16 lessons i learnt about M&A

Lesson # 1: Most acquisitions will fail to beat aaa bond yield

Wealth Destruction on a Massive Scale? A Study of Acquiring-Firm ...

The sad fact is that most major acquisitions display an egregious imbalance: They are a bonanza for the shareholders of the acquiree

they increase the income and status of the acquirer's management; and they are a honey pot for the investment bankers and other professionals on both sides

But, alas, they usually reduce the wealth of the acquirer's shareholders, often to a substantial extent. That happens because the acquirer typically gives up more intrinsic value than it receives.

14 December 2008 mail: What a difference a year makes Just more than 1 year ago Royal Bank of Scotland (RBS) paid $100bn for ABN Amro (80% cash).

For this amount today, RBS could buy: Citibank $22.5bn, Morgan Stanley $10.5bn, Goldman Sachs $21.0bn, Merrill Lynch $12.3bn, Deutsche Bank $13.0bn and Barclays $12.7bn, And still have $8bn change !

Lesson # 2: Dont forget diseconomies of scale

Lesson # 3: be wary of people with grand visions

No corporate planning department actively looking for acquisitions

reliance on serendipity

We have no view of the future that dictates what business or industries we will enter. Indeed, we think it's usually poison for a corporate giant's shareholders if it embarks upon new ventures pursuant to some grand vision.

We prefer instead to focus on the economic characteristics of businesses that we wish to own and the personal characteristics of managers with whom we wish to associate - and then hope we get lucky in finding the two in combination. SERENDIPITY

Even so, we do have a few advantages, perhaps the greatest being that we don't have a strategic plan. Thus we feel no need to proceed in an ordained direction (a course leading almost invariably to silly purchase prices) but can instead simply decide what makes sense for our owners.

In doing that, we always mentally compare any move we are contemplating with dozens of other opportunities open to us, including the purchase of small pieces of the best businesses in the world via the stock market.

Our practice of making this comparison of acquisitions against passive investments is a discipline that managers focused simply on expansion seldom use.

Lesson # 4: low price can offset advantages of control

The Competitive nature of M&A activity almost guarantees the payment of a full - frequently more than full - price when 100% of a company changes hands.

But, less than 100% of the same company can frequently trade in the stock market at deep discounts to prices they would command in negotiated transactions involving the entire business.

Why? In the auction-like nature of the stock market, prices are set by individuals and groups of individuals who are frequently irrational, resulting in irrational prices

Our favorite acquisition is the negotiated transaction that allows us to purchase 100% of such a business at a fair price.

But we are almost as happy when the stock market offers us the chance to buy a modest percentage of an outstanding business at a pro-rata price well below what it would take to buy 100%.

Advantage of buying noncontrolling blocks at bargain prices, often counterbalances the disadvantage, if any, from the lack of control.

Lesson # 5: great businesses rarely make great acquisitions there are exceptions

More often than not, buying poor performers with plenty of room for improvement is a better strategy
Restructuring Potential

Lesson # 6: dont get over-impressed by high replacement cost

Tobins Q

http://en.wikipedia.org/wiki/Tobin's_q Is it worth replacing?

Lesson # 7: be extremely wary of open bid auctions

Envy + DSRS + Authority + Dopamine + Incentive-caused bias + Overconfidence + Social Proof + Low Contrast = Winners Curse

Buffett Does not engage in bidding contests.

The smarter side to take in a bidding war is often the losing side. Knows when to walk away from a deal

Usage of time fuse on bids breakup fee co-relation with stock market shutdown

Lesson # 8: acquiring to diversify is generally a bad idea. there are exceptions e.g. when you get deals that others wont

Buffett on Scott-Fetzer

Berkshire purchased Scott Fetzer at the beginning of 1986. At the time, the company was a collection of 22 businesses Acquisition cost: $315.2 million for Scott Fetzer, against book value of $172.6 million. The $142.6 million premium we handed over indicated our belief that the company's intrinsic value was close to double its book value.

Whats Causing This???

