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Mergers and Acquisitions
“The Deal Continuum – Process, Pitfalls & Precautions”
Deepak Kapoor
Executive Director
ContentsWhy Mergers and Acquisitions?
The Deal Continuum• Road Map to Mergers and Acquisitions• Key Components
Challenges to M&A• Pre Deal• Post Deal
Current M&A Environment
Concluding Thoughts
Contents
Why Mergers and Acquisitions?
The Deal Continuum• Road Map to Mergers and Acquisitions• Key Components
Challenges to M&A• Pre Deal• Post Deal
Current M&A Environment
Concluding Thoughts
Corporate Growth could be:
• Organic – Safer but slower
• Inorganic – Quicker but riskier
Mergers & Acquisitions are at the core of Corporate zeal for Growth
Why Mergers and Acquisitions ?
• Strategic - Intent to strengthen competitiveness, gain higher market share and create critical size
• Products - Broadening the product portfolio
• Markets - Access to new, lucrative markets
• Integration - Backward/forward/lateral
• Scale economies - Cost Savings/Increased Profitability
• Restructuring - Concentrate on core competencies and Businesses
Financial Strategic
ContentsWhy Mergers and Acquisitions?
The Deal Continuum• Road Map to Mergers and Acquisitions• Key Components
Challenges to M&A• Pre Deal• Post Deal
Current M&A Environment
Concluding Thoughts
The Deal Continuum – A Road Map to M&A
Deal/TargetIdentification
Evaluating Deals
Executing Deals
Making Deals Successful
Harvesting Deals
Deal Continuum - Identification
Deal/Target Identification
• Strategy
• Willingness
• Synergies
• Shortlist
• EoI
Deal Continuum - Evaluation
Deal/Target Identification
• Initial MoU
• Term Sheet
• Confidentiality
• Information
• Ballpark Value
Signing a preliminary
Memorandum
• Strategy
• Willingness
• Synergies
• Shortlist
• EoI
Deal Continuum - Execution
Deal/Target Identification
Signing a preliminary
Memorandum
Pre Investment Appraisal
• Due Diligence
• Deal Drivers
• Identification of Deal Issues Value Adj. Reps &
Warranties
• Strategy
• Willingness
• Synergies
• Shortlist
• EoI
• Initial MoU
• Term Sheet
• Confidentiality
• Information
• Ballpark Value
Deal Continuum - Execution
Deal/Target Identification
Signing a preliminary
Memorandum
Pre Investment Appraisal
Valuation and Deal
Structuring
• Valuation
• Bid Strategy
• Negotiations
• Agreements
• Exit Options
• Strategy
• Willingness
• Synergies
• Shortlist
• EoI
• Initial MoU
• Term Sheet
• Confidentiality
• Information
• Ballpark Value
• Due Diligence
• Deal Drivers
• Identification of Deal Issues Value Adj. Reps &
Warranties
Deal Continuum - Succeeding
Deal/Target Identification
Signing a preliminary
Memorandum
Pre Investment Appraisal
Valuation and Deal
StructuringDeal Closure
• Consideration
• Documentation
• Closing Date
• Remittances
• Approvals
• Strategy
• Willingness
• Synergies
• Shortlist
• EoI
• Initial MoU
• Term Sheet
• Confidentiality
• Information
• Ballpark Value
• Due Diligence
• Deal Drivers
• Identification of Deal Issues Value Adj. Reps &
Warranties
• Valuation
• Bid Strategy
• Negotiations
• Agreements
• Exit Options
Deal Continuum - Harvesting
Deal/Target Identification
Signing a preliminary
Memorandum
Pre Investment Appraisal
Valuation and Deal
StructuringDeal Closure
Post Deal Integration
• Synergies
• Control
• Integration
• Compliance
• People
• Strategy
• Willingness
• Synergies
• Shortlist
• EoI
• Initial MoU
• Term Sheet
• Confidentiality
• Information
• Ballpark Value
• Due Diligence
• Deal Drivers
• Identification of Deal Issues Value Adj. Reps &
Warranties
• Valuation
• Bid Strategy
• Negotiations
• Agreements
• Exit Options
• Consideration
• Documentation
• Closing Date
• Remittances
• Approvals
The Deal Continuum The Current Course Content
Deal/TargetIdentification
Evaluating Deals
Executing Deals
Making Deals Successful
Harvesting Deals
Restructuring
Funding OptionsValuation
Accounting Issues
Legal
Aspects Due
DiligenceCompanies Act
Tax IssuesHR &
Integration
ContentsWhy Mergers and Acquisitions?
