Mergers & Acquisitions, Joint Ventures and Wholly
Owned Subsidiaries
Name
Ashutosh Agarkar
Fauzia Hasan
Jane Nazareth
Ankit Patel
Rajitha Pillai
Roll No:
1
22
37
41
44
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Roadmap
M&A’s:
Meaning
Inbound & Outbound M&A’s
Modes of Acquisitions
Types of Mergers
M&A’s: Advantages & Failures
Case study 1: Ranbaxy & Daichii
Joint Ventures:
Meaning, Benefits & Issues
Case Study 2: Maruti & Suzuki
Case Study 3: Hero & Honda
Wholly Owned Subsidiary
Valuation Methods
Case Study 4: Dr Reddy & Betapharm
Case study 5: Tata & Chorus
Case study 6: Hindalco & Novelis
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Mergers & Acquisitions
M&As are a type of inorganic growth paths
Merger:In the pure sense of the term, a merger happens when two firms agree to go
forward as a single new company rather than remain separately owned and
operated. This kind of action is more precisely referred to as a "merger of equals".
Both companies' stocks are surrendered and new company stock is issued in its
place.
For example, in the 1999 merger of Glaxo Wellcome and SmithKline Beecham,
both firms ceased to exist when they merged, and a new company,
GlaxoSmithKline, was created.
Acquisition:When one company takes over another and clearly establishes itself as the new
owner, the purchase is called an acquisition.
From a legal point of view, the target company ceases to exist, the buyer
"swallows" the business and the buyer's stock continues to be traded.
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Inbound & Outbound M&As
Inbound M&A
Inbound M&A are mergers or acquisitions where a
foreign company merges with or acquires an Indian
company
Eg: Daichii acquiring Ranbaxy
Outbound M&A
Outbound M&A are mergers or acquisitions where an Indian
company merges with or acquires an foreign company
Eg: Tata steel acquiring Corus
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Mode of Acquisitions
•Management Buyouts
• A management buyout (MBO) is a form of acquisition where a
company's existing management acquire a large part or all of the
company
Eg: in Sep’07 the UK arm of Virgin Megastores was to be sold off
as part of a management buyout, and from Nov’07, was known
by a new name, Zaavi
•Hostile Takeovers : A hostile takeover allows a suitor to take over a
target company's management unwilling to agree to a merger or
takeover.
Eg
•Oracle –Peoplesoft
•India Cement- Raasi Cement
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Mode of Acquisitions
•Leveraged Buyouts: A leveraged buyout occurs when an investor,
typically financial sponsor, acquires a controlling interest in a
company's equity and where a significant percentage of the purchase
price is financed through leverage (borrowing)
Eg: Tata Corus
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TYPES OF MERGERS
Based on Business Structures
 Horizontal:- Two companies that are in direct competition and
share the same product lines and markets.
 Vertical:- A customer and company or a supplier and company.
Think of a cone supplier merging with an ice cream maker.
 Conglomerate:- Two companies that have no common business
areas.
 Market-extension merger:-Two companies that sell the same
products in different markets.
 Product-extension merger:- Two companies selling different but
related products in the same market.
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TYPES OF MERGERS
Based of method of Financing
Purchase Mergers - This kind of merger occurs when
one company purchases another. The purchase is
made with cash or through the issue of some kind of
debt instrument; the sale is taxable.
Consolidation Mergers - With this merger, a brand new
company is formed and both companies are bought and
combined under the new entity. The tax terms are the
same as those of a purchase merger.
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Advantages of M&A
•
•
•
•
•
•
•
•
•
•
Economy of scale
Economy of scope
Increased revenue or market share
Cross selling
Synergy
Taxation
Geographical or other diversification
Resource transfer
Vertical integration
Absorption of similar businesses under single
management
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Why M & A’s fail…..
Research has conclusively shown that most of the mergers fail to achieve
their stated goals.
Some of the reasons identified are:
 Corporate Culture Clash
 Lack of Communication
 Loss of Key people and talent
 HR issues
 Lack of proper training
 Clashes between management
 Loss of customers due to apprehensions
 Failure to adhere to plans
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Case study 1: Ranbaxy Daichi
Ranbaxy Overview
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The DEAL
Daiichi got to acquire a controlling stake ….51.62% in Ranbaxy for $ 3.4-4.6
billion
Singh family promoters of Ranbaxy sold entire stake 34.8% for Rs 10000 crs
($2.4 bio) at Rs 737/Daiichi had to make an open offer to acquire 20% more from other
shareholders. Japanese company was to acquire another 4.9% through
preferential of share warrants
Ranbaxy was to get $1bn via preferential allotment, funds were to be used to
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retire debt
The DEAL
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Reasons for Takeover
Daiichi
