MERGER AND ACQUISITIONS Poonam Mehra National Institute of

MERGER AND ACQUISITIONS Poonam Mehra National Institute of Securities Markets

Corporate Restructuring: broad array of activities that expand or contract a firm’s operation -modify its financial structure -change organizational structure & internal functioning Expansion Sell offs Corporate Control Changes in Ownership Structure

Expansion Mergers: is the process by which one corporation or business entity unifies its activities into that of another corporation or business activity where by its operations are continued as that of the merged corporation or business entity. Types: Horizontal Merger, Vertical Merger, Conglomerate Merger Tender Offers: The corporation seeking to control another corporation/firms asks the stockholders of the target firms to submit or tender their shares of stock in the firm In case, board of directors favour the tender offer, it is referred to as Acquisition In case board of directors do not support, the target company can replace them and take control of the company: Hostile takeover Joint Ventures: Involves intersection of only a small fraction of the activities of the companies involved and usually for period of limited duration. May represent a separate entity

Merger, Acquisition & Joint Venture

SEBI Tender Offers OFFER OFFE & % of R OBJECT OPENI OFFER CLOSIN SIZE (No. equity PRIC OF THE TARGET NG S. No. COMPANY ACQUIRER DATE G DATE of shares capital) E OFFER INDO TECH TRANSFOR MERS 1 LIMITED PROLEC-GE INTERNACI ONAL, S. DE 04 -Apr 23 -Apr R. L. DE C. V. -09 2124000 MR BHAGYASH VIMALKUM REE AR JAIN, LEASING MR KK AND JAIN, MS FINANCE RANJANA & 09 -Apr 28 -Apr 2 LTD OTHER -09 700020 RAWALWA SLA INDUSTRIES PVT LTD. , GROB TEA STRIP 04 COMPANY COMMODE 15 -Apr 3 LTD AL PVT LTD. -09 May-09 232466 RANE BRAKE LININGS 4 LTD CHANGE IN 20 406 CONTROL TARGETED POST OFFER STAKE OF ACQ (%AGE of MERCHANT equity capital) BANKER MODE OF REGISTRAR DATE OF PA PAYMENT KARVY CITIGROUP COMPUTERSHARE GLOBAL PRIVATE LIMITED MARKETS INDIA (KARVY CONSUL 74. 35 PVT. LTD) 03 -Dec-08 CASH 20 CONSOLID ATION OF 18 HOLDINGS COLLINS MONDKAR STEWART INGA COMPUTERS PVT. 91. 57 PVT LTD. 20 CHANGE IN 80 CONTROL NISSHINBO INDUSTRIES INC AND 30 -Apr 19 OTHERS -09 May-09 1072099 13. 55 CHANGE IN 50 CONTROL VC CORPORATE NICHE ADVISORS PVT TECHNOLOGIES 94. 01 LTD. PRIVATE LIMITED ERNST & YOUNG MERCHANT INTEGRATED BANKING ENTERPRISES SERVICES PVT 31. 5 LTD (INDIA)LTD. 11 -Feb-09 CASH 20 -Jan-09 CASH 02 -Mar-09 CASH

Sell Offs Spin offs: creates a separate new entity, its shares are distributed on pro-rata basis to existing shareholders Split-offs: A portion of existing shareholders receive stock in a subsidiary company in exchange of parent company stock Split-ups: The entire firms is broken up in a series of spin-offs, so that the parent no longer exists Divestitures: Involves sell off of a portion of a firm to a third party. It involves cash transaction Equity Carve outs: An equity carve out involves the sale of a portion of a firm via an equity offering to outsiders. New entity with a new control is created

