Under the guidance of our respected Professor-

Prof S.V.Bidwai

Submitted by:

Pranav Jalan 08BS0002278

Pravesh Surana 08BS0002328

Prerna Singhal 08BS0002

Priyanka Bhuwania 08BS0002372

Rahul Chandalia 08BS000

Rahul Jain 08BS0002500

Ravi Somani 08BS0002638

Rohit Kothari 08BS0002751

Date 12Date 12thth November;09 November;09

Introduction Past History M & A Process Reasons and Issues Strategic Approach to M&A Takeover Strategies and Defenses Issues and Defects Attributes to effective acquisition Legal Procedure Caselets:

P&G and Gillette Tata-JLR Tata-Corus Adidas-Reebok

Case Study

Corporate restructuring is the reorganization of corporate entities. Thereorganizing can be within the company itself or with the involvement of othercorporate entities. A strategy to change business or financial structure. Radical changes in composition Process of redesigning. Example ‟ GE witnessed tremendous growth during tenure of Jack Welch Necessity when the company has grown to the point. Crucial whenever there is a major shift. Continuous process. Result - leaner, more efficient, better organized, and better focused .

Financial Restructuring ‟ Includes raising the finance, decisions regarding mergers, joint ventures and alliances

Operational Restructuring ‟ Reformulate the company on basis of change in technology and environment requirements

Organizational Restructuring ‟ In order to increase efficiency redefining the organizational structure or the processes or the systems.

Market Restructuring ‟ Is the addition of a newer product or shifting one product or segment to another or enlarge the market for the exiting products.

Culture. Inadequate focus and commitment of top

management towards change program "What is in it for me" attitude Mind set/resistance to change Lack of involvement of employees Poor planning Resource Availability Cost and time Poor communication

Expansion Sell offs Corporate control Changes in ownership structure..

A MERGER happens when two firms, often about same size, agree to go forward as a new single company rather than remain separately owned & operated by pooling all their resources together, to create a sustainable competitive advantage. For example,both Daimler-Benz & Chrysler ceased to exist when two firms merged, and a new company ’Daimler-Chrysler’ was created.

When a Company takes over another one & clearly becomes the new owner ,the purchase is called ‘ACQUISITION’. Unlike mergers, acquisitions can sometimes be unfriendly. i.e., when a firm tries to takeover another by adopting hostile measures.

Mergers and Acquisitions M&A ,have become very popular strategy all over the world in last 3 decades.

The value M &A WORLDWIDE increased from $464 Billion in 1990 to $3.4 trillion in 1999-2000, followed by sharp decline during 2001 & 2002.It has again shown improvement from 2003 onwards.

India born Laxmi Nivas Mittal has taken over Arcelor in Europe , to form a largest Steel making Company in Europe-”Arcelor-Mittal.”(117 Mtons/Year-Global) .

Tata Steel-Corus(UK) Acquisition by Tata Steel for $12 Billion is very significant and a landmark for the Indian Corporate World. (28 Mtons/Annum-2006)

M&A means and includes

ACQUISITIONSMERGERS

PURCHASE OF UNITTAKE OVERSALLIANCES

DIVESTITURESSELL OFFS

DEMERGERS

OWN,RESTRUCT.GOING PRIVATE

LEVERAGED Buy OUTS

ORG.RESTRUCT.REDESIGN

PERFORMANCE ENHANCEMENT PROGRAMMES

Company-specific RiskCost-of-capital reduction

Operating SynergyScale EconomiesImprove margins

Financial SynergyRedeploy capital

Increase ROI

Managerial Synergy

Improve management or replace inefficient one

Market Valuation Release “value”

The 1895-1904 Merger Movement.

The 1922-1929 Merger Movement.

The 1940-1947 Merger Movement.

The 1960s Merger Movement.

Post 1980 Merger Movement.

Majorly of Horizontal mergers.

Merging for Monopoly in order to

eliminate competition.

Case: JP Morgan merged with Carnegie

Steel.

Ended in 1904 due to severe economic

recession.

Majorly of Vertical mergers.

Merging for Oligopoly.

Case: FORD- manufacturing tyres of car

from rubber plantations in Brazil.

Ended in 1929 with stock market crash

of Black Tuesday.

Conglomerate Merger.

Occurred during booming American

economy.

Hostile takeover.

Birth of LBO.

Mega-Merger & Cross border merger.

