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1 7ExternalGrowth
1 7ExternalGrowth
1 7ExternalGrowth
7 GROWTH
Measuring size
net profit
capital employed
market capitalization
sales turnover
market share
Number of employees
Small businesses
Lack of specialists
Problems in raising both short and long-
term finance
Marketing risks of limited product range
Difficulty in finding suitable, reasonably
priced premises
WHAT IS YOUR GLOBAL PERSPECTIVE ?
Avon 66
McDonald’s 62
Coca cola 61
Gillette 60
TYPES OF GLOBAL ORGANISATIONS
Multinational corporation : a company that maintains
significant operations in multiple countries but manages
them from a base in the home country.
Transnational corporation : a company that maintains
significant operations in more than one country but
decentralizes management to the local country.
Borderless organization : a global type of organization in
which artificial geographical barriers are eliminated
HOW ORGANISATIONS GROW TO GO GLOBAL ?
Foreign
subsidiary
Joint ventures
Mergers Take-overs
External growth
Horizontal Conglomerate
Same industry – Vertical
With different
Same stage of Industries/
production markets
Backwards – Forwards –
Same industry Towards the
Towards previous Consumer/
processes market
India is now emerging as a promising high growth M&A
market….
300 450
200
300
Number of Deals
150 250
200
100
150
50
100
0 50
FH SH FH SH FH SH FH SH FH SH FH SH FH
1999 1999 2000 2000 2001 2001 2002 2002 2003 2003 2004 2004 2005
Rationale: • Oracle will gain a foothold into the packaged applications market
for banks, which is currently dominated by SAP
• i-flex will be able to leverage on Oracle’s relationships with Tier–I
banks in the lucrative US market for its core banking product
Flexcube. It will also gain direct access to Oracle’s global
infrastructure, resources and support and 8,500 banking
customers for its offshore services business
Indian corporates have come to the conclusion that in
order to achieve global leadership…..M&A would be the
primary tool
In M&A - Strategic thinking would have to be backed by operational
excellence
Define a clear focused acquisition strategy
View acquisitions as a way to execute the business strategy successfully
and faster
Develop a proactive approach to identification of players and
opportunities
Understand own business’ core competencies and how they can be best
leveraged to pay an optimum price to the target
Define M&A success metrics
Typical M&A Process
It is important to understand first certain basic rules
of valuation
Not “precise” – it is “subjective”
There cannot be A RIGHT ANSWER – there are only
analysed, well reasoned range of values
Value lies in the eyes of the beholder – so true!
Important to get first clarity on the following :
– Why to value ?
– What to value ?
– How to value?
There are 3 different approaches to valuation
transactions
DCF / PECV /
Mainly should be
looked at from a Dividend discounting
perspective of method
determining the “base
Cross verification of
Most preferred
value” value derived from
method – DCF
other methodologies
methodology
Other key aspects of Valuations
Appropriate methodology depends on:
– nature of interest in the business which is being valued
– prospects for the company and the industry in which it operates
– type of business
– access to information (eg: hostile situations)
– market value of other firms which are traded actively in the free and open
market
The critical or key part of any valuation is a good understanding of the company /
business
Other key aspects of Valuations
Actual valuation is based on bargaining powers of buyers and sellers
Value of a business is dynamic and not static
Valuation assists in determining a "Fair Value" to which a premium or discount
may be added based on negotiations.
Whether the deal is a small one or large one, amount of due diligence is the
same. ……..small deals is not just about handshakes
Some examples of typical due diligence
issues….
Management’s over optimism in terms of projections
Common costs and separation issues in carve outs
Inter Group business issues / related party issues (loans & Advances,
procurement from group companies)
Assessment of working capital requirement of business
Acquisition related liabilities (past acquisitions, deferred consideration)
Contingent Liabilities
Taxation – Transfer pricing issues, availability and continuity of tax holidays
Change management related issues
Weakness in internal controls
Deal Communication
Communication surrounding M&A – External &
Internal
Crucial communication – hence needs to be handled carefully
Communication should be effective and bring out benefits of the deal to
– Investors
– Employees
– Other stake holders
Important to respect government approvals and statutory
requirements
Deal Integration
2 out of 3 deals have not worked;
the only winners are the shareholders of the acquired firm, who sell their
company for more than it is really worth Economist 1999
From 1987 to 1989 17% of the 393 downgrades by Moody were due to M&A
issues. From 1998 to 2001 this percentage rose to 60%.
