DISSERTATION REPORT ON A STUDY ON PERFORMANCE AND EFFICIENCY OF MERGER AND ACQUISITION IN RETAIL SECTOR By Reema Jain A0101911257MBA General Class of 2013

Under the Supervision ofMs. Bhavna Ranjan In Partial Fulfillment of Requirements for the degree of Master of Business Administration-General At AMITY BUSINESS SCHOOL AMITY UNIVERSITY UTTAR PRADESHSECTOR 125, NOIDA - 201303, UTTAR PRADESH, INDIACHAPTER 1: INTRODUCTION

The process of mergers and acquisitions has gained substantial importance in today's corporate world. It has become a routine affair to hear about the immense numbers of corporate restructurings taking place these days. Several companies have been taken over and several have undergone internal restructuring, whereas certain companies in the same field of business have found it beneficial to merge together into one company. The process of mergers and acquisitions is extensively used for restructuring the business organizations. In India, the concept of mergers and acquisitions was initiated by the government bodies. Some well known financial organizations also took the necessary initiatives to restructure the corporate sector of India by adopting the mergers and acquisitions policies. The Indian economic reforms since 1991 have opened up a whole lot of challenges both in the domestic and international spheres. The increased competition in the global market has prompted the Indian companies to go for mergers and acquisitions as an important strategic choice. The trends of mergers and acquisitions in India have changed over the years. The immediate effects of the mergers and acquisitions have also been diverse across the various sectors of the Indian economy.All our daily newspapers are filled with cases of mergers, acquisitions, spin-offs, tender offers, & other forms of corporate restructuring. Thus important issues both for business decision and public policy formulation have been raised. No firm is regarded safe from a takeover possibility. On the more positive side, Mergers & Acquisitions may be critical for the healthy expansion and growth of the firm. Successful entry into new product and geographical markets may require Mergers & Acquisitions at some stage in the firm's development. Successful competition in international markets may depend on capabilities obtained in a timely and efficient fashion through Mergers & Acquisitions. Many have argued that mergers increase value and efficiency and move resources to their highest and best uses, thereby increasing shareholder value. To opt for a merger or not is a complex affair, especially in terms of the technicalities involved. In this research, I have discussed almost all factors that the management may have to look into in a merger deal.

1.1 OBJECTIVE AND SCOPE The objective of this project report is to understand the concept of mergers and acquisitions. The phenomenon of M&A has gained substantial importance and has become a prominent aspect of running corporate firms in the 21st century and the report tries to study this concept as comprehensively as possible. The project report examines the mergers and acquisitions (M&A) in India as well as International, different types of mergers, the pros and cons of M&A for the various stakeholders. The research also focuses on the critical issues of financing and valuation of companies during M&A. Further, the study also examines the procedure followed in a typical M&A deal.All this information is supplemented by a critical analysis of the real life deal in India and abroad.1.2 SIGNIFICANCE OF THE STUDYThis research could be further used for: Any sort of assistance for the research on the similar topic. To find out the effect of FDI investment in retail sector in India. It will help equity investors in finding out the value of their investment. A properly prepared business valuation provides management with insightful information, which will help them to identify company strengths and weaknesses that affect value. A periodically prepared valuation can serve as a measurement tool to assess managements effectiveness and business success. The purpose of valuing a company is to determine a representation of the overall worth of a business entity. The valuation of the business based on some selected valuation techniques. The use of these methods can affect the value as well as the information gained from the valuation process. To find out the pre merger and post merger value of the company.

1.3 MERGERS AND AQUISITIONS

MergerMerger is a financial tool that is used for enhancing long-term profitability by expanding their operations. Mergers occur when the merging companies have their mutual consent as different from acquisitions, which can take the form of a hostile takeover. AcquisitionsAcquisitions or takeovers occur between the bidding and the target company. There may be either hostile or friendly takeovers. Reverse takeover occurs when the target firm is larger than the bidding firm. In the course of acquisitions the bidder may purchase the share or the assets of the target company.

