About HINDALCO: Hindalco is An Aditya Birla Group Flagship Company, the biggest player in the aluminum industry in India

with around 39% of market share. It has various aluminum products with a market share of 42% in primary aluminum, 20% in extrusions 63% in rolled products, 31% in wheels and 44% in foils. About Novelis: Novelis - Worlds leading producer of aluminum-rolled products with a 19 per cent global market share. World leader in the recycling of used aluminum beverage cans. No.1 in rolled products producer in Europe, South America and Asia. Facilities to produces metal cans for Pepsi and Coke and General motors for automotive components. Industry Scenario: Metal industry was consolidating with Arcelor taken over by Mittal steel and Tata steel taking over Corus. Size gives the metal industry power of economies of scale and high production rate result in growth. Financing Pattern: 1. All cash deal. All of the Novelis common share was acquired for $ 3.6 BN at share price of $ 44.93 16.6 % premium 2. Hindalco also acquired Novelis debt of $ 2.4 BN making the total value of the deal to be $ 6 BN 3. The deal was funded as follows: a. $ 2.85 BN by raising borrowings from different banks b. $ 300 MN as debt from the companies c. Balance $450 MN from the cash reserve of Hindalco 4. Hindalco Dutch subsidiary AV metal raised the bridge loan of $ 2.13 BN and $ 900 MN to fund for the debt service which they planned to repay through cash flows form Novelis 5. The following year Hindalco issued equity shares of Rs.1 on rights basis @ Rs. 96 per share. The amount raised from this issue was used to pay for the bridge loan taken for the acquisition Rationale for Hindalco opting to pay the entire deal amount in cash and not opting a share swap deal As first part lets summarize the strategic rationale briefly: 1. Hindalco will be able to ship primary aluminum from India and make valueadded products. 2. Hindalco metal is accepted under the high-grade aluminum contract on the LME as a registered brand. Hindalcos rationale for the acquisition is increasing scale of operation, entry into highend downstream market and enhancing global presence 3. The benefits from this acquisition are Post acquisition; the company will get a strong global footprint. 4. The deal will give Hindalco a strong presence in recycling of aluminum business. Novelis has a very strong technology for value added products and its latest technology Novelis Fusion is very unique one.

5. When two big companies like Hindalco and Novelis merge together the main purpose is synergy that they gain and the merger thought to be greater than the two companies independently. The strategic and operational synergy can offer economies of scale, reduction in costs, reduction in redundant work force, access to new technologies and markets. Hindalco would gain all of the above through acquiring Novelis and the same has been in mentioned in the case in detail. Now as second part the following brief note explains why the cash deal was preferred than stock swap deal. Terms merger and acquisition are loosely used and interchangeably. The key differences can be seen from the legal and accounting perspective based on the method of transaction through cash or stock swap. When cash is used its simple case of transfer of ownership. In stock transfer its not so clear that who is the buyer and seller. Moreover there are specific reasons why Hindalco used Cash instead of stock swap for this merger. 1. Hindalco is a Strategic Buyer: Hindalco saw the synergy between the merged entity offering end to end integration in aluminum industry where Hindalco providing raw materials to Novelis and Novelis getting them into rolled products. More over Hindalco envisaged new way to grow revenue, cost reduction, new market access etc. and the future cash flow will be more than the current one. Hindalco took the entire risk of the merged entity on the expected synergy value but they were confident that they could make the merged entity work and grow further. 2. Ownership: Hindalco can retain the ownership of merged entity 100% without diluting their shares. It gave two advantages, first to implement Hindalcos vision and strategic direction into Novelis, second is to increase the shareholder value, as the value of the merged entity is more than Hindalco. 3. Confidence of Success: Hindalco was highly confident that the merger will work in its favor and though in a short term they might have higher debtequity ratio, with focus they can pay of the debts and bring back the debtequity ratio lower. The net result will be much bigger organization having complete value chain in aluminum industry helping them to command pricing and sizeable market share. 4. Tax Savings and Depreciation: The interest paid toward borrowings can help to increase the overall net income of Hindalco so helping them to gain more profits in short term. The merger also can help Hindalco to revalue their assets and get depreciation benefits 5. Higher EPS : Hindalco also positioned the merger as accretive as Hindalco believe that combined entity EPS will be higher than the before. The cash generated from the Novelis can help to pay the debt in the short term and add to net income in the long term thus increasing the shareholders value.