•A complementary business combination
•An expanded global reach
•Strong growth potential
•Cost competitiveness by optimizing usage of R&D and manufacturing facilities
Ranbaxy
•The R&D pipeline was not delivering enough products, the generic market
was not generating adequate returns.
•Ranbaxy had three choices
•It could spend lot of money in acquiring a big generic company to
grow inorganically
•Merge with a global player
•Sell-out
•The sell out option was most profitable
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Conclusion
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Joint Ventures (JV)
• JV is an entity formed between two or more parties to undertake
economic activity together.
• The parties agree to create a new entity by both contributing
equity, and they then share in the revenues, expenses, and control
of the enterprise.
• The venture can be for one specific project only, or a continuing
business relationship such as the Sony Ericsson joint venture.
• This is in contrast to a strategic alliance, which involves no equity
stake by the participants, and is a much less rigid arrangement.
• Project Based JV: These are Joint Ventures entered into by
companies in order to accomplish a specific project.
• Functional JV: These are Joint Ventures wherein, companies agree
to share their functions and facilities such as production,
distribution, marketing, etc. to achieve mutual benefit
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JV- Goals, Benefits
Goals
• Synergies
• Transfer of technology/skills
• Diversification
Benefits
• Complementary Benefits
• Acquiring and Sharing Expertise
• New Business / Product Development
• Capacity Expansion
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JV- Issues
Issues in Joint Ventures
• Due Diligence
• Business Strategy
• Development of HR Strategies
• Implementation
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Case Study 2: Maruti Suzuki Joint Venture
HISTORY
•Maruti Udyog Ltd was established in February 1981
•Actual Production commenced in 1983 with Maruti 800
•Project Maruti started by Indira Gandhi & Sanjay Gandhi
•Indian experts started search for collaborators
•Negotiated with – Toyota, Nissan, Honda & Suzuki
•After rounds of negotiation Suzuki was selected
•Joint venture of Govt of India & Japanese Company Suzuki
Motors Corp
Previously Govt of India owned 80% equity & Suzuki had 20%
•Now Indian Financial Institute has 18.28%, Suzuki has 54.24%
& 25% equity is public offering
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SWOT Analysis
STRENGTHS
•Goodwill of Suzuki Brand
•Contemporary Technology
•Market Share & reliability
WEAKNESS
•Japan for technical support
OPPORTUNITIES
•Infrastructure
•Innovation
THREATS
•Govt’s Policies, taxes etc
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BENEFITS OF JOINT VENTURE
For Maruti
Suzuki Motor Corporation, the parent company, is a global
leader in mini and compact cars for three decades
Suzuki’s technical superior
Lightweight engine that is clean and fuel efficient
Nearly 75000 people are employed directly by Maruti Suzuki
and its partners
For Suzuki
Large Indian Market
Monopolistic trade in the Indian automobile market
Availability of resources
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Case Study 3: Hero Honda Joint Venture
The Market before JV
•The license raj that existed prior to economic
liberalization (1940s-1980s) in India did not allow foreign
companies to enter the market.
•In the mid-’80s when the Indian government started
permitting foreign companies to enter the Indian market
through minority joint ventures.
•The entry of these new foreign companies transformed
the very essence of competition from the supply side to
the demand side.
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The Deal Is Done.(June 1984)
• Honda agreed to provide tech. know-how to
HHM and setting up manufacturing facilities.
This included the future R & D efforts.
• Honda agreed for a lump sum fee of $500,000
& 4% royalty on SP.
• Both Partners held 26% of the equity with
other 26% sold to the public and the rest held
to financial institutions.
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Success Story
•HHM had grown consistently, earning the title of the world’s
largest motorcycle manufacturer
•World’s largest two-wheeler manufacturer with annual sales
volume of over 2 million motorcycles.
•Owns world’s biggest selling motorcycle brand – Hero Honda
Splendor.
•Over 9 million motorcycles on Indian roads.
•Deep market penetration with 5000 outlets.
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Reasons for success
•The deep penetration network of hero largely benefited the sales.
•Absence of major competitors in initial years.
•Sound and proven technical capabilities of Honda and the reliability of Hero.
•Increased market for motorcycles
•Better Fuel efficiency.
•Change in people’s perception.
•Decrease in price difference with scooters.
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Wholly Owned Subsidiary
•What Does Wholly Owned Subsidiary Mean?
A subsidiary whose parent company owns 100% of its common stock.
•In other words, the parent company owns the company outright and there are
no minority owners.
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VALUATION METHODS

