Under the guidance of our respected Professor- Prof S.V.Bidwai

1. MBA SEM IVCLASS OF 2010 Sec E BusinessStrategy II Mergers & AcquisitionsDate : 12th November;09 Under the guidance of our respected Professor- Prof S.V.Bidwai

2. Submitted by: Pranav Jalan 08BS0002278 Pravesh Surana 08BS0002328 PrernaSinghal 08BS0002 PriyankaBhuwania 08BS0002372 RahulChandalia 08BS000 Rahul Jain 08BS0002500 Ravi Somani 08BS0002638 Rohit Kothari 08BS0002751 Date 12th November;09

3. Introduction • Past History • M & A Process • Reasons and Issues • Strategic Approach to M&A • Takeover Strategies and Defenses • Issues and Defects • Attributes to effective acquisition • Legal Procedure • Caselets: • P&G and Gillette • Tata-JLR • Tata-Corus • Adidas-Reebok • Case Study

4. Corporate Restructuring Corporate restructuring is the reorganization of corporate entities. The reorganizing can be within the company itself or with the involvement of other corporate entities.  A strategy to change business or financial structure.  Radical changes in composition  Process of redesigning.  Example ‟ GE witnessed tremendous growth during tenure of Jack Welch  Necessity when the company has grown to the point.  Crucial whenever there is a major shift.  Continuous process.  Result - leaner, more efficient, better organized, and better focused .

5. Types of Restructuring • Financial Restructuring ‟ Includes raising the finance, decisions regarding mergers, joint ventures and alliances • Operational Restructuring ‟ Reformulate the company on basis of change in technology and environment requirements • Organizational Restructuring ‟ In order to increase efficiency redefining the organizational structure or the processes or the systems. • Market Restructuring ‟ Is the addition of a newer product or shifting one product or segment to another or enlarge the market for the exiting products.

6. Culture. • Inadequate focus and commitment of top management towards change program •  "What is in it for me" attitude •  Mind set/resistance to change •  Lack of involvement of employees •  Poor planning •  Resource Availability •  Cost and time •  Poor communication

7. Expansion • Sell offs • Corporate control • Changes in ownership structure..

8. A MERGER happens when two firms, often about same size, agree to go forward as a new single company rather than remain separately owned & operated by pooling all their resources together, to create a sustainable competitiveadvantage. For example,both Daimler-Benz & Chrysler ceased to exist when two firms merged, and a new company’Daimler-Chrysler’ was created. • When a Company takes over another one & clearly becomes the new owner ,the purchase is called ‘ACQUISITION’. Unlike mergers, acquisitions can sometimes be unfriendly. i.e., when a firm tries to takeover another by adopting hostile measures.

9. Mergers &Acquisitions –An Overview(RECAP) • Mergers and Acquisitions M&A ,have become very popular strategy all over the world in last 3decades. • The value M &A WORLDWIDE increased from $464 Billion in 1990 to $3.4 trillion in 1999-2000, followed by sharp decline during 2001 & 2002.It has again shown improvement from 2003 onwards. • India born LaxmiNivasMittalhas taken over Arcelor in Europe , to form a largest Steel making Company in Europe-”Arcelor-Mittal.”(117 Mtons/Year-Global) . • Tata Steel-Corus(UK) Acquisition by Tata Steel for $12 Billion is very significant and a landmark for the Indian Corporate World. (28 Mtons/Annum-2006)

10. DIVESTITURES SELL OFFS DEMERGERS OWN,RESTRUCT. GOING PRIVATE LEVERAGED Buy OUTS ACQUISITIONS MERGERS PURCHASE OF UNIT TAKE OVERS ALLIANCES ORG.RESTRUCT. REDESIGN PERFORMANCE ENHANCEMENT PROGRAMMES M&A means and includes

11. M&A is all about…..

12. The Synergy Matrix Managerial Synergy Improve management or replace inefficient one Financial Synergy Redeploy capital Increase ROI Operating Synergy Scale Economies Improve margins Company-specific Risk Cost-of-capital reduction Market Valuation Release “value”

13. Early Merger Movements • The 1895-1904 Merger Movement. • The 1922-1929 Merger Movement. • The 1940-1947 Merger Movement. • The 1960s Merger Movement. • Post 1980 Merger Movement.

14. The 1895-1904 Movement • Majorly of Horizontal mergers. • Merging for Monopoly in order to eliminate competition. • Case: JP Morgan merged with Carnegie Steel. • Ended in 1904 due to severe economic recession.

15. Majorly of Vertical mergers. • Merging for Oligopoly. • Case: FORD- manufacturing tyres of car from rubber plantations in Brazil. • Ended in 1929 with stock market crash of Black Tuesday.

16. 1960s Merger Movement • Conglomerate Merger. • Occurred during booming American economy.

