KAVISH PROJCT

8/7/2019 KAVISH PROJCT

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Under the guidance of our respectedProfessor-

Prof C.CHATTERJEE



KAVISH JALAN



� Introduction� 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



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 .



� Financial Restructuring Includes raising thefinance, decisions regarding mergers, jointventures and alliances

� Operational Restructuring Reformulate thecompany on basis of change in technology andenvironment requirements

� Organizational Restructuring In order toincrease efficiency redefining the organizationalstructure or the processes or the systems.

� Market Restructuring Is the addition of a newerproduct or shifting one product or segment toanother or enlarge the market for the exitingproducts.



�Culture.

� Inadequate focus and commitment of topmanagement 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



� Expansion

� Sell offs

�Corporate control

�Changes in ownership structure..



� 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 competitive advantage. For

example,both Daimler-Benz & Chrysler ceased to exist when twofirms 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 µACQUISITION¶. Unlikemergers, acquisitions can sometimes be unfriendly. i.e., when a

firm tries to takeover another by adopting hostile measures.



�Mergers and Acquisitions M&A ,have become very popular strategy all over the world in last 3 decades.

� The value M &A WORLDWIDE increased from $464 Billionin 1990 to $3.4 trillion in 1999-2000, followed by sharp

decline during 2001 & 2002.It has again shown improvementfrom 2003 onwards.

� India born Laxmi Nivas Mittal has taken over Arcelor inEurope , to form a largest Steel making Company in Europe-´Arcelor-Mittal.´(117Mtons/Year-Global) .

� Tata Steel-Corus(UK) Acquisition by Tata Steel for $12Billion is very significant and a landmark for the IndianCorporateWorld. (28 Mtons/Annum-2006)



M&A means and includes

ACQUISITIONSMERGERS

PURCHASE OF UNITTAKE OVERSALLIANCES

DIVESTITURESSELL OFFS

DEMERGERS

OWN,RESTRUCT.GOING PRIVATE

LEVERAGEDBuy OUTS

ORG.RESTRUCT.REDESIGN

PERFORMANCEENHANCEMENTPROGRAMMES





Company-specific RiskCost-of-capital reduction

Operating SynergyScale Economies

Improve margins

Financial SynergyRedeploy capital

Increase R OI

Managerial SynergyImprove management or

replace inefficient one

Market ValuationRelease ³value´



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 otherbenefits like debentures, cash

Transfer assets and liabilitiesA B



A, B and C = Amalgamating Companies: Cease to exist

D = Amalgamated Company: may or may not haveexisted 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

DB

C



Demergers are one type of spin-offs: under s. 391

A = Demerging Company

B = Resulting Company: may or may not have existedearlier

A transfers undertaking to B

B issues shares to shareholders of A

X Y Y

Company BCompany A

Transfers undertaking Y

Shareholders

of

A

Issues shares



1. Develop a strategic plan for the business.(BusinessPlan)

2. Develop an acquisition plan related to the strategicplan.( Acquisition Plan)

3. Search companies for acquisitions.(Search)4. Screen and prioritize potential companies.(Screen)5. Initiate contact with target.6. Refine valuation, structure the deal and develop

financial plan.( Negotiation)7. Develop plan for integrating the acquired business.

(Integration Plan)8. Obtain all necessary approvals and implement

closing.9. Implement post closing integration.10. Conduct a post closing evaluation.



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 toprovide top management to the acquired company.

�Within the first year of the merger, managements in both

companies should receive promotions across the entities



� 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



Problems inProblems inAchieving SuccessAchieving Success

Problems inProblems inAchieving SuccessAchieving Success

IntegrationIntegrationdifficultiesdifficulties

InadequateInadequateevaluation of targetevaluation of target

Too muchToo muchdiversificationdiversification

Large orLarge orextraordinary debtextraordinary debt

Inability toInability toachieve synergyachieve synergy

Managers overlyManagers overlyfocused on acquisitionsfocused on acquisitions

Too largeToo large

IncreasedIncreasedmarket powermarket power

OvercomeOvercomeentry barriersentry barriers

Lower riskLower riskcompared to developingcompared to developing

new productsnew products

Cost of newCost of newproduct developmentproduct development

Increased speedIncreased speedto marketto market

IncreasedIncreaseddiversificationdiversification

Avoid excessiveAvoid excessivecompetitioncompetition

M & AM & A

Reasons f orReasons f orM & AM & A





Example:Example: General Electric·s acquisition of NBCGeneral Electric·s acquisition of NBC