Reasons for M&A SIZE: Size is a great advantage in relation to costs. It assists in enhancing profitability through cost reduction resulting from economies of scale, operating efficiency and synergy. These savings could be in various areas e.g. finance, administration, capital expenditure, production and warehousing. RISKS: A company with good profit record and strong position in its existing line of business, may wish to reduce risks. Through business combination the risks is diversified, particularly when it acquires businesses whose income streams are not correlated. COMPETITION: It helps to limit the severity of competition by increasing the company's market power where a company takes over the business of its competitor. Thus, the company, conscious of its monopolistic position, may, for instance, raise prices to earn more profit. REDUCE LOSS: In a number of countries, a company is allowed to carry forward its accumulated loss to set-off against its future earnings for calculating its tax liability. A loss-making or sick company may not be in a position to earn sufficient profits in future to take advantage of the carry forward provision. If it combines with a profitable company, the combined company can utilize the carry forward loss and saves taxes SYNERGY: There are many ways in which business combination can result into financial synergy and benefits. This helps in eliminating the financial constraint, deploying surplus cash, enhancing debt capacity and lowering the financial costs. GROWTH: Growth is essential for sustaining the viability, dynamism and value-enhancing capability of a company. A company can achieve its growth objectives by expanding its existing markets or by entering in new markets. For instance, if the company cannot grow internally due to lack of physical and managerial resources, it can grow externally by combining its operations with other companies through mergers and acquisitions. RETURN: A business with good potential may be poorly managed and the assets underutilized, thus resulting in a low return being achieved. Such a business is likely to attract a takeover bid from a more successful company, which hopes to earn higher returns.

Types of mergers and acquisitions From the perspective of business structures, there is a whole host of different mergers. Types of mergers distinguished by the relationship between the two companies that are merging: Horizontal merger - two companies that are in direct competition and share the same product lines and markets. Vertical merger - a customer and company or a supplier and company. 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. Conglomeration - two companies that have no common business areas.

Aim of mergers and acquisitions One plus one makes three: this equation is the special alchemy of a merger or an acquisition. The key principle behind buying a company is to create shareholder value over and above that of the sum of the two companies. Two companies together are more valuable than two separate companies - at least, that's the reason behind M&A. Strong companies will act to buy other companies to create a more competitive, cost-efficient company. The companies will come together hoping to gain a greater market share or to achieve greater efficiency. Because of these potential benefits, target companies will often agree to be purchased when they know they cannot survive alone. Except the obvious synergy effect, the other important motives for M&A are: operating synergy financial synergy diversification economic motives horizontal integration vertical integration tax motives

Steps in valuation Analyzing Historical Performance Forecast Performance Evaluate the companys strategic position, companys competitive advantages and disadvantages in the industry. This will help to understand the growth potential and ability to earn returns over WACC. Develop performance scenarios for the company and the industry and critical events that are likely to impact the performance. Forecast income statement and balance sheet line items based on the scenarios. Check the forecast for reasonableness. Estimating The Cost Of Capital

Estimating the Cost Of Equity Financing CAPM The Arbitrage Pricing Model (APM) Estimating The Continuing Value

Calculating and Interpreting Results Calculating And Testing The Results Interpreting The Results Within The Decision Context

1.4Valuation MethodologiesProperty (including land and real estate assets) is an essential element of many businesses. It is often used as collateral for borrowing by the owners and is one of the key factors of production in most businesses. The value of holding property to the business needs to be measured against the return that the equity could achieve both within the business and elsewhere. Usually, in business decisions including mergers and acquisitions, investors will usually want to review financial statements: balance sheet, profit and loss account, auditors' and directors reports - for the current status and a report on recent history business plan

1.5MERGERS UNDERTAKENFollowing mergers will be considered for the study: Wallmart and Dollar General Welspun India and Welspun Global brands Ltd.

WAL-MART STORES INC-AQUIRING COMPANYWalmart Stores Inc operates retail stores in various formats around the world. The company earns the trust of its customers everyday by provideing an assortment of merchandise and services at every day lower prices (EDLP), by fostering a culture that rewards and embraces mutual respect integrity and diversity. Walmart's operations comprise 3 business segments: Walmart Stores, Sam's CLub and International. Walmart Stores segment is the largest segment of the company's business, accounting for 64% of its net sales during the fiscal year ended Jan 31, 2011, and operates stores in 3 different formats in US, as well as walmarts online retail operations, walmart.com. Sam's Club consists of membership warehouse clubs. It accounted for 11.8% of company's net sales during FY 2011.

DOLLAR GENERAL-TARGET COMPANYDollar General is the largest discount retailer in the United States by number of stores with over 10,000 neighborhood stores in 40 states. Dollar General helps shoppers Save time and Save money. Every day by offering quality private and national branded items that are frequently used and replenished, such as food, snacks, health and beauty aids, cleaning supplies, basic apparel, house wares and seasonal items at everyday low prices in convenient neighborhood stores. Dollar General is among the largest retailers of top-quality products made by America's most trusted manufacturers such as Procter & Gamble, Kimberly Clark, Unilever, Kellogg's, General Mills, Nabisco, PepsiCo and Coca-Cola.