A = Amalgamating Company: Ceases to Exist B = Amalgamated Company B receives all of A’s assets and liabilities Shareholders of A receive shares in B and maybe

other benefits like debentures, cash

Transfer assets and liabilitiesA B

A, B and C = Amalgamating Companies: Cease to exist

D = Amalgamated Company: may or may not have existed before Merger

All assets and liabilities of A, B and C transferred to D

Shareholders in A,B and C get shares in D.

A

DB

C

Demergers are one type of spin-offs: under s. 391

A = Demerging Company B = Resulting Company: may or may not have

existed earlier A transfers undertaking to B B issues shares to shareholders of A

X Y Y

Company BCompany A

Transfers undertaking Y

Shareholders of A

Issues shares

1. Develop a strategic plan for the business.(Business Plan)

2. Develop an acquisition plan related to the strategic plan.( Acquisition Plan)

3. Search companies for acquisitions.(Search)4. Screen and prioritize potential companies.

(Screen)5. Initiate contact with target.6. Refine valuation, structure the deal and

develop financial plan.( Negotiation)7. Develop plan for integrating the acquired

business. (Integration Plan)8. Obtain all necessary approvals and implement

closing.9. Implement post closing integration.10. Conduct a post closing evaluation.

According to Drucker, financial factors provide stimulus for merger activity. He says that mergers should follow five rules, in order to be economically viable.

The acquirer must contribute something to the acquired company.

A common core of unity is required. The acquirer must respect the business of the acquired

company. Within a year or so, the acquiring company must be able

to provide top management to the acquired company. Within the first year of the merger, managements in both

companies should receive promotions across the entities

Horizontal mergers: A horizontal merger involves two firms operating and competing in

the same kind of business activity. Textiles firm merges raw materials firm.

- Example: Exxon - Mobil Vertical mergers:

Vertical mergers occur between firms in different stages of production operation. - Example: Helene Curtis and Unilever

Conglomerate Mergers: - Conglomerate mergers involve firms engaged in unrelated types

of business activity - Example: General Electric buying NBC television

Concentric Mergers - Based on specific management functions where as the

conglomerate mergers are based on general management functions

- Example: Citigroup (principally a bank) buying Salomon Smith Barney (an investment banker/stock brokerage operation

Problems inProblems inAchieving SuccessAchieving Success

Problems inProblems inAchieving SuccessAchieving Success

IntegrationIntegrationdifficultiesdifficulties

Inadequate Inadequate evaluation of targetevaluation of target

Too muchToo muchdiversificationdiversification

Large orLarge orextraordinary debtextraordinary debt

Inability toInability toachieve synergyachieve synergy

Managers overlyManagers overlyfocused on acquisitionsfocused on acquisitions

Too largeToo large

IncreasedIncreasedmarket powermarket power

OvercomeOvercomeentry barriersentry barriers

Lower riskLower riskcompared to compared to

developing new developing new productsproducts

Cost of newCost of newproduct developmentproduct development

Increased speedIncreased speedto marketto market

IncreasedIncreaseddiversificationdiversification

Avoid excessiveAvoid excessivecompetitioncompetition

M & AM & A

Reasons forReasons forM & AM & A

Reasons for M & AReasons for M & AReasons for M & AReasons for M & A

Example:Example: Belgian-Dutch Fortis’ acquisition of American Belgian-Dutch Fortis’ acquisition of American Banker’s Insurance GroupBanker’s Insurance Group

Example:Example: Watson Pharmaceuticals’ acquisition of TheraTechWatson Pharmaceuticals’ acquisition of TheraTech

Example: Example: British Petroleum’s acquisition of U.S. AmocoBritish Petroleum’s acquisition of U.S. Amoco

Increased Market PowerAcquisition intended to reduce the competitive balance of the Acquisition intended to reduce the competitive balance of the industryindustry

Overcome Barriers to EntryAcquisitions overcome costly barriers to entry which may Acquisitions overcome costly barriers to entry which may make “start-ups” economically unattractivemake “start-ups” economically unattractive

Buying established businesses reduces risk of start-up Buying established businesses reduces risk of start-up venturesventures

Lower Cost and Risk of New Product Development

Example:Example: General Electric’s acquisition of NBCGeneral Electric’s acquisition of NBC

Example:Example: Kraft Food’s acquisition of Boca BurgerKraft Food’s acquisition of Boca Burger

Example:Example: CNET’s acquisition of mySimonCNET’s acquisition of mySimon

Reasons for M & AReasons for M & AReasons for M & AReasons for M & A

Increased Speed to MarketClosely related to Barriers to Entry, allows market entry in a Closely related to Barriers to Entry, allows market entry in a more timely fashionmore timely fashion

