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Practical Challenges & Trends in M&A

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Transique Corporate Advisors

The document discusses trends in mergers and acquisitions (M&A) in India. It notes that while Indian startups raised significant funding in 2021 and early 2022, funding has slowed in recent months as access to cheap capital has dried up. The document outlines M&A trends by industry from 2018-2022 and notes that technology is driving many acquisitions as large companies and unicorns acquire startups to build capacity and grow. It then covers various aspects of M&A deals including applicable laws, the role of professionals, and key valuation considerations.

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By Chander Sawhney F.C.A., F.C.S., Registered Valuer (IBBI) Founder & CEO Transique Corporate Advisors 28th May 2022 Practical Challenges & Trends in M&A Bangalore Valuers Association
Section-I Start up & Funding Trends
The Indian startup ecosystem continued to thrive in 2021 and during the first quarter of 2022. However, a sudden decline in funding, especially for larger deals, and the number of unicorns and ESOP buybacks in April indicated a slowdown where home-grown startups struggled to raise capital compared to previous months. Indian startups have raised $2.65 billion across 121 deals in April, a 33% decline from $4 billion in the previous month* Cheap Capital Dries Up..and Cost of Capital is becoming expensive while the macro is becoming less certain, leading to investors de- prioritizing and paying up less for growth. SEQUOIA CAPITAL Indian Startup Trends April 2022 *data tracking platform Fintrackr
Survival of the fittest Japan's SoftBank, which is India's biggest tech investor, with more than $14 billion in investments, has reported a record loss of $26.2 billion at its Vision Fund investment arm. Its founder and CEO Masayoshi Son said that this year the firm may invest only half or a quarter of what it did last year. In India, shares of startups like Nykaa and Zomato which had blockbuster listings last year, are down -67% and -43% from their peaks, respectively. Paytm is trading -73% below its IPO price. Enterprise startups are relatively in a better position than the Startups chasing growth.
Global Capital Market Trends
Section-II M&A Trends
M&A Trends *2022 till May 25, 2022 (Venture Intelligence Data) based on calendar year
Screenshot 2021-09-07 at 12.55.09 PM M&A Trends By Industry Amount (Mn$) INDUSTRY 2018 2019 2020 2021 2022 (5 Months) Deal Amount Deal Amount Deal Amount Deal Amount Deal Amount Healthcare & Life Sciences 58 7,700 61 1,597 53 2,170 87 3,686 35 4,783 IT & ITES 244 27,927 250 5,791 198 3,589 401 32,222 191 3,561 Telecom 7 12,692 9 783 8 6,888 13 586 5 3,292 BFSI 44 4,687 55 15,105 33 1,993 53 11,453 39 3,210 Manufacturing 114 24,439 77 5,283 73 4,247 88 3,087 51 3,167 Energy 43 12,306 49 12,011 44 9,333 75 9,899 31 2,088 Media & Entertainment 19 1,027 17 188 8 25 6 35 10 1,816 Education 10 97 9 364 11 55 20 2,771 9 771 Shipping & Logistics 18 916 22 964 6 689 19 2,403 6 264 Other Services 27 133 20 366 15 3,558 11 693 8 264 Engg. & Construction 21 1,188 19 1,882 9 817 23 1,952 5 197 FMCG 13 824 16 255 10 380 20 754 15 182 Advertising & Marketing 16 113 11 152 10 24 9 129 5 173 Travel & Transport 16 509 22 1,095 6 1,887 11 2,856 7 134 Hotels & Resorts 4 17 8 706 2 123 9 214 1 98 Agri-business 23 5,267 16 1,309 10 684 10 52 10 92 Food & Beverages 11 221 23 1,076 9 207 21 859 15 82 Gems & Jewelry 1 26 1 20 Mining & Minerals 1 6 1 13 3 0 1 20 Textiles & Garments 7 236 8 909 4 4 10 249 2 12 Retail 13 1,520 8 350 4 271 12 59 2 1 Sports & Fitness 3 24 1 0 2 0 1 0 Diversified 1 0 1 181 3 0 Total 714 1,01,876 703 50,381 518 36,942 901 73,958 450 24,226
