DUBAI CAMPUS
 
 
 

STRATEGIC FINANCIAL MANAGEMENT

 
 
 
 
 
FOR
 
 
 
 

MBA SEMESTER IV

Presented by
Adjunct Faculty: T.P.Anand
 
 READING MATERIAL

Financial Management –
Theory and Practice by
Prasanna Chandra – Tata
McGraw Hill publication
Strategic Financial
Management by Dr.Girish
P.Jakhotiya – Vikas publication
 MODULE 1 – INTRODUCTION

Role of Finance and Strategy in

Management Process
Strategic Droop
Management Behaviour
Convergence between
Strategic and Financial Analysis
 OBJECTIVES OF BUSINESS
• Survival: function of -nature of ownership, nature of
business competence of management, general and industry
conditions, financial strength of the enterprise, etc.
• Stability: cautious and conservative objective
• Growth: increase in assets, manufacturing facilities, increase
in sales volume through existing products or new products,
improvements in profits or market share, increase in
manpower, acquisition
• Efficiency: rationally choosing appropriate means to achieve
goals; doing things in best possible manner; utilizing
resources in a most suitable combination to get highest
productivity
• Profitability: sole motive of business; all other objectives are
subservient to profit motive
 STRATEGY
• Shutting unwanted doors first and then keeping only one door open

• Strategy is to unravel complexity and to reduce uncertainty of the

environment.
• Strategy seeks to relate the goals of the organization to the means
of achieving them.
• Strategy is partly planned and partly reactive
• It is a flexible approach for achieving the desired results with
sustainable success
 FINANCIAL MANAGEMENT
• Managing the financial resources
for the purpose of maximizing
the value of the firm
• The three broad areas of
financial management are Capital
Budgeting; Capital Structure and
Working Capital Management
 STRATEGIC FINANCIAL MANAGEMENT
• Every Executive or Stakeholder should be a
strategist
• Strategist should observe financial
management from a long-term perspective
for sustainable success based on short
term tactics that are flexible
• Strategic financial management may offer
different solutions to a single problem
leaving the ultimate conclusive choice to
the strategist
 BUSINESS ENVIRONMENT

• Complex: factors, events, conditions and

influences from different sources
• Dynamic: constantly changing in nature,
shape and character
• Multi-faceted: shape and character of the
environment depends on the perception
of the observer
• Impact: far reaching impact on
organisations in several different ways
 COMPLEX GAME OF CHESS
• Strategic Financial Management is a
very complex game of chess
• Every move has to be made carefully
by thinking about the opponents move
• There are more than two players
• Everyone wins at the end
• In effect it is a Relationship and not a
Game
 INNOVATIVE THINKING

• The key to success in Strategic

Financial Management is
innovative thinking – thinking
out of the box
• Apply Conflict Resolution
Techniques or TRIZ/TIPS (Theory
of Inventive Problem Solving)
 AMAZING SENTENCE
• I do not know where family doctors
acquired illegibly perplexing
handwriting; nevertheless,
extraordinary pharmaceutical
intellectuality counterbalancing
indecipherability transcendentalizes
intercommunication's
incomprehensibleness.
 FIVE FORCES
• Michael Porter’s Competitive Analysis.
• The five forces are:
–Rivalry among existing firms
–New entrants
–Substitute products
–Suppliers bargaining power
–Customer bargaining power
 SUSTAINABLE SUCCESS – 9 S MODEL
• Selectivity – choice and focus on core competence
• Systems – robust system of accounting, reporting, analysis, enabling
decisions
• Sensitivity – effective use of financial information for commercial
decisions
• Structural Flexibility – sum total of qualitative and quantitative
adaptability and adjustability – under tough market conditions enables
the firm to convert threats into opportunities and losses into profits
• Soul Searching for continued benchmarking
• Strategic Cost Management – Activity based costing, life cycle based
costing, notional cost-benefit analysis, etc.
• Sustainability – sustained competitive advantage – survival of the
fittest
• Sanctity – ethical economics of business
• Superiority – position of leadership
 STRATEGIC DROOP
• Starting too many projects with the prior
knowledge that some of them will fail
• The disappointing results of failed
strategies will get compensated by other
successful strategies
• Strategic Droop leads to Inter-project
Rivalry; excess competition for resources;
too many internal squabbles/politics;
inferior result of all projects
 MANAGEMENT BEHAVIOUR

