Welcome

MERGERS
AND
ACQUISTION
AGENDA
• Merger
• Types of Merger
• Acquisition
• Types of Acquisition
• Motives & Benefits of M&A
• Business valuation
• SEBI Takeover Code
• Strategies Used to Prevent Hostile Acquisition
• Some M&A in India
 MERGER
A merger is when you integrate the business with
another and share control of the combined businesses
with other owner. A merger involves the mutual
decision of two companies to combine and become
one entity.

Merger: 2 firms combine all Assets and

Liabilities
Acquirer Target
Usually take a new name
 Types of Mergers
Horizontal Merger

Combination of two or more firms operating in the same stage

of production.

Example: The merger of ACC with Damodar Cements.

Vertical Merger
Combination of two firms that operate in different stages of
production.

Example: Cement manufacturing company acquires a company

engaged in civil construction.
 Cont….
Conglomerate Merger

Merger of firms in unrelated lines of business that are neither

competitors nor potential or actual customers or suppliers of each
other.

Example: General Electric buying NBC television.

Product Extension Merger

It is executed among companies which sell different products of a
related category.
Market Extension Merger
It occurs between two companies that sell identical products in
different markets.
 ACQUISITION
Acquisition may be defined as an act of acquiring effective control
over assets or management of a company by another company
without any combination of businesses or companies.
 Types of Acquisition
Friendly Acquisition

The acquisition of a target company that is willing to be taken

over.

Hostile Acquisition

A takeover in which the target has no desire to be acquired and

actively rebuffs the acquirer and refuses to provide any
confidential information.
 Motives & Benefits of M&A

Economies of large scale Business: This types of Organization

enjoys both internal and external economics which generally lead
to reduction in Cost and Increase in Profits.

Adoption of Modern Technology: Corporate Organization require

large resources for adoption of modern technology which may be
out of reach of an individual firm. This may induce M&A of
different firms .
Example: Hindustan Construction Company.(India) and Karl
Steiner AG(KSAG) Pvt. Ltd. (Switzerland)
 Cont….

Effect of Trade Cycles: Trade Cycles are the periods of Ups and
Downs in the economy. These periods create unhealthy
competition in the market and act as a motivating factor of M&A.

Patent rights: The Exclusive right to use the invention of any new
machines, method, or idea is one of the reasons favoring M&A.
Patents have given monopoly position to many firms in the market
at national and international level.
Example: Ranbaxy Laboratories Ltd.(India) and Daiichi Sankyo
Co.
Ltd.(Japan)
 Cont…
Elimination of Competition: It is one of the motivating factors
for M&A because it eliminates severe, intense and wasteful
expenditure by different competing Organization.

Greater value Generation(Synergy):Companies go for M&A

from the idea that, the joint company will be able to generate
more value than the separate firms. When a company buys
another company, It expect that the newly generated
shareholder value will be higher than the value of the sum of
share of the two separate companies.
 Cont…

Desire to unified control and self sufficiency: Firms

which depends on other units for their raw material
requirements or which are engaged in different process
of product for ensuring uninterrupted supply of raw
materials are encouraged and benefitted by M&A. By
bringing such firms under unified control, their
dependence on other firms can be avoided.

Taxes: A profitable can buy a loss maker to use the

target’s tax right off.
Cont……

M&A are also beneficial:

1. When a firm wants to enter a new market.

2. When a firm wants to introduce new product

through Research and Development.

3. When a firm wants to achieve administrative

benefits.
Business valuation
• Asset Valuation
• Relative valuation: Relative is a comparable concept of
valuation in which we compare the two entity and based
on their comparison we will be valued the business.
Example:
1. FMCG P/Sales
2. Real P/Assets
3. Bank P/Assets
4. Bharti EV/Subscriber
5. HUL EV/Sales
6. Steel EV/Cubic Metric Tonnage
SEBI TAKEOVER CODE
OBJECTIVES OF TAKEOVER CODE
• To provide transparency in bulk acquisition.
• To provide reasonable profit to the small
shareholders of the target company.
(Under section 15H of SEBI ACT, 1992, if the
acquirer fails to comply with SEBI takeover
code, he shall be liable to a penalty of 25 crore or
3 times of the amount of profit made out of such
failure, whichever is high)
ELEMENTS OF TAKEOVER CODE
• Acquirer/Invader
• Person Acting in Concert(PAC)
• Target Company
• Disclosure Level
• Trigger Point
• Public Announcement
• Escrow Account
• First Counter Bid
• Upward Revision
• Creeping Acquisition Zone-1
• Continual Disclosure
• Creeping Acquisition Zone-2
• Public Announcement
• De-Listing Zone
ELEMENTS OF TAKEOVER CODE
• ACQUIRER
– A person interested in buying the shares, voting
right, or control of the target company.
• PERSON ACTING In CONCERT(PAC)
– PAC are the persons who joins the hands with the
acquirer to acquire the shares of the target company.
• TARGET COMPANY
– Target company means the listed Indian company
whose shares/control is acquired by the
acquirer/PAC.
QUIZ
• Whether SEBI takeover code, would apply in
following situation or not

S . SITUATION APPLICABLE
No
1. TATA steel acquired Corus
2. Daichii Sankyo acquired Ranbaxy
3. Vodafone acquired 66.67% in Hutch
Essar India(Pvt) LIMITED
4. Grasim acquired L & T cement company
5. Mittal steel acquired Arcelor
 DISCLOSURE LEVEL
• DISCLOSURE LEVEL

