Description
different types of mergers, important factors in acquisitions, methods of financing mergers and acquisitions. Why M&A fails. M&A scenario in India in consumer markets, pharmaceuticals, telecom, IT and ITes, media and entertainment, steel industry. It also critically analyses Tata Corus deal.
M&A SCENARIO IN INDIA – A STUDY
OF TATA CORUS DEAL
CONTENTS
?
Introduction Different Forms and sources of Finances for M&A
?
?
M & A Scenario in India
Indian Sector analysis Tata Corus Deal
?
?
INTRODUCTION
• It is a combination of two companies into one larger company. For example: Merger of Daimler-Benz and Chrysler to form a new company, DaimlerChrysler
Merger
Acquisitions
• These are those forms of business transactions where the shares in or control of a company are taken over by persons who, prior to the change in shareholding or control, did not possess such shareholding or control
TYPES OF MERGERS (ECONOMIC RELATIONSHIP BETWEEN FIRMS)
Horizontal • merging firms are engaged in the same business bringing economies of scale brings efficiency
Vertical
• firms are vertically related to each other in supply chain --> increases the leverage on supply chain. eg. steel manufacturers are engaged in the business of coal mining
• firms which supplement an already established distinctive competence in some product technology or manufacturing process by acquiring firms with same, or similar, production techniques or product technology.
Technology extension
Market extension
• firms with an established competence in marketing acquire companies whose products are sold , distributed in the same or similar manner
• firms acquire companies in areas unrelated to their main business, there are no marketing or technological commonalities between the acquirer’s main business and the acquired firm.
Conglomerate
FACTOR’S TO CONSIDER(ROBERT BURNER)
Is either the target’s business or the deal itself complicated (broadly defined)? If so, what steps are being taken to mitigate the complexity? What are the premiums that are being paid to merge or acquire that target? Are we making any room for the errors that might occur in the calculation of the premium? Is the business environment experiencing unusual events? If so, what mechanism is being utilized to control (or leverage) the effects of those events? Have contingency plans been established to deal with unexpected developments that may arise post-acquisition? What are the processes to timely identify and address deal and post-deal issues that may arise?
How is operational team-related risk assessed and managed?
IMPORTANT FACTORS IN ACQUISITIONS
Relative size of acquiree to the acquirer. ? Acquisition Rate ? Industry commonality between the acquiree and the acquirer. ? Acquisition timing related to the market cycle ? Type of consideration (cash or securities) used in the payment ? Acquiree profitability just before the acquisition ? Price paid
?
MOTIVES FOR ACQUISITIONS
Efficiency Theory
• States that mergers are done to achieve synergies • Financial Synergy - to lower the cost of capital • Operational Synergy • Managerial Synergy - superior planning and monitoring abilities • Explains mergers aimed at market share and market power • Cross Subsidizing products – using profits from one market to sustain fight in another market • limits competition in more than one sector/market. • Deterring potential entrants in the markets • mergers are done by managers who have better information about the value of the target firm than the stock market • know the advantages that might occur by merging/acquiring
Monopoly Theory
Valuation Theory
Empire Building Theory
• Managers concerned with maximizing their power utility rather than increasing Shareholder’s value.
Disturbance • Mergers are caused due to economic disturbances. These cause changes in individual expectations and increase Theory general level of uncertainty.
MOTIVES FOR ACQUISITIONS : BUYER
PROSPECTIVE
To increase the value of the Organization’s stock, growth rate, stability of earnings & sales. To balance, complete or diversify product line. To reduce competition. To acquire needed resources quickly. To avail tax concessions & benefits. To take advantage of synergies.
METHODS OF FINANCING MERGER AND ACQUISITIONS
CASH
STOCK
Combined
SOURCE OF FINANCING
Advantages
?
Internal
The deal moves quickly ? The bid is stronger ? Less disclosure is required
?
Financing M&A
?
External
They can be used to finance large transactions ? More options are available ? External expertise
?
Internal
External
AFTER THE ACQUISITION
Timelines & Benchmarks
• By what time will the integration be completed? • Preparing the benchmarks goals
• Identifying the cultures of both entities • Identifying the key personnel & their capabilities • Soothing the nerves of the employees regarding layoff. • Keeping the employees updated about the integration.
People Issues
Asset Valuation
• • • •
Correctly valuating the intangible assets Indentifying provisions contingencies Ensuring policies related to expensing & capitalizing costs Consistency in the accounts of the two entities to be merged
Integrating Information Systems Performance measurementPost integration analysis
• Data integrity • Taking stock of the technology platforms • Ensuring adequate disaster recovery system
• Comparing the level of synergy achieved with the level of synergy required for the acquisition to provide value
WHY M&AS FAIL?
Flawed Intentions ? When the mergers are based on a booming stock market, it can spell trouble. ? Mergers are often attempt to imitate: its like a rat race, they often forget that it is not glory-seeking but a business strategy. ? The executive ego, which is boosted by buying the competition, is a major force in M&A, ? Mergers can be driven by generalized fear. Sometimes the management team feels they have no choice and must acquire a rival before being acquired. The idea is that only big players will survive a more competitive world. ? Deal is overpriced or there is over estimation in the economic benefits of the deal.
WHY M&AS FAIL?
The Obstacles ? Coping with a merger can make top managers spread their time too thinly and neglect their core business, spelling doom
?
