際際滷

際際滷Share a Scribd company logo

Reasons for m&a section 2

Download as PPT, PDF
P
pradeep bandi

This document outlines several common reasons for mergers and acquisitions (M&A). It discusses synergies from economies of scale and scope that can be achieved through M&A. It also mentions using M&A to reduce gestation periods in capital-intensive industries, unlock value from sick units, diversify business risks, achieve strategic fits between companies, integrate horizontally or vertically, access distribution channels, acquire brands, obtain talent, and generate profits for private equity firms. The key takeaway is that companies use M&A as a tool for inorganic expansion, so the strategic rationale should be clear.

1 of 13
Download to read offline
Reasons for M&A By Prof. p.m.nayak
Synergy 1+1=3 Synergy is derived from two words synchronous energy. Economies of Scale and Economies of scope are used to achieve synergies and help companies grow. Economies of Scale revolves around reducing the fixed cost per unit. Suzlon acquired 62% stake in REPower in May 2007 because the company believed that the high fixed costs in wind turbines business will get spread over a larger capacity when the two companies scale up. Economies of Scope refers to reducing marketing costs per unit. Vodafone acquired 74% stake in Hutchison Essar to achieve economies of scope.
Lower Gestation Period Capital Intensive industries require high capex and long gestation periods. Harshad Mehta, the controversial big bull of Indian Capital Markets, firmly propagated the replacement cost theory. He kept buying shares of ACC stating that the stock price had to reflect the replacement costs of cement plants. One of the main reasons for Tata acquiring Corus was the gestation period in the steel industry. It is believe that it would take Tata Steel at least 10-15 years to develop the capabilities and market of Corus. * In case of Idea-Spice merger, according to experts, setting up operations in a new circle requires a breakeven period of nearly three years.
Unlocking Value from Sick Units Tax Savings are a major reason for many companies merging with BIFR cases in India. Even in the US, companies are allowed to carry forward their losses up to a period of seven years. If a company has a taxable income of 10 crores and it merges a sick company with with a loss of 6 crores, then its taxable income comes down to 4 crores giving a tax benefit of 1.8 crores. (3 1.2 = 1.8). We will take a case study on unlocking value of sick units later in our lectures.
Diversification This is a case where a company chooses to spread the risk by forming a conglomerate through M&A. Wipro recently diversified into water purification business by buying Mumbai-based Aquatech Industries. The buy has equipped Wipro with capabilities to provide complete water treatment solutions including process, plant, equipment and services for all types of industries. Aquatech is also a dominant player in the high purity water segment for the pharmaceutical industry, which will be an added advantage for Wipro. Wipro, in this case, is spreading its risk by diversifying into water purification business.
Strategic Fit Companies use M&A to achieve purely strategic objectives. The best example is the recent acquisition of Air Deccan by Kingfisher Airlines. Both had a completely different target market and it was considered a surprising move considering Vijay Mallyas flamboyance. However, the primary reason for going for the acquisition was the fact that Air Deccan would get international license much before Kingfisher Airlines.