• Least Resistance: Passive in behaviour and guided

by signals from the external environment – not
ambitious
• Proceed with Caution: Wait and Watch – monitor
the changes in environment, wait for the changes
to occur and then take corrective actions
• Dynamic response: Behaviour to control the
environment – powerful and dynamic feedback
system – ability to convert threats into
opportunities – highly conscious and confident of
strengths
 STRATEGIC PLANNING PROCESS
• Study the external and internal environments.
• Identify marketplace opportunities and threats.
• Determine how to use core competencies.
• Use strategic intent to leverage resources,
capabilities and core competencies and win
competitive battles.
• Integrate formulation and implementation of
strategies.
• Seek feedback to improve strategies.
 STRATEGIC ANALYSIS
• Strategic Business Analysis includes:
– industry analysis - begins with a definition of products and markets, skills and
competitors contained within the industry, followed by industry structural
analysis, and concluded with the identification of the key success factors for
the industry.
– business strategy analysis - begins with a description of the strategic goals
and business strategy of the firm. It's implementation is then analyzed in
terms of the firm's functional and operational capabilities and the resulting
financial and competitive performance
– strategy evaluation - or SWOT analysis encompasses the internal and external
factors that affect the company's business strategy. The business strategy is
compared against the industry's key success factors and competitive resource
requirements and the firm's internal capabilities and resources.
– Critical isssues and recommendations - seek to identify the critical issues that
the company needs to address. The analysis concludes with
recommendations that address the critical issues and result in changes of
product-market strategy or functional implementation.
 FINANCIAL ANALYSIS
• Financial Analysis is done by referring to the
Financial Statements of the Company
• Financial Statements include Statement of
Financial Position; Statement of Profit or
Loss and other Comprehensive Income;
Statement of Cash Flows and Notes on
Accounts
• Financial Analysis is used to analyze whether
an entity is stable, solvent, liquid, or
profitable enough to be invested in. 
 ROLE OF FINANCE MANAGER

• Raising of Funds
• Allocation of Funds
• Management of Funds
• Effective utilisation of Funds
 CONVERGENCE OF STRATEGIC AND
FINANCIAL ANALYSIS
• Strategic Analysis combined with
Financial Analysis
• Review of Strategies, Action Plans
• Plan Vs. Actual – both for Action
Plans as well as for financial
metrics
• Corrective Action
MODULE 2 – FINANCIAL DECISION MAKING