The chances for success are further hampered if the corporate cultures of the companies are very different
?
Not enough attention paid on post merger, often focusing too intently on cutting costs following mergers, while revenues, and ultimately, profits, suffer.
INDIAN M&A SCENARIO
HIGHLIGHTS OF THE INDIAN M&A
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 US$ 15 billion-mark in 2006.
This comprised 60 per cent of the total mergers and acquisitions (M&A) activity in India in 2006. And almost 99 per cent 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 have been 102 with a value of US$ 28.19 billion, representing 59.5 per cent of the total M&A activity in India. The total M&A deals for the period January-February 2007 have been 102 with a value of US$ 36.8 billion. Of these, the total outbound cross border deals have been 40 with a value of US$ 21 billion. There were 111 M&A deals with a total value of about US$ 6.12 billion in March and April 2007. Of these, the number of outbound cross border deals was 32 with a value of US$ 3.41 billion. There were 74 M&A deals with a total value of about US$ 4.37 billion in May 2007. Of these, the number of outbound cross border deals was 30 with a value of US$ 3.79 billion.
M & A SCENARIO IN INDIA
Month
Volume
Value*
Month
Volume
Value*
Jan – 10
Feb – 10 Mar – 10
15
13 17
341.3
615.8 12303.6
Jan – 09
Feb – 09 Mar – 09
5
6 4
40.2
135.7 52.2
CONSUMER MARKETS
HOUSEHOLD AND PERSONAL CARE
Asia, Africa and Latin America are the most preferred destinations ? Major Reasons to go for acquisitions:
?
Access to new and emerging markets ? Fill gaps in existing product offerings ? Access to new product categories ? Companies need good financial & brand strength and a means to grow inorganically
?
?
Major Acquisitions:
Tura(Nigeria), PT Megasari Makmur Group (Indonesia) Keyline Brands Ltd(UK) by Godrej ? Unza Holdings Ltd(Singapore) by Wipro ? Enaleni Pharmaceuticals(South Africa) by Marico ? Fem Care Pharma(India) by Dabur
?
Food, Drinks and Consumer Goods (FDCG) Sector
?
In Q1 2010
Total Deal Value : $49.1 Billion ? Total number of Deals: 770
?
MAJOR ACQUISITIONS: CADBURY BY KRAFT FOODS FUN FOODS PRIVATE LIMITED(DELHI) BY DR OETKAR (GERMANY) RADHAKRISHNA HOSPITALITY SERVICES BY SODEXHO SA
SEGMENTS
AGRI-COMMODITIES
Major activity in this segment was in the sugar sector ? All the sugar prices have come down, the valuations have become very attractive. ? Major M&A:
?
Mawana Sugars merger with Siel Limited ? Phenil sugars Private Limited by Bajaj Hindustan Sugars ? Gokak Sugars, Ratnaprabha Sugars and Godavari Biofuel Private Ltd by Shree Renuka Sugars
?
Retail Sector
In 2010 Q2 alone there have been deals worth US $15.6 Billion
MAJOR ACQUISITIONS: PIRAMYD RETAIL BY INDIABULLS REAL ESTATE W EEKENDER BRAND BY PRIMUS RETAIL
PHARMACEUTICALS
FACTS
M&A in this sector has been on an increasing side ? Global Companies are looking for high growth markets:
?
Decline in the R&D Productivity ? Expiring patents ? Downward pricing pressure ? Sluggish growth in developed markets
?
Global companies are ready to pay premium and are looking at reducing costs through outsourcing ? Smaller companies will face difficulty in adhering to the regulations and IPR regime, making their acquisitions easier
?
Pharmaceuticals
Broadly classified into: ? Domestic ? Exports ? Contract Research and Manufacturing Services(CRAM)
MAJOR ACQUISITIONS: RANBAXY LABORATORIES BY DAIICHI SANKYO NON-ONCOLOGY PORTFOLIO OF DABUR PHARMA BY ALEMBIC PRESCRIPTION BUSINESS OF PLETHICO PHARMACEUTICALS BY SHREYA LIFE SCIENCES
DABUR PHARMA LTD BY FRESENIUS SE
HOLLISTER-STIER LABS BY JUBILANT ORGANOSYS LTD NARAYANA HRUDALAYA BY JP MORGAN AND AIG
MAJOR DEALS (VALUE TERMS) FROM 2005-10
Company Novartis Boston Scientific GE Healthcare Life Sci Technol Merck KGA Fresenius J&J Teva Target company Alcon Guidant Abbott diagnostic Applied Biosyst Millipore Renal Care Pfizer OTC Barr-Pliva $ billion Technology/product 39 in 2009, 28 in 2010 Eye care 27.5 Medical Devices 8.1 Diagnostic 6.7 DNA sequencing 6.0 Equipment 4 Dialysis 16.6 Consumer health 7.5 Generics
Teva
Novartis Mylan Novartis Pfizer Merck Bayer Schering Plough Sankyo Roche AstraZeneca Merck
Ivax
Eon Merck KGA generic Hexal Wyeth Schering Plough Schering Organon Daiichi Genentech MedImmune Serono
7.4 Generics
6.8 Generics 6.7 Generics 5.3 Generics 68 Prevnar, Enbrel Pharmaceuticals 41 Pharmaceuticals 19.7 Pharmaceuticals 14.5 Pharmaceuticals 7.7 Pharmaceuticals 47 Rituxan, Avastin, Herceptin, MoAbs, Oncology 15.6 Monoclonal Antibodies 13.5 Biologics
TELECOM
FACTS
M&A activity will be driven by 3G, WiFi related areas and MVNO models ? Unattractiveness of the domestic industry with the decrease in ARPU levels has made domestic players to look for other emerging/high growth markets ? Established players have demerged their infrastructure into independent companies to concentrate more on their core competence
?