Diversification

Quick way to move into businesses when firm currently lacks Quick way to move into businesses when firm currently lacks experience and depth in industryexperience and depth in industry

Reshaping Competitive ScopeReshaping Competitive Scope

Firms may use acquisitions to restrict its dependence on a Firms may use acquisitions to restrict its dependence on a single or a few products or marketssingle or a few products or markets

Problems with M & AProblems with M & A

Example:Example: Marks and Spencer’s acquisition of Brooks BrothersMarks and Spencer’s acquisition of Brooks Brothers

Example:Example: Intel’s acquisition of DEC’s semiconductor divisionIntel’s acquisition of DEC’s semiconductor division

Example:Example: AgriBioTech’s acquisition of dozens of small AgriBioTech’s acquisition of dozens of small seed firmsseed firms

Integration Difficulties

Differing financial and control systems can make integration of Differing financial and control systems can make integration of firms difficultfirms difficult

Inadequate Evaluation of Target““Winners Curse” bid causes acquirer to overpay for firmWinners Curse” bid causes acquirer to overpay for firm

Large or Extraordinary DebtLarge or Extraordinary Debt

Costly debt can create onerous burden on cash outflowsCostly debt can create onerous burden on cash outflows

Example:Example: Ford and JaguarFord and Jaguar

Example:Example: Quaker Oats and Quaker Oats and SnappleSnapple

Example:Example: GE--prior to selling businesses and refocusingGE--prior to selling businesses and refocusing

Inability to Achieve Synergy

Justifying acquisitions can increase estimate of Justifying acquisitions can increase estimate of expected benefitsexpected benefits

Problems with M & AProblems with M & A

Overly DiversifiedAcquirer doesn’t have expertise required to manage Acquirer doesn’t have expertise required to manage unrelated businessesunrelated businesses

Managers may fail to objectively assess the value of outcomes Managers may fail to objectively assess the value of outcomes achieved through the firm’s acquisition strategyachieved through the firm’s acquisition strategy

Managers Overly Focused on AcquisitionsManagers Overly Focused on Acquisitions

Present Situation Strategy

Growing steadily but in a mature market with limited growth

Acquire a company in a younger market with higher growth rate

Operating at maximum productive capacity

Acquire a company making similar products operating substantially below capacity

Under-utilizing management resources

Acquire a company into which the talents can be extended

Marketing an incomplete product range , or having the potential to sell other products or services to your existing customers

Acquire a company with product range which is complementary

Lacking key clients in a targeted sector

Acquire a company with right customer profile

Need to increase market share Acquire an important competitor

Need to widen capability Acquire a company with key talents and/or technology

Need more control of suppliers or customers

Acquire a company which is, or which gives access to a significant customer or supplier

Preparing for floatation but need to improve balance sheet

Acquire a company with the right customer profile

Kinds of takeovers: Negotiated or Friendly Takeover The existing management of a company decides to give

away the control of the company to another group on terms and conditions mutually agreed upon by both the parties.

Open market or Hostile Takeover A group acquires shares of a company from the open

market in order to take control of the company

Eg:Autoriders’ Hostile Takeover Bid for Saurashtra Cement

Bail-out Takeover When a financially sick company is taken over by a

profit earning company in order to bail out the former ,it is called a bail-out takeover.

Tender Offer General offer made publicly and directly to a firm’s

shareholders to buy their stock at a price well above the current market price.

Street Sweep The acquirer accumulates large amounts of the stocks in the

target company before making the open offer Bear Hug The acquirer tries to put pressure on the management of the

target firm by threatening to make an open offer Strategic Alliance An acquirer offers a partnership rather than a buyout of the

target firm. Brand Power The acquiring firm enters into an alliance with other

powerful brands to displace the competitor’s brand.

Economic Issues Legal Issues Public Policy Issues Powers of financial institutions Proxy wars

Effects on the Acquirer Company Effects on the Target company Effects on the Shareholders of the

Target Company Effects on the Shareholders of Acquiring

Company

Golden Parachutes Poison Put Anti-takeover Amendmentso Super majority amendmentso Fair price amendmentso Classified boardso Authorization of preferred stock Poison Pill Defense Targeted Share Repurchase and

Standstill Agreements Other Takeover Defences

A fundamental characteristic of merger is that the acquiring company takes over the ownership of other companies and combines their operations with its own operations.

