kingfisher & airdeccan merger and leverage buyout of dell-EMC-VMware

Merger of Kingfisher & Air Deccan

Air Deccan

• Founders-Capt. Gopinath, Capt. K.J. Samuel & Vishnu Raval .

• Started- 23rd August 2003.• Merger due to-(a) focus on South India(b) lower demand (c) Scarcity of personnel, etc.

• Merger-April 2008• Kingfisher acquired with 26% equity of

Rs.550crores of Air Deccan.• Rs.155 per share (10% premium on CMP) of

Air Deccan.• The new company- KINGFISHER RED.

• Gopinath- Executive Chairman• Mr. Vijay Mallya- Vice-Chairman.• The company now had a fleet of 71 aircrafts• The combined market share was 33%.

• The savings of cost- 4-5% (Rs.300 crores).• Expected turnover of Rs.3k crore for

Kingfisher and Rs.2200crore for Deccan. • Vijay Mallya paid additionally Rs.418 crore

for a further 20% stake in Air Deccan.• The Combined market share was 29%.

Effect on the Share Price due to the Deal

• Kingfisher deal values shares of Air Deccan at Rs.155 each, 6% more than its closing price of Rs.146.20.

• When Kingfisher completed the deal the shares of Air Deccan rose to 12% .

• By the month-end of the deal Deccan shares climbed to a 52-week high of Rs.335 before closing at Rs.295.

• Air Deccan approved the allotment of equity share of 26% to UB Group

• UB group made money through initial investment of Rs.150crore

• UB group made a open offer

• Kingfisher – Air Deccan was the largest domestic airline

• Synergy benefits

• Improved financial prospects

• Exploit significant benefits

Fresh equity capital

Reduction of cost

Increasing profitability

Increase in market share

• Frequent changes on focus

• Acquisition for expansion

• Economic slow down

• Lack of management

• High operational cost

• Increase in prices

Saves in engineering and maintenance cost

Duplication is avoided OPERATI-

ONAL SYNERGIE

S

Ground infrastructure at 65 airports( 28 are common)

New entity has 71 aircrafts INFRASTR

U-CTURESYNERGIE

S

SYNERGIES

Two carriers account for total 155 flights

Connectivity to US, Europe, different Asian regions ROUTE

SYNERGIES

Both airlines have orders for 90 aircrafts

Alliance with Deccan provides opportunity to negotiate its rates

INVEST-MENT

SYNERGIES

MERGER RESULTED IN:

• Largest fleet of aircrafts- 71• 41 Airbus + 30 ATR• Maximum number of flights and connections• Low fare segment + Business segment• Common Fleet• High market share• Engineering costs to come down

COST- BENEFIT ANAlYSIS• Kingfisher : Deccan Airlines shares swap ratio - 7:3• Cash paid = Rs. 550cr + Rs. 418cr= Rs.968cr• Present value of 46% stake = 62316254.28* 67.25= 419 cr• Cost for kingfisher = Cash paid – Present value = 968 – 419 = Rs. 549cr• Value Created/ Destroyed (67.25/ 155) = - 43.38%

CONCLUSION

• It became the largest Indian Airline resulting in increase in market share by 27.5%.

• Domestic travel increased by 30%• In 2007- combined entity incurred loss of Rs.

995cr.• Kingfisher failed to capture market unlike its

competitors.• Kingfisher Red closed down its operations on

sep 2011• On jan 2012 SBI declared kingfisher airlines

as a Non-performing asset.

Advantages Disadvantages

Corporate Restructuring

Valuable corporate reformation

Negative effects of the overall community

Small amount of capital requirements

Benefit to stock holders Corporate bankruptcy

Management buyout

Last resort Substantial conflicts of interest among employees

Economy Greatly improve its chances for success

A weak economy is highly indicative of a problematic LBO

Established in November 4, 1984

American multinational information technology corporation

Sells and supports computers and related products and services

Industry leader in personal computers

American Multinational company

EMC is a global leader

Deliver information technology as a service

EMC sells data storage, information security, virtualization, analytics, cloud computing etc

Established in 1998

American company

Cloud & virtualization software

On August 14, 2007, EMC sold 15% of the company in a New York IPO

Dell announced an agreement to acquire EMC and with it, control of VMware in a deal valued at $67 billion at the time of the announcement.

This is the first, big, over $50 billion transformative deal

ORGANISATION DETAILS OF THE DEAL

• DELL- In 2013, after a tussle with shareholders, they decided to finance a take-private of the company, by delisting it from Nasdaq• EMC- EMC operates as four federated lines of business:1. EMC Information Infrastructure2. Pivotal3. VMware Virtual Infrastructure4. Virtustream unit

REASON BEHIND THE DELL-EMC DEAL

“ Both companies - had fought significant battles with activist shareholders”

DELL• Engaged battle with Carl Icahn• Change in the voting structure

during deal negotiations

EMC• Had battled with Elliott

management• Called for spinoff of VMware &

break-up of EMC’s federations

DELL EMC VMware

Who owns Vmware now?

WHY DELL INVOLVED VMwareMichael Dell stated:

“VMware is a crown jewel of the EMC federation. Our intent is only to continue to help it thrive,

innovate and grow, as an independent company with an independent and open ecosystem”.

Moreover, CEO of DELL & EMC together have the “opportunity to significantly expand VMware’s

revenue in areas such as the software-defined data center, the hybrid cloud, and in end-user computing”.

The Drama Has Just Begun….

• EMC is using the deal to go private and restructure themselves in the market.

• The company should now take approvals from shareholders and regulatory authorities.

• EMC shareholders-the EMC shareholders should approve the deal which is possible only if they get premiums on their shares.

• Vmware shareholders- due to volatility in Vmware share price, the EMC shareholders shares asset which is 81% in Vmware was devalued by 41%.

• Players and potential bidders-The 60-day go shop period has a bilateral breakup fee arrangement between EMC and Dell. The potential bidders are less.

• Competitors- Lenovo Dell & VMware NetApp• VMware Growth

What’s going on with VMware stock?

Fluctuation in the VMware share price

• Supply of shares and the role of tracking stock• Tracking stock creates a playground for traders• VMware effect on Q3 earnings and concern

about “,massive secular shifts”.• Uncertainty over the merger and it’s impact on

VMware.• Financial impact of the Virtustream business

unit.

•Ever-changing analyst sentiment.

Impact on storage

• EMC garnered annually 8%-9% of its revenue after the deal.

• Dell accounted 50% of its storage revenue.• Earlier, Dell brought more upscale products to

the market.• EMC downstream its products to create

completion between the companies.

Conclusion

• Good customer base.• Job cuts.• Competition.