WELSPUN INDIA LTD.-AQUIRING COMPANYWelspun India Ltd, part of US$ 3.5 billion Welspun Group is one of the top three home textile manufacturers in the world and the largest home textile company is Asia. With a distribution network in 32 countries and manufacturing facilities in India, it is the largest exporters of home textile products from India. Supplier to 14 of Top 30 global retailers, the company has marquee clients like Wal-Mart, J C Penny, and Macys to name a few.

WELSPUN GLOBAL BRANDS LTD.-TARGET COMPANYWelspun Global Brands Ltd. (WGBL) was formed after the demerger of Welspun India Ltd. into two separate companies. The demerger was announced in September 2008 and WGBL was formally launched in March 2009. WGBL is solely responsible for the sales and marketing division of the Home Textile business of Welspun. With the demerger, WGBL allows focus on its own business vertical thereby enabling better business control, flexibility on business operations and leveraging international focus of the group.WGBL is today the most preferred supplier to 14 out of 30 retailers in the World. It has some of the most prestigious brands under its banner and is second to none in product innovation and design. With a strong management and team of talented workforce spread across United Kingdom, United States,Europe and India, WGBL is on its way to be the largest and the most valued Home Textile Company in the World.

1.6 RETAIL SECTOR IN INDIAIt is one of the pillars of its economy and accounts for 14 to15% of its GDP. The Indian retail market is estimated to be US$ 450 billion and one of the top five retail markets in the world byeconomic value. India is one of the fastest growing retail markets in the world, with 1.2 billion people. In November 2011, India's central government announced retail reforms for both multi-brand stores and single-brand stores. These market reforms paved the way for retail innovation and competition with multi-brand retailers such as Walmart, Carrefour and Tesco, as well single brand majors such as IKEA, Nike, and Apple.The announcement sparked intense activism, both in opposition and in support of the reforms. In December 2011, under pressure from the opposition, Indian government placed the retail reforms on hold till it reaches a consensus.In January 2012, India approved reforms for single-brand stores welcoming anyone in the world to innovate in Indian retail market with 100% ownership, but imposed the requirement that the single brand retailer source 30% of its goods from India. Indian government continues the hold on retail reforms for multi-brand stores. IKEA announced in January that it is putting on hold its plan to open stores in India because of the 30% requirement. Fitch believes that the 30% requirement is likely to significantly delay if not prevent most single brand majors from Europe, USA and Japan from opening stores and creating associated jobs in India.

Entry Options For Foreign Players prior to FDI PolicyAlthough prior to Jan 24, 2006, FDI was not authorised in retailing, most general players had been operating in the country. Some of entrance routes used have been discussed below:-

1. Franchise AgreementsIt is an easiest track to come in the Indian market. In franchising and commission agents services, FDI (unless otherwise prohibited) is allowed with the approval of the Reserve Bank of India (RBI) under the Foreign Exchange Management Act. This is a most usual mode for entrance of quick food bondage opposite a world. Apart from quick food bondage identical to Pizza Hut, players such as Lacoste, Mango, Nike as good as Marks as good as Spencer, have entered Indian marketplace by this route.

2. Cash And Carry Wholesale Trading100% FDI is allowed in wholesale trading which involves building of a large distribution infrastructure to assist local manufacturers. The wholesaler deals only with smaller retailers and not Consumers. Metro AG of Germany was the first significant global player to enter India through this route.

3. Strategic Licensing AgreementsSome foreign brands give exclusive licences and distribution rights to Indian companies. Through these rights, Indian companies can either sell it through their own stores, or enter into shop-in-shop arrangements or distribute the brands to franchisees. Mango, the Spanish apparel brand has entered India through this route with an agreement with Piramyd, Mumbai, SPAR entered into a similar agreement with Radhakrishna Foodlands Pvt. Ltd

4. Manufacturing and Wholly Owned Subsidiaries.The foreign brands such as Nike, Reebok, Adidas, etc. that have wholly-owned subsidiaries in manufacturing are treated as Indian companies and are, therefore, allowed to do retail. These companies have been authorised to sell products to Indian consumers by franchising, internal distributors, existent Indian retailers, own outlets, etc. For instance, Nike entered through an exclusive licensing agreement with Sierra Enterprises but now has a wholly owned subsidiary, Nike India Private Limited.

