A REPORT ONMOTIVES OF MERGERFOR

L&T Finance acquisition of Fidelity IndiaHindalco Industries Ltd. Acquisition of Novelis Inc. (outbound)

Submitted by: Submitted to: PGDM 2nd Year, Section ABC: Prof. SHIV NATH SINHAMukul Walia -20121[endnoteRef:1]73 [1: http://www.theguardian.com/money http://www.valueresearchonline.com/ http://www.moneycontrol.com/company-facts/ltfinanceholdings]

Outbound Hindalco: The Novelis Acquisition

Background of the Acquirer Company (Hindalco) Hindalco Industries Limited, the Mumbai based flagship company of the Aditya Birla Group, was structured into two strategic businesses- aluminium and Copper. Established in 1958, Hindalco commissioned its aluminium facility at Renukoot in the Indian state of Uttar Pradesh in 1962. It had grown to become the country's largest integrated producer of Aluminum and ranked in the top quartile of low cost producers in the world. Hindalcos stock was traded on the Bombay Stock Exchange, the National Stock Exchange of India Limited and the Luxembourg Stock Exchange. A key aspect of Hindalco's strategy was continuous growth. The Company had taken two major initiatives in this direction in the recent past. In 1999, the company acquired a 74.6 percent controlling stake in Indian Aluminum Co. Ltd. (INDIAL), a leader in the alumina and semi-fabricated business. The second of the initiatives was a brown-field expansion of facilities at a cost of Rs. 18billion. The expansion added 100,000 TPA to smelting capacity along with a 210,000 TPA increase in Alumina Refining Capacity and matching augmentation of power generation capacity.It enjoyed a domestic market share of 42 percent in primary Aluminum, 63 percent in rolled products, 20 percent in extrusions, 44 percent in foils and 31 percent in wheels. Hindalco had launched several brands like Aura for alloy wheels, Freshwrapp for kitchen foil and Ever Last for roofing sheets in the recent years. The copper plant produced copper cathodes, continuous cast copper rods and precious metals like gold, silver and platinum group metal mix. Sulphuric Acid, Phosphoric Acid, Di-Ammonium Phosphate, other Phosphatic fertilisers and Phospho-Gypsum were also produced at this plant. Hindalco Industries Limited owned a 51 percent shareholding in Aditya Birla Minerals, which had mining and exploration activities in Australia.The compa[footnoteRef:1]ny has annual sales ofUS$14 billion and employs 19,975 people and is listed onForbes 2000. A metals powerhouse with a turnover ofUS$14 billion, Hindalco is one of the world's largest aluminium rolling companies and one of the biggest producers of primary aluminium in Asia. In June 2000, acquisition of controlling stake in Indian Aluminium Company Limited (Indal) with 74.6 per cent equity holding. [1: http://www.moneycontrol.com/company-facts/hindalcoindustries/history http://en.wikipedia.org/wiki/Hindalco_Industries Hindalco: The Novelis Acquisition Case by Vishwanath S R]

In July 2007, Hindalco announced it is acquiring the stake ofAlcanInc.'s in the Utkal Alumina Project located in Orissa.