VALUE SPLITS (Source: Business Standard, February 18, 2008) COMPANY ASSETS SPUN OFF Reliance Energy Power projects Bharti Airtel, Vodafone Towers Reliance Communications Towers Hinduja TMT IT and ITe. S business Indiabulls Financial Services Real estate undertaking Sun Pharma Innovative R&D division Camlin Chemicals division GTL Infrastructure unit GE Shipping Offshore services business Zee Regional channels and cable GMR Industries Ferro alloys Silverline Technologies Animation business Media Video Real estate division Electronic manufacturing services business Solectron Centum Electronics

Corporate Control Premium Buy-backs: represent repurchase of a substantial stockholder’s ownership interest at a premium above the market price Standstill Agreements: written in connection with buy backs. It’s a voluntary contract in which stockholder who bought out agrees not to attempt to take over the company May occur without buy back Antitakeover Amendments: Changes n bylaws to make an acquisition more complicated or more expensive. It includes supermajority voting provision, staggered terms for directors, golden parachutes Proxy Contests: An outside group seeks to obtain representation on the firm’s board. They are called dissidents or insurgents

Change in Ownership Structure Exchange Offers: Exchange of debt or preferred stock for common stock or vice versa. The nature of exchange has an impact on leverage Share Repurchases: the corporation buys back some fraction of its outstanding shares of common stock Going Private: The entire equity interest in a previously public corporation is purchased by a group of investors Leveraged Buyouts: Often private investors arrange for third party transactions. When financing from third parties involve substantial borrowing, such transactions are called LBOs

Merger Movements Mergers have generally occurred in Waves Each merger wave was characterized by a particular type of merger Merger movements coincide with high rates of economic growth and particular developments in business environment Reason: Firms are not motivated to make large investments when business prospects are not favorable

First Merger Wave (1897 -1907) The first merger wave followed the Depression of 1883 Trust Buster: coincided with Sherman Act, 1897 About 2/3 rd of all merger activity was concentrated in petroleum products, mining, metals, food products, and transportation Horizontal mergers leading to high concentration Horizontal Merger: A merger occurring between companies producing similar goods or offering similar services Example: J. P. Morgan merged U. S. Steel with Carnegie Steel and more than 700 small steel firms. The resulting mega-steel company controlled 70~80% of the steel production in the United States Merger for Monopolies

Second Merger Wave (1916 -29) The second merger wave began during World War I and continued until the stock market crash of October 29, 1929 Because of the heighten government vigilance that occurred toward the end of the first merger wave, mergers during the second merger wave faced increased governmental scrutiny The Clayton Act (1914) was an additional tool that federal authorities could now wield against uncompetitive mergers. Mergers for oligopolies rather than monopolies. There were more vertical mergers than horizontal mergers. Vertical Mergers: A merger between two companies producing different goods or services for one specific finished product.

Example of Vertical Merger Acquisition of Fisher Body by General Motors (1926) 1908 Fisher Body Company was launched by six Fisher brothers Company was involved in building bodies for automobile body During that time most automobile bodies were open Realizing the long run demand for closed bodies in near future, they built 150 closed bodies for Cadillac, 1910 and also created the Fisher Closed Body Corporation In 1912, they created Fisher Body Company of Canada In 1916, the three bodies were merged to form the Fisher Body Corporation, the largest body builder in the industry Supplier to Cadillac, Buick, Hudson, Chalmers, Studebaker, Chandler, Cleveland Ford

General Motors was formed by W. C. Durant In 1904, he acquired Buick Motor Company In 1908, General Motors Corporation was formed Growth through buying enterprises: Olds, Cadillac, Oakland Due to administration problem, GM management went in the hands of banks Through partnership with Chevrolet and negotiations with Du. Pont, Durant came back to head GM operations in 1917

Acquisition 1917: contract between GM and FB GM would buy output from FB at a cost plus 17. 6% rate Contract between Cleveland FB for partnership In 1919, agreement between GM and FB In 1920, Durant resigned as President The agreement of 1919 was not satisfying, since FB was concentrating on business of its own and less focus was given to GM requirements In 1921, Fred Fisher, eldest of Fisher brothers was made Director By 1922, FB was thinking of extending its relationship with GM In 1924, the employment contracts expired and two other Fisher Brothers were brought into the board of GM GM wanted to acquire the remaining 40% stocks of FB In 1926 May, FB board was dissolved