1.7FDI Policy in IndiaFDI as defined in Dictionary of Economics (Graham Bannock et.al) is investment in a foreign country through the acquisition of a local company or the establishment there of an operation ona new (Greenfield) site. To put in simple words, FDI refers to capital inflows from abroad that is invested in or to enhance the production capacity of the economy.Foreign Investment in India is governed by the FDI policy announced by the Government of India and the provision of the Foreign Exchange Management Act (FEMA) 1999. The Reserve Bank of India in this regard had issued a notification,which contains the Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations, 2000. This notification has been amended from time to time. The Ministry of Commerce and Industry,Government of India is the nodal agency for motoring and reviewing the FDI policy on continued basis and changes in sectoral policy/ sectoral equity cap. The FDI policy is notified through Press Notes by the Secretariat for Industrial Assistance (SIA), Department of Industrial Policy and Promotion (DIPP).The foreign investors are free to invest in India, except few sectors/activities, where prior approval from the RBI or Foreign Investment Promotion Board (FIPB) would be required. 1.8FDI Policy with Regard to Retailing in IndiaIt will be prudent to look into Press Note 4 of 2006 issued by DIPP and consolidated FDI Policy issued in October 2010 which provide the sector specific guidelines for FDI with regard to the conduct of trading activities.a) FDI up to 100% for cash and carry wholesale trading and export trading allowed under the automatic route.b) FDI up to 51 % with prior Government approval (i.e. FIPB) for retail trade of Single Brand products.c) FDI is not permitted in Multi Brand Retailing in India.