Background of the Acquired Company (Novellis)Novelis is the world leader in aluminium rolling, producing an estimated 19 percent of the world's flat-rolled aluminium products. Novelis is the world leader in the recycling ofused aluminium beverage cans. The company recycles more than 35 billion used beverage cans annually. The company is No. 1 rolled products producer in Europe, South Americaand Asia, and the No. 2 producer in North America. With industry-leading assets andtechnology, the company produces the highest-quality aluminium sheet and foil productsfor customers in high -value markets including automotive, transportation, packaging,construction and printing. Our 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,Thyssen Krupp and others. Novelis represents a unique combination of the new and the5old. Novelis is a new company, formed in January 2005, with a new velocity, a newphilosophy and a new attitude. But Novelis is also a spin-off from Alcan and, as such,draws on a rich 90-year history in the aluminium rolled product marketplace . Novelis has adiversified product portfolio, which serves to the different set of industries vis--vis ithas a very strong geographical presences in four continents.Novelis was always a problem child. It was born in early 2005 as a result of a forced spin-off from its parent, the $ 23.6-billion aluminium giant and Canada-based Alcan. In 2003, Alcan won a hostile offer to wed French aluminium company Pechiney. But the marriage produced an unwanted child Novelis. Both Alcan and Pechiney had bauxite mines, facilities to produce primary aluminium, and rolling mills to turn the raw metal into products such as stock for Pepsi and Coke cans and automotive parts. But the US and European anti-trust proceedings ruled that the rolled products business of either Alcan or Pechiney had to be divested from the merged entity. Alcan cast out its rolled products business to form Novelis. It is now the worlds leadingproducer of aluminium-rolled products with a 19 per cent global market share. But in the spin-off process, Novelis ended up inheriting a debt mountain of almost $2.9 billion on a capital base of less than $500 million. That was just the beginning of its troubles. The situation is worse now.Though it marginally reduced debt, it made some losses too. On a net worth of $322 million,Novelis has a debt of $2.33 billion (most of it high cost). Thats a debt-equity ratio of 7.23:1.Soon, the unwanted child stumbled into another crisis. Novelis has a simple business model. It buys primary aluminium, processes it into rolled products like stock for soft drink cans,automotive parts, etc., and sells it to customers such as Coke and Ford. But the management took a wrong call on aluminium prices. In a bid to win more business from soft drink manufacturers, it promised four customers not to increase product prices even if raw material aluminium prices went up beyond a point. A few months after Novelis signed those contracts, aluminium prices shot up 39 per cent (between 30 September 2005 and 2006). To these four customers, Novelis was forced to sell its products at prices that were lower than raw material costs. These four account for 20 per cent of Noveliss $9-billion revenues. But the managements wrong judgement led to losses of $350 million (in 2006).More recent expansions were made through both acquisitions and modernization of existingmills, which increased Alcans can stock, sheet and foil rolling capabilities. Novelis was spun off to carry on most of the aluminium rolled products businesses operated by Alcan with an approach to business that is more focused on helping our customers perform and on transforming new ideas into practical product solutions.Novelis inherited its assets, know-how and structure from Alcan. In 1902, the Canadiansubsidiary of the Pittsburgh Reduction Company (later re-named Alcoa) was first chartered asthe Northern aluminium Company, Limited. When Alcoa divested most of its interests outside the United States in 1928, Alcan was formed as a separate company from Alcoa to assume control of most of these interests. In the following years Alcan expanded globally, building or acquiring hydroelectric power, smelting, packaging and fabricated product facilities run by approximately 88,000 employees in 63 countries.

The company had 36 operating facilities in 11 countries as of December 31, 2005. The tablesbelow present Net sales and Long-lived assets by geographical area (in millions). Net sales are attributed to geographical areas based on the origin of the sale. Long-lived assets are attributed to geographical areas based on asset location. In 2005, 2004 and 2003, 40%, 41% and 39%, respectively, of our total Net sales were to our ten largest customers.