Valuation means assigning a value to underlying assets

The value should be a fair value

Valuation is not a science; more of an art

Valuation is largely influenced by Valuer’s judgment,
knowledge of business, analysis and interpretation and the
use of different methods

Valuation varies with purpose

Valuation is time sensitive
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Steps in Valuation

Obtaining information

Reviewing data provided

Selecting a method

Applying Method

Conducting sensitivities on assumptions

Assigning Weights

Merger - Exchange Ratio

Reporting
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Principal Methods of Valuation
Asset Based Approach
 Net Assets Method
 Replacement Value/Realisable Value
Earning based approach
 Price Earnings Capitalisation Method
 Discounted Cash Flow
Market Approach
 Market Price
 Market Comparables
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Net Assets Method
The Value as per Net Asset Method is arrived as follows:
Net Asset Value = Total Assets (excluding misc. expenditure
and debit balance of Profit & Loss Account) – Total
Liabilities
OR
Net Asset Value = Share Capital + Reserves (excluding
Revaluation Reserve) – Misc. Expenditure – Debit Balance of
Profit & Loss Account
Following adjustments may be called for:
1) Accounting Policies
2)Contingent Liabilities
3) Sales Tax Deferment Loan 4)Investments & Surplus
Assets
5) Inventory & Debtors
6) Contingent Assets
7) Preference Shares
8) ESOPs / Warrants
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Net Assets Method
LIMITATIONS
Where this method is
used
STRENGTHS
Start up Companies
Traditional method
Service/knowledge based
Investment Companies
Investment companies
Brand driven companies
No sustainable track record
of profits
Capital Intensive
Companies
Intangibles/human
resources value not
captured
Manufacturing companies
where fixed assets have
greater relevance for
earning revenues
Transparent and easy to
compute
Errors/misstatements in
financial statements
Companies with no reliable
evidence of future profits
due
to
violent
fluctuations/disruption of
business
Dependent on accounting
policies followed by
company
Earnings Potential ignored
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Price Earnings Capitalisation Method (PECV)






Based on past performance and /or projections
Non-recurring & extraordinary items excluded
Profits of various years are averaged (simple or weighted). Current
profit is accorded the highest weight
Projected profits discounted for inflation
By applying effective tax rate, arrive at maintainable profit
Finally appropriate capitalisation rate is applied to arrive at the
value
PECV – Parameters
 Future Maintainable Profits
 Appropriate Tax Rate
 Capitalisation Rate
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Price Earnings Capitalisation Method (PECV)
STRENGTHS
LIMITATIONS
Traditional method
Investment/Property company
Knowledge based companies
Company in liquidation
Ignores time value of money
Brand Driven companies
Best used for a matured company
Most widely - quoted valuation
method in equity markets
Based on book earnings, cash
generation not considered
Dependent on accounting policies
followed by company
Lack of comparable firms
No revenues/Negative earnings
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Discounted Cash Flow Method
DCF – Parameters


Cash Flows
Discounting Factor
When to use?

Most appropriate for valuing firms
 Limited life projects
 Large initial investments and predictable cash
flows
 Regulated business
 Start-up companies
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Discounted Cash Flow Method
STRENGTHS
LIMITATIONS
Conceptually sound and widely used
method
Projections are highly subjective hence
could be inaccurate
Values the cash generated and not just
the earnings
Inapplicable where projections cannot be
made for the horizon period
Not dependent on accounting policies
Difficulties in measuring risks
(calculation of )
Determination of Values for all fund
providers
Has not been specifically examined by the
Court though many mergers where DCF
was used as one of the method of
valuation has been approved
Captures Capital Expenditure needs
and Working Capital requirements
Sophisticated enough to deal with
complexity of most situations
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Other Earnings-Based Methods

EBITDA Multiple Method:
- Involves
determination of maintainable
EBITDA
- Based on projections or past performance.
Weights may be assigned to various years’
EBITDA
- Not affected by the pattern of Funding
adopted
by
Company/
Comparable
Companies

Sales Multiple Method:
- Compares Enterprise value to Company’s
Sales
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Market Price Approach
Evaluates the value on the basis of prices
quoted on the stock exchange
 Thinly traded / Dormant Scrip – Low
Floating Stock
 Significant and Unusual fluctuations
in the Market Price
 Weighted Average of quoted price for past
6 months
 Regulatory bodies often consider market
value as important basis – Preferential
allotment, Buyback, Takeover Code

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Market Comparables

Generally applied in case of unlisted entities

Estimates value by relating an element with
underlying element of similar listed companies.
Based on market multiples of Comparable
Companies