Screenshot 2021-09-07 at 12.55.09 PM Radically changed world, characterised by Uncertainty, Geopolitical Instability, Shifting consumer preferences, Accelerated digitisation, COVID ? Increasing Cost of Capital There is a Heightened need for agility and adaptability to remain relevant. Large corporates AND Indias unicorns will be serial acquirers to BUILD Capacities and GROW As of May 2022, Indian unicorns have acquired a total of 326 startups so far, with maximum deals being finalized in 2021. Flipkart aced the (M&A) game with over 17 M&A transactions till date, closely followed by Byjus with over 16 deals. Other leading players in terms of M&A activity include Zomato (15), Quikr (15), Mensa (14), Cure Fit (14), etc.
TECHNOLOGY DRIVES THE TRANSFORMATION AGENDA Source: EY Study Report
TRANSFORMATION AMBITIONS DRIVE M&A POST PANDEMIC Source: EY Study Report
Section-III M&A Roadmap
Why M&A Simplification of Corporate Structure Tax Efficiency Value Unlocking through Corporate Action Value Creation Consolidation of same Business Segregation of different Businesses Segregation of Surplus Assets Segregation of Promoter and Company Assets Reorganisation considering Market trends and Valuation
M&A M&A (NCLT Route) Merger, Demerger IPO (including Direct Listing) SME / Main Board Shareholding Reorganisati on Business/ Asset Transfer / Slump Sale M&A Restructuring Modes Voluntary Winding up Striking off Companies Acquisition (IBC Route)
M&A Companies Act Income Tax Act FEMA - Foreign Shareholders Competition Law Applicable Laws on M&A Accounting Standards Stamp Duty Laws State specific Sectoral Regulators - Industry specific SEBI Laws and Regulations - Listed Companies GST and Labour Laws
Business Valuations, & Financial Modelling Tax Advisory & Structuring Deal Structuring Legal & Regulatory Advisory Stamp Duty Advisory Role of Professionals in M&A Deal Journey Legal Documentati on (Term Sheet, SHA,SPA etc.) Due Diligence NCLT Approvals on M&A Regulatory Approvals (Stock Exchanges, SEBI, Income Tax, Sectoral Regulators) Business, Industry Research and Assessment of recent Deals Pitch Book review and Advisory Promoters Background, Management Team, Tied-up Capital commitment, Traction Connecting with appropriate Buyers/Sellers /Investors Deal Negotiation Financial Advisory Tax, Legal & Regulatory Advisory Fund Raising (VC/PE/HNI/ Corporates) Purchase Price Allocation and Accounting Impact
Key Issues in Merger & Demerger through NCLT Stamp Duty Cost Income Tax / Capital Gains Registered Office / NCLT (for Scheme of Arrangements) Board and Shareholders Approval Lenders and Creditors Approval Regulatory Approval Time-period and Process Accounting Aspects Valuation aspects / Minority Shareholders ? / Relative or Fundamental Valuation ? + Fairness Opinion
4 6 2. Board Approval 3. Stock Exchanges /SEBI Approval 1. Valuation and Scheme of Arrangement 2 5. Shareholders, Lenders and Creditors Approval 4. NCLT Filing 8. Post Merger PPA and Integration 7. NCLT Approval 6. ROC/OL/IT Deptt./Sectoral Regulator Approval Merger & Demerger (NCLT /Regulatory Process)
Section-IV Valuation Aspects
Understanding Purpose of Valuation Information requisition from the Company Financial Analysis and Normalisation Adjustments Understanding Industry Characteristics and Trends Forecasting and reviewing Company Performance Considering and Applying appropriate Valuation Methodologies Performing Value adjustments, Value Conclusion, Documentation and Reporting Valuation Process
