Download merger

Mergers & Acquisitions
Jan 2010
Merger & Acquisitions
1
Group Members
MEMBER NAME
ORGANISATION
•
•
•
•
N-23: Jitender Bansal
N-43: Rajeev Kr Singh
N-51: Rohit Saigal
N-65: Vinai Kumar Kanaujia
NACIL (Air India)
Yamaha Motor Solutions
Steria India Limited
UPSC
•
•
•
•
•
S-09: Anil Kandpal
S-39: Nitin Khanna
S-41: Pradeep Kumar
S-56: Satya Prakash Jha
S-77: Aryan Bhola Krishnoo
Colt
Alcatel-Lucent
Jindal Steel
Public Sector Bank
NACIL (Air India)
Jan 2010
Merger & Acquisitions
2
Agenda
1.
2.
3.
4.
5.
Introduction
Motives
Problems
Merger & Acquisition
Case Studies
TATA JLR
Vodafone Hutchinson Essar
Hindalco-Novelis
HDFC–Centurion Bank
HP-Compaq
Delta-Northwest Airlines
Exxon-Mobil
Kingfisher-Air Deccan
6. Conclusion
Jan 2010
Merger & Acquisitions
3
1
Introduction
Jan 2010
Merger & Acquisitions
4
Latest News on M&A
• U.S. software maker Oracle Corp to acquire computer hardware maker Sun
Microsystems Inc (Jan. 21 2010)
• Reliance Industries raised $577 million through a share sale. It looks to buy
bankrupt petrochemicals firm LyondellBasell (Jan. 04 2010)
• Mumbai-based specialty chemicals company Dorf Ketal Chemicals acquired
the global specialty catalysts business of DuPont Chemicals and Fluoroproducts
for around $40 million (Jan 05, 2010)
• Marico, makers of Parachute hair oil and Saffola edible oil bought Colgate
Palmolive’s hair care brand Code 10 for an undisclosed sum for revenue growth
in South-East Asia and strengthen position in India (Jan 05 2010)
• Godrej Consumer Products is close to acquiring Indonesian household
products company Megasari (Rs 1,200-1,400 crore deal) and has placed bid for
pesticides business of Sara Lee Corp with which it has a joint venture in India
(Jan 04 2010)
Jan 2010
Merger & Acquisitions
5
M&A
Green field Investment
Vs
Mergers & Acquisitions
Jan 2010
Merger & Acquisitions
6
Introduction
• Cross-border M&A is the growth mantra for companies
aspiring to woo customers across the globe transcending
the home country’s border.
• An indispensable strategic tool for expanding product
portfolios, entering new markets, acquiring new
technologies and building new generation organization
with power and resources to compete on a global basis
• M&A today not only dominate FDI flows in developed
countries but are an important mode of entry into
developing countries & economies in transition.
Jan 2010
Merger & Acquisitions
7
Rationale – M&A
URGE to MERGE
driven by
“SPEED”
&
“ACCESS”
to propriety assets
Jan 2010
Merger & Acquisitions
8
Scorecard: Top M&A deals 2000s
Year
Purchaser
Purchased
USD Mil
1
2000
Fusion: America Online Inc. (AOL)
Time Warner
164,747
2
2000
Glaxo Wellcome Plc.
SmithKline Beecham Plc.
75,961
3
2004
Royal Dutch Petroleum Co.
Shell Transport & Trading Co
74,559
4
2006
AT&T Inc.
BellSouth Corporation
72,671
5
2001
Comcast Corporation
AT&T Broadband & Internet Svcs
72,041
6
2004
Sanofi-Synthelabo SA
Aventis SA
60,243
7
2000
Spin-off: Nortel Networks Corporation
8
2002
Pfizer Inc.
Pharmacia Corporation
59,515
9
2004
JP Morgan Chase & Co
Bank One Corp
58,761
10
2008
Inbev Inc.
Anheuser-Busch Companies, Inc
52,000
59,974
Source: Wikipedia, 2009
Jan 2010
Merger & Acquisitions
9
Scorecard: Top M&A deals India
Rank Partners
Date
US$m
1
Tata Steel - Corus
Jan '07
$12,200
2
Vodafone-Hutchison Essar
Feb '07
$11,100
3
Hindalco - Novelis
Feb '07
$6,000
4
Ranbaxy-Daiichi Sankyo
Jun '08
$4,500
5
ONGC-Imperial Energy
Jan '09
$2,800
6
NTT DoCoMo-Tata Tele
Nov '08
$2,700
7
HDFC Bank -Centurion Bank of Punjab
Feb '08
$2,400
8
Tata Motors-Jaguar Land Rover
Mar '08
$2,300
9
Sterlite-Asarco
Mar '09
$1,800
10
Suzlon-RePower
May '07
$1,700
11
RIL-RPL merger
Mar '09
$1,680
Source: ET, 2009
Expected Merger of Bharti Airtel and South Africa's MTN US $23 Billion
Jan 2010
Merger & Acquisitions
10
2
Jan 2010
M&A Motives
Merger & Acquisitions
11
Motives for M&A
• Quest for New Markets and Market Power
Saturated domestic markets, foreign markets beckon
•Economies of Large Scale Business
Internal and external economies lead to cost reduction & more profits
• Elimination of Competition
Eliminates severe, intense and wasteful expenditure on competition
• Adoption of Modern Technology
Requires large resources which may be out of reach of a firm
• Unified control and Self Sufficiency
Ensure constant supply of raw materials and avoid dependence on other firms
•Personal Ambition
Desire of a person to increase profits and enlarge own industrial empire
Jan 2010
Merger & Acquisitions
12
Motives for M&A
• Patent Rights
Exclusive right to use the invention of any new machines, method or idea.