Book Value Multiples
Industry Specific Multiples
Multiples from Recent M&A Transactions.
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Market Comparables
STRENGTHS
Easy to understand
and quick to complete
Involves few explicit
assumptions
Basic data for publicly
traded entities readily
available
Easy to explain and
present to others
LIMITATIONS
May
not
capture
Intrinsic value
Value gets affected by
value of Peers
Difficulty in identifying
comparable companies
Short term volatility in
markets
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Industry
Best measure of value
Auto
Price to Earnings (PE) multiple
Banking
PE and Price to Book Value (PBV) or
Adjusted PBV multiple
Cement
PE, Enterprise Value to Earnings
before interest, tax, depreciation &
amortization (EV/EBITDA), EV/tonne
Engineering
Forward PE, which reflects the order
book position of the company
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Industry
Best measure of value
FMCG
PE, Return on Equity (RoE) and Return
on Capital Employed (RoCE) ratios
Real Estate
Net asset value (NAV), which is book
value at market prices. Also look at debt
levels
Telecom
PE and DCF, because there is a future
stream of cash flows for upfront heavy
investment
Oil & Gas
Residual reserves of energy assets
Technology
Trailing PE and its growth
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Case Study 4: Dr Reddys & Betapharma
- The Acquirer
• Among the largest domestic pharma
companies in India
• Annual turnover of over INR 4900 Cr.
• Annual PAT of INR 438 Cr.
• Approved by USFDA, MHRA (UK)
• Formulations make 37% of company’s product
mix; generic products account for 13%
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- The Target
• Fourth largest generic
pharma company in
Germany
• EBITD margins between
24 – 26%
• Portfolio of over 145
products
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- The Target
• Turnover Eur 186 million
• 3.5 market share in Germany
• Breakup of products
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Valuations
- The Target
•
•
•
•
Sticker Price of €480 mn. from PE firm 3i
Revenues of € 165 mn.
2.9X revenues and 12X EBITDA
The transaction was funded using a combination of
DRL’s internal cash reserves and committed credit
facilities
• Dr Reddy's buys 100% equity of German Co
Betapharm for Rs 2,250 cr (Euro 480 mio) —
Biggest overseas acquisition by an Indian pharma
co
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Goodies for DRL
• Access to lucrative German generic drug market
• Enhanced portfolio
• Leverage its product development skills and lowcost manufacturing in India to boost Betapharm’s
EBIT margins
• Help DRL realize its ambitions of becoming a $1
billion mid-size global pharma company
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Side Effects for DRL
• Betapharm booked losses in 08 & 09
• Raw materials problems in Mexico
• The German market underwent significant
changes after it acquired the company, shifting to
a tender-based model wherein the insurance
companies called for tenders from drug makers
and the lowest bidder got the order for supply of
drugs
• Absence of upsides (revenues arising out of
marketing exclusivity of authorized generics)
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Present Scenario for DRL
• DRL has long been bleeding under the impact of
Betapharm’s losses
• Decline in German sales by 26 per cent
• Dr Reddy's Laboratories (DRL) is currently
restructuring German subsidiary Betapharm
• Fierce competitive bidding from various generic
companies has increased the acquisition cost for DRL
and extended the payback period
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Case Study 5: Tata Corus Merger
• 'Tata Steel', formerly known as TISCO (Tata Iron
and Steel Company Limited), was the world's
56th largest and India's 2nd largest steel
company with an annual crude steel capacity of
3.8 million tonnes.
• Post Corus merger, Tata Steel is India's secondlargest and second-most profitable company in
private sector with consolidated revenues of Rs
1,32,110 crore and net profit of over Rs 12,350
crore during the year ended March 31, 2008
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Corus Overview
• Corus was formed from the merger of
Koninklijke Hoogovens N.V., a Dutch steel
producer with British Steel Plc on 6 October
1999. It has major integrated steel plants in
UK and Netherlands.
• Group turnover for the year to 31 December
2005 was £10.142 billion. Profits were £580
million before tax and £451 million after tax.
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Synergies from the deal
Some of the prominent synergies that could arise from the deal were as follows :
• Tata was one of the lowest cost steel producers in the world and had self
sufficiency in raw material. Corus was fighting to keep its productions costs under
control and was on the look out for sources of iron ore.
• Tata had a strong retail and distribution network in India and SE Asia. This would
give the European manufacturer a in-road into the emerging Asian markets. Tata
was a major supplier to the Indian auto industry and the demand for value added
steel products was growing in this market. Hence there would be a powerful