Value Analysis – A strategic perspective

Advances in Working Capital
Management
Arriving at an Optimal Capital Structure
Impact of Inflation on Financial Decisions
Dividend Decisions – A strategic
Perspective
 BENEFITS OF STRATEGIC FINANCIAL
MANAGEMENT
• Sustainable growth
• Provides alternative answers to both seen and unseen
complexities
• It is a real though notional attempt to convert
qualitative judgments into quantitative results
• Automatic mechanism to prevent profit and growth
leakages by using multi-level and multi-faceted
benchmarks
• Useful for special situations like “expansion through
amalgamation” or “sustaining through reincarnation”
• Will keep creating win-win situation for every
stakeholder
 CONCEPTUAL FRAMEWORK
• Combining “Strategy” with “Finance” requires a
conceptual framework
• Conceptual Framework is the act of putting together
financial assumptions, ideas and perceptions into a
strategic design
• Return on Investment (ROI) – variants are to measure
on Owners Investment; Total Investment; Incremental
Investment; Pre-Tax ROI
• Strategic Questions: what should be the quantified
benchmark for each of the ROI ratios? Can there be a
concept of “minimum achievable ROI” irrespective of
the size and nature of industry-level and enterprise-
level variables?
 MINIMUM ACHIEVABLE ROI
• Minimum Achievable ROI is the sum total of:
– Cost of funds or rate of Inflation whichever is higher
– Rate of Real Income (expected to be half of the rate of
inflation or cost of funds)
– Rate of growth (growth rate of the economy or industry or
the enterprise itself)
• An enterprise executing same business in different
parts will have to expect different rates of ROI, as the
value of the ingredients differ totally
Ingredients of Operating ROI India England
Cost of Funds employed or rate of inflation 15% 7%
Rate of Real Income 7.5% 3.5%
Rate of Growth 5.5% 2.5%
Minimum achievable Operating ROI 28% 13%
 VALUE CHAIN ANALYSIS
• Value Chain – presents stages of value contribution
• Components of the Value Chain:
– Suppliers and Vendors/Sub-contractors and
Facilitators/Product packaging, promotion and
Distribution/Administrative Support/Cost of Funds
• Material Cost + Direct Wages = Prime Cost
• Prime Cost + Manufacturing Overheads = Factory Cost
• Factory Cost + Administrative Overheads = Cost of
Production
• Cost of Production + Selling Overheads = Cost of Sales
• Cost of Sales + Cost of Funds = Total Cost
 STRATEGIC DECISION ON VALUE CHAIN
• The investment made in the Value Chain would
depend on the scope of its networking – retain the
most indispensable portion of the value chain
• Buy Raw Material and convert or Buy Semi-finished
product? Handle HR Function internally or
Outsource? Handle Distribution internally or Appoint
a Distributor?
• An enterprise may withdraw a portion of its
investment in the Value Chain if that portion is
strategically unimportant and if that investment could
be effectively used elsewhere
 STRATEGIC BUSINESS UNITS (SBU)
• Multi-product; Multi-location; Multi-facility enterprise
can adopt the Strategic Business Unit concept
• Strategic Business Unit can be both a Profit Center as
well as a Cost Center
• All the functions need not be present in each SBU
• There could be a separate Corporate Services SBU
providing pooled services to all the Operating SBUs
• SBU concept helps in focus and achieving far greater
efficiencies
• SBU concept also helps in evaluating independently
and knowing the real contribution from various Units
of the business
 WORKING CAPITAL
• Working Capital (WC) is required to maintain
short term assets to conduct the regular
operating cycle of the business
• WC = Current Assets – Current Liabilities
• The Working Capital requirement keeps
changing from time to time depending on
the operating levels in the business
 WORKING CAPITAL MANAGEMENT
• Cash Cycle/Working Capital Cycle
Raw
Material Work in
Progress
Cash
WORKING CAPITAL
CYCLE

Finished
Receivables
Goods

• Number of rotations in a year

• Example: 20% margin with WC Cycle of 120 days
Vs.
15% margin with WC Cycle of 60 days
 WORKING CAPITAL MANAGEMENT
• If the business is seasonal then the Working
Capital Requirement in peak season will be very
high compared to the off-season of the year
• Excess working capital required in peak season is
financed by:
– Trade credit
– Trade Finance from Banks
– Intra-group Corporate Loans
– Sale of short term liquid investments
– Bill Discounting and factoring
– Advance from Customers
 CASE STUDIES ON WC MANAGEMENT
• Carrefour – Working Capital
Management??
• Water Company – Supply to
Grocery Stores on Credit Vs. Cash
• Working Capital Management at
Amazon.com
 CAPITAL STRUCTURE
• Structuring the Capital Needed for
Business
• Global Reach or Local
• Stages – Foundation, Development,
Growth and Expansion
• Source of Funds?
–Equity Vs. Debt – high leverage
(Lehman Brothers Case)
–Long Term Vs. Short Term
–Fixed Capital Vs. Working Capital
 BALANCE YOUR BALANCE SHEET