Patents give monopoly position to firms at national and international levels
• Enjoy Monopoly Power
Firm can easily make adjustment in the supply and price of products and also
increase the profit
•Lack of Talent
Scarcity of entrepreneurial, managerial and technical talent in developing
countries at early stages of industrialization
• Government Pressure
Government can pressurize for M&A through legislation if competition among
firms proves harmful to the country or improvement in overall efficiency of
industrial undertakings is required
Jan 2010
Merger & Acquisitions
13
Motives for M&A
• Financial Considerations
– Acquirer believes Target is Undervalued
– Booming Stock Market
– Falling Interest Rates
• Tax Considerations
• Effect of Trade Cycles in Economy
Ups are the periods of boom when production is on large scale, profits are more,
employment is maximum and new firms crop up indiscriminately in all
directions. This situations creates unhealthy competition and acts as a
motivating factors for M&A
Downs are the period of depression when economic activity reaches to its lowest
point. Only efficient and large firms manage to survive. Inefficient firms, to
reduce the risk of failures, prefer to M&A by strong firms
Jan 2010
Merger & Acquisitions
14
3
Jan 2010
M&A Problems
Merger & Acquisitions
15
Problems with M&A
• Integration Difficulties
Differing financial and control systems make integration of the firms difficult
Ex: Intel’s acquisition of DEC’s semiconductor division
• Inadequate Evaluation of Target
“Winners curse” bid causes acquirer to overpay for firm
Ex: Marks and Spencer’s acquisition of Book Brothers
• Large/Extraordinary Debt
Can create onerous burden on cash outflows
Ex: Agri-Bio Tech’s acquisition of dozens of small seed firms
• Inability to Achieve Synergy
Justifying acquisitions can increase the estimate of expected benefits.
Ex: Quaker Oats and Snapple
Jan 2010
Merger & Acquisitions
16
Problems with M&A
• Overly Diversified
Acquirer doesn’t have expertise required to manage unrelated business
Ex: GE-prior to selling businesses and refocusing
• Managers overly focused on Acquisitions
Managers may fail to objectively access
Ex: Ford and Jaguar
• International Issues
– Cultural Issues
– Government Policy
Jan 2010
Merger & Acquisitions
17
Reasons: M&A Deals Fall Through
1. Smart people are working up this deal - it must be a good one
2. There seems to be one good reason to do this deal
3. The balance sheet is not overflowing with cash, so a good deal is
put off
4. The Company appears to have healthy deal flow
5. The CFO or general counsels are/ can act as M&A champions
6. The information provided by seller has not be thoroughly analysed
7. The decision becomes a strictly a left-brained process
8. There's no post-integration plan
Jan 2010
Merger & Acquisitions
18
4
Jan 2010
Merger and Acquisition
Definition, Types, Forms
Merger & Acquisitions
19
Merger
A transaction
where two firms agree
To integrate their operations
because they have resources and
capabilities
that together may
create stronger competitive advantage
Jan 2010
Merger & Acquisitions
20
Types of Mergers
• Horizontal
• Vertical
• Product Extension
• Market Extension
• Conglomerate
Jan 2010
Merger & Acquisitions
21
Merger Forms
1. By Purchase of Asset
2. By Exchange of Share for Asset
3. By Purchase of Common Shares
4. By Exchange of Shares for Shares
Jan 2010
Merger & Acquisitions
22
Acquisitions
A transaction
where one firm buys another firm
with the intent of
more effectively using
a core competence
by making the acquired firm
its subsidiary
within its portfolio of business
Jan 2010
Merger & Acquisitions
23
Acquisitions Strategies
• Tender Offer
General offer made publicly and directly to firm’s shareholders to buy at a price
well above the current market price
• Street Sweep
Accumulate large number of stocks in target company before making open offer
• Bear Hug
Put pressure on management of firm by threatening to make an open offer
• Strategic Alliance
An acquirer offers a partnership rather than a buyout of the target firm
• Brand Power
Acquiring firm enters into an alliance with others to displace competitor’s brand
Jan 2010
Merger & Acquisitions
24
M&A Truth
• When a deal is made between two companies in friendly terms, it is
typically proclaimed as a merger, regardless of whether it is a buy out
• In an unfriendly deal, where the stronger firm swallows the target firm,
even when the target company is not willing to be purchased, then the
process is labelled as acquisition
• Target companies avoid hostile takeovers through poison pills
• Although, in reality an acquisition takes place, the firms declare it as a
merger to avoid any negative impression
• Difference lies in how the purchase is communicated to and received by
the target company's board of directors, shareholders and employees
Jan 2010
Merger & Acquisitions
25
Regulatory Framework (India)
TRANSACTION STRUCTURE
• Companies Act
• Income Tax Act
• Stamp Acts
• Competition Act
LISTED COMPANIES
• SEBI Regulations
• Stock Exchange – Listing Agreement
TRANS-BORDER TRANSACTIONS
• Foreign Exchange Management Act
Jan 2010
Merger & Acquisitions
26
5
Jan 2010
M&A Case Studies
Success or Failure
Merger & Acquisitions
27
Tata Motors acquisition of
Jaguar and Land Rover (JLR)
Jan 2010
Merger & Acquisitions
28
Tata Motors acquisition of JLR
Tata Group
• One of the largest business Conglomerate in India (7 diverse sector)
• Presence in over 80 countries
• Workforce of around 3.5 Lakh people
Tata Motors
•
•
•
•
Largest Automobile Company in India
Second largest Bus manufacturer in the world
Fourth largest truck manufacturer in the world
Dual listed company: Indian & New York Stock Exchange
Long term strategy includes consolidating its position in the
domestic Indian market and expanding its international footprint by
leveraging on in-house capabilities & products and also through
acquisitions and strategic collaborations
Jan 2010
Merger & Acquisitions
29
Tata Motors acquisition of JLR
Why Ford sold JLR?