Post Acquisition FB stockholders were given 2/3 rd of GM share for 1 FB share William Fisher was made head of FB division He joined FB board along with his three brothers, who were already there Some disagreement on the way the valuation was done Overall argued to be a “happy marriage”

Another look at the events Lets relook at the 10 year contract Contract involves asset specific investment on part of GM Potential Hold up situation FB may refuse to give priority to orders from GM FB refused to build its plants near those of GM could have also held up FB, if the demand did not turn out to be according as expected These could be potential reasons for vertical integration

Third Merger Wave (1965 -1969) The third merger wave coincided with a period of economic prosperity in the United States. The strong economy gave many firms the resources necessary to acquire other companies. This wave was characterized by mergers among unrelated companies, also known as conglomerate mergers. A merger between firms that are involved in totally unrelated business activities The horizontal mergers that occurred during the third merger wave were subject to strict antitrust enforcement. Celler-Kefauver Act of 1950 was promulgated. This law reinforced the Clayton and Sherman Acts.

Fourth Merger Wave (1981 -1989) The fourth merger wave coincided with the presidency of Ronald Reagan, and the economic prosperity of the mid- to late-1980 s. Most mergers that occurred during the fourth merger wave were “friendly” This period included many hostile takeovers than previous merger waves. It was during the fourth merger wave that the term “corporate raider” entered the American lexicon. Mergers in the billion-dollar range became common. Debt was more widely used to finance mergers.

Fifth Merger Wave (1993 -2000) The fifth merger wave followed the economic recession of 1990 -91, and coincided with the presidency of Bill Clinton. Large mergers occurred at about the same level as they had during the fourth merger wave; but hostile takeover activity diminished. Whereas many of the mergers of the fourth wave were executed for short-term financial gains, mergers of this period emphasized longer term business strategies. Debt-financed mergers were less common

Conglomerate Mergers: Case of TATAs TATA GROUP: History 96 operating companies, 330, 000 employees Revenues: 28. 8 billion dollars in 2006 -07 Accounting for 3. 2% of GDP Active in 7 major businesses: Information Systems and Communication, Engineering, Materials, Services, Energy, Consumer Products and Chemicals 27 publicly held companies (as on June 2008) Market Capitalization: 49. 6 billion dollars, share holder base of almost 3 million Operation in 54 countries, trade relations with 120 countries

Strategy in Internationalization

Internationalization by TATA Group

Major TATA Acquisitions

Merger Objectives for TATA • • • Resource Seeking Internationalization Tata Chemical’s acquisition of Brunner Mond (3 plants) and Indo Moroc Phosphore Tata Power buying stake in Indonesian thermal Companies Marketing Distribution Rights • TCS acquisition of TKS technosoft Market Access • Tata Steel acquisition of Nat. Steel and Millenium Steel and Corus Strategic Alliance for Efficiency • • Tata motor acquisition of Daewoo Competition: VSNl acquisition Aggressive Growth: Taj Luxury Hotels TCS has gone for Green field projects instead of M&As

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Exclusive Contract 200, 000 common stocks of FB would be increased to 500, 000, 300, 000 would be bought by GM at 92$ per share 300, 000 GM shares + 35, 000 FB owned would be put in a voting trust, lasting for a period of 5 yrs, having 4 trustees: 2 from FB n 2 from GM 14 directors to be nominated by FB and GM in equal proportion Executive committee: 7 member (2 from GM n 5 from FB) Finance Committee: 5 member (3 GM n 2 FB) For 5 years, 2/3 rd earning will be re-distributed as dividend Fisher brothers had a 5 year employment contract and receive salary plus 5 % of net profits of FB Cost plus 17. 6 % margin 10 yrs contract FB was free to work for other customers