Lesson # 9: Swap ratios and preannouncement stock price ratios may differ

The Math Behind Swap Ratios

3 key factors: A.Prospects B.Mix of Operating and Non operating assets C.capital structure

Lesson # 10: Dont ask a barber if you need a haircut

Lesson # 11: Price is what you pay (now) value is what you get (later) Or Beware of Synergy Trap

Net value added = Total Value Received Total Value Paid

Value Received = Stand alone value + synergy value

Value paid = targets preacquisition market value + control premium

nva= synergy value control premium

Synergy: a term widely used in business to explain an acquisition that otherwise makes no sense.

Ways to Create value for buyers

1. Find cheap targets and buy them for a song unrealistic

2. ensure synergy exceeds control premium control premium is a fact synergy is an estimate enter social psychology

3. buy relative value Pay for an acquisition using a relatively overpriced currency

Using/Misusing Stock as a Currency

4. Expropriate minority stockholders Overpay for acquiring a partial stake and then expropriate value from minority shareholders and creditors of the target

Lesson # 12: be wary of serial acquirers who use stock as currency

The Story of Able, Baker, and Charlie

Lesson # 13: dont forget dilution

In a trade, what you are giving is just as important as what you are getting. This remains true even when the final tally on what is being given is delayed.

Subsequent sales of common stock or convertible issues, either to complete the financing for a deal or to restore balance sheet strength, must be fully counted in evaluating the fundamental mathematics of the original acquisition. (If corporate pregnancy is going to be the consequence of corporate mating, the time to face that fact is before the moment of ecstasy.)

Lesson # 14: there is no such person as an independent valuer

Lesson # 15: remember cash flow shenanigans using m&a

Cash Flow Shenanigan # 3 Inating Operating Cash Flow Using Acquisitions or Disposals

Cash Flow Shenanigan # 3 Inating Operating Cash Flow Using Acquisitions or Disposals

Purchase price is recorded as investing outow, while acquired cash ows are recorded as operating cash inow

85 million split into 45 sale proceeds and 40 million as advance on future revenue

Lesson # 16: accounting goodwill is not the same as economic goodwill

cases in M&A
Case on Gesco Carol Loomis on AOL-Time Warner Merger Carol Loomis on Carly Fiorina, Sandy Weill, and others Warren Buffett on M&A Ajay Piramal on M&A

Case on Ajay Piramal

Piramal Enterprises, a textile company, founded in 1933. 1984: acquired Gujarat Glass. 1988: Acquired Nicholas Laboratories Name changed to Nicholas Piramal India

Case on Ajay Piramal

1991: Merged Gujarat Glass into Nicholas Piramal 1993: Acquired Roche Products 1995: Acquired Sumitra Pharmaceutical 1997: Acquired Boehringer Mannhiem

Case on Ajay Piramal

1998: Merger of Nicholas Piramal, Roche Products & Boehringer Mannhiem 2002: Acquired Rhonepoulenc 2004: Spun off Gujarat Glass

Case on Ajay Piramal

2007: spun off piramal life 2010: sold healthcare business to abbott

Rs 5,400 invested in 1998 has become approximately Rs 11 lacs Return of 28% p.a. Sensex Return: 17%

Ajay Piramal on M&A

Building Global Critical Care business

January 2005, PHL acquired the Inhalation Anaesthetics business of Rhodia for Rs 58 cr. revenues of Rs 71 cr in FY06. So the acquisition price was 0.8 times sales.

With this acquisition, we have become a dominant global player in Halothane and have gained a significant entry in the Isoflurane market, besides gaining access to the business marketing and distribution network in over 90 countries.- Ajay Piramal, Fy06 letter to shareholders

We successfully shifted production of Inhalation Anesthetic products from Rhodia UK facilities to our plant at Digwal, Hyderabad.- FY 07 letter

March 2009: Acquired Minrad and Rx Elite Minrad was acquired for $40 mil and RxElite for $7 mil. Stockholders of Minrad were bought out at just $0.12 per share.

March 2009: Acquired Minrad and Rx Elite Minrad was acquired for $40 mil and RxElite for $7 mil. Stockholders of Minrad were bought out at just $0.12 per share.

2009: Acquired Heamaccel Brand for $ 12 mil

These three acquisitions cost a total of $59 mil (approximately Rs 271 cr.)

April 2010: Acquired Bharat Serums Anesthetic Product Business

Thank you