Merger & Acquisition

A R P I TA B I N J WA ANJALI DROLIA H I M A N S H U PAT I D A R N I D H I D A RYA N I

Outline of the case.

Facts of the case Analysis of the case

Strategic Perspective Cultural Perspective Financials Perspective

Conclusion

INTRODUCTION

Features of Indian Aluminium Industry

Highly concentrated industry with only five primary plants in the country. Bayer-Hall- Heroult technology used y all producers. !nergy cost is "#$ of manufacturing cost for metal and %#$ for rolled products. High cost of technology is the main arrier in achieving high energy efficiency. !nergy conservation and reduced consumption is main motive. &ncreased competition from imports of aluminium.

Hindalco &ndustries 'td.

Structured into two strategic usinesses Aluminium and Copper.

&t en(oyed domestic mar)et share of "*$ &n primary aluminium+ ,% $ in

rolled products+ *# $ &n e-trusion + "" $ in Foils . %/$ in wheels.

Annual revenue of 0S 1/" illion. mar)et capitali2ation in e-cess of 0S 1

*% illion.

3he aluminum division4s product range includes alumina chemicals+

primary aluminium ingots+ and illets+ wire rods+ rolled products+ e-trusions+ foils and alloy.

46 Operations in 13 countries

TRAT!"IC FIT

Hindalco Strategy

Hindalco5 Aluminium Strategy 6 &ntegrated play

7ovelis
&t was orn in early *##8 as a result of a forced9 spin-off from its parent+

the 1 *%.,- illion aluminium giant and Canada- ased Alcan.

3he 0S and !uropean anti-trust proceedings ruled that the rolled products

usiness of either Alcan or Pechiney had to e divested from the merged entity.

3he company is 7o. / rolled products producer in !urope+ South America

and Asia+ and the 7o. * producer in 7orth America.

3his involved e-tensive operations in over %8 plants in // countries and

four continents.

Contd:.
7ovelis is the world leader in aluminium rolling+ producing an

estimated /; percent of the world4s flat-rolled aluminium products.

3he company recycles more than %8 illion used everage cans

annually.

&ndustry-leading assets and technology.

Alcan cast out its rolled products usiness to form 7ovelis.

3rou led 7ovelis

&t had a simple usiness model. &t uys primary aluminium+ processes it into

rolled products li)e stoc) for soft drin) cans+ automotive parts+ etc.+ and sells it to customers such as Co)e and Ford.

&n a id to win more usiness from soft drin) manufacturers+ it promised four

customers not to increase product prices even if raw material aluminium prices went up eyond a point.

But the management9s wrong (udgement led to losses of 1%8# million <in

*##,=.

&nefficiency of the management and finance team.

Strategic Perspective
3he rationale#
3he merger of 7ovelis into Hindalco will esta lish a glo al

integrated aluminium producer with low-cost alumina and aluminium production facilities com ined with high -end aluminium rolled product capa ilities.
After merger Hindalco will emerge as the iggest rolled aluminium

products ma)er and fifth -largest integrated aluminium manufacturer in the world.
&mmediate glo al reach and scale along with technological e-pertise. access to customers such as >eneral ?otors Corp. and Coca-Cola Co

 @ownstream usiness derives its margin through conversion mar)-up+

should act as a natural hedge for '?!-driven+ volatile+ upstream commodity usiness.

&ndustry leading technology+ assets and e-pertise can e leveraged to

grow high-value-added+ flat rolled products in fast-growing mar)ets such as &ndia and China

FINACIA$ FIT

&ndian @eal ma)ers

3eam ?em ers

Aumar ?angalam Birla @e u Bhattacharya+ ?anaging @irector+ Hindalco Sumant Sinha+ >roup CFO

Bounds of negotiation went for /C months efore the deal was finali2ed AcDuisition needs the approval of at least two thirds of 7ovelis4 shareholders A day after the deal was announced+ the Hindalco share plunged /%.E" per cent+

7ovelis Financials5 Pre acDuisition

After spinoff <Alcan and Pechiney= 7ovelis inherited a de t mountain of

almost 1*.; illion on a capital ase of less than 18## million.