17. Post 1980 Merger Movement • Hostile takeover. • Birth of LBO. • Mega-Merger & Cross border merger.

18. A = Amalgamating Company: Ceases to Exist • B = Amalgamated Company • B receives all of A’s assets and liabilities • Shareholders of A receive shares in B and maybe other benefits like debentures, cash Transfer assets and liabilities A B

19. MergersSTRUCTURE 2 • A, B and C = Amalgamating Companies: Cease to exist • D = Amalgamated Company: may or may not have existed before Merger • All assets and liabilities of A, B and C transferred to D • Shareholders in A,B and C get shares in D. A D B C

20. Demergers are one type of spin-offs: under s. 391 • A = Demerging Company • B = Resulting Company: may or may not have existed earlier • A transfers undertaking to B • B issues shares to shareholders of A X Y Transfers undertaking Y Y Company A Company B Shareholders of A Issues shares

21. The M & A Process • Develop a strategic plan for the business.(Business Plan) • Develop an acquisition plan related to the strategic plan.( Acquisition Plan) • Search companies for acquisitions.(Search) • Screen and prioritize potential companies.(Screen) • Initiate contact with target. • Refine valuation, structure the deal and develop financial plan.( Negotiation) • Develop plan for integrating the acquired business. (Integration Plan) • Obtain all necessary approvals and implement closing. • Implement post closing integration. • Conduct a post closing evaluation.

22. Framework for Successful Mergers According to Drucker, financial factors provide stimulus for merger activity. He says that mergers should follow five rules, in order to be economically viable. • The acquirer must contribute something to the acquired company. • A common core of unity is required. • The acquirer must respect the business of the acquired company. • Within a year or so, the acquiring company must be able to provide top management to the acquired company. • Within the first year of the merger, managements in both companies should receive promotions across the entities

23. Types of Mergers • Horizontal mergers: • A horizontal merger involves two firms operating and competing in the same kind of business activity. • Textiles firm merges raw materials firm. - Example: Exxon - Mobil • Vertical mergers: • Vertical mergers occur between firms in different stages of production operation. - Example: Helene Curtis and Unilever • Conglomerate Mergers: - Conglomerate mergers involve firms engaged in unrelated types of business activity - Example: General Electric buying NBC television • Concentric Mergers - Based on specific management functions where as the conglomerate mergers are based on general management functions - Example: Citigroup (principally a bank) buying Salomon Smith Barney (an investment banker/stock brokerage operation

24. Increased market power Integration difficulties Overcome entry barriers Inadequate evaluation of target Cost of new product development Large or extraordinary debt Increased speed to market Inability to achieve synergy M & A Lower risk compared to developing new products Too much diversification Increased diversification Managers overly focused on acquisitions Avoid excessive competition Too large Reasons for M & A Problems in Achieving Success

25. Increased Market Power Acquisition intended to reduce the competitive balance of the industry Overcome Barriers to Entry Acquisitions overcome costly barriers to entry which may make “start-ups” economically unattractive Lower Cost and Risk of New Product Development Buying established businesses reduces risk of start-up ventures Reasons for M & A Example: British Petroleum’s acquisition of U.S. Amoco Example:Belgian-Dutch Fortis’ acquisition of American Banker’s Insurance Group Example:Watson Pharmaceuticals’ acquisition of TheraTech

26. Increased Speed to Market Closely related to Barriers to Entry, allows market entry in a more timely fashion Diversification Quick way to move into businesses when firm currently lacks experience and depth in industry Reshaping Competitive Scope Firms may use acquisitions to restrict its dependence on a single or a few products or markets Reasons for M & A Example:Kraft Food’s acquisition of Boca Burger Example:CNET’s acquisition of mySimon Example:General Electric’s acquisition of NBC

27. Integration Difficulties Differing financial and control systems can make integration of firms difficult Inadequate Evaluation of Target “Winners Curse” bid causes acquirer to overpay for firm Large or Extraordinary Debt Costly debt can create onerous burden on cash outflows Problems with M & A Example:Intel’s acquisition of DEC’s semiconductor division Example:Marks and Spencer’s acquisition of Brooks Brothers Example:AgriBioTech’s acquisition of dozens of small seed firms

28. Inability to Achieve Synergy Justifying acquisitions can increase estimate of expected benefits Overly Diversified Acquirer doesn’t have expertise required to manage unrelated businesses Managers may fail to objectively assess the value of outcomes achieved through the firm’s acquisition strategy Problems with M & A Example:Quaker Oats and Snapple Example:GE--prior to selling businesses and refocusing Managers Overly Focused on Acquisitions Example:Ford and Jaguar

29. Strategic approach To Mergers and Acquisitions

31. Takeover Strategies and Defenses Kinds of takeovers: • Negotiated or Friendly Takeover The existing management of a company decides to give away the control of the company to another group on terms and conditions mutually agreed upon by both the parties. • Open market or Hostile Takeover A group acquires shares of a company from the open market in order to take control of the company Eg:Autoriders’ Hostile Takeover Bid for Saurashtra Cement • Bail-out Takeover When a financially sick company is taken over by a profit earning company in order to bail out the former ,it is called a bail-out takeover.

