Mergers and Acquisitions

Subject Code:

MF 0011

BKID B1732

Revised Edition: Spring 2010

Sikkim Manipal University

Directorate of Distance Education
Department of Management Studies
Board of Studies Chairman HOD, Dept. of Management Studies SMU DDE Additional Registrar SMU DDE Dr. T. V. Narasimha Rao Adjunct Faculty and Advisor SMU DDE Prof. K. V. Varambally Director Manipal Institute of Management, Manipal Originally Prepared by: Mr. R. Vadapalli Associate Professor MDI, Gurgaon Revised Edition: Spring 2010 Printed: January 2013 This book is a distance education module comprising a collection of learning materials for our students. All rights reserved. No part of this work may be reproduced in any form by any means without permission in writing from Sikkim Manipal University, Gangtok, Sikkim. Printed and Published on behalf of Sikkim Manipal University, Gangtok, Sikkim by Manipal Global Education Services Manipal 576 104. Printed at Manipal Technologies Limited, Manipal. Mr. Pankaj Khanna Director HR, Fidelity Mutual Fund Mr. Shankar Jagannathan Former Group Treasurer Wipro Technologies Limited Mr. Abraham Mathew Chief Financial Officer Infosys BPO Ms. Sadhna Dash Senior HR Consultant Bangalore

Content Revised and Updated by: Prof. V. S. Kumar holds PDGBA from IIM Ahmedabad, AICWA from the Institute of Cost and Works Accountants of India, and ACS from the Institute of Company Secretaries of India. He has worked as CEO, Chief Compliance Officer, Company Secretary, Chief Financial Officer, and General Manager in various organizations for over 35 years. He is a specialist in the field of Financial & Accounting Controls, Reporting & MIS, Disclosure, and Decision Support Systems. He conducts programmes in leading corporations like Infosys and Ford, and in premier institution. Peer Reviewed by: Dr. Savitha G. Lakkol, MBA Ph.D., has over 14 years of teaching experience at various management institutes and currently working as Assistant Professor at JSS Centre for Management Studies, SJCE Mysore. She is currently undertaking teaching assignments in the area of Corporate Finance and Restructuring. Her area of research is Mergers Acquisitions and Corporate Restructuring. Her Thesis (in the context of Indian Banking Sector) and few publications are in the area of Corporate Restructuring. She has presented papers at National and International Conferences. Engaged in designing and delivering the Project Management and Entrepreneurship workshops. In House Content Review Team Dr. Sudhakar G. P. HOD Dept. of Management Studies SMU DDE Dr. Sireesha Nanduri Assistant Professor Dept. of Management Studies SMU DDE

Contents SECTION A: THE DIMENSIONS OF M & A Unit 1 Introduction to Mergers and Acquisitions Unit 2 Strategic Evaluation of M & A Opportunities Unit 3 Strategizing and Structuring M & A Activity Unit 4 Synergy and Value Creation in Mergers Unit 5 Corporate Restructuring Unit 6 Demergers Unit 7 LBOs, MBOs, MLPs and ESOPs Unit 8 Joint Ventures Unit 9 International Mergers & Acquisitions 1

19

39 59

75

93 105 123

139

SECTION B: THE PROCESSES IN M & A Unit 10 Takeover Defences Unit 11 Legal and Regulatory Framework of M & A Unit 12 Accounting for Amalgamation Unit 13 Valuation Unit 14 Post-merger Integration 155 170 185 204 224

SECTION C: ILLUSTRATIONS OF NOTED M & AS Unit 15 Prominent Cases of Mergers and Acquisitions

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MF 0011
Mergers and Acquisitions COURSE DESCRIPTION
Mergers and Acquisitions (MF 0011) The hallmark of any successful business is profitable growth. It is not sufficient if the business is making a good net profit; it also needs to post an increase in volumes year on year. There are two ways in which this can be done: organic growth, and inorganic growth. Organic growth is increase in volumes by the business on its own, acquiring fresh customers, making and selling new products, and entering new markets with its products. But businesses have realised that this is steady but not spectacular: for growth in quantum leaps they look for inorganic growth or growth by acquiring businesses. This is the subject of Mergers & Acquisitions, which you will be studying in this SLM. This fascinating subject is a major component of financial management, and exemplifies some key concepts of financial management like business valuation, due diligence, financing, and buyback. The course comprises 15 units divided into three sections: Section A, which comprises Units 1-9, deals with the many facets and dimensions of M & A activity, It starts with looking at strategies, goes on to discuss various forms of mergers including demergers, sickness & restructuring and defence against hostile takeover bids. Section B, comprising Units 10-14, covers the wide variety of processes involved in a typical merger and the attendant managerial actions. Here we look at takeover defences, valuation, accounting and statutory compliances, and round off with the post-merger integration activity, which is the key to realising the benefits targeted by a merger. Section C (unit 15) describes a few renowned merger cases.