On a net worth of 1%** million+ 7ovelis has a de t of 1*.%% illion <most of it

high cost=. @e tF!Duity GE.*%5/

7ovelis made a loss of 1/E# million for the first nine months of *##, and it

could ta)e a while to turn the company around

7ovelis for the first nine months of *##,+ had a loss of 1/E# million <Bs E,8 crore= on revenues of 1E." illion <Bs %%+%## crore=.

Hindalco Health5 Pre AcDuisition

Health prior to AcDuisition

Hindalco had over 1C## million <Bs %+8*# crore= in cash and eDuivalents @e t to !Duity Batio almost Hero

@eal structure
@ivided into * parts/=/##$ of 7ovelis eDuity I"".;%1 per share which add up to 1%., *=1*." de t on 7ovelis alance sheet - 7o Option of 'everage uyout unli)e 3A3A Corus

FUNDIN" A %!"A&D!A$# '(()

1*." illion will e raised on the alance sheet of 7ovelis

AJ ?inerals <7etherlands= a indirect su sidiary of Hindalco raised ridge loans of 1*./% illion KCB I E.*$L . ;## million

Hindalco raised a de t of 1*.C illion.

1"8# million from its cash reserves !ssel ?ining+ another A J Birla group company+ chipped in with 1%## million from its reserves. 3ied up with AB7 Amro Ban)+ Ban) of America and 0BS for the Asian leg of the transaction+ 3he non-recourse de t raised on 7ovelis4 oo)s funded through AB7 Amro and 0BS

@eal Financing 5*##C

Hindalco issued eDuity shares of Be. / each on rights asis

I Bs. ;, per share

Batio of %5E in Septem er+ Aggregating to 8*8+C#*+"#% shares. 3otal Amount receiva le of Bs. 8+#"E.E# Cr Company has received Bs. "+8"8 Cr Bs. /*".;# Cr spent on related e-penses of the rights issue Balance amount utili2ed to repay the ridge loan ta)en for

acDuisition of 7ovelis.

Ban)s involved
*##E 5Hindalco-7ovelis deal+ 0BS <along with AB7 A?BO . Ban) of America= threw

the Birla company a 1*.C illion de t lifeline.

*##C5 waiver due to default in @e tF!B&3A ratio for novelis

*##C5 1/- illion loan was ta)en on Hindalco9s oo)s+ and the an)s that participated in

the e-ercise included AB7 Amro+ Barclays Capital+ Ban) of 3o)yo-?itsu ishi 0FM+ Calyon+ Citigroup+ @eutsche Ban)+ HSBC+ ?i2uho Financial and Sumitomo ?itsui Financial.

*##;5Hindalco too) a syndicated loan of 1;C* million <Bs "+;/# crore at current rate=

from // foreign an)s to repay the ridge loan ta)en two years ago for the 7ovelis acDuisition.

Jaluation I Premium

N&f we earn 1/# for every 1/## of aluminum we sell+ we will now e a le to earn another 1/# for every 1/## worth of aluminum that 7ovelis processes into rolled products.O

--@e u Bhattacharya. ?@

PAcDuisitions are not geography dependent. 3hey depend on value-creation and will have to e in sync with e-isting usinessesO

Aumar ?angalam Birla+ *##E

N3he valuation depends on the intrinsic capa*ility of an asset. He points out that it would have ta)en Hindalco at least 1( years to create that )ind of capacity on the downstream front. 3he acDuisition is a good strategic fit and the way we see it+ there is a lot of upside potential in aluminum as a commodity. He spea)s of areas li)e transportation+ architecture+ pac)aging and pharmaceuticals which will e ig mar)ets in the future for aluminum.O