Telecom
Telecom deals in 2010 has been around US $23 Billion in Q1
Major Acquisitions: Merger of GTL Infrastructure with telecom tower business of Reliance Communications Ltd
Acquisition of Kuwait-based Zain Telecom’s African Business by Bharti Airtel for $10.7 Billion
Incorporation of Indus Towers Limited by Bharti Airtel, Vodafone-Essar and Idea Cellular Limited
IT AND ITES
FACTS
?
?
Global companies acquire Indian IT and ITES companies for the inherent cost advantage Tier I companies look for
? ? ? ?
Specific verticals or markets Quality assets Infrastructure management services Engineering services To add scale To add reach To strengthen their service offerings
?
Mid tier companies use the inorganic route
? ? ?
?
?
Smaller companies will find it difficult to raise funds and to grow organically. They will have to consolidate to remain competitive After the global financial meltdown, large financial institutions and banks are looking to hive off their non-core businesses
IT and ITES
MAJOR ACQUISITIONS:
AXON GROUP(UK BASED SAP PROVIDER) BY HCL TECHNOLOGIES PEOPLESUPPORT(PHILIPPINES-BASED BPO) BY AEGIS BPO CITIGROUP GLOBAL SERVICES BY TCS CITI TECHNOLOGY SERVICES BY WIPRO LIMITED
MAJOR ACQUISITIONS:
WNS HOLDINGS LIMITED BY NALANDA CAPITAL CMS LIMITED BY BLACKSTONE SOFTEC GMBH (GERMANY) BY NIIT TECHNOLOGIES CAMBRIDGE SOLUTIONS LTD(INDIA) BY XCHANGING PLC. (UK) SATYAM COMPUTERS BY TECH MAHINDRA
MEDIA AND ENTERTAINMENT
FACTS
?
It has been observed that companies which acquire presence across media platforms will be on the path to sustainable profitability (KPMG)
E.g: News Corporation, Walt Disney Company ? This is the major reason for M&A in this sector:
?
Starting as a television content provider, UTV now also undertakes animation, post-production, gaming etc ? Network 18 in now into film production and financing, web properties and publishing etc.
?
SEGMENTS
?
Television Broadcasting:
CAGR of 15% ? Key Deals
?
Walt Disney acquisition of 20% stake in UTV Global Broadcasting ? NBC Universal acquisition of 26% stake in NDTV Network plc ? Merrill Lynch’s investment of USD 30 Million in Zoom Entertainment Private Ltd
?
?
Television Distribution
Morgan Stanley and India Infrastructure Holding Fund’s USD 60 million investments in Hathway Cable and Datacom Private Ltd ? Struggles with inefficiency ? M&A in this segment will be skewed towards acquiring the local cable companies.
?
SEGMENTS
?
Print:
CAGR of 10% ? One of the major private equity investments has been the DE Shaw’s investment in Amar Ujala Publications ? The readers of English dailies are considered to be from the higher income segment and hence garner greater advertising support
?
?
This has led Kotak Mahindra Bank to increase its stake in Business Standard
?
Gaming
Growth of 43% ? In 2007, UTV Software Communications acquired Indiagames and the UK based Ignition entertainment. ? Domestic Companies such as Zapak and Indiagames will seek to complement their existing portfolios and technologies through acquisitions
?
MEDIA AND ENTERTAINMENT
MAJOR ACQUISITIONS:
AXON GROUP(UK BASED SAP PROVIDER) BY HCL TECHNOLOGIES PEOPLESUPPORT(PHILIPPINES-BASED BPO) BY AEGIS BPO CITIGROUP GLOBAL SERVICES BY TCS CITI TECHNOLOGY SERVICES BY WIPRO LIMITED
MAJOR ACQUISITIONS:
WNS HOLDINGS LIMITED BY NALANDA CAPITAL CMS LIMITED BY BLACKSTONE SOFTEC GMBH (GERMANY) BY NIIT TECHNOLOGIES CAMBRIDGE SOLUTIONS LTD(INDIA) BY XCHANGING PLC. (UK) SATYAM COMPUTERS BY TECH MAHINDRA
STEEL INDUSTRY
MOTIVES FOR M&A
14%
50% Asset Seeking 36% Resource Seeking Market Seeking
Source: International journal of Business Strategy
• BRIC countries are the center of M&A activity led by China • In 2009, China fulfilled 63.9% of its steel demand by import. Chinese companies are looking to alleviate this dependency •India and China’s demand for Steel are the key drivers to spur industrial production •Least movement : Russia
TATA CORUS DEAL
TATA STEEL: INTRODUCTION
Part of one of the oldest and trusted business conglomerates of India, TATA Group ? World's 56th largest and India's 2nd largest steel company(crude steel capacity-3.8 mT) ? In the 1990’s biggest integrated plants in India and Asia. ? Tata steel first acquired the, NATSTEEL; a Singapore manufacturing plant in Feb’05-first foray in Asian and Australian markets. ? In December same year the company also acquired, Millennium Steel, a Thailand based company.
