TAKEOVER

& MERGER

Jagjit Raman 11179Gaurav Jhamb 11191

TAKEOVER

0Where one business acquires a controlling interest in another business, i.e. a change of ownership.

0A takeover bid is an offer to purchase enough share of a company to overtake the current majority shareholder.

0 It takes place usually by acquisition or purchase from the shareholders of a company their shares at a specified price to the extent of at least controlling interest in order to gain control of the company.

Strategic motives

• Improve & develop the business

• Closely linked to competitive advantage

• E.g. economies of scale

Financial motives

• Make best use of financial resources for shareholders

• Improve financial performance

• E.g. higher profits

TAKEOVER : 3 Main Motives

Managerial motives

• Self-interest of managers

• Not necessarily in the best interest of shareholders

• E.g. want to lead a bigger business

Shareholder Value - Example

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Original Target Combined

Bu

sin

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Va

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(£

m) £10

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£2m

£15m

Takeover : Types

Friendly TakeoverTarget company's management and

board of directors agree to a merger or acquisition by another company.

Hostile Takeover A takeover attempt that is strongly

resisted by the target firm.

Acquirer Target CompanyCountryTargeted

Deal Value ($ Million)

Industry

Tata Steel Corus Group plc UK 12,000 Steel

Hindalco Novelis Canada 5,982 Steel

VideoconDaewoo Electronics Corp.

Korea 729 Electronics

Dr. Reddy’s Labs Betapharm Germany 597 Pharmaceutical

Suzlon Energy Hansen Group Belgium 565 Energy

HPCLKenya Petroleum Refinery Ltd.

Kenya 500 Oil and Gas

Ranbaxy Labs Terapia SA Romania 324 Pharmaceutical

Tata Steel Natsteel Singapore 293 Steel

Videocon Thomson SA France 290 Electronics

VSNL Teleglobe Canada 239 Telecom

Top 10 Acquisitions Made By Indian Companies Worldwide:

E.g. Paying too much!

Valuation has to strike a balance

Don’t pay too much!

Get the best price!

Example of the Winner’s Curse - RBS

0In 2007, RBS was part of a consortium that bid £49bn as it competed to buy ABN-Amro.

0RBS clearly overpaid for the takeover.

0Led to nationalisation of RBS in 2008 to avoid a collapse of the UK banking system.

Awful Deals

SOLD£15bn

Awful Deals

SOLD£25m

MERGERS

0A combination of two previously separate businesses into a new business.

0The combining of two or more companies, generally by offering the stockholders of one company securities in the acquiring company in exchange for the surrender of their stock.

+ =

X Y+ = X

X Y Z

1

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3

Synergy

Merger : Types

• Horizontal Merger

• Vertical Merger

• Conglomerate Merger

Mergers : India

0 From 1991 to date, mergers are not regulated from a competition perspective.

0Pepsi gained a major market presence by acquiring Duke in 1988.

0 It indicates for example – Coca Cola re-entered the Indian market in 1993 by acquiring Parle.

0The Asian Development Outlook 2005 mentions the impact of MERGERS in India.

Takeovers & Mergers : Advantages

• Expansion and growth

• Financial Synergy

• Creating value to stakeholders

• Risk reduction

• Gain in market share

• Gaining cost efficiency

• Improved Market Research & Industry Visibility

Takeovers & Mergers : Drawbacks

0High cost involved0 Clash of cultures0Upset customers0 Problems of integration (change management)0Resistance from employees0 Incompatibility of management styles, structures and

culture0Questionable motives0High failure rate0Diseconomies of scale

0 Two companies are more valuable, profitable than individual companies.

0 The shareholder value is also over and above that of the sum of the two companies.

0 M&T’s continue to be an important tool behind growth of a company.

0 The basic reasons : To achieve economies of scale, Widen their reach, Acquire strategic skills, and Gain competitive advantage.0 It is the time for business houses and corporate to watch the

market, and grab the opportunity.