Rationale of the Merger

From the Point of View of Acquirer (Hindalco)This acquisition was a very good strategic move from Hindalco. Hindalco will be able to shipprimary aluminium from India and make value-added products. The combination of Hindalco and Novelis establishes an integrated producer with low-cost alumina and aluminium facilities combined with high-end rolling capabilities and a global footprint. Hindalcos rationale for the acquisition is increasing scale of operation, entry into highend downstream market and enhancing global presence. It has presence in 11 countries and provides sheets and foils to automotive and transportation, beverage and food packaging, construction and industrial, and printing markets. Hindalcos rationale for the acquisition is increasing scale of operation, entry into highend downstream market andenhancing global presence. Novelis is the global leader (in terms of volumes) in rolled products with annual production capacity of 2.8 million tonnes and a market share of 19 per cent. It has presence in 11 countries and provides sheets and foils to automotive and transportation, beverage and food packaging, construction and industrial, and printing markets. Acquiring Novelis will provide Aditya Birla Group's Hindalco with access to customers such as General Motors Corp. and Coca-Cola Co. Indian companies, fueled by accelerating domestic growth, are seeking acquisitions overseas to add production capacity and find markets for their products. Tata Steel Ltd. spent US $12 billion last month to buy U.K. steelmaker Corus Group Plc. Novelis has capacity to produce 3 million tonne of flat- rolled products, while Hindalco has 220,000 tonne.This acquisition gives Hindalco access to higher-end products but also to superior technology,'' Hindalco plans to triple aluminium output to 1.5 million metric tonne by 2012 to become one of the world's five largest producers. The company has interests in telecommunications, cement, metals, textiles and financial services. After the deal was signed for the acquisition of Novelis, Hindalco's management issued press releases claiming that the acquisition would further internationalize its operations and increase the company's global presence. By acquiring Novelis, Hindalco aimed to achieve its long-held ambition of becoming the world's leading producer of aluminium flat rolled products. Hindalcohad developed long-term strategies for expanding its operations globally and this acquisition was a part of it. Novelis was the leader in producing rolled products in the Asia-Pacific, Europe, and South America and was the second largest company in North America in aluminium recycling, metal solidification and in rolling technologies worldwide. The benefits from this acquisition can be discussed under the following points: Post acquisitions, the company will get a strong global footprint. After full integration, the joint entity will become insulated from the fluctuation ofLME Aluminium prices. The deal will give Hindalco a strong presence in recycling of aluminium business.As per aluminium characteristic, aluminium is infinitely recyclable and recycling itrequires only 5% of the energy needed to produce primary aluminium. Novelis has a very strong technology for value added products and its latesttechnology Novelis Fusion is very unique one. It would have taken a minimum 8-10 years to Hindalco for building these facilities,if Hindalco takes organically route. As per company details, the replacement value of the Novelis is US $12 billion,so considering the time required and replacement value; the deal is worthfor Hindalco. The current revenue of hindalco is very much dependent on the aluminium prices and when the prices are high they make a larger margin, this not the case with rolling business which usually has a constant margin. For Hindalco to develop such technology will take a lot of time. According to Standard and Poors it would take 10 years and $ 12 billion to build the 29 plants that Novelis has with capacity of close to 3 million tonnes. The takeover of Novelis provides Hindalco with access to the leading downstream aluminium player in western markets. The purchase structurally shifts Hindalco from an upstream aluminium producer to a downstream producer.This is reflected in Novelis downstream product capacity of 3.0 mt compared to Hindalcosexisting primary capacity of 500 kt. Even with Hindalcos expansion plans to take primaryproduction to 1.5 mt by 2011, the group will remain a downstream aluminium producer. Novelis shareholders are required to approve the deal which h the companies expect to be completed by 2007.

From the Point of View of Acquirer (Novalis)Novelis being market leader in the rolling business has invested heavily in developing various production technologies. One of such technology is a fusion technology that increases the formability of aluminium. This means that it can be better used formed into the designrequirement by the car companies. All raw aluminium is processed so that it can be used inproducts. Fourty percent of the products are rolled products and Novelis is in leader in rollingbusiness with a market share of 20%. Any change in the raw material price is directly passed on to the customers who range from coca cola to automobile companies like aston martin. So to dominate the aluminium prices Novaliss acquisition by Hindalco was good for Novalis as well. Novalis got to expand its operations to many developing countries like India without facing pain of expansion.For various reasons Novalis wasnt performing any good in comparison to our firms in the industry for the following reasons:- Novelis inherited huge debt and couldnt pay back. Financial losses High debt equity ratio of 7.23:1 Chaos in financial reporting

Loss of credibility

Constant restructuring

Search for CEO

The Merger Deal and the Motivations

The Merger Deal:-Style: FriendlyIntention: OpportunisticPurpose: DefensivePredictability of Value: CalculativeStrategic Mode: Development and Expansion.Number of shares (m) 74.7 Price per share ($) 44.93 EV 6216million$Debt 2860 million$Equity value 3356 million$

Under the terms of the agreement, Novelis shareholders would receive $44.93 in cash for each outstanding common share at a 15 percent premium to the market price. AV Metals the A V Birla group's Canada-based special purpose vehicle (SPV) - would infuse $3.5 billion to finance Hindalco's proposed acquisition. Putting aside the $2.4 billion debt burden of Novelis, the cash component for financing the deal stood at $3.5 billion. Of this amount, AV Metals would take loans worth $2.8 billion from three financial institutions, namely UBS, ABN AMRO and Bank of America. This included a bridge loan of $1.4 billion at a coupon rate of 7.2 percent. Novelis already carried $2.4 billion of debt comprising of $1 billion term loans and $1.4 billion high-yield loans.