The Deal Continuum• Road Map to Mergers and Acquisitions• Key Components
Challenges to M&A• Pre Deal• Post Deal
Current M&A Environment
Concluding Thoughts
Key Challenges to Mergers and Acquisitions
Pre Deal
Post Deal
Structuring the Deal
Valuation
Investment Banking
Representations and Warranties
Exit Options
Human Resources
Pre Investment Appraisal
Cultural Issues
Integration Issues
Process Integration
Harvesting the deal
Deal Synergies
Agreements
What do you want & How to get it?(Investment Banking – Deal Sourcing)
M&A STRATEGY
Corporate/portfolio strategyBusiness unit strategyAcquisition strategyMarket reviewsBusiness planningExit strategy
FINANCE RAISING & MBO
Bank financing Securitisation MBOs, MBIs and IBOs
ACQUISITIONS
Criteria formulation Target / partner identification Assessment Financial & tax structuring Negotiations Public company takeovers
JVs & ALLIANCES
Corporate & legal structuring Capital structuring Valuation of JV assets Debt restructuring Negotiations Documentation
DISPOSALS
Options appraisals Value enhancing initiatives Buyer identification Information memoranda Marketing Negotiations Project management
PRIVATE EQUITY
Investment identification Investment evaluation Assistance in negotiation Documentation Deal Closure Fund Raising
Challenge No. 1
What would it take to make informed investment decisions?(Due Diligence Reviews)
Due Diligence Review
Buy Side Diligence(Are you buying what you think you are
buying)
• No Access Diligence(How reliable is the Information Memorandum)
• Market Diligence(Helps understand the competitive position)
• Operational Diligence( Are your Operational Assumptions reasonable)
Sell Side Diligence(Do you know the issues buyers may
negotiate on)
• No Access Diligence(Determine how to get maximum, by giving the least)
Challenge No. 2
What price to negotiate for?(Valuation)
• Fair Value
– Open & Unrestricted Market,
– Knowledgeable & Willing Parties,
– Acting at arm’s length
• Price
– Keenness/negotiating strengths of parties
– Degree of competition
– Specific Parties involved
• Timing
– Value could change with time
– Risk perceptions could change
– Change of people
Challenge No. 3
Value (Rs.)
Intrinsic Value - Buyer
Intrinsic Value - Seller
Max. Premium Possible
NO DEAL ZONE FOR BUYER
NO DEAL ZONE FOR SELLER
Seller’s Initial Price
Buyer’s Initial Offer
Possible Deal Price
Reported Control Premium
Value to Buyer vs Value to Seller (Typical Price Bargaining)
What’s the most efficient way to go about it?(Structuring)
• Objective of structuring a transaction is to optimise / maximise achievement of interests of all concerned parties, in full compliance with the law
Purchase of Shares – Investment vs Acquisition vs Disinvestment
Purchase of Assets – Itemized v Slump Sale
Joint Ventures without direct Equity Participation
Outsourcing Arrangements
Spin Off of a “non – core” unit
Other Structures
Challenge No. 4
Understanding of Both Sides to a Transaction and Their Competing Interests(Deal Closure)
Buyer• Pay contract price or
possibly reduce purchase price
Challenge No. 5
• Do not want to assume uncertain liabilities
• Obtain as many assurances from Seller in the form of representations and warranties as possible
• Maximize indemnifications
• Desire to purchase assets
Seller• Maintain or possibly
increase purchase price
• Absolve themselves of exposure to uncertain liabilities
• Minimize assurances provided to the Buyer in the form of representations and warrantees
• Minimize indemnifications
• Desire to sell stock
Preventing Failures(Post Closure)
• Integration “could” get difficult, on account of the following:
– Poor Evaluation of Internal strengths and weaknesses of the
parties involved.– Lack of clarity on how to harvest deal synergies and other
potential benefits– Technological Incompatibility– No proper tracking mechanism for the progress made and how is
it being managed– Cultural Clashes
Challenge No. 6
Although A and B are in the same industry there could be cultural differences
Company A
Voice-mail driven
Consensus driven
Short Term
Consultative
Risk Averse
Fear of numbers
Centralised
Decisive management
Company B
E-mail driven
Hierarchy driven
Dislike projects
Deadlines cause stress
Non confrontational
Scientific debate
Gentlemanly
Fear ‘discomfort’
?Illu
strative
Illustrative
... in organisational and individual behaviours
ContentsWhy Mergers and Acquisitions?