CHAPTER 2: LITERATURE REVIEWReview of work already done on the subject:Michael Lubatkin(1987) has explained the relationship between stockholder gains and the relatedness of merging firms. It is tested by classifying mergers into four relatedness categories and by using measures of stockholder value as developed in the literature on capital markets. In all, stock returns of 439 acquiring firms in 1031 large mergers are examined, as are stock returns of 340 large acquired firms. The results show that mergers lead to permanent gains in stockholder value for both acquiring and acquired firms' stockholders.James walsh(1988) has explained the employment status of target companies top managers for 5 years from the date of acquisition. Results indicate that turnover rates in acquired top management teams are significantly higher than 'normal' turnover rates, and that visible, very senior executives are likely to turn over sooner than their less-visible colleagues. Variations in top management turnover rates, however, are not accounted for by type of acquisition (i.e. related or unrelated).Steven J. Pilloff and Anthony M. Santomero (1996) has focused on retail industry that has experienced an unprecedented level of consolidation on a belief that gains can accrue through expense reduction, increased market power, reduced earnings volatility, and scale and scope economies. It suggests that the value gains that are alleged have not been verified. It also talks about the traditional view of value of mergers. The paper then addresses alternative explanations and reconcile the data with continued merger activity.Andrei Schleifer, Robert.W Vishny(1997) presented a model ofmergersand acquisitions based on stock market misvaluations of the combining firms. The key ingredients of the model are the relativevaluationsof the merging firms and the market's perception of the synergies from the combination. The model explains who acquires whom, the choice of the medium of payment, thevaluationconsequences ofmergers,andmergerwaves. The model is consistent with available empirical findings about characteristics and returns of merging firms, and yields new predictions as well. Raghuram Rajan(1997) undertakes an in-depth analysis of the tire industry over the period 1970-1990. It attempted to uncover the causes and the consequences of the acquisition activity in the industry in the 1980s, which resulted in all but one large U.S. tire manufacturer being sold to foreign companies. Bradshaw (1998) provided two things: First, he provided more detail about the particular valuation models that analysts use. Second, and crucially, he advances and test specific hypotheses about the valuation model choices of analysts. In particular he tested hypotheses about how valuation methodologies vary across industrial sectors.Chatterjee R and Kuenzi A (2001) has tested two alternative hypotheses for explaining acquiring companies stock return: The Investment Opportunity Hypothesis and the Risk Sharing Hypothesis . The first hypothesis states that firms with excellent future investment opportunities should not pay in cash for acquisitions. The second hypothesis states that, particularly for high-risk transactions, it could be advantageous to pay in stock because in this case, the target company will have an incentive to make a success of the takeover transaction. Angelika Kdzierska-Szczepaniak,(2002) has focused on world market economy which is currently characterized by the tendency to globalization, which means that companies have to cooperate and tighten their relations. Companies working on the local market do not have many possibilities for development, so mergers and acquisitions (M&A) can be a chance for them to cooperate with companies from all over the world. The main goal of this paper is to present the most important risk factors for M&A transactions.Valente (2003) has presented in this paper, a general model of strategic behavior of (regulated and non-regulated) firms in M&A was presented. For non-regulated firms, the model indicated that targeted firms issue new debt strategically. In this case, the firms capital structure is chosen so that it maximizes the (ex-ante) market value of the firm. However, the focus of the paper was on regulated firms (mostly monopolies). Kropf and Viswanathan (2004) investigated whether acquisitions occurring during booming markets are fundamentally different from those occurring during depressed markets. He found out that acquirers buying during high-valuation markets have significantly higher announcement returns but lower long-run abnormal stock and operating performance than those buying during low-valuation markets. He investigated possible explanations for the long-run underperformance and conclude it is consistent with managerial herding.Schoenberg (2006) has explained complex phenomenon that mergers and acquisitions (M&As) represent has attracted substantial interest from a variety of management disciplines over the past 30 years. Three primary streams of enquiry can be identified within the strategic and behavioural literature which focus on the issues of strategic fit, organizational fit and the acquisition process itself.McDonald J, Coulthard M and Lange De P (2006) used semi-structured interviews to: identify the link between corporate strategic planning and M&A strategy; examine the due diligence process in screening a merger or acquisition; and evaluate previous experience in successful M&As. The study found that there was a clear alignment between corporate and M&A strategic objectives but that each organisation had a different emphasis on individual criterion. Due diligence was also critical to success; its particular value was removing managerial ego and justifying the business case. Finally, there was mixed evidence on the value of experience, with improved results from using a flexible framework of assessment.Jens Hagendorff, Michael Collins and Kevin Kease(2007) has explained how changes in the regulatory regime of the USA, Italy and Germany have spurred bank merger activities. For each country, future polices that bank supervisors may adopt in order to benet from a more integrated nancial sector are also critically discussed.Miyajima (2007) has shown spotlight on Japans M&A activity, which has surged since the end of 1999, and takes a look at the factors that have contributed to the surge, and its various economic dimensions. The paper places Japans M&As in an international context, and identify the causes of the wave and its structural characteristics. It also examines the economic role of M&A and its pros and cons. We contend that M&As contribute to raising the efficiency of resource allocation and organizations. Lastly it addresses policy implications and contains concluding remarks.Pramod Mantravadi(2008) has explained the impact of mergers on the operating performance of acquiring corporates in different industries, by examining some pre- merger and post-merger financial ratios, with the sample of firms chosen.Sidharth Saboo( 2009) aimed to study the impact of mergers on the operating performance of acquiring firms by examining some pre- merger and post-merger financial ratios of these firms and to see the differences in the pre merger and post merger ratios of the firms that go for domestic acquisitions and the firms that go for the international/cross-border acquisitions. Dr Neena Sinha(2010) has examined the impact of mergers and acquisitions on the financial efficiency of the selected companies in India. The analysis consists of two stages. Firstly, by using the ratio analysis approach, he calculated the change in the position of the companies during the period 2000-2008. Secondly, he examined changes in the efficiency of the companies during the pre and post merger periods by using nonparametric Wilcoxon signed rank test value.Siegel S. D and Simons L. K (2010) has focused on mergers and acquisitions typically of firm-level financial performance. In contrast, they have used human capital theory to model these events as transactions that simultaneously have cross-level, real effects on workers, plants, and firms. Their empirical analysis is based on longitudinal, linked employer-employee data for virtually all Swedish manufacturing firms and employees. They found that mergers and acquisitions enhance plant productivity, although they also result in the downsizing of establishments and firms. Firm performance does not decline in the aftermath of these ownership changes. It has been concluded that such transactions constitute a mechanism for improving the sorting and matching of plants and workers to more efficient uses.Saraswathy(2010) has presented the nature, extent and structure of M&A deals in India. In this paper he argued that the current surge in cross-border deals should be viewed in a multi-factor dimension, which involves the push factors from home country such as market constraint, need for low priced factors of production, increasing global competition as well as the pull factors from foreign firms such as the wider market, technology and efficient operation.Burksaitiene D (2010) has said that in 2008, the value of cross-border mergers and acquisitions (M&A) sales of developed country companies fell by 39 %, approximately their 2006 level, and the number of such M&A deals fell by 13 % as the financial and economic crisis made a dampening effect on cross-border M&A activity.Data for 2009 show a continuing downward trend,the number of high value M&A deals fell sharply, as banks avoided financing such transactions in the prevailing landscape of high and rising risk. In addition to lack of finance, the decline in the value of M&A transactions has been driven by sharp falling stock prices on developed countries stock markets where stock market indices plunged. The decrease in total cross-border M&As has had a significant impact on FDI flows, as they are strongly correlated with the value of cross-border M&A transactions. One outcome of the crisis is that a number of large privatization projects have had to be cancelled.