Horizontal Integration Lets first understand the Rule of 3. The recent acquisition of 40.8% in Spice Communications by Idea Cellular was done to perform horizontal integration. Bharti and Reliance are the top two private telecom operators by market share. With ARPUs falling and competition increasing, telecom companies in India are looking to keep capex under control. Idea increased its market share to 11.9% and increase its subscriber base by 17%.
Distribution Channels M&A can also be used as a tool to develop distribution channels so that the company can reach its customers in a better way. Building new distribution channels can be a time consuming and daunting task. In a marketing based economy, distribution channels are a critical aspect of strategic planning. Take the case of insurance companies. In Feb 2007, AIG Inc.'s American General Life Insurance Co. Unit acquired stake in Matrix Direct Inc., A Direct Marketer of Term Life Insurance to access its distribution channels. In the case of insurance companies, distribution accounts form the largest element in insurers costs and impact the profitability. .
Vertical Integration Vertical Integration is all about controlling you value chain. The concept of Vertical Integration was introduced by Andrew Carnegie at his steel company towards the end of the nineteenth century. Andrew Carnegie obtained greater efficiency by purchasing the coke fields and iron-ore deposits that furnished the raw materials for steelmaking, as well as the ships and railroads that transported these supplies to his mills. Carnegie Steel was merged with several other companies to form the U.S. Steel company by JP Morgan in 1901.
Acquisition of Brands Good brands, over a period of time, become an integral part of the consumers' lives and this goes a long way in adding to the brand equity of the product. Acquisitions of Brands has become an important strategic element for companies. In May 2001, Marico Industries completed the acquisition of two brands Parachute and Saffola from Bombay Oil Industries. The acquisition saved Rs 3 crore annually on royalty payments Marico was making to Bombay Oil, the original owner of the brands. In July 2008, Glenmark reached an agreement with Icelands Actavis and its Polish affiliate Biovena to acquire seven pharmaceutical brands in Poland. The acquisition gives the company access to the Polish market, touted to be the largest pharma market in Central and East Europe.
Access to talent Access to talent can be a major reason for service companies to perform M&A. An interesting observation was made while working on a deal in the IT sector. Minacs Worldwide merged with AB Nuvo at 0.5 times revenues and Kanbay merged with Capgemini at 6 times revenues. The valuations were extreme because Minacs was a call center and Kanbay was a high end solutions provider.
Pure Profits Private equity players have been in the news since the 80s decade of Reaganomics. Private equity players are mostly interested in IRR. PE players acquire stakes in companies and de-list them of stock exchanges to later sell them and make profits. Our team worked on a PE deal where in an Indian company was acquiring stake in a Belgian company. The valuations of the deal revolved completely around the IRR of the PE player who owned the company rather than the actual fundamentals of the company.
Conclusion We have discussed the primary reasons for companies to perform M&A activities. The reasons discussed point towards the fact that M&A is primarily used by companies as a tool to expand inorganically. The critical point to note is that the strategy should be very clear when performing M&A activity. The M&A activity should be a part of the grand strategy of the company.

