1.7
GROWTH
Measuring size

net profit

capital employed

market capitalization

sales turnover

market share

Number of employees
Small businesses




Lack of specialists
Problems in raising both short and longterm finance
Marketing risks of limited product range
Difficulty in finding suitable, reasonably
priced premises
WHAT IS YOUR GLOBAL PERSPECTIVE ?
COMPANY
NON-US REVENUE AS %
OF TOTAL REVENUE
Colgate Palmolive
72
Avon
66
McDonald’s
62
Coca cola
61
Gillette
60
TYPES OF GLOBAL ORGANISATIONS



Multinational corporation : a company that maintains
significant operations in multiple countries but manages
them from a base in the home country.
Transnational corporation : a company that maintains
significant operations in more than one country but
decentralizes management to the local country.
Borderless organization : a global type of organization in
which artificial geographical barriers are eliminated
HOW ORGANISATIONS GROW TO GO GLOBAL ?
Foreign
subsidiary
Joint ventures
Strategic
Hiring foreign
alliances
representation
or contracting
Licensing/
Exporting to foreign
with foreign
Franchising
countries
mfrs
Business growth
Business expansion
Internal
growth
External growth
through integration
Mergers
Take-overs
External growth
Horizontal
Same industry –
Same stage of
production
Vertical
Backwards –
Same industry
Towards previous
processes
Conglomerate
With different
Industries/
markets
Forwards –
Towards the
Consumer/
market
India is now emerging as a promising high growth M&A
market….
Corporate Finance Deals in India
300
450
Value of Deals in Rs. Bn
Number of Deals
400
350
200
300
150
250
200
100
150
50
100
0
50
FH
1999
SH
1999
FH
2000
SH
2000
FH – First Half, SH – Second Half
Source: India Advisory Partners Report
FH
2001
SH
2001
FH
2002
SH
2002
FH
2003
SH
2003
FH
2004
SH
2004
FH
2005
Number of Deals
Value of Deals in Rs. Bn
250
Dabur - Balsara
The Deal:
The Terms:
acquired the entire
business of
• Purchase consideration: Rs. 140 crores (US$33 mn)
• All Cash Deal
• Funded mainly through internal accruals, additional loans of
about Rs. 20 crores
Rationale:
• Strengthen Dabur’s position in oral care
• Add new avenues of growth : household care
• Economies of scale from combined business : significant
synergy
• High growth potential as penetration of categories quite low
Oracle – i-flex
The Deal:
The Terms:
Rationale:
acquired Citigroup Venture
Capital International’s 41%
stake in
Purchase Consideration
Operations post acquisition
• Acquisition of Citigroup Venture
Capital International’s 41% stake for
US$ 593 mn (Rs. 2,575 cr)
• i-flex to remain a publicly listed
company
• Open offer, as per SEBI guidelines,
for an additional 20% stake –
US$316 mn (Rs. 1,370 cr)
• Will pursue its own product
services and growth plans
• Current management to continue
• Oracle will gain a foothold into the packaged applications market
for banks, which is currently dominated by SAP
• i-flex will be able to leverage on Oracle’s relationships with Tier–I
banks in the lucrative US market for its core banking product
Flexcube. It will also gain direct access to Oracle’s global
infrastructure, resources and support and 8,500 banking
customers for its offshore services business
Indian corporates have come to the conclusion that in
order to achieve global leadership…..M&A would be the
primary tool
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




In M&A - Strategic thinking would have to be backed by operational
excellence
Define a clear focused acquisition strategy
View acquisitions as a way to execute the business strategy successfully
and faster
Develop a proactive approach to identification of players and
opportunities
Understand own business’ core competencies and how they can be best
leveraged to pay an optimum price to the target
Define M&A success metrics
Typical M&A Process
It is important to understand first certain basic rules
of valuation


Not “precise” – it is “subjective”
There cannot be A RIGHT ANSWER – there are only
analysed, well reasoned range of values

Value lies in the eyes of the beholder – so true!