combination of high quality developed and low cost high growth markets
• There would be technology transfer and cross-fertilization of R&D capabilities
between the two companies that specialized in different areas of the value chain
• There was a strong culture fit between the two organizations both of which highly
emphasized on continuous improvement and ethics. Tata steel's Continuous
Improvement Program ‘Aspire’with the core values :Trusteeship,integrity,respect
for individual, credibility and excellence. Corus's Continuous Improvement
Program ‘The Corus Way’ with the core values : code of ethics, integrity, creating
value in steel, customer focus, selective growth and respect for our people.
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Valuation
• On 20 October 2006 the board of directors of Anglo-Dutch steelmaker
Corus accepted a $7.6 billion takeover bid from Tata Steel, the Indian steel
company.
• Tata Steel's bid to acquire Corus Group was challenged by CSN, the
Brazilian steel maker.
• In November 2006,Brazilian steel marker Companhia Siderúrgica Nacional
(CSN) challenged Tata Steel's proposal for acquisition. They countered Tata
Steel's offer of 455 pence per share by offering 475 pence per share of
Corus.
• Finally , on January 30, 2007, Tata Steel purchased a 100% stake in the
Corus Group at 608 pence per share in an all cash deal, cumulatively
valued at USD 12.04 Billion.
• The deal is the largest Indian takeover of a foreign company and made
Tata Steel the world's fifth-largest steel group.
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Funding the deal – TATA Corus merger
• $3.5–3.8bn infusion from Tata Steel ($2bn as its
equity contribution, $1.5–1.8bn through a bridge
loan)
• $5.6bn through a LBO ($3.05bn through senior term
loan, $2.6bn through high yield loan)
• The funding structure of this deal is the leveraged
buyout model that Tata Steel used to fund the Corus
buy.
• Effectively, the Tatas are paying only a third of the
acquisition price. This was possible because Corus
had relatively low debt on its balance sheet and was
able to borrow more.
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Case Study 6: HINDALCO - NOVELIS ACQUISITION:
CREATING AN ALUMINIUM GLOBAL GIANT
• Indian aluminium giant Hindalco acquired Atlanta based
company Novelis Inc, a world leader in aluminium rolling and
flat-rolled aluminium products in May 2007.
• Novelis processes around 3 million tonnes of aluminium a year
and has sales centers all over the world. In fact, it commands a
19% global market share in the flat rolled products segment,
making it a leader.
• Strategically, the acquisition of Novelis takes Hindalco onto the
global stage as the leader in downstream aluminium rolled
products.
• The transaction made Hindalco the world's largest aluminium
rolling company and one of the biggest producers of primary
aluminium in Asia, as well as being India's leading copper
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producer.
Novelis - Background
• World leader in the recycling of used aluminium beverage cans
• Recycles more than 35 billion used beverage cans annually.
• No. 1 rolled products producer in Europe, South America and Asia, and the
No. 2 producer in North America.
• Produces the highest-quality aluminium sheet and foil products for
customers in high -value markets including automotive, transportation,
packaging, construction and printing.
• customers include major brands such as Agfa -Gevaert, Alcan, AnheuserBusch, Ball, Coca-Cola, Crown Cork & Seal, Daching Holdings, Ford,
General Motors, Lotte Aluminium, Kodak, Pactiv, Rexam, Ryerson Tull,
Tetra Pak, ThyssenKrupp, etc.
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Financing Structure put in place by
Novelis Enterprise Value ~ USD 6 billion
All cash deal
Hindalco
HINDALCO
NOVELIS
Figures in USD Millions
Recourse Financing by
banks on Corporate
Guarantee of Hindalco
Liquidation of Treasury
TOTAL
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3100
450
3550
Non Recourse Debt at Novelis
Term Loans
1000
High Yield Bonds
1400
TOTAL
2400
Benefits to Hindalco
•
•
•
•
•
•
•
establish Hindalco as a global integrated aluminium producer with low-cost alumina and
aluminium production facilities combined with high -end aluminium rolled product
capabilities.
emerge Hindaloc as the biggest rolled aluminium products maker and fifth -largest integrated
aluminium manufacturer in the world.
The acquisition will give the company immediate scale and strong a global footprint.
Hindalco's position as one of the lowest cost producers of primary aluminium in the world is
leverageable into becoming a globally strong player.
Novelis is a globally positioned organization, operating in 11 countries with approximately
12,500 employees.
Novelis will work as a forward integration for Hindalco as the company is expected to ship
primary aluminium to Novelis for downstream value addition.
Novelis has a rolled product capacity of approximately 3 million tonne while Hindalco does
not have any surplus capacity of primary aluminium.
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THANK YOU
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