CHAPTER 3: RESEARCH METHODOLOGY

3.1 Primary Objectives The research aimed at finding out the To analyze pre and post merger financial position To study the theoretical analysis of the synergy created in post merger scenario Conceptual framework of Mergers and Acquisitions To do the valuation of an Indian company and an International company in retail sector using valuation methods. To find out the effect of FDI investment in retail sector in India.

3.2 Research Design For this purpose conclusive research was undertaken. Conclusive research is used to provide information that is used in reaching decisions or make appropriate decisions. It is quantitative in nature i.e. in the form of numbers that can be quantified and summarized. Conclusive research relies on both secondary data, particularly existing database that are reanalyzed to shed light on different problem than the original and primary data specifically gathered for current study.

3.3 Data Collection and Analyzing instrument Keeping in mind the nature of requirements of the study to gather all the applicable information regarding my topic, data which was collected was secondary. Research is totally based on secondary data. Some of the common sources of collecting secondary data are with the help of journals, magazines, newspaper articles, books, periodicals, annual reports, company circulars, government publications, government websites, industry association, libraries, e-libraries, university database and search engines Various required documents are:

Financial reports of the company: These are published both quarterly and annually. Financial reports are an important tool for analyzing the credit worthiness of a company.It contains balance sheet of the company, income statement and cash flow statement. Transcripts: These are management discussion and analysis report in which the management reveals its past performance and future predictions about its revenues and growth. It also gives better understanding of what the company does and usually points out some key areas where it performed well. Research papers: These are the reports on what opinion research firms have about the company and what it predicts in future..

3.4 Data AnalysisOnce the data is collected it needs to be analyzed. Data Analysis is a very important step in the entire research process. The entire research process can be a failure if the data analysis is not done properly so as to reach the objectives framed for the research. The process for analyzing starts with data editing, coding and data entry and lastly data analysis. The researcher would collect all secondary information regarding mergers of the company involved in the research and edit the data. Only those financial information and details which are important to lead the objectives would be picked up. Secondly the researcher would input all the relevant data in the excel sheet. Data entry would be done in all the parameters which are chosen to be analyzed for the acquiring firm. The main place of the data entry would be in Excel Spreadsheet where the data would be entered, stored and analyzed for further use. This data can be analyzed at the users convenience by various forms like bars, charts and diagrams.

3.5 Methodology

SYNERGY EQUATIONFor any M&A deal, Synergy can be represented by the following equation:

NAV = PVab ( PVa + PVb ) P EWhere,

NAV = Value of synergy or net asset value of purchase PVab = Present value of the combined entity ab (either through merger or acquisition) PVa = Present value of the standalone firm a PVb = Present value of the standalone firm b P = Premium paid by acquirer a to the target b (in case of acquisition) E = sum of all expenses incurred on merger/acquisition

VALUATIONEvery asset, whether financial or real, has value. Value is an expression of an assets worth. In finance, valuation is the process of estimating the market value of a financial asset or liability. Valuations can be done on assets (for example, investments in marketable securities such as stocks, options, business enterprises, or intangible assets such as patents and trademarks) or on liabilities (e.g., Bonds issued by a company). Accurate business valuation is one of the most important aspects of M&A as valuations like these will have a major impact on the price that a business will be sold for. Most often this information is expressed in a Letter of Opinion of Value (LOV) when the business is being valuated for interest's sake. Investors in a company that is aiming to take over another one must determine whether the purchase will be beneficial to them. In order to do so, they must ask themselves how much the company being acquired is really worth. Naturally, both sides of an M&A deal will have different ideas about the worth of a target company: its seller will tend to value the company at as high of a price as possible, while the buyer will try to get the lowest price that he can. There are, however, many legitimate ways to value companies. The most common method is to look at comparable companies in an industry, but deal makers employ a variety of other methods and tools when assessing a Target Company. Here are just a few of them:

Comparative Ratios - The following are two examples of the many comparative metrics on which acquiring companies may base their offers:

Price Earning Ratio (P/E Ratio) - With the use of this ratio, an acquiring company makes an offer that is a multiple of the earnings of the Target Company. Looking at the P/E for all the stocks within the same industry group will give the acquiring company good guidance for what the target's P/E multiple should be. Enterprise Value-To-Sales (Ev/Sales) - With this ratio, the acquiring company makes an offer as a multiple of the revenues, again, while being aware of the price to sales ratio of other companies in the industry.

