3030
31Net Assets Method Where this method is used STRENGTHS LIMITATIONS Start up CompaniesTraditional methodService/knowledge basedInvestment CompaniesInvestment companiesBrand driven companiesNo sustainable track record of profitsCapital Intensive CompaniesIntangibles/human resources value not capturedManufacturing companies where fixed assets have greater relevance for earning revenuesTransparent and easy to computeErrors/misstatements in financial statementsCompanies with no reliable evidence of future profits due to violent fluctuations/disruption of businessDependent on accounting policies followed by companyEarnings Potential ignored3131
32Price Earnings Capitalisation Method (PECV) Based on past performance and /or projectionsNon-recurring & extraordinary items excludedProfits of various years are averaged (simple or weighted). Current profit is accorded the highest weightProjected profits discounted for inflationBy applying effective tax rate, arrive at maintainable profitFinally appropriate capitalisation rate is applied to arrive at the valuePECV – ParametersFuture Maintainable ProfitsAppropriate Tax RateCapitalisation Rate3232
33Price Earnings Capitalisation Method (PECV) STRENGTHSLIMITATIONSTraditional methodKnowledge based companiesBrand Driven companiesBest used for a matured companyMost widely - quoted valuation method in equity marketsInvestment/Property companyCompany in liquidationIgnores time value of moneyBased on book earnings, cash generation not consideredDependent on accounting policies followed by companyLack of comparable firmsNo revenues/Negative earnings3333
34Discounted Cash Flow Method DCF – ParametersCash FlowsDiscounting FactorWhen to use?Most appropriate for valuing firmsLimited life projectsLarge initial investments and predictable cash flowsRegulated businessStart-up companies3434
35Discounted Cash Flow Method STRENGTHSLIMITATIONSConceptually sound and widely used methodProjections are highly subjective hence could be inaccurateValues the cash generated and not just the earningsInapplicable where projections cannot be made for the horizon periodNot dependent on accounting policiesDifficulties in measuring risks (calculation of )Determination of Values for all fund providersHas not been specifically examined by the Court though many mergers where DCF was used as one of the method of valuation has been approvedCaptures Capital Expenditure needs and Working Capital requirementsSophisticated enough to deal with complexity of most situations
36Other Earnings-Based Methods EBITDA Multiple Method:Involves determination of maintainable EBITDABased on projections or past performance. Weights may be assigned to various years’ EBITDANot affected by the pattern of Funding adopted by Company/ Comparable CompaniesSales Multiple Method:Compares Enterprise value to Company’s Sales
37Market Price ApproachEvaluates the value on the basis of prices quoted on the stock exchangeThinly traded / Dormant Scrip – Low Floating StockSignificant and Unusual fluctuations in the Market PriceWeighted Average of quoted price for past 6 monthsRegulatory bodies often consider market value as important basis – Preferential allotment, Buyback, Takeover Code
38Market 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 CompaniesBook Value MultiplesIndustry Specific MultiplesMultiples from Recent M&A Transactions.
39STRENGTHS LIMITATIONS Market ComparablesSTRENGTHSLIMITATIONSEasy to understand and quick to completeInvolves few explicit assumptionsBasic data for publicly traded entities readily availableEasy to explain and present to othersMay not capture Intrinsic valueValue gets affected by value of PeersDifficulty in identifying comparable companiesShort term volatility in markets
40IndustryBest measure of valueAutoPrice to Earnings (PE) multipleBankingPE and Price to Book Value (PBV) or Adjusted PBV multipleCementPE, Enterprise Value to Earnings before interest, tax, depreciation & amortization (EV/EBITDA), EV/tonneEngineeringForward PE, which reflects the order book position of the company
41IndustryBest measure of valueFMCGPE, Return on Equity (RoE) and Return on Capital Employed (RoCE) ratiosReal EstateNet asset value (NAV), which is book value at market prices. Also look at debt levelsTelecomPE and DCF, because there is a future stream of cash flows for upfront heavy investmentOil & GasResidual reserves of energy assetsTechnologyTrailing PE and its growth
42Case Study 4: Dr Reddys & Betapharma - The AcquirerAmong the largest domestic pharma companies in IndiaAnnual 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%Mitalee42
43- The Target Fourth largest generic pharma company in Germany EBITD margins between 24 – 26%Portfolio of over 145 productsMitalee43
44- The Target Turnover Eur 186 million 3.5 market share in Germany Breakup of productsMitalee44
45- The Target Valuations Sticker Price of €480 mn. from PE firm 3iRevenues of € 165 mn.2.9X revenues and 12X EBITDAThe transaction was funded using a combination of DRL’s internal cash reserves and committed credit facilitiesDr Reddy's buys 100% equity of German Co Betapharm for Rs 2,250 cr (Euro 480 mio) — Biggest overseas acquisition by an Indian pharma coMukul45
46Goodies for DRL Access to lucrative German generic drug market Enhanced portfolioLeverage its product development skills and low-cost manufacturing in India to boost Betapharm’s EBIT marginsHelp DRL realize its ambitions of becoming a $1 billion mid-size global pharma company
47Side Effects for DRL Betapharm booked losses in 08 & 09 Raw materials problems in MexicoThe 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 drugsAbsence of upsides (revenues arising out of marketing exclusivity of authorized generics)
48Present Scenario for DRL DRL has long been bleeding under the impact of Betapharm’s lossesDecline in German sales by 26 per centDr Reddy's Laboratories (DRL) is currently restructuring German subsidiary BetapharmFierce competitive bidding from various generic companies has increased the acquisition cost for DRL and extended the payback period
49Case 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
50Corus OverviewCorus 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.
51Synergies 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 marketsThere would be technology transfer and cross-fertilization of R&D capabilities between the two companies that specialized in different areas of the value chainThere 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.
52ValuationOn 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.
53Funding 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.
54Case Study 6: HINDALCO - NOVELIS ACQUISITION: CREATING AN ALUMINIUM GLOBAL GIANT 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.
55Novelis - BackgroundWorld leader in the recycling of used aluminium beverage cansRecycles 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.
56Financing Structure put in place by Hindalco Novelis Enterprise Value ~ USD 6 billionAll cash dealHINDALCONOVELISFigures in USD MillionsRecourse Financing by banks on Corporate Guarantee of Hindalco3100Liquidation of Treasury450TOTAL3550Non Recourse Debt at NovelisTerm Loans1000High Yield Bonds1400TOTAL2400
57Benefits to Hindalcoestablish 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.