• MATCHING THE ASSSETS AND

LIABILITIES + EQUITY
• MATCHING THE LONG TERM
FUNDS WITH APPLICATION ON
NON-CURRENT ASSETS
• MATCHING THE SHORT TERM
FUNDS WITH APPLICATION ON
CURRENT ASSETS
 FACTORS INFLUENCING CAPITAL STRUCTURE
S.No Factors influencing Capital Structure
. Cycle
1 Long term borrowings at competitive
interest rates
2 Reasonable amount of equity share
3 Reinvestment of initial profits
4 Convertible long term loans, collected
through bonds like flexi-rate notes
5 Medium term public loans like deposits,
bonds, etc.
6 Long term equity capital and convertible
preference shares
Stage of the Corporation in its Life
Phase of incorporation and
takeoff
Promoters’ initial control on the
capital of the corporation
Takeoff and consolidation through
organic growth
Second phase of consolidation
and gradual debentures and
securitized papers expansion of
equity capital
Beginning of inorganic growth
through small acquisitions,
amalgamations, etc.
Large size takeovers and
expansion of subsidiaries
 FACTORS INFLUENCING CAPITAL STRUCTURE
S.No Factors influencing Capital Structure Stage of the Corporation in its Life
. Cycle
7 Very long term loans in dollars, euros, yen Hedging of forex risk, international
and pounds takeover and joint ventures
8 Large amount of preference shares and Consolidating the group fo holding
non-participating equity shares companies and subsidiaries
9 Medium term public loans at competitive Consolidating the control by
interest rate promoters through equity
acquisitions and buy back of equity
shares
10 Reissue of bought back shares and fresh Further consolidation of the Group’s
preference shares leadership in the global market
11 A mix of equity and preference shares along Expanding the business of blue chip
with long term bonds companies from the group
12 Issue of non-participative equity shares to Reconciliation and reformation of
technology providers production and distribution facilities
 IMPACT OF INFLATION
• Inflation: sustained increase in the general price
levels of goods and services – reduction in the
purchasing power
• When the inflation is higher than expected, the
borrower gains at the expense of the lender
• Inflation risk is greater for long term bonds
• In a period of volatile inflation rates, borrowers
will be disinclined to issue long term fixed interest
bonds and investors, too will be reluctant to buy
such bonds
• Low and steady rate of inflation is preferred by all
 DIVIDEND POLICY
• Two important dimensions of Dividend Policy:
– What should be the average pay out ratio?
– How stable should the dividends be over time?
• Considerations relevant for Dividend Payout Ratio:
– Funds requirement in the foreseeable future – Reliance Industries
– low payout ratio – expanding rapidly
– Liquidity – availability of cash to pay dividend
– Access to external sources of financing – restricted access – low
payout ratio
– Shareholders preference – preference for high dividend or capital
gains?
– Difference in the cost of external equity and retained earnings –
issue cost and under-pricing
– Control – external financing would mean dilution of control – use
of retained earnings would mean no dilution
– Taxes – Dividend income is tax free however the company pays a
tax of 16.995%. Long term capital gains is tax free
 CHANGES IN ACCOUNTING POLICY
• Case Study – Delta Airlines Vs. Singapore Airlines

DESCRIPTION BEFORE JULY 1.7.86 TO FROM

1986 31.3.1993 1.4.1993
DL/SQ DL/SQ DL/SQ

Residual Value 10%/10% 10%/20% 5%/20%

Useful Life 10/8 15/10 20/10

Depreciation 9/11.25 6/8 4.5/8
expense per
$100 Gross
Aircraft Value

• Why did these two companies in the same industry adopt different
policy whilst both are using the same type of aircraft made by a
common manufacturer? (Airbus or Boeing)
 REASONS FOR DL Vs. SQ POLICY DECISION

• DL was incurring losses and wanted to show

better results – despite downtrend in Airline
Industry DL was also expanding

• SQ was highly profitable and was deferring

tax liability as the Corporate Tax Rates were
progressively being reduced by the
Government
 MODULE 3 – CORPORATE VALUATION

Rationale for Shareholders’ Wealth

Maximization
New Performance Metrics – Economic
Value Added and Market Value Added
Various approaches to Corporate
Valuation
Alignment of the interest of various
stakeholders of a Firm
SHAREHOLDERS’ WEALTH MAXIMIZATION

Profitable Company
Regular Dividend Payout
Higher value for the shares in the
market
Good future prospects for the
Company
Maximize the Net Present Value of the
future cash flows
 SHAREHOLDERS’ WEALTH MAXIMIZATION
OBJECTIVE
Maximizing shareholder value is not an abstract, shortsighted,
impractical, or sinister objective.
It is a concrete, future-oriented, pragmatic, and worthy
objective
The pursuit of this objective motivates and enables managers
to make substantially better strategic and organizational
decisions
Its accomplishment is essential to the welfare of all the
company’s stakeholders
It is only when wealth is created that customers will continue
to enjoy a flow of new, better, and cheaper products
The world’s economies will see new jobs created and old ones
improved.
 SHAREHOLDERS’ WEALTH MAXIMIZATION
ASSUMPTIONS

• Shareholder value is the best measure

of wealth creation for the firm
• Shareholder value maximization
produces the greatest
competitiveness
• Shareholder value maximization fairly
serves the interests of the company’s
other stakeholders
WARREN BUFFET
WARRANT BUFFET RULES FOR CEOs
 ECONOMIC VALUE ADDED (EVA)