An acquisition may be defined as an act of acquiring effective control by one company over the assets or management of another company without any combination of companies.

Attributes of Effective Acquisitions

Attributes of Effective Acquisitions

Complementary Assets or ResourcesBuying firms with assets that meet current needs to build competitiveness

++

Friendly AcquisitionsFriendly Acquisitions

Friendly deals make integration go more smoothly

++

Careful Selection ProcessCareful Selection Process

Deliberate evaluation and negotiations is more likely to lead to easy integration and building synergies

++

Maintain Financial SlackMaintain Financial SlackProvide enough additional financial resources so that profitable projects would not be foregone

++

Attributes of Effective AcquisitionsAttributes of Effective Acquisitions

Low-to-Moderate DebtLow-to-Moderate DebtMerged firm maintains financial flexibility

++

FlexibilityFlexibilityHas experience at managing change and is flexible and adaptable

++

Emphasize Innovation Emphasize Innovation Continue to invest in R&D as part of the firm’s overall strategy

++

TRANSACTION STRUCTURE•Companies Act•Income Tax Act•Stamp Acts•Competition Act

TRANS-BORDER TRANSACTIONS•Foreign Exchange Management Act

LISTED COMPANIES•SEBI Regulations•Stock Exchange – Listing Agreement

Sec 391 – 394 of Indian companies act covers M & A.

Examination of object clause Approval from the board Intimation to share holders and

creditors. Approval from share holders and

creditors.- 75% of SH and creditors to approve.

Application to National Company Law Tribunal (NCLJ)

Intimation to SEs

Pettion to NCLT for approval Filing order with ROC Transfer of assets and Liabilities Issuance of shares/cash

THE DEALTHE DEAL

Sep 20, 06 : CORUS uses the strategy to work with low cost producer. Oct 06, 06 : Initial offer by TATA is considered to be too low. Oct 17, 06: TATA kept its offer to 455 pence per share. Oct 20, 06 : CORUS accepts the offer of £4.3 billion. Oct 23, 06 : Brazilian Steel Group CSN counter-offer to TATA’s offer. Oct 27, 06 : CORUS criticized by JCB for acceptance of TATA’s offer. Nov 18, 06 : The CSN approaches Corus With an offer of 475 pence per share Nov 27, 06 : Board of Corus decides to give more time for shareholders to

decide whether it issue forward a formal offer. Dec h18,06 : Tata increases its original bid for Corus 500 pence per share,

then CSN made its counter bid at 515 pence per share in cash Jan 31, 07 : Tata ad agreed to offer Corus investors 608 pence per share in

cash Apr 02, 07 : Tata steel manages to win acquisition to CSN and has the full

voting support from Corus shareholders

TATA Acquired CORUS on 2nd April 2007 which is 4 times larger than its size. The deal price was $ 12 Billion. TATA Steel,the winner of the auction for CORUS declares a bid of 608 Pence per

share. In 2005 when the deal was started the price per share was 455 pence. TATA Surpassed the final bid from Brazilian steel maker ‘COMPANHIA SIDERURGICA

NACIONAL’ (CSN) of 603 pence per share. The combined entity has become the world’s fifth largest steelmaker after the deal. For this deal TATA has finance only 4 Billion $ from internal company resources. TATA Have secured funding commitments from its advisors. These advisors were Deutshe bank, ABN Amro and Standard Chartered.

The initial motive behind the deal was not CORUS revenue size but rather its market value.

To compete on global scale because then TATA was just at 56th rank in steel production.

CORUS holds a number of Patents and R & D facility.

Acquiring Corus will give Tata access to European customers of steel.

Acquisition cost will be lower then setting up new green field plants and marketing channel.

FOR TATAFOR TATA

To extend its Global reach through TATA. To get access to Indian Ore reserves, as well

as virgin market for steel. To get access to low cost materials. Total Debt of Corus was GBP 1.6bn Saturated market of Europe. Better facilities and lower cost of production Employee cost was 15 % (TATA- 9%) Profit margin was 3.4% (TATA- 17%)

FOR CORUSFOR CORUS

Major Acquisitions

Target Buyer Value ($ bn) Year

Arcelor Mittal Steel 31 2006

NKK Corp Kawasaki Steel 14.1 2001

LMM Holdings Ispat Intl 13.3 2004

Corus TATA 12.0 2006

Krupp AG Thyssen 8.0 1997

Dofasco Arcelor 5.2 2005

Intl Steel Mittal Steel 4.8 2005

COMPANYCOMPANY CAPACITY inCAPACITY in

(million tones)(million tones)

1.Arcelor-Mittal

2.Nippon steel

3.Posco

4.JEF steel

5.Tata steel- Corus

110.0

32.0

30.5

30.0

27.7

Ford, a leading automaker and one of the largest MNC in the global automobile industry.

