Mergers & Acquisitions: Text & Cases

439 Pages·2010·96.16 MB·English

by  B Rajesh Kumar

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Mergers and Acquisitions
Text and Cases
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About the Author
B Rajesh Kumar is a faculty in the area of finance at the Institute of Management
Technology, Dubai International Academic City, UAE. He received his Ph.D in the area
of Mergers and Acquisitions (M&A) from School of Management, Indian Institute of
Technology (IIT), Kharagpur. His empirical research papers in the area of M&A have
appeared in refereed journals like Vikalpa (IIM-Ahmedabad), Management Review
(IIM-Bangalore), Decision (IIM-Calcutta), Afro-Asian Journal of Finance and Account-
ing and Journal of Applied Business and Economics. He has also co-authored a book
on Growth Strategies of Indian Pharmaceutical Industry.
The McGraw-Hill Companies
Mergers and Acquisitions
Text and Cases
B Rajesh Kumar
Assistant Professor
Institute of Management Technology
Dubai International Academic City, UAE
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Mergers and Acquisitions: Text and Cases
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Preface
Mergers and industrial/corporate restructuring have become topics of great importance in the global corpo-
rate arena. Mergers and acquisitions (M&A) have become world-wide phenomena to achieve strategic and
financial objectives. In the context of a changing business environment, many firms have no other alternative
but to merge, acquire or to be acquired. M&A activity has manifested itself in waves which are driven by
a combination of various economic, regulatory and technological changes. The M&A wave is different in
industry focus, transaction types, capital structures, presence and absence of hostile takeovers, mega deals and
favourable economic factors like falling interest rates, booming stock market and the expanding economy.
It is no surprise, therefore, that announced M&A deals hit an all-time-high record in 2006 topping
$4 trillion globally. Private equity firms represented nearly a quarter of the deals in 2006. M&A activity
slowed worldwide in 2007-08 largely due to uncertainty in the global credit markets and fall in the share
market around the world. According to Thomson Reuters, global M&A totalled $3.1 trillion in announced
deals during 2007-08. According to the Grant Thornton Report, the total number of M&A deals announced
in the year 2008 was 454 with a total announced value of $30.95 billion. Global M&A activity again showed
signs of recovery in February 2010, with a 3.8% increase in the number of announced transactions. Due to
bigger deals, reported dollar volume jumped by 211% in comparison to that in February 2009, which was
the lowest-volume month since 1996.
India has been a late starter in the M&A events due to rigid regulations, but in recent years cross-border
deals are happening faster. The increased cross border M&A activity can be seen as the response to globalised
competition since 1990s.The period from 2000-2007 saw Indian multinationals engaged in 594 overseas ac-
quisitions with an underestimated value of $51.2 billion. The increased momentum of overseas acquisitions by
Indian firms can be attributed to India's higher economic growth, rising foreign exchange reserve, continuing
Outward Foreign Direct Investment (OFDI) policy regime, allowing domestic firms access to global financial
markets, increasing bilateral trade and investment treaties. In the initial part of the year 2010, there were a total
of 134 announced Indian M&A transactions, a 55.8% increase from the prior-year figure. Dollar volume of
$15.5 billion represented a dramatic rise from $0.4 billion in January-February 2009, largely due to three
billion-dollar-plus deals totaling $13.7 billion.
In this backdrop, the introductory chapter of this book discusses global M&A trends and focuses on the
emergence of M&A wave in India. The next chapter explains the significance of economic, financial and
strategic perspectives of M&A. The third chapter focuses on economic theories that have provided many
possible reasons for why mergers might occur: efficiency-related reasons that often involve economies of
scale, attempts to create market power, market discipline, diversification etc. The next chapter discusses
various types and characteristics of M&A. The following chapters highlight the importance of due diligence,
negotiation, deal structuring and methods of payment in M&A. The chapter on valuation highlights the various
valuation models used for M&A process. The eighth chapter focuses on accounting issues for mergers; the
chapter on corporate restructuring deals with the various types of restructuring activities. The next chapter
discusses the various corporate control mechanisms and types of takeovers. The chapter on 'Post-merger