The Deal Continuum• Road Map to Mergers and Acquisitions• Key Components
Challenges to M&A• Pre Deal• Post Deal
Current M&A Environment
Concluding Thoughts
Deal Landscape……………2005 and 2006 (6 months)
Total 343 M&A deals in 2005 valued at US$ 16.3 bn
192 cross-border transactions 136 outbound with a total deal value of ~US$ 4.3 bn
Outbound deals higher in number but lower in value
Largest proportion of outbound deals in 2005 in Europe (50% of deal value) followed by North America (24%)
As per analysts, the UK remains the gateway for investments (and markets) by India Inc in Europe, and is the leading destination for FDI in Europe
The last 10 years : US most attractive destination (accounting for a fourth of all outbound
investments approved) UK and British Virgin Islands was second (one-fifth of all investments
approved)
Strategic investors looking positively towards India
M&A inbound
Year Aquirer Indian Company Sector StakeConsideration (US$ million)
2006 Mylan Labs, US Matrix Laboratories Pharma 71.5% 736
2006 Hutchison Whampoa Hutchison Essar Telecom Services 5% 580
2006Electronic Data Systems Corporation (EDS)
MphasiS BFL IT/ BPO 52% 380
2006 Chevron, USReliance Petroleum Ltd
Oil & Gas 5% 300
2006 Ciments Francis, France Zuari Cements Cement 50% 134
2005 Vodafone Bharti Tele-Ventures Telecom Services 10% 1500
2005Maxis, Malaysia & The Reddy Family, India
Aircel Telecom Services 100% 1080
2005 Holcim, SwitzerlandAmbuja Cement India Ltd.
Cement 67% 800
2005 Oracle i-flex Solutions Software 41% 550
2005 Huber Group, Germany Micro Inks Printing & Stationery 59% 220
Year Indian Aquirer Company Sector StakeConsideration (US$ million)
2006 ONGC VideshPetrobras’ BC-10 block in offshore Brazil
Oil & Gas 15% 1400
2006 Tata TeaGlaceau, “enhanced water” drinks maker (US)
FMCG 30% 667
2006 Suzlon EnergyHansen Transmissions, Belgium
Wind Energy 100% 588
2006 Dr. Reddys LaboratoriesBetapharm Arzneimittel GmbH, Germany
Pharma 100% 572
2006 Ranbaxy Laboratories Terpia, Romania Pharma 96.70% 324
2006 Ballarpur Industries, JP MorganSabah Forest Industries, Malaysia
Paper & Pulp 97.78% 261
2006 Tata Coffee Eight O'Clock, USA Retail 100% 220
2005 Matrix Laboratories Docpharma, Belgium Pharma 22% 263
2005 Apeejay Surendra Group Premier Group, UK Tea 100% 141
2005 Tata Chemicals Brunner Mond Group, UK Chemicals 63.5% 112
Indian companies venturing overseas M&A outbound
Issues in Cross Border Transactions
Issues Inbound Outbound
Valuation & Due Diligence Related
Difficulty in carrying detailed analysis and due diligence Structured information sharing & start of due diligence Informal arrangements & related party transactions Robust forecasts & projections Review of the independent auditors’ work papers People Related
Flexibility of labour laws Employee liabilities
Issues in Cross Border Transactions
Issues Inbound Outbound
Assets Related
Clarity of title Perception on assets (ownership vs lease) Idle or under-utilised assets Environmental Issues
Understanding of regulatory issues Systems & Controls Environmental Obligations
Issues in Cross Border Transactions
Issues Inbound Outbound
Cultural Issues - Pre & Post Deal
Willingness to take risk Expectation on Management Interaction Escrow mechanism Reps & Warranties Regulatory approvals Colour of the skin
ContentsWhy Mergers and Acquisitions?
The Deal Continuum• Road Map to Mergers and Acquisitions• Key Components
Challenges to M&A• Pre Deal• Post Deal
Current M&A Environment
Concluding Thoughts
Successful deals
• a risk/reward game
• more sophisticated vendors are making life (much) harder
• The deal does not finish on signing
• … that just gives you the opportunity to win or lose later
Best practice processes can reduce risk
• pro-active management of issues is key
• get ahead of the process, it’s very difficult to catch up
• small(er) deals require just as much effort and attention
Speed, Focus, Stability & Ruthless prioritisation
Concluding Thoughts
Thank You!