Motivations for both the companies:- Dominate the aluminium prices. Improved operations. Improved Market Share. Expanding its wings. Perfect Synergy. The Fusion Technology. Forward Integration

Impacts of the Merger on the Enlarged Entity Expand its operations Leverageable into becoming a globally strong entity. Increase in sales and profit. Increased Market Share. Reduction in debt equity ratio. Good value for share holders Increase in credibility.

yearsMar '09Mar '10Mar '11Mar '12

PAT348.832,879.353,558.704,351.85

L&T Finance acquisition of Fidelity India

Background of the Acquirer Company (L&T Finance acquisition)L&T Finance Company Limited(L&T Infra) is promoted by the engineering and construction conglomerate Larsen & Toubro Limited(L&T) and L&T Finance Holdings Limited (a subsidiary of L&T). It was originally incorporated as L&T Capital HoldingsLimited on May 1, 2008 under the Companies Act, as a public limited company, to carry on the business of investment/finance. Our Company received the certificate of commencement of business on May 15, 2008. Our Company subsequently changed the name of our Company to L&T Finance Holdings Limited pursuant to a special resolution passed by the shareholders at a general meeting dated September 1, 2010. Pursuant to the change of name, a fresh certificate of incorporation was granted to our Company by the RoC on September 6, 2010. It was set up with an initial capital of Rs. 500 crore and has expanded at a rapid rate since inception to reach an asset base of Rs.152 bn. L&T Finance provides a wide range of customized debt & equity products as well as Financial Advisory Services for the development of infrastructure facilities in the country with a focus on power, roads, telecom, oil & gas and port sectors. It is primarily engaged in short to medium term asset backed financing viz. construction equipment finance, transportation equipment finance, rural products finance, supply chain finance, corporate loans and leases, microfinance, etc.

Background of the Acquired Company (Fidelity) Fidelity Worldwide's India asset management arm, which was launched in 2004, managed assets worth about 88 billion rupees as of end-December, data from the Association ofMutual Funds in India showed. As per the assets under management, it was the 15th largest company in India's 44-player asset management industry.Assets managed by fund managers in India rose to 5.9 trillion rupees as of March 2011 from 2.3 trillion in March 2006, a study by research and Consultancy Company PricewaterhouseCoopers showed.[footnoteRef:2] [2: https://www.fidelity.com/india http://articles.economictimes.indiatimes.com/2012-03-27/news http://www.moneycontrol.com/company-facts/fidelityfinance/management http://www.hindustantimes.com/]

Rationale of the MergerFrom the Point of View of Acquirer (L&T Finance)Fidelity AMC has established itself in this space as one of the leading Asset Management Companies; with most of their schemes having performed well compared to their peers. This acquisition will catapult L&T Mutual Fund into the big league of Indian asset managers.L&T is a well-known, trusted and respected brand in our country. But it has recently shifted its focus on the financial services industry and is a relatively new player in this area compared to Fidelity. So L&T Finance will get help and support from Fidelity.Over the last two years the equity funds of Fidelity India were at their peak form due to the hard work put in by the likes of Sandeep Kothari and other members in his team who were managing the equity portfolio of Fidelity MF.Training programs will be available by Fidelity Research Directors to the L&T fund managers and analysts as a part of knowledge transfer for the period of transitionFrom the Point of View of Acquired (Fidelity) As growing competition, weaker markets and regulatory changes take a toll on the sector's profitability. The sharp fall in the Indian equity markets last year and the recent regulatory changes such as the removal of the entry load, or a commission charged by a mutual fund distributor for selling a product, have added to the competitive pressure. Fidelitys accumulated losses, which has clearly made them to exit.A source at Fidelity confirmed that L&T Finance holdings were not the highest bidder for the business. The continuity of management turned the deal in favour of L&T Finance. The equity fund managers at Fidelity will manage the funds as long as they are needed through the transition.