Replacement Cost - In a few cases, acquisitions are based on the cost of replacing the target company. For simplicity's sake, suppose the value of a company is simply the sum of all its equipment and staffing costs. The acquiring company can literally order the target to sell at that price, or it will create a competitor for the same cost. Naturally, it takes a long time to assemble good management, acquire property and get the right equipment. This method of establishing a price certainly wouldn't make much sense in a service industry where the key assets - people and ideas - are hard to value and develop.

Discounted Cash Flow (DCF) - A key valuation tool in M&A, discounted cash flow analysis determines a company's current value according to its estimated future cash flows. Forecasted free cash flows (operating profit + depreciation + amortization of goodwill capital expenditures cash taxes - change in working capital) are discounted to a present value using the company's weighted average costs of capital (WACC).

Professionals who valuate businesses generally do not use just one of these methods but a combination of some of them, as well as possibly others that are not mentioned above, in order to obtain a more accurate value. These values are determined for the most part by looking at a company's balance sheet and/or income statement and withdrawing the appropriate information.

Valuation is a highly specialized process. It requires the knowledge and experience of professionals. Valuation of firm as a going concern is the basis of any investment exercise. The determination of the right value of the business is essential to maintain a long-term success of investment. There are various methods available for the valuation of a company. Some of the very common methods to valuation are discounted cash flow method , market value method, turnover method, and book value method.

BOOK VALUE METHODSome companies which are under performing usually generate no cash flows and therefore have no general intangible value. The value of such firms can be obtained from the hypothetical sale of their assets. This would be the case for some businesses that are losing money or paying the ownerless in total than a fair market compensation. Selling such a business is often a matter of getting the best possible price for the equipment, inventory, and other assets of the business. When the valuation is done based on the going concern assumption it is called the adjusted book value approach and when it is conducted based on the liquidation principle it is termed as the liquidation value approach.

METHODS OF VALUATION:

TANGIBLE ASSETS

1. CURRENT ASSETS

Cash: It doesnt generally require any adjustment. Accounts Receivable: Debtors and the book receivables are valued at their book value, after allowing all the allowances for the doubtful debts. The uncollectible debts should be removed. Inventory: The inventory is valued depending on its nature. Raw Material: It can be valued at LIFO, FIFO, or the average cost method. Work-in-Progress: The work in progress can be valued at the cost price of the sales price. Finished Goods: Finished goods are valued at the current realizable sale value after deducting all sales related expenses. Other Assets: Some of the assets which usually require adjustment are marketable securities, other non operating assets, B/R etc. If they are not used in the operations of the company they should be removed from the balance sheet.

2. FIXED ASSETSFixed assets constitute a substantial portion of the asset side of the balance sheet of a capital intensive company. Land is valued at its current market price. Buildings are generally valued at the replacement costs. However, proper allowances are to be made for depreciation. Similarly plant and machinery, capital equipments, furniture and fixtures etc. are to be valued at the fixed costs net of depreciation.

INTANGIBLE ASSETSThe valuation of the intangible assets like brands, goodwill, patents, trademark and copyrights etc. is a controversial area of valuation. As the intangibles have significant financial value, their absence from the valuation distorts the true financial position of the company. Hence to ensure that the valuation of the company represents the true intrinsic worth it has become necessary for companies to determine the value of the intangibles.

Two Popular methods for the valuation of the intangibles:a. Earning Valuation Method: The value of an intangible like any other asset is equal to the present value of the future earnings attributable to it. The main drawback of this approach may that the future projections may be too optimistic.

b. Cost Method: This method involves stating the value of the intangible asset as its cost to the company. This is relatively easy when the intangible asset is acquired.

LIABILITIESThe valuation of the liabilities is relatively simple. The valuation doesnt include share capital, and reserves & surplus. Only the liabilities owed to the outsiders is considered. All long-term debts like loans, bonds, etc. are to be valued at their present value. All the current liabilities and provisions are to be taken at the book value.When assessing the value of the firm non-operating assets are usually added to the operating value of the firm to arrive at the total value.

OFF BALANCE SHEET ASSETSThe liabilities relating to the assets require adjustment. If the interest charged on the bills payable is a fixed rate that is significantly different from the market rate on the valuation date, the debt should be adjusted.

OFF BALANCE SHEET LIABILITIESThere may be unrecorded liabilities like the guarantees, warranty obligations, pending litigation other disputes like taxes etc. Such liabilities should be quantified and deducted from the value of the firm.