• Ford acquired Jaguar for $2.5 billion in 1989
• Ford acquired Land Rover for $2.75 billion in 2000
• Losses at Jaguar stood at US $715 million in 2006. Jaguar not able
to provide profit for ford because of high manufacturing costs in UK
• Land Rover's profit, on the other hand, was driven by the record sale
of 2.26 lakh vehicles, an 18% YoY growth in 2007
• Ford put the two marquees on the market in 2007 after posting
losses of $12.6 billion in 2006 - the heaviest in its 103-year history
• Ford needed to sell JLR as per its restructuring Plan, which involved
shutting down unprofitable Operations. Ford combined both the
brands since the products and manufacturing of vehicles for Land
Rover and Jaguar is so intertwined
Jan 2010
Merger & Acquisitions
30
Tata Motors acquisition of JLR
Why TATA acquired JLR?
•
•
•
•
Long term strategic commitment to automotive sector
Reduce dependence on Indian market, accounts for 90% of its sale
Increased business diversity across markets and products
Establish presence in the high end premier segment of the Global
automobile market
• Land rover provides a natural fit for Tata Motors SUV segment
• Jaguar offers a range of “performance/ luxury” vehicles to broaden
the brand portfolio
• Synergies in the areas of component sourcing, design services and
low cost engineering as well as service and distribution network
Jan 2010
Merger & Acquisitions
31
Tata Motors acquisition of JLR
Need For Growth
• Tata group has led the growing appetite among Indian companies to
acquire businesses overseas in Europe, the US, Australia and Africa
• With revenues of $7.2 billion in 2006-07. With over 4 million Tata
vehicles plying in India, it is the leader in commercial vehicles and
third largest in passenger vehicles
Competitive Advantage
• Tata Motors is vulnerable to greater competition at home. Foreign
vehicle makers including Daimler, Nissan Motor, Volvo and MAN AG
have struck local alliances for a bigger presence
• Tata Motors, has a joint venture with Fiat for cars, engines and
transmissions in India, is also facing heat from top car maker Maruti,
Hyundai Motor, Renault and Volkswagen
Jan 2010
Merger & Acquisitions
32
Tata Motors acquisition of JLR
Acquisition Deal
In June 2008, Tata Motors completed the acquisition of the two iconic
British brands - Jaguar and Land Rover (JLR) from the US- based Ford
Motors for US $ 2.3bn on a cash-free debt-free basis
3 Plants in UK
These are well invested manufacturing plants spanning an area of 800 acres
2 advanced design &
engineering center
Around 5,000 engineers of the total 16,000 workforce of JLR engaged in
testing, prototype design & powertrain Engineering, development &
integration
26 National sales
company
Existing national sales companies of Jaguar & Land Rover and ones carved
out of current Ford operation
Intellectual property
rights (IPR)
This covers all key technologies to be transferred to JLR & perpetual royalty
free license on technologies shared with Ford
Capital Allowance
Minimum guaranteed amount of $1.1 bn which will help managing in Tax
going forward
Support from Ford
Motor Credit
Ford Motor Credit will continue to support the sales of JLR for around next
12 months
Pension Contribution
by Ford
Ford will contribute $ 600 mn to the Pension Fund
Jan 2010
Merger & Acquisitions
33
Tata Motors acquisition of JLR
Cost Synergies
Jan 2010
Merger & Acquisitions
34
Tata Motors acquisition of JLR
Failure/ Results
• Tata Motors suffered a net loss of about Rs 2,500 Crore in 2008-09
mainly on account of JLR that it acquired in June 2008. The
expensive JLR marquee suffered on account of the economic
meltdown
• Deal mean a lot from business point of view as it is a major step of
India corporate sector to really become Global as well as on
emotional point of view as it brought pride to India. May be the deal
is not sounding convincing in the first year of its operation but of
course the technological knowledge and advancement it will bring to
Tata Motors with its world class R & D, it will surely benefit Tata
Motor in long run and will establish it as a major player in global auto
market
Jan 2010
Merger & Acquisitions
35
Vodafone - Hutch
Jan 2010
Merger & Acquisitions
36
Vodafone – Market Penetration
Jan 2010
Merger & Acquisitions
37
Vodafone Acquisition of Hutchinson
History
•
•
•
•
Biggest deal in the Indian telecom market in Feb ‘07
Vodafone acquired 67% interest in Hutch Essar for US$11.1 billion
Enterprise Value $18.8 bn
Vodafone has 10% share in Bharti
Primary Motives
•
•
Increase Vodafone’s presence in higher growth emerging markets
Hutch Essar delivered a strong existing platform in India
–
–
–
–
•
Nationwide presence with 22 out of 23 licence areas (“circles”)
23.3 million customers as on 31 December 2006 (16.4% market share)
Revenue growth of 51%, EBITDA margin of 33% in 6 months (Jun 06)
Experienced and highly respected management team
HTIL exited India because
–
–
–
Jan 2010
urban markets in the country had become saturated
Future expansion would have had to be only in the rural areas, which would lead
to falling average revenue per user (ARPU) and lower returns on its investments
HTIL also wanted to use the money earned through this deal to fund its
businesses in Europe.