?
TATA STEEL: SWOT
STRENGTHS: 1. Low debt to equity ratio 2. lowest cost producer in world 3.Tata group has successfully acquired some companies in the past OPPORTUNITIES: 1. Exposure to global steel market. 2. consolidation trend in steel industry
WEAKNESS: 1. Lack of market penetration in Europe and NA 2. Absence of high end products in portfolio
THREATS Industry consolidation
CORUS GROUP: INTRODUCTION
? ?
?
?
Corus was formed on 6th oct’99 - merger of Koninklijke Hoogovens N.V. with British Steel Plc It has major integrated steel plants at Port Talbot, South Wales; Scunthorpe, North Lincolnshire; Teesside, Cleveland (all in the U.K) and Ijmuiden in the Netherlands. Its core business comprises of manufacturing, development and allocation of steel and aluminum products and services. Products and services – wide variety which comprise of the manufacturing of electrical steel, narrow strip, plates, packaging steel, plated steel strip, Semi finished steel, tube products, wire rod and rail products and services.
CORUS GROUP: SWOT
STRENGTHS: 1. World's ninth largest and Europe's largest steel producer 2. Wide range of products 3. Operating facilities spread in whole Europe OPPORTUNITIES: 1. Consolidation trend 2. To get right price at a time when market is less volatile
WEAKNESS: 1. Corus was in bad shape because of high operational cost 2. Tariff imposed by Bush regime led to loss in clientele
THREATS 1. Huge pension liability might have led to collapse of deal 2. Disagreement of labor and government due to possibility of job cuts
RATIONALE FOR ACQUISITION
Tata Steel • Lowest Cost Steel Manufacturer & self sufficient in raw material • Strong retail & distribution network • Needed Global presence • Would become 5th largest steel producer of Corus • Looking for iron ore source • Access to high quality cheap raw material from India • R&D and technology transfer between both companies • Can write off its debt and come out of financial crisis
THE TIME LINE OF DEAL
September 20, 2006: Corus Steel has decided to acquire a strategic partnership
October 6, 2006: The initial offer from Tata Steel is considered to be too low
October 17, 2006: Tata Steel has kept its offer to 455p per share.
October 20, 2006: Corus accepts terms of ? 4.3 billion takeover bid from Tata Steel
April 2, 2007: Tata Steel manages to win the acquisition
January 31, 2007: Agrees to offer Corus investors 608 pence per share in cash
December 18, 2006: Brazil's CSN bid for Corus at 515 pence per share in cash,
November 18, 2006: CSN approached the board of the company with a bid of 475p per share
POST ACQUISITION TATA-CORUS
B Muthuraman Tata Steel Members Ratan Tata Corus Members T Mukherjee Kaushik Chatterjee Phillipe Varin David Loyd Rauke Hensta
• Majority of the management team of the earlier Corus was retained • Corus is now working as a part of the Tata Steel, following their directions • Tata’s policy are now been followed in the Corus Steel
TATA CORUS’S SWOT ANALYSIS
STRENGTHS: 1. Tata steel rises from 56th to 6th in steel production 2. Cost advantage of operation in India is leveraged in western world 3. Differentiation based on innovative Corus R&D
OPPORTUNITIES: 1. Chinese counterparts depend on imported raw material which limits their bargaining power 2. Strong R&D combined with competitive advantage of TATA 3. Opens market opportunities
WEAKNESS: 1. Corus EBITDA was much lower than the that of Tata steel at the time of merger 2. Tata's merger plans fuelled by the patriotic passion
THREATS: 1.Capacity Addition by Russian, Brazilian and Chinese counterparts which might lead to lower steel prices 2. Company cash flows might decrease due to declining performance by Corus
SYNERGIES IN THE TATA CORUS DEAL
TATA Steel gained access to European markets and Corus to Asian markets ? TATA Steel became a Global player ? Tata was one of the lowest cost steel producers & Corus was fighting to keep its productions costs under control. ? Technology transfer and cross-fertilization of R&D capabilities ? Economies of Scale of the combined entity ? Better equipped to handle the intensifying competition in the international markets ? Operational efficiencies through enhanced options to optimize asset base and material flow, including sourcing of materials and semi-finished steel
?
PITFALLS
High value paid. Approximately 7.7 times its Enterprise Value. ? Corus’ EBITDA was at 8% which was much lower as compared to Tata Steel’s 30%. ? Debt of US $ 6.14 was raised against the cash flows of Corus. It was a risky proposition. ? Tata’s debt equity ratio was adversely affected to 2.74:1 from 1.1 which it was maintaining earlier. ? Fast consumption of Tata Steel’s captive iron ore reserves as production capacity increased from 5.3 million (estimated for 50 years at this capacity) to 27 million tons of steel per annum.
?
CONCLUSION
?
Only on numbers, TATA ended up paying 68% above the average price, else
If TATA Steel were to create, a Greenfield project comparable to Corus, it would end up investing 70% to 85% more than it is paying now. ? Setting up a new factory, a 3 to 5 years project if everything goes well, has great execution risk.
?
?