Ford acquired Jaguar from British Leyland Limited in 1989 for US$ 2.5 billion

Ford bought Land Rover in 2000 for US$ 2.7 billion from BMW Over the years, the operations of both Jaguar and Land Rover were fully

integrated Ford reported losses of US$ 12.7 billion in the year 2006 Ford conducted strategic reviews on the two brands and in June 2007

announced that it was considering selling JLR Ford was concerned more about the interest of the workers employed

with JLR than the price JLR’s labour union were against selling to private equity firms to be

assure of job security On January 03,2008,Ford announced that it had chosen Tata

Motors for the JLR deal and had entered into focused negotiations with the company.

On March 26,2008, Tata Motors agreed to pay US$ 2.3 billion in cash for a 100% acquisition of the businesses of JLR.

Tata Motors raised a bridge loan of US S$ 3 billion through a syndicate of banks

The loan was raised through Tata Motors UK, a special purpose vehicle and a 100% subsidiary of Tata Motors

The interest on the bridge loan was linked to LIBOR(London Inter Bank Offer Rate)

Tata also proposed to raise around US 500 to 600 million through an international issue

Sales of JLR declined by 11.4% during the 2nd quarter ending Sep.2008

Tata motors had to pump in funds to keep JLR on the move By the end of Nov.2008,198 employees opted for voluntary

retirement and 400 more decide to leave by Jan 2009 With not much of cash generation internally, additional

investments of funds would only add to the debt and interest burden of the company

In early Jan 2009,JLR announced 450 jobs cut Announced that managers would not receive any bonuses in 2009

while salary raises would be deferred till Oct 2009 For the quarter ending Dec2008,the sales volumes of JLR

decreased by 35.2% to 49,186 Total car sales in the UK in the year 2009 would be at 1.78 million

as against 2.4 million in 2008 By the end of 2008,retail vehicle sales were reported at 10.8

million-around 2 million lower than the sales reported in 2007 Consumers were delaying the purchase of new vehicles due to

lack of consumer loans

Biggest merger in the history of Consumer goods

P&G acquired Gillette for $57b to become the world’s largest consumer goods company

Annual Sales of the combined entity:$60.7b

After purchase of Gillette P&G will have $21b brands with market cap of $200b

P&G paid .975$/share(20% premium),later buyback of shares worth $18-22b over 12-18 months

Merging companies: similarity in Corporate history

Merger based on a different model where innovation was the focus rather than the scale

Regulatory concerns: Product overlaps Consumer goods after 1980s

P&G strength: Women’s personal care products Gillette strength: Men’s grooming category Complementary in strength cultures and vision

to create potential for superior sustainable growth

Gillette stock climbed 50% since 2003,profits jumped on premium products

Acquisition added about 20% to P&G sales, long term sales growth estimate to 5-7% a year

Operating margin expected to grow by 25 % by 2015 from 19% in 2003

The companies expected cost savings of $14-16 bn from combining back-room operations and new growth opportunities.

more resources to enable intensive collaborative supply chain initiatives in a more cost-effective way.

merger would also bring down the advertising and media costs owing to greater bargaining power

Opportunities in developing markets: Gillette would give exposure to P&G in emerging economies like India and Brazil, while P&G would distribute Gillette products in China

It will give P&G the much needed boost to further strengthen its product categories where at present it has negligible presence

The deal will help Gillette in improving its inventory days.

The merger would result in around 6,000 job cuts, equivalent to 4% of the two companies' combined workforce of 140,000. Most of the downsizing will take place to eliminate management overlaps and consolidation of business support functions. 

Cultural problems absence because of geographical proximity

P&G is considered a promote-from-within company, and already had a lot of executive talent at the top. Therefore, absorbing Gillette's management to their satisfaction could be difficult

P&G's ability to handle this massive cultural assimilation would decide the success or failure of this acquisition.

Overlaps of some brands

Pressure for competitors in the industry competitors could launch new products

or strengthen their supply chain relationships during this time to gain an edge

P&G-Gillette combination could be a transformative deal for the industry because of Gillette's growth potential. Analyst forecasted that this deal could lead to further consolidation in the industry