Mergers & Acquisitions, Joint Ventures and Wholly Owned Subsidiaries Name Roll No: Ashutosh Agarkar 1 Fauzia Hasan 22 Jane Nazareth 37 Ankit Patel 41 Rajitha Pillai 44
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 Roadmap
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 GlaxoWellcome and SmithKline Beecham, both firms ceased to exist when they merged, and a new company, GlaxoSmithKline, was created. Mergers & Acquisitions 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.
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 Inbound & Outbound M&As 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
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 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 Mode of Acquisitions
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. 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. TYPES OF MERGERS
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
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
Ranbaxy Overview Case study 1: Ranbaxy Daichi
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 retire debt
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
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
JV- Goals, Benefits Goals Synergies Transfer of technology/skills Diversification Benefits Complementary Benefits Acquiring and Sharing Expertise New Business / Product Development Capacity Expansion
JV- Issues Issues in Joint Ventures Due Diligence Business Strategy Development of HR Strategies Implementation
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 CorpPreviously 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
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
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
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.
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.
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.
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.
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.
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
Steps in Valuation • Obtaining information • Reviewing data provided • Selecting a method • Applying Method • Conducting sensitivities on assumptions • Assigning Weights • Merger - Exchange Ratio • Reporting 28
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 29
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 30
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 32
Price Earnings Capitalisation Method (PECV) STRENGTHS LIMITATIONS 33
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 34
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
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
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.
Market Comparables STRENGTHS LIMITATIONS
- The Acquirer Case Study 4: Dr Reddys & Betapharma 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%
- The Target Fourth largest generic pharma company in Germany EBITD margins between 24 – 26% Portfolio of over 145 products
- The Target • Turnover Eur 186 million • 3.5 market share in Germany • Breakup of products
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
Goodies for DRL • Access to lucrative German generic drug market • Enhanced portfolio • Leverage its product development skills and low-cost manufacturing in India to boost Betapharm’s EBIT margins • Help DRL realize its ambitions of becoming a $1 billion mid-size global pharma company
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)
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
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 second-largest 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
Corus Overview Corus was formed from the merger of KoninklijkeHoogovens 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.