32. Tender Offer General offer made publicly and directly to a firm’s shareholders to buy their stock at a price well above the current market price. • Street Sweep The acquirer accumulates large amounts of the stocks in the target company before making the open offer • Bear Hug The acquirer tries to put pressure on the management of the target firm by threatening to make an open offer • Strategic Alliance An acquirer offers a partnership rather than a buyout of the target firm. • Brand Power The acquiring firm enters into an alliance with other powerful brands to displace the competitor’s brand.

33. Economic Issues • Legal Issues • Public Policy Issues • Powers of financial institutions • Proxy wars

34. Effects of Takeovers • Effects on the Acquirer Company • Effects on the Target company • Effects on the Shareholders of the Target Company • Effects on the Shareholders of Acquiring Company

35. Defenses against Takeovers • Golden Parachutes • Poison Put • Anti-takeover Amendments • Super majority amendments • Fair price amendments • Classified boards • Authorization of preferred stock • Poison Pill Defense • Targeted Share Repurchase and Standstill Agreements • Other Takeover Defences

36. What is an Acquisition? • A fundamental characteristic of merger is that the acquiring company takes over the ownership of other companies and combines their operations with its own operations. • An acquisition may be defined as an act of acquiring effective control by one company over the assets or management of another company without any combination of companies.

37. + Complementary Assets or Resources Buying firms with assets that meet current needs to build competitiveness + Friendly Acquisitions Friendly deals make integration go more smoothly + Careful Selection Process Deliberate evaluation and negotiations is more likely to lead to easy integration and building synergies + Maintain Financial Slack Provide enough additional financial resources so that profitable projects would not be foregone Attributes of Effective Acquisitions

38. + Low-to-Moderate Debt Merged firm maintains financial flexibility + Flexibility Has experience at managing change and is flexible and adaptable + Emphasize Innovation Continue to invest in R&D as part of the firm’s overall strategy Attributes of Effective Acquisitions

39. M&AREGULATORY FRAMEWORK • TRANSACTION STRUCTURE • Companies Act • Income Tax Act • Stamp Acts • Competition Act • LISTED COMPANIES • SEBI Regulations • Stock Exchange – Listing Agreement • TRANS-BORDER TRANSACTIONS • Foreign Exchange Management Act

40. Sec 391 – 394 of Indian companies act covers M & A. • Examination of object clause • Approval from the board • Intimation to share holders and creditors. • Approval from share holders and creditors.- 75% of SH and creditors to approve. • Application to National Company Law Tribunal (NCLJ) • Intimation to SEs

41. Pettion to NCLT for approval • Filing order with ROC • Transfer of assets and Liabilities • Issuance of shares/cash

43. THE DEAL

44. Sep 20, 06 : CORUS uses the strategy to work with low cost producer. Oct 06, 06 : Initial offer by TATA is considered to be too low. Oct 17, 06: TATA kept its offer to 455 pence per share. Oct 20, 06 : CORUS accepts the offer of £4.3 billion. Oct 23, 06 : Brazilian Steel Group CSN counter-offer to TATA’s offer. Oct 27, 06 : CORUS criticized by JCB for acceptance of TATA’s offer. Nov 18, 06 : The CSN approaches Corus With an offer of 475 pence per share Nov 27, 06 : Board of Corus decides to give more time for shareholders to decide whether it issue forward a formal offer. Dec h18,06 : Tata increases its original bid for Corus 500 pence per share, then CSN made its counter bid at 515 pence per share in cash Jan 31, 07 : Tata ad agreed to offer Corus investors 608 pence per share in cash Apr 02, 07 : Tata steel manages to win acquisition to CSN and has the full voting support from Corus shareholders

45. TATA Acquired CORUS on 2nd April 2007 which is 4 times larger than its size. The deal price was $ 12 Billion. TATA Steel,the winner of the auction for CORUS declares a bid of 608 Pence per share. In 2005 when the deal was started the price per share was 455 pence. TATA Surpassed the final bid from Brazilian steel maker ‘COMPANHIA SIDERURGICA NACIONAL’ (CSN) of 603 pence per share. The combined entity has become the world’s fifth largest steelmaker after the deal. For this deal TATA has finance only 4 Billion $ from internal company resources. TATA Have secured funding commitments from its advisors. These advisors were Deutshe bank, ABN Amro and Standard Chartered.

46. FOR TATA • The initial motive behind the deal was not CORUS revenue size but rather its market value. • To compete on global scale because then TATA was just at 56th rank in steel production. • CORUS holds a number of Patents and R & D facility. • Acquiring Corus will give Tata access to European customers of steel. • Acquisition cost will be lower then setting up new green field plants and marketing channel.

47. FOR CORUS • To extend its Global reach through TATA. • To get access to Indian Ore reserves, as well as virgin market for steel. • To get access to low cost materials. • Total Debt of Corus was GBP 1.6bn • Saturated market of Europe. • Better facilities and lower cost of production • Employee cost was 15 % (TATA- 9%) • Profit margin was 3.4% (TATA- 17%)