• Economic Value Added per

annum = Post Tax profit before
interest – total cost of capital
including notional cost of
reserves
• How to calculate the Notional
Cost of Reserves??
 ECONOMIC VALUE ADDED

• Is there a real increase in the Net

Worth of the Organisation
• Real growth that is added to
shareholders’ wealth
• Analyse the true usage of the capital
• EVA should be real value growth after
discounting inflation and other
negative factors
 MARKET VALUE ADDED (MVA)

• Market Value of a Company =

Company’s Market Value –
Capital Invested
• A high MVA indicates the
company has created
substantial wealth for the
shareholders
 MARKET VALUE ADDED (MVA)

• MVA is not a performance

metric like EVA
• MVA is a wealth metric
 CORPORATE VALUATION

• Business Valuation or
Corporate Valuation is a
process of determining the
economic worth of a business
• The Valuation is based on the
Business Model and external
environment
 CORPORATE VALUATION

• The Valuation would depend on

the following factors:
– Purpose of valuation
– Stage of Business
– Past financial performance
– Expected financial results in future
– Industry scenario and business
outlook
 APPROACHES TO CORPORATE VALUATION

• Adjusted Book Value Approach – book value of

Net Assets adjusted to reflect the true market
value
• Stock and Debt Approach or Market Approach
– for publicly listed companies
• Direct Comparison Approach – applied in Real
Estate business
• Discounted Cash Flow Method –present value
of cash flow during explicit forecast period +
after the explicit forecast period
 COMPARISON OF THE APPROACHES TO
CORPORATE VALUATION
•Adjusted Book Value Approach makes sense when liquidation is being
considered a distinct possibility or when you want to establish minimum
benchmark price
•Stock and Debt Approach or Market Approach is eminently suitable
when securities of the firm are actively traded and there is no price
manipulation
•Direct Comparison Approach is quite appropriate when (a) the current
earnings of the firm are reflective of future earnings capacity (b) the
company expects to enjoy stable growth rate and (c) there are
comparable companies business
•Discounted Cash Flow Method is ideally suited when (a) a fairly credible
business plans and cash flow projections are available for the explicit
forecast period of five to ten years or more and (b) the firm is expected
to reach a steady state at the end of the explicit forecast period
 ADJUSTED BOOK VALUE METHOD
Balance Sheet of Prosperous Metals Ltd:

LIABILITIES AMOUNT in ASSETS AMOUNT in

USD USD
Share Capital 600,000 Land and Buildings 270,000
Profit & Loss A/c 40,000 Plant & Machinery 100,000
6% Debentures 60,000 Stock 300,000
Bank Overdraft 10,000 Receivables 160,000
Creditors 80,000
Provision for Tax 100,000
TOTAL 890,000 TOTAL 890,000

On 31st March 2016 Land & Buildings were valued at $280,000 and Goodwill
at $200,000 and Plant & Machinery at $120,000.
Receivables include 4,000 irrecoverable and Tax is 35%. What is the
company’s business value under the Adjusted Book Value Method.
 STOCK AND DEBT APPROACH
(Closing Capital + Goodwill) / No. of Shares = Book Value of
Share

No. of Shares X Book Value = Value of Business

 COMPARABLES APPROACH APPROACH
1. MV/EBIT
2. MV/Book Value
3. MV/Sales Ratio
Average of all the above is taken as Value
Valuation Process:
• Take a peer group of companies data
• Compute the MV/EBIT Multiple
• Apply the multiple of the peer group on the target
company’s EBIT to arrive at the Enterprise Value
• Deduct the Debt
• Arrive at the Equity Value
• Divide by number of shares
• Arrive at the Value per Share under the Comparables
Approach
 DISCOUNTED CASH FLOW METHOD
• The Present Value of future cash flows of the business is
the Value of the Business
• DCF Valuation of Aramex.xlsx
 ALIGNMENT OF VARIOUS STAKEHOLDERS

•Shareholders Value
•Customer Value
•Employee Value
•Suppliers Value
•Channel Partners Value
•Managerial Value
•Societal Value
MODULE 4 – CORPORATE RESTRUCTURING