It was a timely move by the Tata’s, given the rising consolidation trend in the market
Thank You!
doc_814497140.pptx
different types of mergers, important factors in acquisitions, methods of financing mergers and acquisitions. Why M&A fails. M&A scenario in India in consumer markets, pharmaceuticals, telecom, IT and ITes, media and entertainment, steel industry. It also critically analyses Tata Corus deal.
M&A SCENARIO IN INDIA – A STUDY
OF TATA CORUS DEAL
CONTENTS
?
Introduction Different Forms and sources of Finances for M&A
?
?
M & A Scenario in India
Indian Sector analysis Tata Corus Deal
?
?
INTRODUCTION
• It is a combination of two companies into one larger company. For example: Merger of Daimler-Benz and Chrysler to form a new company, DaimlerChrysler
Merger
Acquisitions
• These are those forms of business transactions where the shares in or control of a company are taken over by persons who, prior to the change in shareholding or control, did not possess such shareholding or control
TYPES OF MERGERS (ECONOMIC RELATIONSHIP BETWEEN FIRMS)
Horizontal • merging firms are engaged in the same business bringing economies of scale brings efficiency
Vertical
• firms are vertically related to each other in supply chain --> increases the leverage on supply chain. eg. steel manufacturers are engaged in the business of coal mining
• firms which supplement an already established distinctive competence in some product technology or manufacturing process by acquiring firms with same, or similar, production techniques or product technology.
Technology extension
Market extension
• firms with an established competence in marketing acquire companies whose products are sold , distributed in the same or similar manner
• firms acquire companies in areas unrelated to their main business, there are no marketing or technological commonalities between the acquirer’s main business and the acquired firm.
Conglomerate
FACTOR’S TO CONSIDER(ROBERT BURNER)
Is either the target’s business or the deal itself complicated (broadly defined)? If so, what steps are being taken to mitigate the complexity? What are the premiums that are being paid to merge or acquire that target? Are we making any room for the errors that might occur in the calculation of the premium? Is the business environment experiencing unusual events? If so, what mechanism is being utilized to control (or leverage) the effects of those events? Have contingency plans been established to deal with unexpected developments that may arise post-acquisition? What are the processes to timely identify and address deal and post-deal issues that may arise?
How is operational team-related risk assessed and managed?
IMPORTANT FACTORS IN ACQUISITIONS
Relative size of acquiree to the acquirer. ? Acquisition Rate ? Industry commonality between the acquiree and the acquirer. ? Acquisition timing related to the market cycle ? Type of consideration (cash or securities) used in the payment ? Acquiree profitability just before the acquisition ? Price paid
?
MOTIVES FOR ACQUISITIONS
Efficiency Theory
• States that mergers are done to achieve synergies • Financial Synergy - to lower the cost of capital • Operational Synergy • Managerial Synergy - superior planning and monitoring abilities • Explains mergers aimed at market share and market power • Cross Subsidizing products – using profits from one market to sustain fight in another market • limits competition in more than one sector/market. • Deterring potential entrants in the markets • mergers are done by managers who have better information about the value of the target firm than the stock market • know the advantages that might occur by merging/acquiring
Monopoly Theory
Valuation Theory
Empire Building Theory
• Managers concerned with maximizing their power utility rather than increasing Shareholder’s value.
Disturbance • Mergers are caused due to economic disturbances. These cause changes in individual expectations and increase Theory general level of uncertainty.
MOTIVES FOR ACQUISITIONS : BUYER
PROSPECTIVE
To increase the value of the Organization’s stock, growth rate, stability of earnings & sales. To balance, complete or diversify product line. To reduce competition. To acquire needed resources quickly. To avail tax concessions & benefits. To take advantage of synergies.
METHODS OF FINANCING MERGER AND ACQUISITIONS
CASH
STOCK
Combined
SOURCE OF FINANCING
Advantages
?
Internal
The deal moves quickly ? The bid is stronger ? Less disclosure is required
?
Financing M&A
?
External
They can be used to finance large transactions ? More options are available ? External expertise
?
Internal
External
AFTER THE ACQUISITION
Timelines & Benchmarks
• By what time will the integration be completed? • Preparing the benchmarks goals
• Identifying the cultures of both entities • Identifying the key personnel & their capabilities • Soothing the nerves of the employees regarding layoff. • Keeping the employees updated about the integration.
People Issues
Asset Valuation
• • • •
Correctly valuating the intangible assets Indentifying provisions contingencies Ensuring policies related to expensing & capitalizing costs Consistency in the accounts of the two entities to be merged
Integrating Information Systems Performance measurementPost integration analysis
• Data integrity • Taking stock of the technology platforms • Ensuring adequate disaster recovery system
• Comparing the level of synergy achieved with the level of synergy required for the acquisition to provide value
WHY M&AS FAIL?
Flawed Intentions ? When the mergers are based on a booming stock market, it can spell trouble. ? Mergers are often attempt to imitate: its like a rat race, they often forget that it is not glory-seeking but a business strategy. ? The executive ego, which is boosted by buying the competition, is a major force in M&A, ? Mergers can be driven by generalized fear. Sometimes the management team feels they have no choice and must acquire a rival before being acquired. The idea is that only big players will survive a more competitive world. ? Deal is overpriced or there is over estimation in the economic benefits of the deal.
WHY M&AS FAIL?
