This book provides an insight in the phenomenon of Mergers and Acquisitions (M&A), including the various forms of corporate restructuring. It highlights the importance of M&A as a strategy for faster growth in the corporate. The book provides an enriched experience of the art of valuation with detailed description of M&A process, deal structuring and financing. The book also provides the broader perspective of Accounting and Regulatory aspects of M&A.
While covering the conceptual underpinnings of M&A, the book supplements it with real life examples on each sub-topic with various numeric examples. Thus the judicious blend of theory and practical aspects, through numerical as well as real life case-studies, make the book a source of vast knowledge in the complicated and dynamic world of M&A.
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Vinod Kumar and Priti SharmaAn Insight into Mergers and Acquisitionshttps://doi.org/10.1007/978-981-13-5829-6_1
Begin Abstract
1. Introduction to Merger, Acquisition, and Corporate Restructuring
Vinod Kumar1 and Priti Sharma2
(1)
SGND Khalsa College, University of Delhi, New Delhi, Delhi, India
(2)
Institute of Management Technology, Centre for Distance Learning, Ghaziabad, Uttar Pradesh, India
Vinod Kumar
Keywords
MergersAcquisitionsCorporate restructuringHorizontal mergerVertical integrationConglomerate mergerDivestitureJoint ventureStrategic allianceLeveraged buyoutMerger wavesTrends of M&A in india
End Abstract
1.1 Introduction
Growth is the objective of almost all the organizations, whether big or small. Organizations can grow by using a strategy of internal growth of expansion or diversification known as greenfield expansion. Organic growth is where a company builds its own infrastructure and sets up its own manufacturing, distribution, and selling networks or building an ecosystem, internally, without impacting the corporate structure or the business model of its own. For decades, this has been a major strategy followed by most of the corporate all over the world including India. M&A is a route to achieve exponential growth rather than a linear and slower growth. M&As have become an integral part of the Indian economy and daily business headlines.
When Relaxo Footwears sets up its own manufacturing plant and enhances its distribution network to expand its reach and cater to a wider customer base, it is greenfield expansion. But when Coca-Cola enhances its presence in a country by partnering with local manufacturers through franchising and by acquiring an established brand like âThums Upâ, it is inorganic growth. So inorganic growth is a typical way to climb a ladder multi-foot, by way of strategic tie-ups, mergers and acquisitions, where an entity tries to expand its business with the help of the others.
Basically, the projects which have to be build up from scratch are called greenfield projects while the projects which are established by using an existing facility or upgrading or modifying it are called brownfield projects. For example, in 2010, Fortis Hospitals acquired assets of Wockhardt Hospitals, which included eight operational hospitals and two semi-constructed hospitals. This is an example of one of the largest acquisitions/brownfield project in the Indian healthcare sector.
The expansion of Relianceâs exploration project in KG-D6 basin is an example of greenfield project. The route of organic expansion or growth is a time-consuming process and also involves the risk of a competitor taking the lead during the time of completion of expansion. Another risk of taking this route is that the economic momentum envisaged in the segment may slow down by the time the planned expansion is actually completed. The other route to growth is an inorganic one through mergers and acquisitions. This route of brownfield expansion has certain benefits in terms of expansion of capacity at a faster pace, an easy entry in the new industry, or a new geographical market. For example, Airtelâs acquisition of Zen is an example of easy entry to South African telecom market, the inorganic route.
Another example would be the recent acquisition of Kesh King by Emami Ltd.
Emami Ltd., in June 2015, acquired the âKesh Kingâ a brand associated with hair and scalp products for Rs. 1651 crores. This was one of the largest deals in Indiaâs fast-growing hair oil market; the acquisition is an attempt by Emami to take advantage of the established brand image of Kesh King in the hair oil market.
Emami is aiming to capitalize on the brand image and the higher margins of Kesh King to boost its own bottom line. Emami management believes that Kesh King which has an EBITDA margin of 40% as against the normal FMCG margins of 25% will strengthen Emamiâs bottom-line post-acquisition.
Over the past few decades, mergers and acquisitions have been increasingly used for achieving rapid growth and increasing shareholder value. Achieving competitive advantage through consolidation and strategic alliances is another objective of mergers and acquisitions. According to an E&Y report on mergers and acquisitions in India, during the past 5 years, mergers and acquisition transactions have increased in absolute number from 825 in 2011 to 930 deals in 2015. The absolute value of all the deals was nearly about $26 billion in the year 2015 (Fig. 1.1).
Global M&As had a mixed first quarter with a dip in the number of deals but a rise in the overall value of deal activity, according to a merger market report.
While the total number of deals fell 17.9% compared with the first quarter of 2016, the overall deal value was up 8.9% to $678.5 billion. In the first quarter of 2015, the deal value was $760.1 billion, the highest since 2008.
During the first half of 2016, the Merger & Acquisition activity rose by nearly 12% to $15.7 billion in terms of value.
1.2 Corporate Restructuring
Corporate restructuring is referred to as a change in the business structure and/or financial structure of an organization via diversification, acquisition, change in management, spin-off, hive-off, etc., to meet the goals of an organization.
Change in corporate structure such as a change in business model, management team, and capital structure can be termed as corporate restructuring (Fig. 1.2).
Fig. 1.2
Growth and corporate restructuring
Corporate restructuring takes place in several forms:
1.2.1 Amalgamation/Combination
Amalgamation or combination is an action, process, or result of combining or uniting two entities. In case of amalgamation, two separate entities come together to achieve a common goal, for fulfilling either financial or strategic objectives. Based on the type of amalgamation, an entity may combine its assets and liabilities with another entity. This can be:
1.
Combination through merger(or)
2.
Combination through acquisition/purchase
1.2.1.1 Combination Through Merger
In case of a merger, two companies or entities join together, in which one of the entities ceases to exist. The acquiring company would generally consolidate or add the assets and liabilities of the company acquired. The shareholders of the acquired company may be paid either cash or the shares of the acquirer company in exchange for the shares held in the target company. Post-merger, it is at the option of the acquirer company to decide whether the brand name of the acquired company would be used or not. A typical merger would involve combination of books of accounts in the stand-alone statements of the acquirer company.
For example, in the year 2015, Ranbaxy Laboratory got merged into Sun Pharma, where Sun Pharma acquired all the assets and assumed all the liabilities of Ranbaxy in an all-stock deal. However, Sun Pharma chose to use the brand name of âRanbaxyâ for all the products of Ranbaxy. This is a typical strategy, which might be used by the acquirer company to take advantage of the brand image of the acquired company.
1.2.1.2 Combination Through Acquisition/Purchase
In case of an acquisition/purchase/takeover, one entity purchases the stakes of the other entity resulting in taking over the management control of the acquired entity. The principle of substance over form applies here, that is, even if the acquiring entity purchases, say, 20 or 30% of the target entity resulting in higher individual shareholding to take control over the...