M & A activity exemplifies many major financial concepts like valuation, due diligence, financing and buyback strategies. Applied knowledge of these

topics can strengthen a Finance Managers skill-set considerably and get him to succeed especially in times of financial crisis.

Course Objectives: The objective of this course is to introduce the students the concept of Mergers and Acquisitions, Amalgamation and the valuation approaches. After studying this subject, you should be able to: describe the key motives of M & A activity discuss strategic aspects of M & A decisions and identification of acquisition opportunities explain the merger process right from planning the merger till implementation explain the concept of synergy in M & A as the primary source of value addition through M & A describe corporate restructuring and different methods of corporate restructuring describe the structure of demerger, and explains tax implication of demergers explain the meaning of LBO, MBO, MLP and ESOP explain the role of joint ventures in business strategy discuss international M & A describe takeover regulations and amendments, and explains guidelines for takeovers explain valuation approaches explain types of amalgamation, describes the methods of accounting for amalgamation, describe the accounting and legal aspects of M & A explain integration planning, lists the factors in post-merger integration model, discusses post-merger integration model discuss some examples of M&A in the Indian and international contexts

The Self Learning Material (SLM) for this subject is divided into 15 units. A brief description of all the 15 units is given below: SECTION A: THE DIMENSIONS OF M&A Unit 1: Introduction to Merger and Acquisition Defines the meaning of mergers and acquisitions (M & A), describes the motives behind the M & A, states the advantages and disadvantages of M & A, classifies the types of mergers, and explains the steps to be taken for a successful merger. Unit 2: Strategic Evaluation of M & A Opportunities Defines selection approaches and criteria, explains the modalities of fixing the acquisition price, lists the key steps in the strategic planning of a merger, discusses feasibility analysis in respect of cash and stock deals, describes fair value: institutional criteria, and explains the special features of acquisition of sick companies. Unit 3: Strategising and Structuring M & A Activity Explains the merger process right from planning the merger till implementation, discusses the five-stage model, elaborates methods of financial mergers, and describes merger as a capital budgeting decision. Unit 4: Synergy and Value Creation in Mergers Explains synergy and its different types, describes the role of industry life cycle, discusses the value creation in synergy, and recognises the theoretical factors that would affect M & A activity. Unit 5: Corporate Restructuring Explains the meaning of corporate restructuring, states the need for corporate restructuring, and describes different methods of corporate restructuring. Unit 6: Demergers Defines the meaning of demerger, explains the characteristics of demerger, describes the structure of demerger, and explains tax implication of demergers.

Unit 7: LBOs, MBOs, MLPs and ESOPs Explains the meaning of LBO, MBO, MLP and ESOP, describes governance and mode of purchase in LBO, identifies the key motives behind an MBO, states the structure of MBO, classifies the types of MLP and ESOP, and explains regulations that usually govern ESOPs. Unit 8: Joint Ventures Explains the meaning of joint ventures, defines the characteristics of a joint venture, states the rationale for joint ventures, explains the role of joint ventures in business strategy, defines joint venture and complex learning, explains tax aspects of joint ventures, describes international joint ventures, discusses common reasons for failure of joint ventures, and explains joint venture vis--vis anti-trust policy. Unit 9: International M & A Defines international M & A activity, explains the opportunities and threats, states role of M & A in international trade growth, recognises the external advantages in differential products, defines the impact of government policies and political and economic stability on international M&A decisions, and makes recommendation for effective cross-border M & A. SECTION B: THE PROCESSES IN M&A Unit 10: Takeover Defences Identifies different types of takeovers, defines techniques of bidding for a takeover, states the defences against takeover bids, describes takeover regulations and amendments, and explains guidelines for takeovers. Unit 11: Valuation Explains valuation approaches, defines the basis of valuation, states different methods of valuation, discusses valuation of synergy, corporate control and LBO. Unit 12: Accounting for Amalgamation Defines amalgamation, explains types of amalgamation, describes the methods of accounting for amalgamation, states the meaning of consideration, and discusses the treatment of goodwill, reserves and other profits.

Unit 13: Legal and Regulatory Framework of M & A Defines the provisions of the Companies Act, 1956 relating to M & A, explains buyback of shares, discusses the provisions of SEBI act, 1992 and 1997, discusses provisions relevant to M & A activity in the Income Tax Act, and Foreign Exchange Management Act. Unit 14: Post-Merger Integration Explains integration planning, lists the factors in post-merger integration model, discusses post-merger integration model, describes strategic interdependence and autonomy, states political and cultural aspects in integration, defines cultural profiling and assessment of cultural compatibility, explains HRM issues, and discusses the problems in integration and five rules of integration process SECTION C: ILLUSTRATIONS OF NOTED M&AS Unit 15: Prominent Cases of Mergers and Acquisitions Discusses some examples of M & A in the Indian and international contexts.