Sunirmal 3alu)dar+ CFO+ Hindalco

Qhy pay "".%,1 a share for a %#1 share

Analysts

CU$TURA$ FIT

O (ective
Hindalco was an upstream player efore it acDuired 7ovelis+ so its profits varied every

year. &t decided to add downstream operations for a few good reasons5
First+ the company wanted to steady the profit stream. Second+ it reali2ed that it had to e glo ally competitive at home since &ndia was not a

protected mar)et anymore .And

third+ to move away from the commodity usiness +Hindalco had to manufacture value

added products.
?a)ing aluminium at competitive prices reDuires economies of scale+ process s)ills+ and

cheap raw materials .Selling value added aluminium products demands attention to Duality+ service and randsR product development s)ills Rand a )nac) for forging customer relationships- capa ilities that Hindalco did not possess. 3o learn them it decided to acDuire the downstream companies5&ndal in &ndia and 7ovelis overseas.3he o (ective was to gain new competencies 6not to get ig fast or reduce costs.

&ntegration Process
Hindalco9s management allowed the post merger

process to ta)e place naturally and rarely intervenes

Four step Process5 /.

Financial

*. Organi2ational %. Business Process ". ?ar)ets.

Financial &ntegration
Same Financial 'anguage. Standardi2ation 5 Prior to Mune *##E + Hindalco9s

financial year ended on ?arch+ %/st+ whereas 7ovelis9 period ended on @ecem er+ %/st
>uidelines of S!B& . S!C were met. Plan to optimi2e ta- ills of oth countries. Sharing est practices.

Organisational &ntegration5
!-isting management structure +system +people <Mo

Boles = left undistur ed.

&n the first si- months after the ta)e over Hindalco

deputed (ust two of its own e-ecutives to 7ovelis5 it sent an e-pert from its copper division to institutionali2e a ris)-management process and installed a senior e-ecutive in 7ovelis 9logistics department to help improve its glo al supply chain
7o 'ayoffs +however hiring activities were )ept on hold

for sometime.

Business Process &ntegration

Plain and simple techniDues to manage usiness. &t set up a company to manage &3 functions of

7ovelis due to availa ility of ine-pensive engineers.

Hindalco has set 7ovelis a target of seven to /* stoc)

turns per year y *#/#+which could free around 1%## million in wor)ing capital

?ar)et &ntegration
&ndia9s demand for aluminium products is pro(ected

to dou le from / million tones in *##E to almost /.; million tones in *#/*+ and half of that increase will e for the )ind of flat-rolled products 7ovelis produces. 3hus+ &ndia could a sor a third of the 7orth American company9s output in three years9 time

PBOF&'! OF &C&C& BA7A

H&S3OBS In 1955, ICICI Limited was incorporated with the collective

efforts of the ma or !, named "orld #an$, %overnment of India and Indian Industr&'s representatives(
)he esta lishment has *een ta$en place with a view to aid

Indian *usinesses *& acting as a source of finance to medium and long term pro ects(
In 199+'s, the ICICI institution started diversif&ing its

operations, and end up at the wholl& owned su*sidiar& called ICICI #an$(
)he #an$ was esta*lished in 199, and *ecame the first

*an$ listed on -./0 1-ew .or$ /toc$ 02change3(

 ICICI *an$ turned out to *e the second largest *an$ in Indian

)erritor& for the &ear ended !1st Mach 4+1+ with the asset *ase of 5s( !6!,!99(71 crore 18/ 9 :1 #illion3 and net profit after ta2 5s( ,,+4,(9: crore 18/ 9 :96 million3(
)he #an$ has its spread over 19 countries with 45!+ *ranches

and appro2 61+4 A)Ms in India(

An e2tensive range of ;roduct and services offered *& ICICI

though diverse deliver& channels are personal *an$ing, corporate *an$ing, -5I *an$ing, finance and insurance, retail *an$ing, commercial *an$ing, mortgages, credit cards, asset management, investment *an$ing