The Obstacles ? Coping with a merger can make top managers spread their time too thinly and neglect their core business, spelling doom
?
The chances for success are further hampered if the corporate cultures of the companies are very different
?
Not enough attention paid on post merger, often focusing too intently on cutting costs following mergers, while revenues, and ultimately, profits, suffer.
INDIAN M&A SCENARIO
HIGHLIGHTS OF THE INDIAN M&A
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 US$ 15 billion-mark in 2006.
This comprised 60 per cent of the total mergers and acquisitions (M&A) activity in India in 2006. And almost 99 per cent 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 have been 102 with a value of US$ 28.19 billion, representing 59.5 per cent of the total M&A activity in India. The total M&A deals for the period January-February 2007 have been 102 with a value of US$ 36.8 billion. Of these, the total outbound cross border deals have been 40 with a value of US$ 21 billion. There were 111 M&A deals with a total value of about US$ 6.12 billion in March and April 2007. Of these, the number of outbound cross border deals was 32 with a value of US$ 3.41 billion. There were 74 M&A deals with a total value of about US$ 4.37 billion in May 2007. Of these, the number of outbound cross border deals was 30 with a value of US$ 3.79 billion.
M & A SCENARIO IN INDIA
Month
Volume
Value*
Month
Volume
Value*
Jan – 10
Feb – 10 Mar – 10
15
13 17
341.3
615.8 12303.6
Jan – 09
Feb – 09 Mar – 09
5
6 4
40.2
135.7 52.2
CONSUMER MARKETS
HOUSEHOLD AND PERSONAL CARE
Asia, Africa and Latin America are the most preferred destinations ? Major Reasons to go for acquisitions:
?
Access to new and emerging markets ? Fill gaps in existing product offerings ? Access to new product categories ? Companies need good financial & brand strength and a means to grow inorganically
?
?
Major Acquisitions:
Tura(Nigeria), PT Megasari Makmur Group (Indonesia) Keyline Brands Ltd(UK) by Godrej ? Unza Holdings Ltd(Singapore) by Wipro ? Enaleni Pharmaceuticals(South Africa) by Marico ? Fem Care Pharma(India) by Dabur
?
Food, Drinks and Consumer Goods (FDCG) Sector
?
In Q1 2010
Total Deal Value : $49.1 Billion ? Total number of Deals: 770
?
MAJOR ACQUISITIONS: CADBURY BY KRAFT FOODS FUN FOODS PRIVATE LIMITED(DELHI) BY DR OETKAR (GERMANY) RADHAKRISHNA HOSPITALITY SERVICES BY SODEXHO SA
SEGMENTS
AGRI-COMMODITIES
Major activity in this segment was in the sugar sector ? All the sugar prices have come down, the valuations have become very attractive. ? Major M&A:
?
Mawana Sugars merger with Siel Limited ? Phenil sugars Private Limited by Bajaj Hindustan Sugars ? Gokak Sugars, Ratnaprabha Sugars and Godavari Biofuel Private Ltd by Shree Renuka Sugars
?
Retail Sector
In 2010 Q2 alone there have been deals worth US $15.6 Billion
MAJOR ACQUISITIONS: PIRAMYD RETAIL BY INDIABULLS REAL ESTATE W EEKENDER BRAND BY PRIMUS RETAIL
PHARMACEUTICALS
FACTS
M&A in this sector has been on an increasing side ? Global Companies are looking for high growth markets:
?
Decline in the R&D Productivity ? Expiring patents ? Downward pricing pressure ? Sluggish growth in developed markets
?
Global companies are ready to pay premium and are looking at reducing costs through outsourcing ? Smaller companies will face difficulty in adhering to the regulations and IPR regime, making their acquisitions easier
?
Pharmaceuticals
Broadly classified into: ? Domestic ? Exports ? Contract Research and Manufacturing Services(CRAM)
MAJOR ACQUISITIONS: RANBAXY LABORATORIES BY DAIICHI SANKYO NON-ONCOLOGY PORTFOLIO OF DABUR PHARMA BY ALEMBIC PRESCRIPTION BUSINESS OF PLETHICO PHARMACEUTICALS BY SHREYA LIFE SCIENCES
DABUR PHARMA LTD BY FRESENIUS SE
HOLLISTER-STIER LABS BY JUBILANT ORGANOSYS LTD NARAYANA HRUDALAYA BY JP MORGAN AND AIG
MAJOR DEALS (VALUE TERMS) FROM 2005-10
Company Novartis Boston Scientific GE Healthcare Life Sci Technol Merck KGA Fresenius J&J Teva Target company Alcon Guidant Abbott diagnostic Applied Biosyst Millipore Renal Care Pfizer OTC Barr-Pliva $ billion Technology/product 39 in 2009, 28 in 2010 Eye care 27.5 Medical Devices 8.1 Diagnostic 6.7 DNA sequencing 6.0 Equipment 4 Dialysis 16.6 Consumer health 7.5 Generics
Teva
Novartis Mylan Novartis Pfizer Merck Bayer Schering Plough Sankyo Roche AstraZeneca Merck
Ivax
Eon Merck KGA generic Hexal Wyeth Schering Plough Schering Organon Daiichi Genentech MedImmune Serono
7.4 Generics
6.8 Generics 6.7 Generics 5.3 Generics 68 Prevnar, Enbrel Pharmaceuticals 41 Pharmaceuticals 19.7 Pharmaceuticals 14.5 Pharmaceuticals 7.7 Pharmaceuticals 47 Rituxan, Avastin, Herceptin, MoAbs, Oncology 15.6 Monoclonal Antibodies 13.5 Biologics
TELECOM
FACTS
M&A activity will be driven by 3G, WiFi related areas and MVNO models ? Unattractiveness of the domestic industry with the decrease in ARPU levels has made domestic players to look for other emerging/high growth markets ? Established players have demerged their infrastructure into independent companies to concentrate more on their core competence
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Telecom