Example:Example: Kraft Food·s acquisition of Boca Burger Kraft Food·s acquisition of Boca Burger

Example:Example: CNET·s acquisition of mySimonCNET·s acquisition of mySimon

Reasons f or M & AReasons f or M & AReasons f or M & AReasons f or M & A

Increased Speed to MarketClosely related to Barriers to Entry, allows market entry in a moreClosely related to Barriers to Entry, allows market entry in a moretimely fashiontimely fashion

Diversificationi k way to move into sinesses when firm rrently la ksi k way to move into sinesses when firm rrently la ks

e erien e and de th in ind strye erien e and de th in ind stry

Reshaping Competitive ScopeReshaping Competitive Scope

Firms may se a q isitions to restri t its de enden e on a single orFirms may se a q isitions to restri t its de enden e on a single ora few rod ts or marketsa few rod ts or markets



Problems with M & AProblems with M & A

Example:Example: Marks and Spencer·s acquisition of Brooks BrothersMarks and Spencer·s acquisition of Brooks Brothers

Example:Example: Intel·s acquisition of DEC·s semiconductor divisionIntel·s acquisition of DEC·s semiconductor division

Example:Example: AgriBioTech·s acquisition of dozens of small seed firmsAgriBioTech·s acquisition of dozens of small seed firms

Integration DifficultiesDiffering financial and control systems can make integration of firmsDiffering financial and control systems can make integration of firmsdifficultdifficult

Inadequate Evaluation of Target´Winners Curseµ bid causes acquirer to overpay for firm´Winners Curseµ bid causes acquirer to overpay for firm

Large or Extraordinary DebtLarge or Extraordinary Debt

Costly debt can create onerous burden on cash outflowsCostly debt can create onerous burden on cash outflows



Example:Example: Ford and Jaguar Ford and Jaguar

Example:Example: Quaker Oats and SnappleQuaker Oats and Snapple

Example:Example: GE GE----prior to selling businesses and refocusingprior to selling businesses and refocusing

Inability to Achieve Synergy

Justifying acquisitions can increase estimate of expectedJustifying acquisitions can increase estimate of expectedbenefitsbenefits

Problems with M & AProblems with M & A

Overly DiversifiedAcquirer doesn·t have expertise required to manageAcquirer doesn·t have expertise required to manageunrelated businessesunrelated businesses

Managers may fail to objectively assess the value of outcomesManagers may fail to objectively assess the value of outcomesachieved through the firm·s acquisition strategyachieved through the firm·s acquisition strategy

Managers Overly Focused on AcquisitionsManagers Overly Focused on Acquisitions



Present Situation Strategy

Growing steadily but in a mature marketwith limited growth

Acquire a company in a youngermarket with higher growth rate

Operating at maximum productivecapacity

Acquire a company makingsimilar products operatingsubstantially below capacity

Under-utilizing management resources Acquire a company into which

the talents can be extended

Marketing an incomplete product range ,or having the potential to sell otherproducts or services to your existing

customers

Acquire a company withproduct range which iscomplementary



Lacking key clients in a targeted sector Acquire a company with rightcustomer profile

Need to increase market share Acquire an importantcompetitor

Need to widen capability Acquire a company with keytalents and/or technology

Need more control of suppliers orcustomers

Acquire a company which is, orwhich gives access to asignificant customer or supplier

Preparing for floatation but need toimprove balance sheet

Acquire a company with theright customer profile



Kinds of takeovers:

� Negotiated or Friendly TakeoverThe existing management of a company decides to give

away the control of the company to another group on termsand conditions mutually agreed upon by both the parties.

� Open market or Hostile TakeoverA 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 profitearning company in order to bail out the former ,it is called abail-out takeover.



� Tender Offer

General offer made publicly and directly to a firm·s shareholders tobuy their stock at a price well above the current market price.

� Street Sweep

The acquirer accumulates large amounts of the stocks in the targetcompany before making the open offer

� Bear Hug

The acquirer tries to put pressure on the management of the targetfirm by threatening to make an open offer

� Strategic AllianceAn acquirer offers a partnership rather than a buyout of the target

firm.

� Brand PowerThe acquiring firm enters into an alliance with other powerful

brands to displace the competitor·s brand.