The Merger Deal and the MotivationsThe Merger Deal Fidelity Asset Management Company has been recently acquired by L&T Mutual Fund. As a result, a few schemes of Fidelity MF are all set to merge with L&T MF effective 16thNovember 2012. Industry sources said L&T has paid about Rs 530-550 crore to buy Fidelity, valuing the deal at 6.2% of Fidelity's total assets under management of Rs 8,881 crore as on December 31. L&T, which entered themutual fund industryin September 2009 by buying DBS Cholamandalam Asset Management, had assets worth Rs 4,616 crore as on December 31. L&T mutual fund with assets worth Rs 4,600 crore acquired the Rs 8,800 crore-Fidelity MF. L&T Finance has agreed to buyFidelityWorldwide Investment's Indian mutual fund business, becoming the 10th-biggestequity fund housein a highly fragmented and competitive market marked by wafer-thin profitability. The financial services arm of construction major Larsen & Toubro pipped rivals, includingHDFC Asset ManagementandPramerica, to purchase FIL. The deal will immediately boost L&T's assets to Rs 13,500 crore, making it the 13thbiggest fund and the 10th-largest on the basis of equity. A large part of the L&T Finance business is lending. This is part of the move to increase fee-based income which is a steady business over mid-to-long term. Shares of L&T Finance rose 4.6% to close at Rs 49.80 on Tuesday after a late spurt. "It will be a turning point for L&T Mutual Fund and sad for the mutual fund industry, because a good fund house has decided to walk out of the country. The following are the schemes to be merged -Fidelity Flexi Gilt Fund with L&T Gilt FundFidelity Wealth Builder Fund-Plan A with L&T Monthly Income PlanFidelity Wealth Builder Fund-Plan B & Plan C with L&T MIP Wealth Builder FundL&T Contra Fund and Fidelity India Value Fund to form L&T India value FundFidelity India Growth Fund to form L&T India large Cap FundMotivations for both the companiesThere have been several acquisitions of Indian mutual funds with valuations ranging from 1.6% to 13% of AUM.The deal will immediately boost L&T's assets to Rs 13,500 crore, making it the 13thbiggest fund and the 10th-largest on the basis of equity.

Increase in sales and profit and Market Share.

Impacts of the Merger on the Enlarged EntityPursuant to the acquisition of Fidelity's Indian mutual fund business by L&T Finance Limited (LTF), a subsidiary of L&T Finance Holdings Limited (LTFH). The names of schemes are changed as follows:Old Name of the SchemeNew Name of the Scheme

Fidelity Equity FundL&T Equity Fund

Fidelity Tax Advantage FundL&T Tax Advantage Fund

Fidelity India Special Situations FundL&TIndia Special Situations Fund

Fidelity International Opportunities FundL&T Indo Asia Fund

Fidelity Flexi Bond FundL&T Flexi Bond Fund

Fidelity Ultra Short Term Debt Fund *L&T Low Duration Fund

Fidelity Fixed Maturity Plan Series VI (comprising of six plans (Plan A to F), having separate portfoliosL&T Fixed Maturity Plan Series VI

Fidelity Short Term Income FundL&T Short Term Income Fund

Fidelity Cash FundL&T Cash Fund

Fidelity Global Real Assets FundL&T Global Real Assets Fund

Fidelity India Prudence Fund ***L&T India Prudence Fund

Fidelity India Equity and Gold Fund ****L&T India Equity and Gold Fund

Upon completion of the proposed transaction certain schemes of Fidelity Mutual Fund will be merged with certain schemes of L&T Mutual Fund. Consequently, the transferee schemes will be the surviving schemes as listed below:Transferor SchemesTransferee / Surviving Schemes

Fidelity Flexi Gild FundL&T Gilt Fund

Fidelity Wealth Builder Fund Plan AL&T Monthly Income Plan

Fidelity Wealth Builder Fund Plan BL&T MIP Wealth Builder Fund

Fidelity Wealth Builder Fund Plan CL&T MIP Wealth Builder Fund

Hike in recurring expense ratio:- With effect from November 16, this international fund will have a recurring expense of upto 2.5 per cent as against 0.75 per cent earlier. It is noteworthy that this fund was investing in Fidelitys own global fund (feeder route). Now with the two management being different, the investment management and advisory fees is hiked from 0.05 per cent to 0.75 per cent. This is the primary reason for the increase in expense. This will result in more charges on your NAV.With an excellent blend of equity and debt assets, combined with a great brand in L&T and a complementary distribution network, this provides a great platform for L&T Mutual Fund to potentially attain market leadership.yearsMar '09Mar '10Mar '11

PAT391.17454.8729.19