Telecom deals in 2010 has been around US $23 Billion in Q1
Major Acquisitions: Merger of GTL Infrastructure with telecom tower business of Reliance Communications Ltd
Acquisition of Kuwait-based Zain Telecom’s African Business by Bharti Airtel for $10.7 Billion
Incorporation of Indus Towers Limited by Bharti Airtel, Vodafone-Essar and Idea Cellular Limited
IT AND ITES
FACTS
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Global companies acquire Indian IT and ITES companies for the inherent cost advantage Tier I companies look for
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Specific verticals or markets Quality assets Infrastructure management services Engineering services To add scale To add reach To strengthen their service offerings
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Mid tier companies use the inorganic route
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Smaller companies will find it difficult to raise funds and to grow organically. They will have to consolidate to remain competitive After the global financial meltdown, large financial institutions and banks are looking to hive off their non-core businesses
IT and ITES
MAJOR ACQUISITIONS:
AXON GROUP(UK BASED SAP PROVIDER) BY HCL TECHNOLOGIES PEOPLESUPPORT(PHILIPPINES-BASED BPO) BY AEGIS BPO CITIGROUP GLOBAL SERVICES BY TCS CITI TECHNOLOGY SERVICES BY WIPRO LIMITED
MAJOR ACQUISITIONS:
WNS HOLDINGS LIMITED BY NALANDA CAPITAL CMS LIMITED BY BLACKSTONE SOFTEC GMBH (GERMANY) BY NIIT TECHNOLOGIES CAMBRIDGE SOLUTIONS LTD(INDIA) BY XCHANGING PLC. (UK) SATYAM COMPUTERS BY TECH MAHINDRA
MEDIA AND ENTERTAINMENT
FACTS
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It has been observed that companies which acquire presence across media platforms will be on the path to sustainable profitability (KPMG)
E.g: News Corporation, Walt Disney Company ? This is the major reason for M&A in this sector:
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Starting as a television content provider, UTV now also undertakes animation, post-production, gaming etc ? Network 18 in now into film production and financing, web properties and publishing etc.
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SEGMENTS
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Television Broadcasting:
CAGR of 15% ? Key Deals
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Walt Disney acquisition of 20% stake in UTV Global Broadcasting ? NBC Universal acquisition of 26% stake in NDTV Network plc ? Merrill Lynch’s investment of USD 30 Million in Zoom Entertainment Private Ltd
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Television Distribution
Morgan Stanley and India Infrastructure Holding Fund’s USD 60 million investments in Hathway Cable and Datacom Private Ltd ? Struggles with inefficiency ? M&A in this segment will be skewed towards acquiring the local cable companies.
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SEGMENTS
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Print:
CAGR of 10% ? One of the major private equity investments has been the DE Shaw’s investment in Amar Ujala Publications ? The readers of English dailies are considered to be from the higher income segment and hence garner greater advertising support
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This has led Kotak Mahindra Bank to increase its stake in Business Standard
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Gaming
Growth of 43% ? In 2007, UTV Software Communications acquired Indiagames and the UK based Ignition entertainment. ? Domestic Companies such as Zapak and Indiagames will seek to complement their existing portfolios and technologies through acquisitions
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MEDIA AND ENTERTAINMENT
MAJOR ACQUISITIONS:
AXON GROUP(UK BASED SAP PROVIDER) BY HCL TECHNOLOGIES PEOPLESUPPORT(PHILIPPINES-BASED BPO) BY AEGIS BPO CITIGROUP GLOBAL SERVICES BY TCS CITI TECHNOLOGY SERVICES BY WIPRO LIMITED
MAJOR ACQUISITIONS:
WNS HOLDINGS LIMITED BY NALANDA CAPITAL CMS LIMITED BY BLACKSTONE SOFTEC GMBH (GERMANY) BY NIIT TECHNOLOGIES CAMBRIDGE SOLUTIONS LTD(INDIA) BY XCHANGING PLC. (UK) SATYAM COMPUTERS BY TECH MAHINDRA
STEEL INDUSTRY
MOTIVES FOR M&A
14%
50% Asset Seeking 36% Resource Seeking Market Seeking
Source: International journal of Business Strategy
• BRIC countries are the center of M&A activity led by China • In 2009, China fulfilled 63.9% of its steel demand by import. Chinese companies are looking to alleviate this dependency •India and China’s demand for Steel are the key drivers to spur industrial production •Least movement : Russia
TATA CORUS DEAL
TATA STEEL: INTRODUCTION
Part of one of the oldest and trusted business conglomerates of India, TATA Group ? World's 56th largest and India's 2nd largest steel company(crude steel capacity-3.8 mT) ? In the 1990’s biggest integrated plants in India and Asia. ? Tata steel first acquired the, NATSTEEL; a Singapore manufacturing plant in Feb’05-first foray in Asian and Australian markets. ? In December same year the company also acquired, Millennium Steel, a Thailand based company.