� Economic Issues

� Legal Issues

� Public Policy Issues

� Powers of financial institutions

� Proxy wars



� 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



�Golden Parachutes

� Poison Put

�Anti-takeover Amendmentso

Super majority amendmentso Fair price amendments

o Classified boards

o Authorization of preferred stock

�Poison Pill Defense�Targeted Share Repurchase and Standstill

Agreements

�Other Takeover Defences



�A fundamental characteristic of merger isthat the acquiring company takes over theownership 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 companyover the assets or management of another

company without any combination ofcompanies.



Attributes of Effective AcquisitionsAttributes of Effective Acquisitions

ComplementaryAssets or ResourcesBuyi fir s it assets t at eet curre t

ee s t uil c etiti e ess

++

FriendlyAcquisitionsFriendlyAcquisitions

Friendly deals make integration go more smoothly

++

Caref ul Selection ProcessCaref ul Selection Process

Deli erate e aluati a e tiati s is re li ely

t lea t easy i te rati a uil i syner ies

++

Maintain Financial Slack Maintain Financial Slack

Provide enough additional financial resources so

that profitable projects would not be foregone

++



Attributes of Effective AcquisitionsAttributes of Effective Acquisitions

Low-to-Moderate DebtLow-to-Moderate Debt

Merged firm maintains financial flexibility

++

FlexibilityFlexibility

Has experience at managing change and is

flexible and adaptable

++

Emphasize InnovationEmphasize Innovation

Continue to invest in R &D as part of the firm¶s

overall strategy

++



TR ANSACTION STR UCTURE

�Companies Act

�Income Tax Act

�Stamp Acts

�Competition Act

TR ANS-BORDER TR ANSACTIONS

�Foreign ExchangeManagement Act

LISTED COMPANIES

�SEBI R egulations

�Stock Exchange ±

Listing Agreement



�Sec 391 ² 394 of Indian companies actcovers M & A.

�Examination of object clause�

Approval from the board� Intimation to share holders andcreditors.

�Approval from share holders andcreditors.- 75% of SH and creditors to

approve.�Application to National Company Law

Tribunal (NCLJ)� Intimation to SEs



� Pettion to NCLT for approval

� Filing order with ROC

�Transfer of assets and Liabilities

� Issuance of shares/cash





THE DEALTHE DEAL



� Sep 20, 06 : COR US 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 : COR US accepts the offer of £4.3 billion.

� Oct 23, 06 : Brazilian Steel Group CSN counter-offer to TATA¶s offer.

� Oct 27, 06 : COR US 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 f ull

voting support fromCorus shareholders





The initial motive behind the deal was not CORUS

revenue size but rather its market value. To compete on global scale because then TATA wasjust at 56th rank in steel production.

CORUS holds a number of Patents and R & Dfacility.

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.

FOR TATAFOR TATA



To extend its Global reach through TATA.

To get access to Indian Ore reserves, as well asvirgin 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%)

FOR CORUSFOR CORUS



Major Acquisitions

Tar t r al ( ) Y ar

Arc lor Mittal St l 31 2006

NKK Corp Kawasaki St l 14.1 2001

LMM Holdi s Ispat I tl 13.3 2004

Cor s TATA 12.0 2006

Kr pp AG Th ss 8.0 1997

Dofasco Arc lor 5.2 2005

I tl St l Mittal St l 4.8 2005



COMP ANY COMP ANY C AP ACI TY inC AP ACI TY in

(million tones)(million tones)

1.Arcelor-Mittal

2.Nippon steel

3.Posco

4.JEF steel

5.Tata steel- Corus

110.0

32.0

30.5

30.0

27.7





� Ford, a leading automaker and one of the largest MNC in the globalautomobile industry.

� Ford acquired Jaguar from British Leyland Limited in 1989 for US$ 2.5 billion

� Ford bought Land Rover in 2000 for US$ 2.7 billion from BMW

� Over the years, the operations of both Jaguar and Land Rover were fully

integrated� Ford reported losses of US$ 12.7 billion in the year 2006

� Ford conducted strategic reviews on the two brands and in June 2007announced that it was considering selling JLR

� Ford was concerned more about the interest of the workers employed withJLR than the price

� JLR·s labour union were against selling to private equity firms to be assureof job security

� On January 03,2008,Ford announced that it had chosen Tata Motors f orthe JLR deal and had entered into f ocused negotiations with thecompany.