Important to get first clarity on the following :
– Why to value ?
– What to value ?
– How to value?
There are 3 different approaches to valuation
Asset based approach Markets based
approach
 Historical cost / Net
 Market Multiples
Realizable Value
– Companies in
liquidation
– Projects under
construction

Mainly should be
looked at from a
perspective of
determining the “base
value”



Earnings based
approach

Comparable
companies
Comparable
transactions
Cross verification of
value derived from
other methodologies


Going concern value
based on profits /
cash flows to be
derived from
businesses
DCF / PECV /
Dividend discounting
method
Most preferred
method – DCF
methodology
Other key aspects of Valuations


Appropriate methodology depends on:
– nature of interest in the business which is being valued
– prospects for the company and the industry in which it operates
– type of business
– access to information (eg: hostile situations)
– market value of other firms which are traded actively in the free and open
market
The critical or key part of any valuation is a good understanding of the company /
business
Other key aspects of Valuations

Actual valuation is based on bargaining powers of buyers and sellers

Value of a business is dynamic and not static

Valuation assists in determining a "Fair Value" to which a premium or discount
may be added based on negotiations.
– Market share premium
– Controlling stake premium
– Brand value premium
– Cost of not acquiring
– Small player discount
– Discount for potential loss of employees
– Discount for potential loss of contracts / customers
Due Diligence Process
A due diligence ensures that what you see is
what you get!


A review of the target and the company by an independent party
A process which analyses, discusses threadbare all investment issues – so that
no post deal surprises happen come up later

Proper documentation of the transaction

Post issue identification, transaction is valued properly

Typically, 3 main types of due diligences
– Financial
– Tax
– Legal
– Besides, more specialist oriented - Environmental, Technology, HR

DD may influence
– Price
– Structure and terms
– Deal (could be a deal breaker)
Whether the deal is a small one or large one, amount of due diligence is the
same. ……..small deals is not just about handshakes
Some examples of typical due diligence
issues….

Management’s over optimism in terms of projections

Common costs and separation issues in carve outs

Inter Group business issues / related party issues (loans & Advances,
procurement from group companies)

Assessment of working capital requirement of business

Acquisition related liabilities (past acquisitions, deferred consideration)

Contingent Liabilities

Taxation – Transfer pricing issues, availability and continuity of tax holidays

Change management related issues

Weakness in internal controls
Deal Communication
Communication surrounding M&A – External &
Internal

Crucial communication – hence needs to be handled carefully

Communication should be effective and bring out benefits of the deal to
– Investors
– Employees
– Other stake holders

Important to respect government approvals and statutory
requirements
Deal Integration
With the Catching, ends the pleasure of chase
- Abraham Lincoln
Many mergers have failed……….

2 out of 3 deals have not worked;
the only winners are the shareholders of the acquired firm, who sell their
company for more than it is really worth Economist 1999

From 1987 to 1989 17% of the 393 downgrades by Moody were due to M&A
issues. From 1998 to 2001 this percentage rose to 60%.
– The biggest hindrances to a successful transaction are according to Moody
are encountered in the Post Merger Integration.
– In particular risks in the area of Synergies, Communication, Corporate Culture
and Project Management are not properly dealt with.
Some more statistics……….

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Just 23% of all acquisitions earn their cost of capital
In acquired companies, 47% of executives leave within the first year; 74% leave
within the first three years
Synergies projected for the deals are not achieved in 70% of the cases
Most CEOs and CFOs quote people problems and cultural factors as top factors
in failed integrations
Different stakeholders would have different
concerns………….and each would have to be
handled differently

Investors

Top Management

Middle Management

Front line employees

Customers
It’s important to have a team in place which can bring consensus besides
having some past experience of the process
Various post deal integration factors…

Speed

Cultural mismatch

Global complexities

Corporate Arrogance

Confusion on authority

Enhancing customer focus

Retaining people – re-recruitment plan

Communication and feedback throughout the integration
An example : integration challenges in a telecom
merger