Merger & Acquisitions
38
Vodafone Hutch – Financial Plan
Financial Assumptions
•
•
•
•
•
Increase capital investment in first 3 years, 12% of revenues by FY2012
ROIC exceeds local adjusted cost of capital within 5 years
IRR of around 14% (exceeds cost of capital by 200 basis points)
Operational plan results in an FY2007-12 EBITDA CAGR around 35%
Cash tax rates of 11-14% for FY2008-12 expected due to various tax
incentives and will trend towards approximately 30-34% in the long term
Jan 2010
Merger & Acquisitions
39
Vodafone Hutch
Post Merger Strategy
•
•
•
•
•
•
•
•
•
Infrastructure sharing with Bharti ($1 billion capex and opex saved in 5 years)
Introduced Value-added services
Acquired Licenses in remaining 7 circles
Started operations in MP, Orissa, Assam, North East and Bihar in 2008
Launched the Apple iPhone 3G in 2008 on its 17 circle 2.75G network
2009: Vodafone launched Recharge Online
2009: Vodafone Essar - 1st Indian Telecom operator to receive the Payment
Card Industry Security Standard certification for its Mumbai operations
2009: The Zoozoos campaign resonated strongly with viewers in creating an
emotional connect and communicating Vodafone various offerings
Launch Zoozoo merchandise in partnership with retail chain Shopper's Stop
Jan 2010
Merger & Acquisitions
40
Vodafone Hutch
Success/Results
• 2nd Largest Telecom Operator in India (Revenue & Subs)
• 24.06% customer market share – 91.4 million of which
93.2% are pre-paid users (Dec 09, source COAI)
• Revenues in first 6 months of 2009 were £1.1485 billion
• Revenue increase by 26% in the 6 months ended Sep 09,
but operating profit rose 6.6% due to tough competition
• Recorded highest net additions of 2.98 million and seen
subscriber count at 85.8 million subscribers in Nov 09
Source: Telecom India Daily
Jan 2010
Merger & Acquisitions
41
Hindalco - Novelis
Jan 2010
Merger & Acquisitions
42
Hindalco : Company profile
•
Hindalco a Flagship Company of $28 billion Aditya Birla
Group ( set up in 1857 )
•
Largest integrated aluminum producer : 40% market share
in India.
•
Ranks among top quartile of low cost producers in the
world.
Jan 2010
Merger & Acquisitions
43
Novelis: Company Profile
•
•
•
•
Novelis - World’s leading producer of aluminium-rolled
products with a 19 per cent global market share.
World leader in the recycling of used aluminium
beverage cans.
No.1 in rolled products producer in Europe, South
America and Asia.
Facilities to produces metal cans for Pepsi and Coke.
Jan 2010
Merger & Acquisitions
44
Introduction
•
The series of acquisitions in metal industry was
initiated by acquisition of Arcelor by Mittal followed by
Corus by Tata’s.
•
Indian aluminium giant Hindalco extended this process
by acquiring Atlanta based company Novelis Inc, a
world leader in aluminium rolling and flat-rolled
aluminium products.
Jan 2010
Merger & Acquisitions
45
Reasons for Acquisition
The fundamental reason for which we acquired
Novelis – global market leadership, cutting edge
technology, going up the value chain in the largest
segment of value added products and a highly
competent team.
“Kumar M Birla” , Letter to Shareholder 08-09.
•
•
•
•
•
Increased market power
Learning and Developing new capabilities
Overcoming the new entrants into the industry.
Cost of new product development
To avoid excessive competition
Jan 2010
Merger & Acquisitions
46
Facts about the Deal
•
All-cash transaction, US $6.0 billion, including
approximately US $2.4 billion of debt.
•
Hindalco - Global integrated aluminium producer with lowcost alumina and aluminium production facilities.
•
Novelis - Biggest rolled aluminium products maker and fifth
largest integrated aluminium manufacturer in the world.
• Globally positioned organization
Jan 2010
Merger & Acquisitions
47
Strategic Rationale for Acquisition
•
Hindalco will be able to ship primary aluminium from India
and make value-added products.
•
Hindalco metal is accepted under the high-grade aluminium
contract on the LME as a registered brand.
•
Hindalco’s rationale for the acquisition is increasing scale of
operation, entry into high—end downstream market and
enhancing global presence(11 countries).
Jan 2010
Merger & Acquisitions
48
Benefits
•
•
•
•
Post acquisition, the company got a strong global
footprint
The deal gave Hindalco a strong presence in recycling
of aluminium business
Novelis has a very strong technology for value added
products
As per company details, the replacement value of the
Novelis is US $12 billion, so considering the time
required and replacement value; the deal is worth for
Hindalco
Jan 2010
Merger & Acquisitions
49
Conclusion
•
To conclude the achievements in the financial year, the
company recorded a commendable performance in an
extremely difficult year that witnessed unprecedented
events in the financial and commodity markets
•
This performance is because of the underlying
strength of business operations & project management
capabilities.
Jan 2010
Merger & Acquisitions
50
HDFC Bank – Centurion Bank
Jan 2010
Merger & Acquisitions
51
HDFC Bank – Centurian Bank of Punjab
Glimpse
•
On May 23, 2008, the amalgamation was formally approved by Reserve Bank of
India
•
Merger between the two banks took on the swap ratio of 1:29
•
HDFC Bank-Centurion Bank of Punjab: $2.4 billion
–
One of the largest mergers in the financial sector in India in February, 2008
–
HDFC Bank became the second-largest private sector bank in India
–
The acquisition was also India's 7th largest ever.
•
HDFC bank also considered selling shares to HDFC in order to maintain its
holding over 20%.
Jan 2010
Merger & Acquisitions
52
Objectives / Motives
 From HDFC Bank - Perspective
Opportunity to add scale, geography (northern and southern states) and management bandwidth
Mr. Deepak
Parekh, Chairman, HDFC said, “it would be the
largest
merger
in the synergy
privateand
sector
in India. HDFC Bank was
 Potential
of business
culturalbanking
fit betweenspace
the two organizations
looking for an appropriate merger opportunity that would add scale, geography and
staff to its franchise.
opportunity
arose
and we thought it is an
experienced
Branch expansion/Size
– likely This
determinant
of the
merger
attractive route to supplement HDFC Bank’s organic growth. We believe that
Centurion Bank of Punjab would be the right fit in terms of culture, strategic intent
and
Bank
wouldtoemerge
as the biggest private bank in terms of branches
approach
business.”
Mr. CBoP
Rana -Talwar,
Chairman, Centurion Bank of
 From
Perspective
 HDFC bank would exploit its underutilized branch network that had the requisite expertise in retail
Punjab
stated,
“Overandthethird
last
fewdistribution
years, Centurion Bank of Punjab has
liabilities,
transaction banking
party
set benchmarks for growth. The bank today has a large nationwide network, an
 The combined
entity
would improve
productivity
levels
of CBoP branches
leveraging
HDFC Bank's
extremely
valuable
franchise,
7,500
talented
employees,
andbystrong
leadership
brand
positions
in name.
the market place. I believe that the merger with HDFC Bank will create
a world class bank in quality and scale and will set the stage to compete with banks
both locally as well on a global level.”
