![Value Creation Through Mergers
and Acquisitions
Merger will create an economic advantage (EA)
when the combined present value of the merged
firms is greater than the sum of their individual
present values as separate entities.
14
Net economic advantage = Economic advantage – Cost of merger/acquisition
NEA [ ( )] – (cash paid )
PQ P Q Q
V V V V
](https://image.slidesharecdn.com/ch32-230507203851-1063403c/85/Ch_32-ppt-14-320.jpg)
Ch_32.ppt
- 1. CORPORATE RESTRUCTURING, MERGERS AND ACQUISITIONS CHAPTE R 32
- 2. LEARNING OBJECTIVES Discuss the form of mergers and acquisitions Highlight the real motives of mergers and acquisitions Show how mergers and acquisitions could help in creating value Illustrate the methodology for valuing mergers and acquisitions Focus on the considerations that are important in the mergers and acquisitions negotiations Consider the issues involved in post-merger integration Understand the implications and valuation of the leveraged buyouts and disinvestment Explain the legal framework for mergers and acquisition in India 2
- 3. INTRODUCTION Corporate restructuring includes mergers and acquisitions (M&As), amalgamation, takeovers, spin-offs, leveraged buy-outs, buyback of shares, capital reorganisation etc. M&As are the most popular means of corporate restructuring or business combinations. 3
- 4. CORPORATE RESTRUCTURING AND BUSINESS COMBINATION Corporate restructuring refers to the changes in ownership, business mix, assets mix and alliances with a view to enhance the shareholder value. Hence, corporate restructuring may involve ownership restructuring, business restructuring and assets restructuring. 4
- 5. TYPES OF BUSINESS COMBINATIONS Merger or Amalgamation Merger or amalgamation may take two forms: • Absorption • Consolidation In merger, there is complete amalgamation of the assets and liabilities as well as shareholders’ interests and businesses of the merging companies. There is yet another mode of merger. Here one company may purchase another company without giving proportionate ownership to the shareholders’ of the acquired company or without continuing the business of the acquired company. 5
- 6. TYPES OF BUSINESS COMBINATION Forms of Merger: Horizontal merger Vertical merger Conglomerate merger 6
- 7. Acquisition may be defined as an act of acquiring effective control over assets or management of a company by another company without any combination of businesses or companies. A substantial acquisition occurs when an acquiring firm acquires substantial quantity of shares or voting rights of the target company. 7 TYPES OF BUSINESS COMBINATION
- 8. Takeover – The term takeover is understood to connote hostility. When an acquisition is a ‘forced’ or ‘unwilling’ acquisition, it is called a takeover. A holding company is a company that holds more than half of the nominal value of the equity capital of another company, called a subsidiary company, or controls the composition of its Board of Directors. Both holding and subsidiary companies retain their separate legal entities and maintain their separate books of accounts. 8 TYPES OF BUSINESS COMBINATION
- 9. Largest M&A Deals in India 1. Tata Steel-Corus, $12.2 billion 2. Vodafone-Hutchison Essar, $11.1 billion 3. Hindalco-Novelis, $6 billion 4. Ranbaxy-Daiichi Sankyo, $4.5 billion 5. ONGC-Imperial Energy, $2.8 billion 9
- 10. MOTIVES AND BENEFITS OF MERGERS AND ACQUISITIONS Mergers and Acquisition are intended to: Limit competition. Utilise under-utilised market power. Overcome the problem of slow growth and profitability in one’s own industry. Achieve diversification. Gain economies of scale and increase income with proportionately less investment. Establish a transnational bridgehead without excessive start-up costs to gain access to a foreign market. 10
- 11. Cont… Utilise under-utilised resources–human and physical and managerial skills. Displace existing management. Circumvent government regulations. Reap speculative gains attendant upon new security issue or change in P/E ratio. Create an image of aggressiveness and strategic opportunism, empire building and to amass vast economic powers of the company. 11
- 12. Benefits of Mergers and Acquisitions The most common advantages of M&A are: Accelerated Growth Enhanced Profitability • Economies of scale • Operating economies • Synergy Diversification of Risk 12
- 13. Benefits of Mergers and Acquisitions Reduction in Tax Liability Financial Benefits • Financing constraint • Surplus cash • Debt capacity • Financing cost Increased Market Power 13
- 14. Value Creation Through Mergers and Acquisitions Merger will create an economic advantage (EA) when the combined present value of the merged firms is greater than the sum of their individual present values as separate entities. 14 Net economic advantage = Economic advantage – Cost of merger/acquisition NEA [ ( )] – (cash paid ) PQ P Q Q V V V V
- 15. Valuation under Mergers and Acquisitions: DCF Approach In order to apply DCF technique, the following information is required: • Estimating Free Cash Flows Revenues and expenses Capex and depreciation: Working capital changes • Estimating the Cost of Capital • Terminal Value 15
- 16. FINANCING A MERGER Cash Offer: A cash offer is a straightforward means of financing a merger. It does not cause any dilution in the earnings per share and the ownership of the existing shareholders of the acquiring company. Share Exchange: A share exchange offer will result into the sharing of ownership of the acquiring company between its existing shareholders and new shareholders (that is, shareholders of the acquired company). The earnings and benefits would also be shared between these two groups of shareholders. The precise extent of net benefits that accrue to each group depends on the exchange ratio in terms of the market prices of the shares of the acquiring and the acquired companies. 16
- 17. Merger Negotiations: Significance of P/E Ratio and EPS Analysis The mergers and acquisitions decisions are also evaluated in terms of EPS, P/E ratio, book value etc. Share Exchange Ratio The share exchange ratio (SER) would be as follows: The exchange ratio in terms of the market value of shares will keep the position of the shareholders in value terms unchanged after the merger since their proportionate wealth would remain at the pre-merger level. 17 Share price of the acquired firm Share exchange ratio Share price of the acquiring firm b a P P
- 18. Merger Negotiations: Significance of P/E Ratio and EPS Analysis Post-merger weighted P/E ratio: (Pre-merger P/E ratio of the acquiring firm) (Acquiring firm’s pre-merger earnings Post-merger combined earnings) + (Pre-merger P/E ratio of the acquired firm) (Acquired firm’s pre-merger earnings Post-merger combined earnings) 18 No. of shares exchanged SER Pre-merger number of shares of the acquired firm ( / ) 0.25 4,000 1,000 b a b P P N PAT PAT Post-merger combined PAT Post-merger combined EPS = Post-merger combined shares (SER) a b a b N N P/E (P/E ) (PAT / PAT ) (P/E ) (PAT / PAT ) w a a c b b c
- 19. Merger Negotiations: Significance of P/E Ratio and EPS Analysis Earnings Growth The formula for weighted growth in EPS can be expressed as follows: Weighted Growth in EPS = Acquiring firm’s growth × (Acquiring firm’s pre-merger PAT/combined firm’s PAT) + Acquired firm’s growth × (Acquired firm’s pre-merger PAT/combined firm’s PAT). 19 PAT PAT PAT PAT a b w a b c c g g g