Mergers and Acquisitions IFAP session

1. M&A Introduction Level 1 Module 1 Session 1 IFAP Reshma Krishnan

2. Why are you here? • To understand what an Analyst does in the context of Corporate finance and Investment Banking • To acquire skills critical to being a good analyst • To go beyond corporate finance theory

3. Logistics • Programme Manager & M&A track faculty- Reshma Krishnan • Email: re.krishnan@gmail.com • Programme Administrator & soft skill faculty – PradeepKhanapure • Pradeep.khanapure@imarticus.org • Faculty- Harish Menon • Faculty – HemalLotia • Walk-in hours – Saturday 9-10 (Before Class) on notified days

4. Financial Analysis Landscape EQUITY & CREDIT RESEARCH INVESTMENT BANKING PROJECT FINANCE CONSULTING • Capital Raising • Debt • Equity • Advisory Services • M&A • Restructuring • Analysis of stock markets worldwide • Economic, Strategy and Commodities Research Analysis • Corporate Debt • Project Structuring • Portfolio Monitoring and Collections • Risk Analysis • Debt, Sub-debt, Quasi-Equity Funding, Equity Investments • Corporate Finance Advisory • Forensic and Dispute Services • M & A Transaction Services • Reorganisation Services FINANCIAL ANALYSIS

5. Two guiding Principles How do I become bigger? Increase my sales faster and in a sustained manner? Top Line How do I make more money? Increase my profitability in a faster and Bottom Line

6. Vehicles of Growth Make or Buy? Hedge Funds Mutual Funds Insurance Companies HNI Wealth Management • Organic- Greenfield • Time • Resources Brokerage Firms IPO Equity Research Analysts Analyst Buy-side Sell-side Equity Capital Markets • Inorganic • M&A • Options • Market • Price

7. Start-up Growth Maturity Transformation • Acquire established market access and track record • Acquire a platform for growth • Fill strategic gaps • Geographic expansion • Bulk-up of revenues and client base • Capability augmentation • Land grab • Market share consolidation • Introduction of new business lines • Block & Tackle • Acquire a platform in order to reorient business model around that Why should you buy? - Strategic Rationale For M&A REVENUE Start-up Growth Maturity Transformation TIME

8. What is M&A and how does it create value? • 1+1=3 • The key principle behind buying a company is to create shareholder value over and above that of the sum of the two companies. Two companies together are more valuable than two separate companies - at least, that's the reasoning behind M&A.

9. M&A is not one word • Mergers- Merger of equals. A merger happens when two firms, often of about the same size, agree to go forward as a single new company rather than remain separately owned and operated. • Rare • Exchange of Stock • Daimler- Benz & Chrysler merged to become Daimler Chrysler • Acquisition-When one company takes over another and clearly established itself as the new owner, the purchase is called an acquisition • More often the case • Will buy the entire stock of the company • Tata buying Jaguar

10. The concept of ‘Synergy’- the Holy Grail of M&A • The magic behind the M&A; the holy grail • Staff Reductions • Competition elimination • Economies of Scale • Acquiring new technology • Improved Market Reach and Industry Visibility

11. Types of M&A

12. Understanding the value chain of an industry Diamond company expertise across the value chain Distributors Distributors Brokers & Distributors Retail Sales of Diamond Jewellery Preparing Rough and reselling Value Add: Sorting roughs as per colour, clarity and size Jewellery Manufacturing Value Add: Setting Cut & Polished diamonds into jewellery Rough Production and mining Cutting and Polishing Value Add: Sizing the diamond into shapes that maximise yield and refraction of light Glitter’s presence across the value chain allows it to bypass the costs of middle men and also control quality of raw material at each stage thereby leading to higher margins. • Changing Industry structure: The disappearance of middle man is advantageous to players such as Glitter who do not depend on them for raw materials and now have the opportunity to cater to major customers like jewellery manufacturers and retailers on their own leading to a significant expansion in margins. • Inorganic Growth Opportunities: Glitter can focus its inorganic growth efforts across the value chain enabling it to spur its growth exponentially over the coming years as the fragmented industry starts to consolidate.