Jan 2010
Merger & Acquisitions
53
KEY BUSINESS PARAMETERS at the time of merger
HDFC
CBoP
Branches (Nos)
754
394
ATM (Nos)
1906
452
Customer A/C (M)
10
2
Debit cards (M)
5.0
1.1
Credit cards (M)
3.5
0.2
Deposits
993,869
207,100
CASA Deposits
505,630
50,740
CASA Ratio %
51
25
3,541
1,873
NETWORTH
113,584
19,633
Other liabilities
206,942
27,306
Total liabilities
1,314,395
254,309
Advances
713,868
150,835
Retail
364,073
90,228
Other assets
600,527
103,204
1,314,395
254,309
2,798.0
2544.0
(Rs Million)
LIABILITIES
Share capital
ASSETS
Goodwill
TOTAL ASSETS
NET NPAs
Jan 2010
Merger & Acquisitions
54
Main Highlights of Merger
 HDFC Bank took a hit of Rs. 7 bn to streamline the policies of erstwhile CBoP itself.


Around 70% went toward the harmonization of accounting policies relating to loan- loss provisioning
and depreciation of assets
Balance 30% reserves write-offs were toward the merger-related restructuring costs.
 The loan book size of erstwhile CBoP was close to Rs. 150 bn.


In terms of asset quality, the gross NPAs at the end of March2008 were around 3.8% and net NPAs at around
1.7%.
The duration of CBoP’s lending portfolio is around 18-20 months so the risk of incremental slippage would
continue in near future.
 The CASA ratio at the end of June 2008 was 45%.

This in line with expectations of analysts as CBoP had a much lower CASA ratio of around 25% compare to 56% of
Pre-merged HDFC Bank. By the end of the year, the target CASA ratio is around 47-48%.
 The cost/income ratio of the merged entity has increased to around 56% from 50% levels
for standalone HDFC Bank.

The increase was expected as CBoP’s C/I ratio was around 60%.
 HDFC Bank has retained almost all the employees of CBoP and expects to achieve full
synergies and efficiencies

The aim is to reduce C/I ratio to around 52-53% by the end of FY09.
Jan 2010
Merger & Acquisitions
55
Results – Success / Failure
Steady Growth
Rs. Crore
FY 2008
FY 2009 E*
FY 2010 E*
Net Interest Income
5,228
7,805
10,600
Other Income
2,283
3,222
4,085
Net Profit
1,590
2,290
2,950
EPS (Rs)
45.4
54
66
P/BV (x)
3.2
2.4
2.1
Jan 2010
Merger & Acquisitions
56
Results – Success / Failure
 HDFC Bank’s NIM at 4.5% is much higher than CBoP’s 3.6%, hence NIM of the merged
entity declined in the medium term to 4.3%.
 HDFC Bank’s productivity and profitability ratios are among the best in the industry,
which was declined in case of the merged entity.
 HDFC Bank has strong distributional reach — 1,412 branches across 528 cities at
March end 2009 (up from 761 branches in 327 cities in the preceding year).
 The capital adequacy ration has dropped to 11.4 per cent (Q2 FY09), 9 per cent above
the regulatory floor.
 It will get stronger when Rs 3500 crore of warrants issued to parent HDFC are exercised.
 HDFC Bank overtook ICICI Bank to become the second-largest bank by market
capitalization after the State Bank of India (SBI).
Jan 2010
Merger & Acquisitions
57
Results – Success / Failure
 HDFC Bank’s deposit base is built on a very stable retail base: current, savings and retail
term deposits make up about 80 per cent.

That also means that its costs are low, and margins can be high.
 Today, HDFC Bank hawks the full retail suite — credit cards, auto, personal and gold
loans, and advances against shares.
 The number of savings accounts has increased by over 70 per cent and the total customer
base has increased to about 19 million (of which 2 million were added through CBoP)
from about 11.6 million in FY08.
 Citi, with 40 branches, posted a net profit of Rs 2,100 crore for 2008-09. By comparison,
HDFC Bank’s profit after tax for FY09 was Rs 2,245 crore, despite its larger footprint.
 HDFC Bank’s employee base of 52,000-plus is 52 per cent higher than ICICI Bank’s
(while total assets are 52 per cent lower)
 CBoP merger only added 20 per cent to the balance sheet. “It’s the distribution that has
made the big difference.
Jan 2010
Merger & Acquisitions
58
Results – Success / Failure
 One big factor in HDFC Bank’s favour is that it has all along been pretty good at garnering
current and savings accounts (CASA).
 The other headache is dud loans.


During the fourth quarter, the bank’s stock of NPAs shot up by 119 per cent to Rs 1,988 crore.
But, 42 per cent of this was from CBoP’s books.
 Still indicating a high rate of slippage in the CBoP loan portfolio post-acquisition as well.
 But the bank’s net non-performing loans are still just 0.6 per cent.
 In the CBoP merger, HDFC Bank managed a quick integration despite being on different
platforms — i-flex’s ‘Flexcube’ and Infosys’s ‘Finacle’. HDFC Bank is now powered by
‘Flexcube’.

It also has a strong technology platform that supports its client servicing capabilities.
 All of this gives HDFC Bank the foundation for the shift from a hitherto conservative
stance to one of qualified aggression.