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Key value drivers in cellular acquisitions – Economies of scale, expanding
footprint, early mover advantage
Value creation is always achieved from ability to manage integration
The backend IT integration issues – Billing, CRM, Service levels, back end
integration
Learning curve helps !
– Bharti took 36 months to integrate billing in its first acquisition (Andra Pradesh); it just
took less than 6 months for later acquisition (Rajasthan)
– To launch the brand - It took 7 months (AP) and 14 months (Chennai) earlier ; it took
just 3 months for the later deal (Rajasthan)
Some thoughts on integration challenges typically in
cross border M&A

Ratio of successful cross border deals has been low (in some estimates 50%)

Different types of Cultural differences
– Language barriers (typically for European acquisitions)
– Divergent work practices (Japan’s Bridgestone’s acquisition of Firestone)
– Organizational structure (Japan Vs USA)
– Compensation structures (Daimler Chrysler)
Demergers – current flavour of
the day
Demergers / Spinoffs



Mainly done to create shareholders’ value ; especially in cases wherein
valuations are not reflecting true inherent value
Better valuations of parts which could neglected in a conglomerate structure
Classically, textbooks define “forms of restructuring business firms” under the
following :
– Expansions (Mergers / Acquisitions / JVs)
– Sell offs (Spin-offs / Divestitures)



A spinoff creates a new legal entity ; shares are distributed on a pro rata basis to
existing shareholders of the parent company
Note : there is a separation of control and new entity may develop policies and
strategies different from original parent
Divestiture involves sale of portion of the firm to an outside third party. Cash or
equivalent consideration is received by the divesting firm.
Demergers / Spinoffs

Spin-offs in India on an average have done well – especially ones wherein there
was a clear case wherein a higher profitability business is separated from less
promising ones

Godrej Soaps – Demerger of Godrej Consumer Products

Wockhardt – Demerger of Wockhardt Lifesciences

Dabur – Demerger of Dabur Pharma

Eveready – Demerger of Tea business

GE Shipping – Demerger of Oilfield services division

Mafatlal Industries – Navin Fluorine
There are various rationales and motives that drive
M&A…..

Buy underperforming businesses domestically (at current levels) – wherein buyer
has capabilities to derive upsides
– Wockhardt Merind
– Dabur Balsara

Buy underperforming businesses overseas – wherein buyer has restructuring
capabilities
– Some of the European pharma acquisitions by Indian companies
– Asian Paints’ acquisitions in emerging markets
– Recent auto component / engineering acquisitions in Europe by Indian companies

Buy Businesses / Companies which allows you to expand in different markets
overseas
– Indian Pharma’s overseas acquisitions

Buy businesses / companies which gives you access to lucrative customer
relationships
– Bharat Forge’s acquisition of Dana Spicer’s UK order book
There are various rationales and motives that drive
M&A…..

Buy Companies which gives you a wider domestic reach / pan India presence
– Cellular acquisitions of Bharti
– Cement companies’ acquisitions
– Deccan Chronicle – Asian Age

Buy a business which gives you a parallel distribution network
– HLL Modern Foods

Buy a direct competitor who is debt ridden
– Nirma Saurashtra Chemicals
– IFFCO Oswal Fertilizer unit
– Eveready BPL Batteries

Buy a good plant / asset from a debt ridden / under performing company
– Recent API asset buyouts of Wanbury, Unichem and Matrix’s acqusition of formulations
plant of Sigma
There are various rationales and motives that drive
M&A…..

“India entry” with a leader
– DHL Blue Dart
– Holcim ACC Gujarat Ambuja

Buy an “India exit” candidate
–
–
–
–

Nicholas Piramal acquisitions
Zydus Cadila - German Remedies
Skanska – Italian Thai Development
Metropolis – Gribbles Pathnet
Strategic use of capabilities / resources
– Barter model of Bennett & Coleman (Pantaloon, Hakoba, Today’s, Videocon)
– Gujarat Ambuja’s recent Rs 60 crore investment (15% stake) in ING Vysya Life
Insurance Company Limited