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TATA STEEL: SWOT
STRENGTHS: 1. Low debt to equity ratio 2. lowest cost producer in world 3.Tata group has successfully acquired some companies in the past OPPORTUNITIES: 1. Exposure to global steel market. 2. consolidation trend in steel industry
WEAKNESS: 1. Lack of market penetration in Europe and NA 2. Absence of high end products in portfolio
THREATS Industry consolidation
CORUS GROUP: INTRODUCTION
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Corus was formed on 6th oct’99 - merger of Koninklijke Hoogovens N.V. with British Steel Plc It has major integrated steel plants at Port Talbot, South Wales; Scunthorpe, North Lincolnshire; Teesside, Cleveland (all in the U.K) and Ijmuiden in the Netherlands. Its core business comprises of manufacturing, development and allocation of steel and aluminum products and services. Products and services – wide variety which comprise of the manufacturing of electrical steel, narrow strip, plates, packaging steel, plated steel strip, Semi finished steel, tube products, wire rod and rail products and services.
CORUS GROUP: SWOT
STRENGTHS: 1. World's ninth largest and Europe's largest steel producer 2. Wide range of products 3. Operating facilities spread in whole Europe OPPORTUNITIES: 1. Consolidation trend 2. To get right price at a time when market is less volatile
WEAKNESS: 1. Corus was in bad shape because of high operational cost 2. Tariff imposed by Bush regime led to loss in clientele
THREATS 1. Huge pension liability might have led to collapse of deal 2. Disagreement of labor and government due to possibility of job cuts
RATIONALE FOR ACQUISITION
Tata Steel • Lowest Cost Steel Manufacturer & self sufficient in raw material • Strong retail & distribution network • Needed Global presence • Would become 5th largest steel producer of Corus • Looking for iron ore source • Access to high quality cheap raw material from India • R&D and technology transfer between both companies • Can write off its debt and come out of financial crisis
THE TIME LINE OF DEAL
September 20, 2006: Corus Steel has decided to acquire a strategic partnership
October 6, 2006: The initial offer from Tata Steel is considered to be too low
October 17, 2006: Tata Steel has kept its offer to 455p per share.
October 20, 2006: Corus accepts terms of ? 4.3 billion takeover bid from Tata Steel
April 2, 2007: Tata Steel manages to win the acquisition
January 31, 2007: Agrees to offer Corus investors 608 pence per share in cash
December 18, 2006: Brazil's CSN bid for Corus at 515 pence per share in cash,
November 18, 2006: CSN approached the board of the company with a bid of 475p per share
POST ACQUISITION TATA-CORUS
B Muthuraman Tata Steel Members Ratan Tata Corus Members T Mukherjee Kaushik Chatterjee Phillipe Varin David Loyd Rauke Hensta
• Majority of the management team of the earlier Corus was retained • Corus is now working as a part of the Tata Steel, following their directions • Tata’s policy are now been followed in the Corus Steel
TATA CORUS’S SWOT ANALYSIS
STRENGTHS: 1. Tata steel rises from 56th to 6th in steel production 2. Cost advantage of operation in India is leveraged in western world 3. Differentiation based on innovative Corus R&D
OPPORTUNITIES: 1. Chinese counterparts depend on imported raw material which limits their bargaining power 2. Strong R&D combined with competitive advantage of TATA 3. Opens market opportunities
WEAKNESS: 1. Corus EBITDA was much lower than the that of Tata steel at the time of merger 2. Tata's merger plans fuelled by the patriotic passion
THREATS: 1.Capacity Addition by Russian, Brazilian and Chinese counterparts which might lead to lower steel prices 2. Company cash flows might decrease due to declining performance by Corus
SYNERGIES IN THE TATA CORUS DEAL
TATA Steel gained access to European markets and Corus to Asian markets ? TATA Steel became a Global player ? Tata was one of the lowest cost steel producers & Corus was fighting to keep its productions costs under control. ? Technology transfer and cross-fertilization of R&D capabilities ? Economies of Scale of the combined entity ? Better equipped to handle the intensifying competition in the international markets ? Operational efficiencies through enhanced options to optimize asset base and material flow, including sourcing of materials and semi-finished steel
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PITFALLS
High value paid. Approximately 7.7 times its Enterprise Value. ? Corus’ EBITDA was at 8% which was much lower as compared to Tata Steel’s 30%. ? Debt of US $ 6.14 was raised against the cash flows of Corus. It was a risky proposition. ? Tata’s debt equity ratio was adversely affected to 2.74:1 from 1.1 which it was maintaining earlier. ? Fast consumption of Tata Steel’s captive iron ore reserves as production capacity increased from 5.3 million (estimated for 50 years at this capacity) to 27 million tons of steel per annum.
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CONCLUSION
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Only on numbers, TATA ended up paying 68% above the average price, else
If TATA Steel were to create, a Greenfield project comparable to Corus, it would end up investing 70% to 85% more than it is paying now. ? Setting up a new factory, a 3 to 5 years project if everything goes well, has great execution risk.
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It was a timely move by the Tata’s, given the rising consolidation trend in the market
Thank You!
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