Sear *##/

Particular Ban) of ?adura <est. /;"%= was acDuired y &C&C& + an all-stoc) amalgamation &ntegration of an)ing operations and group's financing of &C&C& in to individual entity+ consisting oth wholesale and retail. &C&C& amalgamated Sangli Ban)+ the deal costing Bs. %#* crores

*##*

*##E

 E./$ increase in profit after ta- to Bs "+#*".;C crore for the

year ended ?arch %/+ *#/# from Bs. %+E8C./% crore for the year ended ?arch %/+ *##;.

7et non-performing asset decreased to Bs. %+C"/.// crore at

?arch %/+ *#/# from Bs. "+88%.;" crore at ?arch %/+ *##;. Capital and disclosed reserves= capital adeDuacy of /%."C$. appro-imately Bs. /* per share proposed.

Strong capital adeDuacy ratio of /;./"$ and 3ier-/<!Duity 3he shareholders also en(oying the dividend of

PBOF&'! OF BA7A OF BAMAS3HA7

H&S3OBS 3he an) of Ba(asthan was esta lished as Moint Stoc) Ban) y

?ansing)a rothers at 0daipur on Cth ?ay+ /;"%+ and years starting from /;"C.

Served the >overnment of Ba(asthan as Scheduled an) for more than /"

)he #an$ of 5a asthan with the asset *ase of 5s( 17,!++(+6

crores incurred the net loss after provisions and ta2es remained at 5s( 1+4(1! crores for the &ear ended !1st Mar 4+1+( )he *an$ operates through all over India as a private sector *an$ with ,6! *ranches wor$s as networ$( It includes 67 onsite and 49 offsite A)Ms in 4!+ cities along with speciali<ed Industrial and fore2 *ranches(

year *### *##*

particulars Bind off with &nfosys 3echnology in order to get fully automated ?o0 signed y Ban) of Ba(asthan with Ba(a( Allian2 >eneral &nsurance Company and Birla Sun 'ife &nsurance ?o0 signed with Ban) of Baroda to issue coranded international Jisa !lectron @e it Card 3ermination of ties up with Ba(a( Allian2 >eneral &nsurance Company and Birla Sun 'ife &nsurance 3he Ban) signed an ?o0 with &CBA 'td. in Septem er

*##%

*##8*##, *##C

 3he net profit has gone down from //E.E/ crores as year ended ?arch *##; to

/#*./% crores at FS *#/# which reflects a drastic decrease.

As Ban) of Ba(asthan was facing losses during the year *##;-*#/#+ the

shareholders were not proposed for any dividend.

@ue to lac) of capital Ban) of Ba(asthan has facing low credit growth of ".,;$

due to lower dis ursement and large prepayments y some of its clients.
3he overall condition of Ban) of Ba(asthan was seen continuously

deteriorating due to various legal issues. Some of those were5 7otice from Maipur Stoc) e-change limited for alleged violation of clause %, of

the listing agreement.

Penelty y BB& on Ban) of Ba(asthan of Bs. *8 la)hs. 0nion stri)e y % ma(or employee union of Ban) of Ba(asthan 7otice y Ba(asthan high court

S.no. Aey rationale / * % " 3ype &ndustry Sear of &ncorporation Products

&C&C& an) Private sector Ban)ing financial services /;;" <promoted y &C&C&= Finance and insurance+ Betail Ban)ing+ Commercial Ban)ing+ ?ortgages+ Credit Cards+ Private Ban)ing+ Asset ?anagement+ &nvestment Ban)ing

Ban) of ra(asthan Private sector Ban)ing+ loan+ capital mar)et and allied industry /;"%+ udaipur Corporate or wholesale an)ing+ Personal an)ing + Commercial an)ing+ Betail an)ing+ Finance and insurance+ &nvestment Ban)ing+ Au-iliary services+ ?erchant an)ing+ 3rust and custodial services. All over india "ECT

8 ,

Business presence

/; countries

7um er of offices /E/ET

;rocession of merger
First Call 3he strategic focus of &C&C& has shifted to alance sheet growth and mar)et share heighten in order to improvise

returns and profita ility inde-.