Mr. A’s(Acquirer) Shareholding in %Shareholding Whether Mr. A is

the Target Company required to make
disclosure
Initial Shareholding as on 23/02/xxxx 3% No
Shares acquired by Mr A on 24/05/xxxx 2.1% Yes
TOTAL 5.1%
Shares acquired by Mr A on 13/06/xxxx 3.5% No

Shares acquired by Mr A on 18/06/xxxx 1.5% Yes

TOTAL 10.1%
Shares acquired by Mr A on 12/07/xxxx 1.7% No

Shares acquired by Mr A on 8/09/xxxx 2.4% Yes

TOTAL 14.2%
Shares acquired by Mr A on 11/10/xxxx .79% No

TOTAL 14.99%
ELEMENTS OF TAKEOVER CODE
• TRIGGER POINT
▫ It is the point in which once the acquirer/PAC acquires
15% shareholding, they have to make a public
announcement(PA) within 4 days to acquire 20% more
stake of the target company. Such PA is drafted by
merchant bankers appointed by acquirer.
• ESCROW ACCOUNT
▫ It is opened by acquirer, but controlled by merchant
banker. In this account 25% of the first 100cr and
minimum 10% of the balance amount is deposited.
ELEMENTS OF TAKEOVER CODE
• FIRST COUNTER BID
▫ It is the first bid given by the promoters of the
target company against the acquirer to buy their
own share within 21 days of PA.
• UPWARD REVISIONS Of OFFER
▫ The acquirer & promoter of the company is given
“n” number chances for upward revision of their
offer price.
ELEMENTS OF TAKEOVER CODE
• CREEPING ACQUISITION ZONE-1
▫ In this acquirer can acquire 55% shareholding. In each
fiscal year of the company he can acquire 5% of shares to
buy more than 5% of share he has to make a PA.
• CONTINUAL DISCLOSURE
▫ Every person holding 15% shares of the target company
shall disclose his shareholding to the target company.
Promoters discloses this information.
• CREEPING ACQUISITION ZONE-2
▫ In this the acquirer can acquire up to 75% of shares of the
target company but only from open market.
DELISTING ZONE
• If the acquirer acquires more than 75% shares of
the target company, then, either he shall off load
extra shareholding back into the market, or
otherwise he shall pick up the remaining shares
from market as per SEBI(delisting of securities)
Guidelines, 2003 by the way of reverse book
building.
Strategies Used to Prevent Hostile
Acquisition
• GOLDEN PARACHUTING
▫ It is the contract with between the target company and
it’s managing director that, he is removed before his
tenure, then the company is liable to pay him big
compensation.
▫ In India it is prohibited according to section 320 of the
Companies act.
• SHARK REPELLANT
▫ AOA of the target company is modified such that it
become unattractive.
Ex- Issue of equity shares to it’s promoter.
Cont….
• CROWN JEWEL
▫ Target company disposes its profitable assets.
• PAC MAN
▫ Offence is a best way of defense.
• WHITE KNIGHT
▫ Target company takes the help of another
person(white knight) to make a counter bid.
• GRAY KNIGHT
▫ Target company’s friend acquire the shares of
acquirer company.
Cont….
• POISON PILLS
▫ Issue of low price preferential shares to the existing
shareholders.
• GREEN MAIL
▫ Love letter to acquirer
• FENCING OFF
▫ Filing false litigation against the acquirer.
• REVERSE BID
▫ Exchange of shares between the target company
shares and shareholders of acquirer company.
 Some M&A in India

The proposed merger between Bharti Airtel and South Africa's

MTN would be India's biggest-ever M&A deal.
The potential value of the Bharti Airtel-MTN deal would amount
to $23 billion.
As per the exploring agreement, MTN and its shareholders
would acquire around 36 per cent economic interest in Bharti
Airtel, while, the Sunil Mittal - promoted Bharti Airtel would
acquire 49 per cent stake in South African telecom giant MTN.
 Tata Steel-Corus: $12.2 billion.

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 $12.2 billion.The deal is the largest
Indian takeover of a foreign company till date and made Tata
Steel the world's fifth-largest steel group
Vodafone-Hutchison Essar: $11.1 billion.

On February 11, 2007, Vodafone agreed to buy out the

controlling interest of 67% held by Li Ka Shing Holdings in
Hutch-Essar for $11.1 billion.
This is the second-largest M&A deal ever involving an Indian
company.
Vodafone Essar is owned by Vodafone 52%, Essar Group 33%
and other Indian nationals 15%.
HDFC Bank-Centurion Bank of Punjab: $2.4
billion.

HDFC Bank approved the acquisition of Centurion Bank of

Punjab for Rs 9,510 crore ($2.4 billion) in one of the largest
mergers in the financial sector in India in February, 2008.

CBoP shareholders got one share of HDFC Bank for every 29

shares held by them. Post-acquisition, HDFC Bank became the
second-largest private sector bank in India.
MAJOR MERGERS AND ACQUISITIONS
IN INDIA
Recently the Indian companies have undertaken some
important acquisitions. Some of those are as follows:

#Hindalco acquired Canada based Novelis. The deal

involved transaction of $5,982 million.
#Tata Steel acquired Corus Group plc. The acquisition deal
amounted to $12,000 million.
#Dr. Reddy's Labs acquired Betapharm through a deal
worth of $597 million.
# Ranbaxy Labs acquired Terapia SA. The deal amounted to
$324 million.
# Suzlon Energy acquired Hansen Group through a deal of
$565 million.
# The acquisition of Daewoo Electronics Corp. by Videocon
involved transaction of $729 million.
# HPCL acquired Kenya Petroleum Refinery Ltd.. The deal
amounted to $500 million.
# VSNL acquired Teleglobe through a deal of $239 million.
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