Restructuring, Merger & Acquisition

The Search Process
Valuation and Deal Structuring
Accounting and Tax Implications
Post Merger Integration and Learning
Restructuring through Privatization,
Leveraged Buy-Out
Restructuring of Sick enterprises
Due Diligence and Certification
 RESTRUCTURING
It is a conscious effort to restructure
policies, products, programmes, processes
and people in order to achieve the
redefined purpose on a sustainable basis.
Purpose of Restructuring?
Scope of Restructuring?
Result? – Mergers, Acquisition,
Demergers, Sale of Units, Equity Carve-
outs, downsizing, etc.
SYMPTOMS PROMPTING RESTRUCTURING
OPERATIONAL SYMPTOMS
Reducing employee productivity
Delays in supply chain
Weak market feedback on products, prices, promotional policies
Confusion in territorial, divisional, individual performance accounting,
appraisals, etc.
High employee turnover
Decline in the market development efforts
High asset maintenance and repairs
Growing incidences of industrial relations problems and production
stoppages
Disturbed ratio between number of core employees and support employees
Disturbed ratio between time spent on core performances and support
performances
Uncomfortable relations with external stakeholders like suppliers,
contractors, consultants, government departments
SYMPTOMS PROMPTING RESTRUCTURING
STRATEGIC SYMPTOMS
Slowed down desire for perpetual growth and wealth
acceleration
Growing mismatch between strategy formulations by
owners and managers
Declining market leadership
Imbalance of value additions done by value-driving
divisions, individuals and other strategic inputs
Heavily subsidized products and divisions, creating
increased pressure on strong products and divisions
Imbalance between short-term tactics and long-term
strategies
SYMPTOMS PROMPTING RESTRUCTURING
FINANCIAL SYMPTOMS
Increasing Operating costs and cost of finance
Falling share prices
Declining earnings ratio
Increase costs on supply side and demand side of the value chain
Increasing cost of licences, copyrights, patents, etc.
Unusual cost of wastages
Growing cost of corrective efforts
Increasing cost of marketing operations
Growing pressure on manufacturing costs
Imbalance between core cost and support cost
Serious drawbacks and problems in implementation of transfer
price mechanism
 SYMPTOMS PROMPTING RESTRUCTURING
EXTERNAL SYMPTOMS – MARKET/ECONOMY/GLOBAL LEVEL
 Substantial change in the Government Policies
 Sustained recession, shrinking international markets
 Cheaper funds availability in international markets
 Growing import substitution
 Growing influence of networking and multinational corporations
 Increased international culture of branding anything and everything
 Domestic confusion with interest rate behaviour and other bank
related policies
 Fast changing “IT advancement” resulting in one single market
 Replacement of skill and system employees by knowledge
employees and entrepreneurial employees
 Opening up of certain economies – emerging markets
 RESTRUCTURING PLAN
Step 1: Define the purpose further with maximum details of
possible sustainability
Step 2: Decide the sequence of restructuring
Step 3: Chalk out all minute details of each operation under
each phase of the sequence with the use of PERT and CPM
Step 4: Have a parallel cost-benefit chart along with the PERT-
CPM chart of operations. The costs and benefits should be on
both scales – short and long
Step 5: Design a lead team of key executives and owners to
carryout the whole process of restructuring. Then decide the
action plan and monitor the process
Step 6: Chalk out a detailed plan with soft and hard aspects,
costs and crisis management tactics for the post-restructuring
management of change and result indicators
 CORPORATE RESTRUCTURING

Corporate
Restructuring

Acquisitions:
• Mergers Divestitures:
• Purchase of a Unit or Plant • Partial sell offs
• Takeovers • Demergers
• Leveraged buyouts • Equity Carve outs
• Business Alliances • Sale of equity stake
 MERGERS AND ACQUISITIONS
Mergers: combination of two or more
companies into one through absorption or
consolidation
• Absorption: Digital Equipment Corporation
absorbed by Compaq and Compaq was later
absorbed by HP
• Consolidation: Hindustan Computers,
Hindustan Instruments, Indian Software
Company, Indian Reprographics combined
to form HCL Limited
 MERGERS EXAMPLES

• National Bank of Dubai merged

with Emirates Bank and
together it is now known as
Emirates NBD
 ACQUISITION EXAMPLES

