EXTERNAL GROWTH STRATEGY

Mergers & Acquisitions

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 Backdrop…..

• Mergers occurred extensively during 1898-1902,1926-30, 1946-56

• Largest # of mergers – 1970s.

• The average size of M&A has grown to around Rs 300 crore recently where
Telecom sector - 41%, Pharma - 6% , and Broking and asset management firms
have also contributed significantly

• In the recent past, M&A has become popular with Tata, Mittal, and Reliance,
acquiring overseas companies giving a post to many other Indian corporate-
FICCI-Gujarat.
• The total value of M&A deals in India has been growing at a CAGR of around 28%
between 2002 and 2006.
• “India ranks second in capital market inflows and fourth in M&A

• Thomson Financial revealed that 121 Indian firms mobilised $23.96 billion while
there were 697 M&A deals worth $41.069 billion.

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Why External Growth Strategy ??

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• (M&A) & corporate restructuring are a big part of the corporate
finance world.

• Every day, Wall Street investment bankers arrange M&A

transactions, which bring separate companies together to form larger
ones.

• Not surprisingly, these actions often make the news. Deals can be
worth hundreds of millions, or even billions, of dollars. They can
dictate the fortunes of the companies involved for years to come.

• For a CEO, leading an M&A can represent the highlight of a whole

career. And it is no wonder that these MnA do happen all the time.

• Next time you flip open the newspaper’s business section, odds are
good that at least one headline will announce some kind of M&A
transaction.
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 Defining Mergers & Acquisition…
Merger..

 A merger is where two or more businesses join forces to become one organization.
 A new legal entity will be formed & decisions will need to be made regarding the
future of the newly merged organizations including who will lead and manage the
business and how cost efficiency will be achieved.
 With a merger consent is given, it is sometimes referred to a marriage between
two companies.

Acquisition…

o An acquisition is the purchase or takeover of another business, so that the

organization becomes the legal owner and controller of the business they have
acquired.
o This can be expensive as the acquiring company will be paying for the net assets,
goodwill and brand name of the company they are buying.
o With an acquisition no consent is given.

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 Difference between
Merger Acquisition
A merger happens when two firms, of When one company takes over
same size, agree to move forward & another company and clearly
exist as new company rather than establishes itself as the new owner,
remain separately owned and operated. the purchase is called an acquisition.

A purchase deal will be called a merger When the deal is unfriendly - that is,
when the CEOs of both the companies when the target company does not
agree that joining together is in the best want to be purchased, it is regarded
interest of both of their companies. as an acquisition.

Merger of equals “Merger of unequals”

Mergers are often financed by a stock In acquisitions, as the target

swap, in which the stock owners in both company ceases to exist, the buyer
companies receive an equivalent swallows the business & buyer's
quantity of stock in the new company. stock continues to be traded. cash price
per share according to a spec, C. ratio

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 Types of Merger
1. Horizontal Merger: It takes place when there is a combination of
two or more organizations in the same business, or of
organizations engaged in certain aspects of the production or
marketing processes.

Example: a company making footwear combines with another

footwear company, or a retailer of pharmaceuticals combines
with another retailer in the same business.

2. Vertical mergers: It takes place when there is a combination of two

or more organisations , not necessarily in the same business,
which create complementarily either in the terms of supply of
materials(inputs) or marketing of goods and services (outputs).

Example: a footwear company combines with a leather tannery

or with a chain of shoe retail stores

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 Types of Merger
• 3. Conglomerate mergers; it takes place when there is a
combination of two or more organizations unrelated to each
other , either in terms of customer functions, customer groups,
or alternate technologies used, for Example, a footwear
company combining with a pharmaceutical firm.

• 4. Concentric mergers: It takes place when there is a

combination of two or more organizations related to each other
either in the terms of customer functions, customer groups, or
the alternative technologies used.
• Example: A footwear company combining with a hosiery firm
making socks or another specialty footwear company, or with a
leather goods company making purses, handbags, and so

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RECENT INDIAN M&A SCENARIO…..
 Indian outbound deals, which were valued at US$ 0.7 billion in 2000-
01, increased to US$ 4.3 billion in 2005, and further crossed in 2006.
 These outbound deals comprised 60 per cent of the total mergers
and acquisitions (M&A) activity in India in 2006 15 billion-mark.
 Almost 99% of acquisitions were made with cash payments.

 The total M&A deals for the year during January-May 2007 have
been 287 with a value of US$ 47.37 billion. Of these, the total
outbound cross border deals 59.5 % of the total M&A activity in
India.

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 TAKE OVER
 A takeover in business refers to one company (the acquirer, or bidder)
purchasing another (the target). In the UK the term properly refers
to the acquisition of a public company whose shares are listed on
a stock exchange, in contrast to the acquisition of a private
company.

 TYPES

 FRIENDLY OVER/ HOSTILE TAKE OVER

When a bidder makes an offer for another company, it will

usually inform the board of the target beforehand. If the board
feels that the offer is such that the shareholders will be best
served by accepting, it will recommend the offer be accepted
by the shareholders. A takeover would be considered "hostile"
if (1) the board rejects the offer, but the bidder continues to
pursue it, or (2) if the bidder makes the offer without informing11
the board beforehand.
 TAKEOVER
 REVERSE TAKEOVER

– A reverse takeover occurs when a publicly-traded smaller

company acquires ownership of a larger company. It typically
requires reorganization of capitalization of the acquiring company.

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Introduction Joint Venture
Joint Venture is an entity
formed between two or more
companies to undertake
economic activity together
Contribute equity
Share revenue and expenses
Control the entity
Joint Ventures can be
corporations, or other legal
structure.
A good example is SBI LIFE
INSURANCE, between SBI
AND CARDIF SA of FRANCE.

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 Types Of Joint Venture

Joint Venture agreements generally take one

of three forms:
Contractual Joint Venture
Corporate Joint Venture
Partnership Joint Venture
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In a 'Contractual' joint venture, the terms, obligations, and
liabilities are set forth in a written instrument signed by both
parties.

In a 'Corporate' joint venture, the obligations, terms and

liabilities are also set forth in a written agreement, it is much more
extensive document in that it contemplates that the Joint venture
will be incorporated and become a separate legal entity.

In the 'Partnership' joint venture, the partners either form a

general or limited partnership and the rights and obligations of
the ventures are set forth in a partnership agreement.

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Basic reasons for failure of
Inadequate preplanning for the joint venture.
The hoped-for technology never developed.
Agreements could not be reached on alternative
approaches to solving the basic objectives of the
joint venture.
People with expertise in one company refused to
share knowledge with their counterparts in the
joint venture.
Parent companies are unable to share control or
compromise on difficult issues.

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Foreign Collaboration as a Strategy of
Growth
• Collaboration with foreign companies has
been found to have special appeal as a
growth strategy particularly in developing
countries. Depending on the purpose in view,
such collaboration may be classified as:

• Technical
• Financial, &
• Managerial

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 Benefits which may accrue to the
foreign collaboration are
• Earning by the way of royalty and fees for
technological collaboration, supply of drawings
and documents, technical and managerial
know-how
• Return on financial outlay;
• Market expansion in countries restricting hard
currency imports;
• Tax benefits derived in low-tax host countries.
Royalties, technical fees, and service charge
are taxed at a lower rate than profits.
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