Jan 2010
Merger & Acquisitions
59
HP - Compaq
Jan 2010
Merger & Acquisitions
60
HP-Compaq Merger
Pre Merger Issues
HP
• Not adapting to technological innovation fast
• Margins going down
• IPG - leader in market segment but not among top 3 in servers, storage or
services
• Printing line facing competition from Lexmark and Epson
• Needed to build strong complementary business lines
COMPAQ
• Weakening performance made Compaq directors impatient
• Dell became strong competitor through cost efficiency
• Compaq missed the online bus and its made-to-order system through its
retail outlets failed to take off due to bad inventory management
• Bad investments
• Got caught in a cycle of cost cutting and layoffs
• Too small and poorly run to maintain its wide array of products and services
Jan 2010
Merger & Acquisitions
61
HP-Compaq Merger
Market Benefits
•
•
•
•
•
•
Create a full-service technology firm capable of doing everything from selling PCs
and printers to setting up complex networks
Create immediate end to end leadership
Compaq was a clear #2 in the PC business and stronger on the commercial side than
HP, but HP was stronger on the consumer side. Together they would be #1 in
market share
Expand the numbers of the company’s service professionals. As a result, HP would
have largest market share in all hardware market segments and become the number
three in market share in services
Improves access to the market with Compaq’s direct capability and low cost structure
Bigger company could have scale advantages: gaining bargaining power with
suppliers; and scope advantage: gaining share of wallet in major accounts
Jan 2010
Merger & Acquisitions
62
HP-Compaq Merger
Operational Benefits
• HP and Compaq had highly complimentary R&D capabilities
– HP was strong in mid and high-end UNIX servers, a weakness
for Compaq; while Compaq was strong in low-end industry
standard (Intel) servers, a weakness for HP
• Top management experienced with complex organizational changes
• Merger would result in work force reduction by around 15,000
employees saving around $1.5 billion per year
Financial Benefits
• Merger could result in substantial increase in profit margin and
liquidity
• $ 2.5 billion: the estimated value of annual synergies
• Provides the combined entity with better ability to reinvest
Jan 2010
Merger & Acquisitions
63
HP-Compaq Merger
Challenges
• HP’s strategy was to move to higher margin less commodity like
business, hence merging with Compaq was a strategic misfit
• Lower growth prospects on invested capital
• Market position in key attractive segments remain same
• Services remain highly weighed to lower margin segment
• No precedent for success in big technology transactions
• Market reaction for the merger was negative
• Revenue risk might offset synergies
• HP and Compaq have different cultures
Jan 2010
Merger & Acquisitions
64
HP-Compaq Merger
Deal Summary
Deal Value
$ 25 Billion
Announcement Date
September 4, 2001
Name of the merged entity
Hewlett Packard
Chairman and CEO
Carly Fiorina
President
Michael Capellas
Ticker symbol change
From HWP to HPQ
Form of payment
Stock
Exchange Ratio
0.6325 HPQ shares to each Compaq
Shareholder
Ownership in merged company
64% - former HWP shareholders
36% - former CPQ shareholders
Ownership of Hewlett and Packard
Families
18.6% before merger
8.4% after merger
Accounting Method
Purchase
Jan 2010
Merger & Acquisitions
65
HP-Compaq Merger
Results
•
•
•
•
•
•
•
•
•
•
Achieved merger-related cost savings of more than $1.3B annually
Restructured direct material procurement to save $450M annually
Redesigned products & re-qualifying components to save $300M
Consolidated multiple mfg. sites achieving $120M in annualized savings
Achieved manufacturing savings of $200M annually
Reduced supply chain headcount by 2,700
Realized logistics savings of $100M+ annually
Indirect Procurement negotiated annual savings of $220M
Out-compete Dell: The new HP needed a highly competitive direct sales
model
- 50% of retail shelf space was occupied by HP & Compaq
- Direct sales model benefited from Compaq direct sales model
Out-compete IBM
- Manage the high level relationships with global enterprise customers
- With help of Compaq managed 40 big deals in competition with IBM
Jan 2010
Merger & Acquisitions
66
HP-Compaq Merger
Results
•
•
•
•
•
HP now offers a one-stop shopping experience for global corporate customers—
– The company has the ability to procure everything from PDAs to commercial
printers and servers from the same source
The economies of scale have helped HP focus on its legacy of manufacturing
innovation
– It can build and deliver precisely the product that customers need and want to
buy.
Ease of doing business
– The supply chain strategy allows a single point of collaboration with HP,
simplifying suppliers’ interaction with HP, increasing business collaboration, and
lowering costs for both parties.
Enhanced supply and demand visibility
– Improves participants’ ability to predict demand. It enables suppliers to build
purchasing, manufacturing, and logistical efficiencies into their own supply
chains. Also enables suppliers to pass associated discounts onto customers
such as HP
Elimination of non-value-added steps, such as administration, and costs
Jan 2010
Merger & Acquisitions
67
Delta – Northwest Airlines
Jan 2010
Merger & Acquisitions
68
Delta-Northwest Airlines Merger
Why the Merger
•
•
•
•
•
•
•
•
•
•
Post 9/11 a Death Knell for the Airlines Business
Sharing of the Information Technology e.g. PSS/GDS
Mounting Losses : combined losses of $2 Bn. Accumulated $10.5 Bn
Finding difficult to retain the market both in terms of % as well as the
number of Passengers.
Growing competition from the New Breed of LCCs.
Rising ATF costs e.g. $110 at the time of Merger
Recession
Avoid Chapter 11 Protection
Consolidation waiting to happen
Cutting the costs for both the Airlines by combining the Operations
costs both at the airport and off-airports (cut overlapping flights and
competing offices)
Jan 2010
Merger & Acquisitions
69
Delta-Northwest Airlines Merger= The Deal
•
•
•
•
•
•
•
•
All Stock Transaction: NW Shareholders to get 1.25x of Delta Shares for each NW
Share
Pilots hold 3.5% stake in Post Merged Entity, other employees = 4%
Creates world’s premier global airline
– 75,000 employees
– 66 countries and 375 cities and 400 Airports
– Eight hubs and thousands of additional connecting opportunities
Atlanta, Cincinnati, Detroit, Memphis, Minneapolis, New York JFK, Salt Lake City
– Adding service to Australia making it USA’s only airline with non-stop service to
six continents
– Ability to leverage strength of combined aircraft fleet of 1450 aircrafts, more than
800 operational jets
– 6400 daily flights- $32 Bn in Annual Revenues
– Enterprise value $17.7 Bn 40% above the pre-merger
NW operates as subsidiary until single license approved
NW planes being painted to match Delta livery-Post Merger Brand
Merger to Complete by mid of 2010
Create Competition to the American and United- Continental Combine
Leverage benefits from transatlantic Sky-Team alliance that includes Air France/KLM.