VALUATION OF THE FIRMThe ownership value of a company is the difference between the value of the assets and the value of the liabilities. Normally no premium is added for control as assets and liabilities are taken at their economic values. On the other hand, a discount may be necessary to factor in the marketability element. The market for some of the assets may be illiquid or may fetch a slightly lesser price if the buyer does not perceive as much value of the asset to his business. Hence a discount factor may be applied.

Ownership Value = Total Assets Total LiabilitiesTURNOVER METHODSales multiple is the most widely used business valuation methods benchmark used in valuing a business. The information needed is annual sales and an industry multiplier, which is usually a range of .25 to 1 or higher. The industry multiplier can be found in various financial publications, as well as analyzing sales of comparable businesses. This method is easy to understand and use. The industry multiplier, which is based on the average sales figures within the industry, is multiplied by companys gross sales.

MARKET VALUE METHODThe market value or market capitalization approach is applicable for quoted companies only. Market capitalization represents the public consensus on the value of a company. In this method the market value of a company is determined by multiplying the quoted share price of the company by the number of issued shares. This valuation reflects the price that the market at a point in time is prepared to pay for the shares of the company. The market valuation method broadly takes into account the investors perceptions about the performance of the company and the managements capabilities to deliver a return on their investments. This approach involves valuation methods that use transactional data to help determine a companys value. These methods might involve private company transactions, public company transactions, as well as public company valuation measures using current stock market data. The theory behind this approach is that valuation measures of similar companies that have been sold in arms-length transactions should represent a good proxy for the specific company being valued.

CALCULATING RATIOSFinancial ratios are useful indicators of firms performance and financial situation. It give relative magnitude of two selected numerical values taken from organisations financial statements. They are used to compare trend and to compare organisations financials with those of others.

Following ratios are calculated for the purpose of current research project: I. Overall profitability parameters (Return to Equity Shareholders) In the present study Return to Equity for shareholders is measured with the help of two ratios: Return on Net Worth and Earning Per Share. The use of both these ratios presents a broad picture of a company's efficiency, financial viability and its ability to earn returns on shareholders' funds and capital employed.

Return on Net Worth (RONW)RONW measures the rate of return on the shareholders equity of the owners. It measures the companys efficiency of using the capital (shareholders funds) entrusted to it and generating profits. Earning Per Share (EPS) In order to get true idea of return on investment owner should evaluate his investment returns not on the basis of the dividend received, but on the basis of the EPS i.e. earnings per share. The more the EPS better are the performance and prospects of the company.

Return on Assets (ROA) = Net Profit/Total Assets We can analyze the efficiency and effectiveness of management . It clears that the managers are efficient in allocation assets for NP. Positive ROA shows the better efficiency of the financial instructions.

Return on Equity (ROE) = Net Profit/Equity. This ratio measures the rate of return on the bases of capital and equity capital.

II. Liquidity parameters Liquidity ratios measure the short term solvency i.e. the firms ability to pay off current dues. In the present study current ratio is used to check the liquidity of the firm.

Current Ratio In a sound business, a current ratio of 2:1 is considered an ideal one. A very high ratio will result in idleness of funds and therefore, is not a good sign. On the contrary, a low ratio would mean inadequacy of working capital.

III. Solvency parameters Solvency parameters indicate the ability of an enterprise to meet its long term indebtedness (obligations). In this study debt-equity ratio is used to measure the solvency position.

Debt-Equity ratio The debt to equity ratio is worked out to ascertain soundness of the long term financial policies of the firm. A higher ratio indicates a risky financial position while a lower ratio indicates safer financial position.

IV. Overall efficiency parameters The main objective of business is to earn profit. Therefore, efficiency in business is measured by profitability. Thus, a measure of profitability is the overall measure of efficiency. To check the overall efficiency of the merging cases, profit before tax, profit after tax and profit before tax to total income are calculated.

Profit before tax (PBT) Profit before tax, or PBT, measures the profits of the companies before paying corporate taxes.

Profit before tax to Total income Profit before tax (PBT) to total income is the relationship between profit before tax and total income incurred by the business.

3.6 Scope of the study Firstly the research will be problem solving and systematic. Secondly it will have a logic and flow so that others can easily understand the main theme of the research It will be based on facts, so that decision making and conclusions can be derived from the information collected. Lastly it will be replicable so that others test it or carry out further analysis.

3.7 Limitation In this paper the researcher proposed to employ non-participant observation method especially by analyzing qualitative information from journals, books, magazines and many more reliable resources. However, the method does not involve direct interviews, which will slightly reduce objectivity and the accuracy of information.