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viii Preface
lntegration, attempts to understand different aspects related to the integration process. The regulatory and
legal framework of M&A is discussed in the following chapter. Empirical research on M&A has revealed
a great deal about their trends and characteristics in the last century. Event studies have demonstrated that
mergers create shareholder value, with most of the gains accruing to the target company. The chapter on
M&A successes reviews research studies based on these business activities.
This is followed by a section discussing M&A activity in the major sectors in India. The cases" focus
on sectors like pharma, banking, IT & BPO, consumer goods, airline, telecom, cement, auto, oil & energy,
and metal. It also discusses high-profile deals like Tata's acquisition of Corns and Vodafone's acquisition
of controlling stake in Hutchison-Essar. Further, it focuses on the growth strategy of the master acquirer—
Cisco—through multiple acquisitions. The other major cases discussed include the Arcelor-Mittal merger
and the story of GE acquisitions.
This book will serve as a basic resource for the students, scholars and executives dealing with M&A. It
provides a methodological overview of the concepts in M&A and is supplemented by case discussions on
real world M&A scenarios. It is my hope that the book will aid students and executives to comprehend more
clearly the complexity of the dynamics inherent in the M&A process, as well as the synergies involved in
it.
Acknowledgements
1 wish to acknowledge the valuable contribution of Miss Kavya Shree and Mr Shiva Kumar in preparing
the chapter on accounting for mergers and problems in valuation. 1 also thank Mr Erlingappa, Librarian at
PGDMS, SIT Tumkur, for facilitating the use of resources.
I would like to thank my family, friends and all colleagues for their support and encouragement.
My heartfelt gratitude is for my beloved mother for inspiring me to do better in life.
My special thanks are due to the entire Tata McGraw-Hill team associated with the project, for their con-
sistent support and cooperation. I especially thank Ms Vibha Mahajan, Mr Tapas K Maji, Mr Hemant K Jha,
Ms Shalini Negi, Ms Anubha Srivastava, Ms Sneha Kumari, Mr Manohar Lai and Mr Atul Gupta for the
effort they have put in for this book.
B Rajesh Kumar
*The case studies included in this book have been prepared for the sole purpose of aiding classroom teaching and discussion. They are
not meant to serve as endorsements, or sources of data, or illustrations of effective or ineffective management.
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Contents
Preface vii
1. Mergers and Acquisitions: Trends 1
Introduction 1
Cross Border M&A 11
Sectoral Review of M&A 19
The Key Drivers for M&A 30
The Future Ahead 31
Summary 31
Discussion Questions 32
Additional References 32
2. Perspectives on Mergers and Acquisitions 34
Introduction 34
Economic Perspective on M&A 35
Finance Theory Perspective on Mergers 36
Strategic Perspective on M&A 38
Strategic Facilitators for M&A Growth in India 46
Summary 48
Discussion Questions 49
Additional References 49
3. Theories of Merger 50
Introduction 50
Hypothesis Concerning Mergers & Acquisitions 51
Summary 61
Discussion Questions 62
Additional References 62
4. Mergers and Acquisitions: Types and Characteristics 64
Mergers and Acquisitions 64
Mergers 64
Acquisitions 65
Types of Mergers 66
Synergies in Mergers 71
Vertical Integration 74
Summary 80
Discussion Questions 80
Additional References 80
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x Contents
5. Mergers and Acquisitions: Due Diligence 82
Introduction 82
Due Diligence Challenges 84
Checklist for Due Diligence 84
Decision About Acquisition Price 88
Due Diligence in India 89
Due Diligence in the Age of Technology 92
Summary 92
Discussion Questions 93
Additional References 93
6. Negotiation, Deal Structuring and Methods of Payment in Mergers and Acquisitions 94
Introduction 94
Structuring of Transactions 94
Regulatory Approval 95
Deal Making in India 95
Methods of Payment in M&A 98
Distinction between Stock and Cash Transactions 99
Types of Exchange of Shares 99
Summary 101
Discussion Questions 102
Additional References 102
7. Mergers and Acquisitions: Valuation 103
Introduction 103
Understanding the Drivers of Value 104
Brand Valuation 105
Cost of Capital 109
Equity Valuation 111
Firm Valuation 112
Relative Valuation 114
Enterprise Value 115
Valuation of Indian Companies - Some Scenarios 116
General Guidelines 118
Synergy and Value Creation 118
Problems 119
Miscellaneous Problems 126
Summary 128
Discussion Questions 128
Additional References 128
8. Accounting for Mergers 130
Introduction 130
Accounting Entries 133
Summary 147
Discussion Questions 147
Additional References 147