Just 23% of all acquisitions earn their cost of capital
In acquired companies, 47% of executives leave within the first year; 74% leave
within the first three years
Synergies projected for the deals are not achieved in 70% of the cases
Most CEOs and CFOs quote people problems and cultural factors as top factors
in failed integrations
Different stakeholders would have different
concerns………….and each would have to be
handled differently
Investors
Top Management
Middle Management
Front line employees
Customers
It’s important to have a team in place which can bring consensus besides
having some past experience of the process
Various post deal integration factors…
Speed
Cultural mismatch
Global complexities
Corporate Arrogance
Confusion on authority
Enhancing customer focus
Retaining people – re-recruitment plan
Communication and feedback throughout the integration
An example : integration challenges in a telecom
merger
Key value drivers in cellular acquisitions – Economies of scale, expanding
footprint, early mover advantage
Value creation is always achieved from ability to manage integration
The backend IT integration issues – Billing, CRM, Service levels, back end
integration
Learning curve helps !
– Bharti took 36 months to integrate billing in its first acquisition (Andra Pradesh); it just
took less than 6 months for later acquisition (Rajasthan)
– To launch the brand - It took 7 months (AP) and 14 months (Chennai) earlier ; it took
just 3 months for the later deal (Rajasthan)
Some thoughts on integration challenges typically in
cross border M&A
Ratio of successful cross border deals has been low (in some estimates 50%)
Different types of Cultural differences
Mainly done to create shareholders’ value ; especially in cases wherein
valuations are not reflecting true inherent value
Better valuations of parts which could neglected in a conglomerate structure
Classically, textbooks define “forms of restructuring business firms” under the
following :
– Expansions (Mergers / Acquisitions / JVs)
– Sell offs (Spin-offs / Divestitures)
A spinoff creates a new legal entity ; shares are distributed on a pro rata basis to
existing shareholders of the parent company
Note : there is a separation of control and new entity may develop policies and
strategies different from original parent
Divestiture involves sale of portion of the firm to an outside third party. Cash or
equivalent consideration is received by the divesting firm.
Demergers / Spinoffs
Spin-offs in India on an average have done well – especially ones wherein there
was a clear case wherein a higher profitability business is separated from less
promising ones
Godrej Soaps – Demerger of Godrej Consumer Products
Wockhardt – Demerger of Wockhardt Lifesciences
Dabur – Demerger of Dabur Pharma
Eveready – Demerger of Tea business
GE Shipping – Demerger of Oilfield services division
Mafatlal Industries – Navin Fluorine
There are various rationales and motives that drive
M&A…..
Buy underperforming businesses domestically (at current levels) – wherein buyer
has capabilities to derive upsides
– Wockhardt Merind
– Dabur Balsara
Buy underperforming businesses overseas – wherein buyer has restructuring
capabilities
– Some of the European pharma acquisitions by Indian companies
– Asian Paints’ acquisitions in emerging markets
– Recent auto component / engineering acquisitions in Europe by Indian companies
Buy Businesses / Companies which allows you to expand in different markets
overseas
– Indian Pharma’s overseas acquisitions
Buy businesses / companies which gives you access to lucrative customer
relationships
– Bharat Forge’s acquisition of Dana Spicer’s UK order book
There are various rationales and motives that drive
M&A…..
Buy Companies which gives you a wider domestic reach / pan India presence
– Cellular acquisitions of Bharti
– Cement companies’ acquisitions
– Deccan Chronicle – Asian Age
Buy a business which gives you a parallel distribution network
– HLL Modern Foods
Buy a direct competitor who is debt ridden
– Nirma Saurashtra Chemicals
– IFFCO Oswal Fertilizer unit
– Eveready BPL Batteries
Buy a good plant / asset from a debt ridden / under performing company
– Recent API asset buyouts of Wanbury, Unichem and Matrix’s acqusition of formulations
plant of Sigma
There are various rationales and motives that drive
M&A…..
“India entry” with a leader
– DHL Blue Dart
– Holcim ACC Gujarat Ambuja
Buy an “India exit” candidate
– Nicholas Piramal acquisitions
– Zydus Cadila - German Remedies
– Skanska – Italian Thai Development
– Metropolis – Gribbles Pathnet
Strategic use of capabilities / resources
– Barter model of Bennett & Coleman (Pantaloon, Hakoba, Today’s, Videocon)
– Gujarat Ambuja’s recent Rs 60 crore investment (15% stake) in ING Vysya Life
Insurance Company Limited