Jan 2010
Merger & Acquisitions
70
Delta-Northwest Airlines Merger
Positioning Delta for continued success
• Delta will operate in 400 airports worldwide
• Delta rebranding completed in 62 out of 76 Northwest only Operated
airports
• Airport consolidations in 173 Delta/Northwest locations, Currently
underway – 108 completed to date
• LARGEST AIRLINE As projected Delta-Northwest merger has been
approved by shareholders and the Justice Department, the new Delta
would be the largest U.S. airline based on market share.
New Delta 21.8%, American 17.1%, United 14.5%, Continental 10.4%,
Southwest 8.9%, US Airways 7.6%, JetBlue 3.2%,
Jan 2010
Merger & Acquisitions
71
Delta-Northwest Airlines Merger
The Scene as of Now
1.
2.
3.
4.
5.
6.
7.
8.
9.
Competition: World’s Largest Airlines to give competition to AA and UA+Co
Cutting of costs – upto $2 Bn by the end of 2010
Employees Issues = Stand resolved
Cost of the Merger – $155 Mn
Rank- 5th re On-Time Performance from 5-7, due Tech Synergies
Benefits of $700 Mn in Synergies
Renegotiating 600 Corporate Contracts (Largest ever)
Increased Liquidity by renegotiating the Debts with Liquidity of $5.8 Bn
Operating Revenues grew 32%
Q3 09 Proj
2008
Net profit margin
-2.13%
-39.31%
Operating margin
1.60%
-36.63%
EBITD margin
-31.05%
Return on average assets
-1.45%
-23.04%
Return on average equity
-68.70%
-162.41%
Employees
75.000
81,740
10. Conclusion : A merger Proceeding in Line of success as Forecasted
Jan 2010
Merger & Acquisitions
72
Exxon - Mobil
Jan 2010
Merger & Acquisitions
73
Exxon-Mobil Merger
History
• Exxon and Mobil was one company called Standard Oil Company of
Ohio in 1870
• In 1911, broken up into Exxon and Mobil until 1999
• In December 1998 Exxon agreed to buy Mobil for about $75 billion
Motives
•
•
•
•
•
•
Falling Oil Prices ($10.92 barrel in late 1998 - $23 barrel in 1997)
Increased Exploration and Production Costs
Improved Earnings Stability ($4.2 Bn saving per year)
Long-term Capital Productivity ($2.8 Bn operating synergy)
Enhanced Competitive Advantage in Technology
Mobil's strong point was liquefied natural gas and Exxon had a
strong hold on pipeline gas thus completing the oil circle
Jan 2010
Merger & Acquisitions
74
Exxon-Mobil Merger
Financial Plan
Jan 2010
Merger & Acquisitions
75
Exxon-Mobil Merger
Post-Merger Strategy
• Operational Efficiency, Margin Improvement Initiatives and Prudent
Capital Management
• Attract customers willing to pay additional premiums for their
products and at the same time improve efficiency in supply chain in
order to reduce cost
• Focus on core business R&D to e-business and venture capital
activities
Results
•
•
•
•
•
•
Strong cash flows at the operating level
Operating profit three times that required for operational activity
30-40% of net earnings is normally paid out as dividend
Huge investments in non-gasoline products
Cost Savings of $4.6 Bn by 2000
$75 Bn Net Profit and $123 Bn Cash between 1998 - 2004
Jan 2010
Merger & Acquisitions
76
Exxon-Mobil Merger
Financial Data USD millions
Jan 2010
Year-end
2002
2003
2004
2005
2006
Total revenue
204 506
237 054
291 252
358 955
377 635
EBITDA
26 038
41 220
51 646
70 181
79 869
Net income
11 460
21 510
25 330
36 130
39 500
Total debt
10 748
9 545
8 293
7 991
6 645
Merger & Acquisitions
77
Kingfisher – Air Deccan
Jan 2010
Merger & Acquisitions
78
The Deal
• On June 1, 2007 Kingfisher Airlines picked up 26% stake in Deccan
Aviation Ltd., at Rs 546 crores.
• New shares allotted at Rs.155 per share representing approximately
a 10% premium to the current market price of the shares of Deccan
Aviation Ltd.
• UB Group became the largest single shareholder in Deccan Aviation
Ltd., entitled to nominate 3 Directors on the Board.
• Kingfisher to continue to serve the corporate and business travel
segment while Air Deccan to focus on serving the low fare segment
but with improved financial prospects for both carriers.
• After UB Group secured around 50% stake in the budget carrier
w.e.f from 29 Aug' 08, the airline was renamed -“Kingfisher Red”.
• Captain GR Gopinath will continue as Exec Chairman, a new CEO
to be appointed to report directly to board of directors.
Jan 2010
Merger & Acquisitions
79
Business Case
Merger Scenario
PRE Merger Scenario
Challenges
Winning Team
• ATF monopoly - $37-38 a liter as compared to
international rate of $22
• Price War
• Kingfisher wait for international route
• Sizable Net losses reported by Air Deccan and challenges
in funding expansion activities
• Reducing market share to Low Cost carriers
• High cost of pilots due to shortage
• Funds for Kingfisher infrastructure plans
• Infrastructure, engineering and maintenance cost
• Competition for Delhi-Mumbai route
• Ground handling cost
• Kingfisher has ordered new aircrafts at high price
• Competing routes and fleet cost
• Better consolidated bargaining power with government for
fuel price and permission to hedge. Also airport tax.