13. Valuation in M&A- How much will you pay?

14. Control Premium • For the most part, acquiring companies nearly always pay a substantial premium on the stock market value of the companies they buy. The justification for doing so nearly always boils down to the notion of synergy; a merger benefits shareholders when a company's post-merger share price increases by the value of potential synergy. • Pre Merger value of both firms +Synergy = Pre Merger Stock Price Post Merger Number of Shares

15. Indian M&A Market –An Overview M&A in India has grown at a significant rate between 2003 and 2007 at a CAGR of almost 58% with focus being on IT & ITES, Telecom, Energy & Life sciences sectors. A majority of the M&A transactions had been cross-border in nature. • Indian M&A Market • Domestic • Cross border • Inbound- No mega deals • Outbound- Decline in the last few years because of the Global Crisis. • Global M&A • Down 2% to 2.78 Trillion • Oil & Gas Led the Global Sector • 42,455 deals • The $54.5bn pending bid for • TNK-BP by Rosneftegaz, announced on 22nd October, was the largest deal of the year and accounted for 14% of total Oil & Gas volume Source: Grant Thornton

16. M&A Pitfalls- why over half of them fail to create any value… Evaluation Diligence Implementation • Overestimate Savings and imagine the synergies don’t exist. • Underestimate integration and deal costs. • Inadequate Due Diligence: This often happens in the auction process when speed is of the essence and buyers are expected to finish due diligence quickly to ensure Closure of transaction. • Cultural Clash: Companies are like people and have their own personalities. Merging two extremely different cultures often results in a failed merger. • Merger of AOL-Time Warner’s synergies ascribed to the deal were over sold. The shareholders of AOL owned 55% of the new company while Time Warner shareholders owned only 45%, wall street worry was that the smaller AOL had in fact bought out the far larger Time Warner. • February 20, 2007, Bear Sterns ordered by a U. S. Bankruptcy Judge in New York to repay $159 million to the Trustee of Manhattan Investment Fund Ltd. for providing services to the fund from 1996 to 2000 provides a stark example of the huge risk-to-reward gulf if your company’s due diligence procedures are not what they should be. • The 2002 merger of HP and Compaq is a good example of culture clash. Significant differences were: Compaq tended was market-oriented and aggressive, while the traditional HP emphasized teamwork, consensus and long-term view. Consulting firms helped HP conduct 144 focus groups and 150 interviews in 22 countries. These firms discovered that the situation was ready-made for massive culture clash. Deal Heat/ winners Curse: Bidders get caught up in a deal and lose sight of value and strategic fit and focus on winning thereby losing synergies.

17. Tata Corus- An analysis of why this time is different CORUS FAILURE • Corus, the merger between British Steel and Hoogovens in 1999, underestimated the integration valuing the companies market cap at US$ 6 billion, but in 2005 the company was worth US$ 250 million. • Corus was an attempt to revive the ailing British Steel which had incurred a net loss of £81 million in the March 1999. • Corus’s Failure: • Chief among them being the cultural mismatch between the merged entities and the lack of HR involvement when integrating the two entities. • Large scale labour unrest due to the downsizing and rationalization of various operations seriously impacted the normal functioning of the new organization. • The high valuation of the British pound and stagnation in demand for steel was gradually undermining the competitiveness of British Steel in the European market. Wishful Thinking!

18. Tata Corus- An analysis of why this time is different TATA CORUS DEAL • Tata Steel acquired Britain’s Corus for £5.75 billion ($11.3 billion now 12.1) in 2007. • Tata-Corus combine will become the fifth largest steelmaker in the world. • The New TATA-Corus • Access to low-cost slabs: • The ability to export surplus slabs either from Tata Steel's facilities or through acquisitions in low-cost regions over the next few years will be the key driver of this deal. • Restructuring of Corus' existing units: • It is likely that over the next few years, Tata Steel will put through an extensive restructuring of its underperforming units at Port Talbot and Scunthorpe in the UK, though it has ruled out any job cuts. It may also prune down high-cost slab facility at Teesside. • Better Implementation and management of Cultural issues: • The ruling out of job cuts creates a better environment post integration unlike the one seen in the earlier transaction. • Quantified Potential synergies: • For the first time since this deal surfaced, Tata Steel has quantified that it will benefit to the tune of $300-350 million every year. However, the benefits from the deal may be lower than this amount spelt out in the first two years and attain this level from the third year onwards. Wishful Thinking!

19. Winners Curse! • A tendency for the winning bid in an auction to exceed the intrinsic value of the item purchased. • Tata Corus had quantified synergies but many reckon that they might have bid almost • The acquisition by Tata amounted to a total of 608 pence per ordinary share or ₤6.2 billion (US $12 billion) which was paid in cash. First of all, the general assumption is that the acquisition was not cheap for Tata. The price that they paid represents a very high 49% premium over the closing mid market share price of Corus on 4 October, 2006 and a premium of over 68% over the average closing market share price over the twelve month period. Moreover, since the deal was paid for in cash automatically makes it more expensive, implying a cash outflow from Tata Steel in the amount of £1.84 billion.

20. Thank you Get in touch with us at http://imarticus.orgor call us + 91 22 40792314