� On March 26,2008, Tata Motors agreed to pay US$ 2.3 billion in cash f or a100% acquisition of the businesses of JLR.



� Immediate entryto the luxuryperformance carand premium all-terrain vehiclesegments

� An improvementin global market

position througha combination ofresources andstrengths

� Strengthening oftechnologicaland productdevelopment/innovationcapabilities toaddress changingmarket trends

�

Enhanced humancapital andmanagerialtalent

� Sharing of bestpractices inmanufacturingand qualityassurancesystems andprocesses

� Potential

operationalsynergies



Tata Motors acquired:

� Three manufacturingplants

� Two advanced designedand engineering centers

� Worldwide network of 26national sales companies

Tata Motors did not inheritany of the debt liabilities

of JLR, the acquisition wastotally debt free



�Tata Motors raised a bridge loan of US S$3 billion through a syndicate of banks

�The loan was raised through Tata Motors UK,

a special purpose vehicle and a 100%subsidiary of Tata Motors

�The interest on the bridge loan was linkedto LIBOR(London Inter Bank Offer Rate)

�Tata also proposed to raise around US 500 to600 million through an international issue



� Sales of JLR declined by 11.4% during the 2nd quarter ending Sep.2008

� Tata motors had to pump in funds to keep JLR on the move

� By the end of Nov.2008,198 employees opted f or voluntary retirementand 400 more decide to leave by Jan 2009

� With not much of cash generation internally, additional investments of

funds would only add to the debt and interest burden of the company

� In early Jan 2009,JLR announced 450 jobs cut

� Announced that managers would not receive any bonuses in 2009while salary raises would be deferred till Oct 2009

� For the quarter ending Dec2008,the sales volumes of JLR decreasedby 35.2% to 49,186

� Total car sales in the UK in the year 2009 would be at 1.78 million asagainst 2.4 million in 2008

� By the end of 2008,retail vehicle sales were reported at 10.8 million-around 2 million lower than the sales reported in 2007

� Consumers were delaying the purchase of new vehicles due to lack of consumer loans





� Biggest merger in the history of Consumergoods

� P&G acquired Gillette for $57b to become

the world·s largest consumer goods company�Annual Sales of the combined entity:$60.7b

�After purchase of Gillette P&G will have$21b brands with market cap of $200b

� P&G paid .975$/share(20% premium),laterbuyback of shares worth $18-22b over 12-18months



�Merging companies: similarity in Corporatehistory

�Merger based on a different model where

innovation was the focus rather than thescale

�Regulatory concerns: Product overlaps

�Consumer goods after 1980s



� P&G strength: Women·s personal care products

� Gillette strength: Men·s grooming category

� Complementary in strength cultures and vision tocreate potential for superior sustainable growth

� Gillette stock climbed 50% since 2003,profitsjumped on premium products

� Acquisition added about 20% to P&G sales, longterm sales growth estimate to 5-7% a year

� Operating margin expected to grow by 25 % by2015 from 19% in 2003

� The companies expected cost savings of $14-16bn from combining back-room operations andnew growth opportunities.



� more resources to enable intensive collaborativesupply chain initiatives in a more cost-effectiveway.

� merger would also bring down the advertisingand media costs owing to greater bargainingpower

� Opportunities in developing markets: Gillettewould give exposure to P&G in emergingeconomies like India and Brazil, while P&Gwould distribute Gillette products in China

� It will give P&G the much needed boost tofurther strengthen its product categories whereat present it has negligible presence

� The deal will help Gillette in improving itsinventory days.



� The merger would result in around 6,000 job cuts,equivalent to 4% of the two companies' combinedworkforce of 140,000. Most of the downsizing will takeplace to eliminate management overlaps andconsolidation of business support functions.

� Cultural problems absence because of geographicalproximity� P&G is considered a promote-from-within company, and

already had a lot of executive talent at the top.Therefore, absorbing Gillette's management to theirsatisfaction could be difficult

� P&G's ability to handle this massive cultural assimilationwould decide the success or failure of this acquisition.� Overlaps of some brands



� Pressure for competitors in the industry

� competitors could launch new products orstrengthen their supply chain relationships

during this time to gain an edge� P&G-Gillette combination could be a

transformative deal for the industry becauseof Gillette's growth potential. Analyst

forecasted that this deal could lead tofurther consolidation in the industry



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KAVISH PROJCT