• Air fare to increase by 5-7%.
• Leverage Air Deccan position (5 domestic years exp)
• Infusion of fresh equity will allow Deccan Aviation to restructure their loans and fund expansions.
• Merger to have largest market share
• Better bargaining power
• Obtain infrastructure and spare planes from Air Deccan
• Reduced cost due to sharing
• Leadership in Delhi-Mumbai route
• Synergies in ground handling
• Better Bargaining power.
• Fleet and route rationalization.
Merger & Acquisitions
80
Goals
Merger Objectives
Expedite
International
Route for
Kingfisher
End to End
Service
Restructure
Loan, Fund
Financial
Stability
Operational
Synergy
Expansion
Jan 2010
Bargaining
Reduction
Of
Price War
Merger & Acquisitions
Power
(Govt. &
Suppliers)
Operational
Consolidation
Cost
reduction
Of
Infrastructure By Infrastructure
sharing
Projects
Reduced
Engineering &
Maintenance
cost
Largest
Market Share
&
Fleet
Ground
Handling
synergies
Largest
Combined
Market
Share
Leadership
In
Delhi-Mumbai
route
Rationalization Rationalization
Of
Of
routes
Fleet
81
6
Jan 2010
Conclusion
Merger & Acquisitions
82
M&A in India: Growth in recent years
• The Indian industry has been steadily moving towards building
competitive enterprises globally.
• Increase in both inbound and outbound M&A.
• Not only the number & the size of the deals, but also the quality of
the deals and range of participants has improved.
• A rise in cross border M&A activity has the backing of healthy
performance at home, strong management capabilities and access
to competitive financing.
• India Inc. is spreading its wings beyond border and acquiring foreign
assets to serve global markets– with M&A fast becoming the most
preferred route.
• The easy availability of funds, speed of execution and the growing
confidence of the India Inc. are some of the contributory factors,
giving momentum to the growth. Table I reveals largest M&A deals
by Indian companies.
Jan 2010
Merger & Acquisitions
83
India Scenario
At the close of 2009, where are we?
• In the wake of the global financial meltdown, a number of policy
changes have been undertaken by Government and SEBI aimed at
boosting investments and M&A
• In 2008, introduction of the Companies Bill, proposes a few positive
changes in context of M&A, as compared to the Companies Act, 1956
• Among the recent noteworthy amendments brought in by the SEBI are:
– Relaxation of registration requirements pertaining to the FIIs
– Pricing guidelines set out in DIP (Disclosure & Investor Protection)
– Permitting majority shareholders to further consolidate shareholding under
the Takeover Regulations
– Disclosure of pledged shares by promoters and additional restrictions on
company directors under the Insider Trading Regulations
• On the FDI front, there is better clarity available around rules governing
sectoral caps for foreign shareholding
Jan 2010
Merger & Acquisitions
84
M&A in India: Opportunities & Challenges
• Indian companies are pursuing a rapid growth strategy by expanding
in the global markets through M&A - a quick path to pursue
competitive business globally.
• With turmoil in global financial markets & slowdown in the domestic
markets, time is appropriate for outbound acquisitions by Indian
companies because of attractive valuations at which global
companies are available currently.
• The Indian corporate industry has made investments for expansion,
increased its capacity & has successfully countered competition.
• Indian companies have been harboring global ambitions & are
taking steps to increase their footprints in the global markets.
• Spate of M&A activities is all set to accelerate in the near future.
Jan 2010
Merger & Acquisitions
85
India Scenario
For 2010, what should be the Agenda?
• Statistically, M&A activity and economic growth have shown a strong
correlation, forming a vortex around each other at the peak of financial
market activity. As India gears up for the next big M&A rally, the role of
the policymaker and the regulator will continue to become even more
important in the coming times
• It will be interesting to see how they deal with issues such as
–
–
–
–
–
the FDI in retail, as 100 per cent is already allowed through wholesale
further streamlining of the FIPB approvals process
practical issues that still surround M&A in listed companies
double taxation of cross-border deals
guidelines relating to leveraged buyouts for domestic M&A
Jan 2010
Merger & Acquisitions
86
M&A: Partner with your acquisitions
• Emerging MNCs are bucking conventional wisdom and preserving
the identity of the companies they’ve taken over. By allowing them
operational autonomy, they’re reaping awards.
• Helping them bag premier companies – as the Ulker group did with
Godiva
• Companies like CISCO & Renault have experimented successfully
with this hands-off technique.
• They assume that incumbent teams know their customers & rivals
best.
• They resist the urge to impose their way of doing things
Jan 2010
Merger & Acquisitions
87
M&A: Integration Vs Partnering
Integration
Partnering
Structure
Absorb acquired
company
Keep acquired
company separate
Activities
Integrate core &
supporting activities
Selectively coordinate
a few activities
Top Executives
Replace
Retain
Autonomy
None or very limited
Near total
Speed of Integration
Rapid
Gradual
Jan 2010
Merger & Acquisitions
88
Conclusion
• A merger can happen when two companies decide to
combine into one entity or when one company buys
another
• An acquisition always involves the purchase of one
company by another
• M&A deal can be executed by means of a cash
transaction, stock-for-stock transaction or a combination of
both
• The functions of synergy allow for the enhanced cost
efficiency of a new entity made from two smaller ones synergy is the logic behind mergers and acquisitions.
Jan 2010
Merger & Acquisitions
89
Conclusion
• One size doesn't fit all
• Mergers can fail for many reasons including a lack of
management foresight, the inability to overcome practical
challenges and loss of revenue momentum from a neglect
of day-to-day operations
• Some may better perform with Mergers & Acquisition, and
some may not
Jan 2010
Merger & Acquisitions
90
THANK YOU
Jan 2010
Merger & Acquisitions
91