• Jaguar and Land Rover

acquired by Tata Group
• Aujan’s 50% stake acquired by
Coca Cola
• Sun Pharma buying out
Ranbaxy to become the world’s
fifth largest pharma company
BENEFITS OF MERGERS AND ACQUISITIONS
• Strategic Benefit
• Economies of Scale
• Economies of scope
• Economies of vertical integration
• Complementary resources
• Tax Sheilds
• Utilisation of surplus funds
• Managerial effectiveness
 MAJOR ACQUISITIONS
•$2.5 Billion for Minecraft by Microsoft
•$7.2 Billion for Nokia Handsets by Microsoft
•$12 Billion for Motorola Handsets by Google
•$19 Billion for WhatsApp by Facebook
•$1 Billion for Instagram by Facebook
•$28 Billion for Heinz by Berkshire Hathaway
•$8.3 Billion for Concur by SAP
 VALUATION AND DEAL STRUCTURING
•Valuation is the most complex and therefore
the most interesting topic in Strategic
Financial Management
•It is very complex because it is highly
subjective
•It is highly subjective because different
stakeholders look at the organisation, its
brand, its employees and its assets differently
and based on their convenience or perception
 REASONS FOR VALUATION
•Amalgamation or merger with another enterprise
•Assessment of fund-raising capacity and required rating by lenders
•Issue of shares
•Partial or full privatization
•The enterprise’s own internal exercise for the knowledge of owners and top executives
•Group restructuring exercise leading to mergers or de-mergers inside the group
•Strategic Alliance and Joint Ventures with domestic and international partners
•Sale of few assets, brands and other claims
•Governmental requirement for taxation, securitization, etc.
•Rehabilitation of a Sick or Dying enterprise
•Significant change to be made in the value chain knowing the independent strength of
various value drivers contributing to the value chain of an enterprise
•Converting key employees into entrepreneurial employees and then into equal partners
in the enterprise
•Valuation of Goodwill for its presentation in the balance sheet or for charging royalty to
dealers, representatives, group members, etc.
•Partial valuation of certain divisions and product lines for partial restructuring
 COMPONENTS OF BUSINESS VALUATION
•Inflated or adjusted value of
physical and tangible assets +
•Value of brand and other
intangible assets +
•Value of human resources
• Note: If the brand strength is wholly contributed by
the employees then the intrinsic value of the brand
and potential employees will be the same.
 BRAND VALUATION
• The pre-requisite for brand valuation is the
identification of the brand
• A highly successful brand may become absolutely
unsuccessful if it changes hands
• The buyer of a brand must first think about
sustaining the brand’s strength when he buys and
gives it to his managers
• The price that a buyer would pay for a brand hence
depends on the sustainability
• The seller may expect higher price when selling
brand to a strong organisation as the brand may
become stronger
 BRAND VALUATION
• Brand Valuation without taking into
account the brand managers becomes a
very complex exercise
• Separation of the Brand from its source
of strength becomes the most strategic
issue in the valuation exercise
• The valuation is far easier in the case of
total takeover of the whole organisation
 METHODS OF VALUATION
• Super Profits Method – discounted value
of extra cash flows to be generated by a
brand
• Discounting Factor x (total profits in “n”
years) – (profit without the brand in “n”
years)
• Cost of Acquisition or Cost of Nurturing
Method – cumulative sum of expenses
incurred on nurturing or acquiring a brand
 ACCOUNTING FOR MERGERS
POOLING OF INTEREST METHOD
• All assets and liabilities of the transferor company before
amalgamation should become the assets and liabilities of the
transferee company
• Shareholders holding not less than 90% of the face value of equity
shares of the transferor company should become shareholders of the
transferee company
• The consideration payable to the shareholders should be discharged
by the transferee company by issue of equity shares
• Business of transferor company is intended to be carried on by the
transferee company
• The transferee company intends to incorporate into its balance sheet
the book value of the assets and liabilities of the transferor company
without any adjustment except to the extent needed to ensure
uniformity of accounting policies
 ACCOUNTING FOR ACQUSITION
PURCHASE METHOD:
• The assets and liabilities of the transferor company
are carried into the books of the transferee
company at their fair value
• The difference between the Purchase
Consideration and the Net Book Value of Assets
over liabilities is treated as “Goodwill” that has to
be amortised over a period
• If the Purchase Consideration is less than the Net
Book Value of Assets over Liabilities the difference