More Related Content

Reasons for m&a section 2

  • 1. Reasons for M&A By Prof. p.m.nayak
  • 2. Synergy 1+1=3 Synergy is derived from two words synchronous energy. Economies of Scale and Economies of scope are used to achieve synergies and help companies grow. Economies of Scale revolves around reducing the fixed cost per unit. Suzlon acquired 62% stake in REPower in May 2007 because the company believed that the high fixed costs in wind turbines business will get spread over a larger capacity when the two companies scale up. Economies of Scope refers to reducing marketing costs per unit. Vodafone acquired 74% stake in Hutchison Essar to achieve economies of scope.
  • 3. Lower Gestation Period Capital Intensive industries require high capex and long gestation periods. Harshad Mehta, the controversial big bull of Indian Capital Markets, firmly propagated the replacement cost theory. He kept buying shares of ACC stating that the stock price had to reflect the replacement costs of cement plants. One of the main reasons for Tata acquiring Corus was the gestation period in the steel industry. It is believe that it would take Tata Steel at least 10-15 years to develop the capabilities and market of Corus. * In case of Idea-Spice merger, according to experts, setting up operations in a new circle requires a breakeven period of nearly three years.
  • 4. Unlocking Value from Sick Units Tax Savings are a major reason for many companies merging with BIFR cases in India. Even in the US, companies are allowed to carry forward their losses up to a period of seven years. If a company has a taxable income of 10 crores and it merges a sick company with with a loss of 6 crores, then its taxable income comes down to 4 crores giving a tax benefit of 1.8 crores. (3 1.2 = 1.8). We will take a case study on unlocking value of sick units later in our lectures.
  • 5. Diversification This is a case where a company chooses to spread the risk by forming a conglomerate through M&A. Wipro recently diversified into water purification business by buying Mumbai-based Aquatech Industries. The buy has equipped Wipro with capabilities to provide complete water treatment solutions including process, plant, equipment and services for all types of industries. Aquatech is also a dominant player in the high purity water segment for the pharmaceutical industry, which will be an added advantage for Wipro. Wipro, in this case, is spreading its risk by diversifying into water purification business.
  • 6. Strategic Fit Companies use M&A to achieve purely strategic objectives. The best example is the recent acquisition of Air Deccan by Kingfisher Airlines. Both had a completely different target market and it was considered a surprising move considering Vijay Mallyas flamboyance. However, the primary reason for going for the acquisition was the fact that Air Deccan would get international license much before Kingfisher Airlines.
  • 7. Horizontal Integration Lets first understand the Rule of 3. The recent acquisition of 40.8% in Spice Communications by Idea Cellular was done to perform horizontal integration. Bharti and Reliance are the top two private telecom operators by market share. With ARPUs falling and competition increasing, telecom companies in India are looking to keep capex under control. Idea increased its market share to 11.9% and increase its subscriber base by 17%.
  • 8. Distribution Channels M&A can also be used as a tool to develop distribution channels so that the company can reach its customers in a better way. Building new distribution channels can be a time consuming and daunting task. In a marketing based economy, distribution channels are a critical aspect of strategic planning. Take the case of insurance companies. In Feb 2007, AIG Inc.'s American General Life Insurance Co. Unit acquired stake in Matrix Direct Inc., A Direct Marketer of Term Life Insurance to access its distribution channels. In the case of insurance companies, distribution accounts form the largest element in insurers costs and impact the profitability. .
  • 9. Vertical Integration Vertical Integration is all about controlling you value chain. The concept of Vertical Integration was introduced by Andrew Carnegie at his steel company towards the end of the nineteenth century. Andrew Carnegie obtained greater efficiency by purchasing the coke fields and iron-ore deposits that furnished the raw materials for steelmaking, as well as the ships and railroads that transported these supplies to his mills. Carnegie Steel was merged with several other companies to form the U.S. Steel company by JP Morgan in 1901.
  • 10. Acquisition of Brands Good brands, over a period of time, become an integral part of the consumers' lives and this goes a long way in adding to the brand equity of the product. Acquisitions of Brands has become an important strategic element for companies. In May 2001, Marico Industries completed the acquisition of two brands Parachute and Saffola from Bombay Oil Industries. The acquisition saved Rs 3 crore annually on royalty payments Marico was making to Bombay Oil, the original owner of the brands. In July 2008, Glenmark reached an agreement with Icelands Actavis and its Polish affiliate Biovena to acquire seven pharmaceutical brands in Poland. The acquisition gives the company access to the Polish market, touted to be the largest pharma market in Central and East Europe.
  • 11. Access to talent Access to talent can be a major reason for service companies to perform M&A. An interesting observation was made while working on a deal in the IT sector. Minacs Worldwide merged with AB Nuvo at 0.5 times revenues and Kanbay merged with Capgemini at 6 times revenues. The valuations were extreme because Minacs was a call center and Kanbay was a high end solutions provider.
  • 12. Pure Profits Private equity players have been in the news since the 80s decade of Reaganomics. Private equity players are mostly interested in IRR. PE players acquire stakes in companies and de-list them of stock exchanges to later sell them and make profits. Our team worked on a PE deal where in an Indian company was acquiring stake in a Belgian company. The valuations of the deal revolved completely around the IRR of the PE player who owned the company rather than the actual fundamentals of the company.
  • 13. Conclusion We have discussed the primary reasons for companies to perform M&A activities. The reasons discussed point towards the fact that M&A is primarily used by companies as a tool to expand inorganically. The critical point to note is that the strategy should be very clear when performing M&A activity. The M&A activity should be a part of the grand strategy of the company.