3he merger with Ban) of Ba(asthan could e one of the strategic moves of &C&C& an) to attain its vision. &rregular performance of the an) gave rise to several investigations along with the order of BB& for a special audit. On *8th Fe *#/#+ Beserve Ban) of &ndia has imposed a pecuniary penalty of Bs. *8 la)h<Bupees 3wenty Five 'a)h

only= on 3he Ban) of Ba(asthan 'td. @ue to following reasons5-

AcDuisition of &mmova le properties- Jiolation the BB&'s guidelinesFdirections issued under Section %8A of the Ban)ing Begulation Act+ /;";. Blue-penciled the records an)'s &3 system i7on-adherence of guidelines related to Anow Sour Customers and anti money laundering in opening and conduct

of accounts.

&rregular account's conduct of a corporate group ?isrepresentation of facts- una le to produce documents sought y the Beserve Ban) of &ndia. 3he discussions were held with many leading an)s named &C&C& Ban)+ H@FC Ban)+ A-is Ban) etc. But none of

them paid interest in the deal.

Somehow 3he &C&C& an) ecomes ready to pay the price higher than the mar)et valuation of Ban) of Ba(asthan.

Second Call A non-cash merger deal was approved y the oard of directors of the &ndia 's second

largest private sector an).

merger would further flourish the &C&C& 's ranch networ) y *8 percent appro-imately. swapping ratio will e at /5".E* which will inferred as 3he &C&C& Ban) would allot *8

shares for every //C shares of Ban) of Ba(asthan.

3he internal analysis of the amalgamation was done considering the following5 Strategic value of the deal ?ar)et capitali2ation per ranch of the former private sector an)s And comparison of deal with the relevant precedent transactions

3he Ban) of Ba(asthan cost to &C&C& an) at nearly Bs. %#"/ crore on the asis of internal

valuation+ i.e. ,., crore for each of the BoB

ranch.

 F&7A' @AS On /*th of August *#/#+ Alpana Aillawala+ C>?+ department of

communication+ BB& has pu lished a press release that NAll ranches of Ban) of Ba(asthan 'td. will function as ranches of &C&C& Ban) 'td. with effect from August /%+ *#/#. 3his is conseDuent upon the Beserve Ban) of &ndia sanctioning the Scheme of Amalgamation of Ban) of Ba(asthan 'td. with &C&C& Ban) 'td.99

Challenges
Pre merging challenges 5egulator& Concerns Asset =ualit& Management Legal Issues related to 0%M 8nion /tri$e and violation of Compan& Law Post merging challenges Corporate governance 5is$ of asset qualit& deterioration >ustif& operations or leverage s nerg&

!ON!LUSION
The a"o#e case o$ amalgamation %ill "e s&"stantiall

to enhance I!I!I Ban'(s "ranch net%or') alrea* the largest among In*ian +ri#ate sector "an's) an* es+eciall strengthen its +resence in northern an* %estern In*ia, It %o&l* com"ine Ban' o$ Ra-asthan(s "ranch $ranchise %ith I!I!I Ban'(s strong ca+ital "ase) to enhance the a"ilit o$ the merge* entit to ca+itali.e on the gro%th o++ort&nities in the In*ian econom , This is the thir* ac/&isition " I!I!I Ban', It ha* earlier ac/&ire* Ban' o$ Ma*&ra %a "ac' in 0112 an* the Maharashtra3"ase* Sangli Ban' in 0114 %hich sho%s that I!I!I Ban' "elie#e in the e5+ansion " the strategic mo#e thro&gh amalgamation %hich *e$initel a cost e$$ecti#e strateg ,

T+AN, -OU