is shown as “Capital Reserve”
 TAX ASPECTS
• In a scheme of amalgamation the merging company is called the
Amalgamating Company and the merged company is called the Amalgamated
Company
• The Amalgamated Company is entitled to various tax benefits, if the following
conditions are satisfied:
– All the assets and liabilities of the amalgamating company immediately before
amalgamation becomes the assets and liabilities of the amalgamated company by
virtue of the amalgamation
– Shareholders holding not less 90% in value of shares in the amalgamating
company become shareholders of the amalgamated company by virtue of the
amalgamation
• Tax concessions are granted only if the amalgamating company is an Indian
Company
• The Amalgamated company will continue to get deductions which remain
unabsorbed or unfulfilled in the amalgamating company
• The amalgamated company will also enjoy the carry forward of losses and
unabsorbed depreciation of the amalgamating company
 RESTRUCTURING THROUGH PRIVATISATION
• Privatisation quantitatively means conversion of Government
Ownership into Private Ownership
• Privatisation qualitatively means conversion of bureaucratic
management into entrepreneurial management
GOVERNMENT OWNERSHIP PRIVATISATION
Employment Generation Employability
Budgets are stereotyped and procedure Budges are flexible and performance driven
driven
Direct public accountability is very high and Accountability to shareholders is very high
hence cost of environmental consumption, and hence ROE, Economic Value Added and
transparency in account, etc are more Dividend Distribution are more important
important parameters
Social consequences are more important Prices, Costs are monitored strictly with an
and hence profit cannot be the sole motive eye on Profitability.
Divisions or Products will be closed or Unprofitable divisions or products will be
downsized gradually over a long period of ruthlessly closed down or downsized
time
 LEVERAGED BUY OUT
• Leveraged Buy Out involves
transfer of ownership
consummated mainly with
debt
 LEVERAGED BUY OUT - Example
• T Limited has three divisions, viz., Plastics Division, Textiles
Division, Garments Division and the company has decided to sell
the Plastics Division.
• The replacement cost of the assets of Plastic Division is $140
million but they will fetch only $ 90 million if the division is
liquidated. T Limited is willing to sell the division for $ 100
million.
• Four key executives of the Plastics Division are keen to acquire
and have pooled together $ 8 Million.
• They approach a Private Equity Investor who comes up with an
investment of $ 7 Million for some stakes in the new company
• The balance $85 million is financed through debt from a Financial
Institution
 RESTRUCTURING A SICK UNIT
• The restructuring of an organisation may be needed due to
Operational Sickness or Financial Sickness
OPERATIONAL SICKNESS FINANCIAL SICKNESS
Product is weak Working capital is blocked on receivables
and inventory
Processes and technology are outdated Borrowed funds are costly and have not
been swapped timely
Employee productivity is down Unproductive resources and over-
employment add to sunk costs
Whole organisation is facing an internal Capital has not been properly appropriated
inertia and employees are happy with along various value drivers in the
ongoing programmes organisation
Drawbacks or hurdles in supply chain and Ruthless expansion takes away all resources
distribution management and ongoing activities suffer
Organisational focus is lost and core Owners withdraw disproportionate
competence is neglected dividends without bothering for calamities
and inflation
DUE DILIGENCE AND CERTIFICATION
• The evaluation of the target company by a potential
acquirer
• Ascertaining the facts and figures and ensuring that
the facts and figures are properly verified and
assessed
• Due Diligence can cover Technical, Marketing,
Operational and Financial aspects of the Business
• It is a process of checking, verifying and certifying all
the material facts stated by the target company
• This Validation process will help to avoid future
surprises or shocks
 CASE STUDY
• In 2005, ICICI Venture became majority owner of Chennai, India-
based VA Tech India, a VA Tech Wabag GmbH subsidiary started in
1996
• Rajiv Mittal headed a management group which took the minority
share
• In 2007, VA Tech India acquired the Austrian parent from
Siemens for about $100 million
• In 2009, Mittal's management team owned 38 percent, and ICICI
owned 31 percent, of VA Tech Wabag.
• The company incorporated a China subsidiary
• VA Tech Wabag Chennai is the Parent Company with subsidiaries
all over the world and topline revenue of over USD 4 Billion
 THANK YOU

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