Valuation for Scheme of Arrangement In case of a merger valuation, the emphasis is on arriving at the RELATIVE value of the shares of the merging companies to facilitate determination of the swap ratio Under SEBI Master Circular SEBI/HO/CFD/DIL1/CIR/P/2021/0000000665 dated November 23, 2021, Valuation by IBBI Registered Valuer mandatory other than in cases where there is no change in the shareholding pattern of the listed company. As per SEBI Master Circular, fair value of listed companies needs to be undertaken as per preferential allotment guidelines prescribed under the SEBI (ICDR) Regulations, 2018. w.e.f. 14/1/2022, for valuation of Frequently Traded Shares of Listed Company has to be computed based on 90/10 trading days VWAP prior to Relevant date. The relevant date for this purpose is defined as the date of Board Meeting in which the scheme of merger is approved. As per Stock Exchange circulars the valuation reports on Scheme of Arrangement, the valuation reports shall display the workings, relative fair value per share and fair exchange ratio with justification in the following format: XYZ Ltd PQR Ltd Valuation Approach Value per Share Weight Value per Share Weight Asset Approach X a y d Income Approach X b y e Market Approach X c y f Relative Value per Share X y Exchange Ratio (rounded off) xx w.e.f. 1/11/2021, as per SOP of Stock Exchanges, the period under consideration for valuation of unlisted Companies (other than Income Approach) should not be Older than 3 months.
Valuation for Mergers Fairness Opinion In case of M&A, focus is on comparative valuation of companies and thus apart from adhering to the general valuation principles, the valuation needs to be fair from the point of view of shareholders of the transferor and transferee companies. In accordance with SEBI Master Circular and SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, the listed as well as the unlisted company getting merged shall each be required to obtain a fairness opinion on the valuation of assets/equity shares done by the valuers from an independent merchant banker. Purchase Price Allocation (PPA) Under Ind AS 103, now all business combinations (except group consolidation) are considered in the nature of purchase and require the acquirer to apportion the consideration paid among tangible and intangible assets. Intangibles need to be separable and identified based on their unique characteristics. Ind AS 38 and IVS 210 deals with Intangible Assets. As per para 18 (measurement principle) of Ind AS 103, the acquirer shall measure the identifiable assets acquired and the liabilities assumed at their acquisition-date fair values. The difference amount, if any, between the consideration paid and assets acquired goes to goodwill.
Valuation for Mergers Purchase Price Allocation (PPA) Template
Lets LearnUnlearnRelearn and make the most of Professional Opportunities
Contact Us Chander Sawhney F.C.A., F.C.S., Registered Valuer (IBBI) Founder & CEO Transique Corporate Advisors M: +91 9810557353 E: chander@transique.in DLF CYBER CITY (NCR) The Executive Centre Suite No.10 & 50, Level 18, Building No.5, Tower A, Phase 3 Gurugram B: +91 124 6637851 E: info@transique.in THE CAPITAL (MUMBAI) The Executive Centre Level 7, Plot No C-70, G Block Bandra Kurla Complex, Bandra East Mumbai M: +91 9587011010 Web: www.transiqueadvisors.com

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Practical Challenges & Trends in M&A

  • 1. By Chander Sawhney F.C.A., F.C.S., Registered Valuer (IBBI) Founder & CEO Transique Corporate Advisors 28th May 2022 Practical Challenges & Trends in M&A Bangalore Valuers Association
  • 2. Section-I Start up & Funding Trends
  • 3. The Indian startup ecosystem continued to thrive in 2021 and during the first quarter of 2022. However, a sudden decline in funding, especially for larger deals, and the number of unicorns and ESOP buybacks in April indicated a slowdown where home-grown startups struggled to raise capital compared to previous months. Indian startups have raised $2.65 billion across 121 deals in April, a 33% decline from $4 billion in the previous month* Cheap Capital Dries Up..and Cost of Capital is becoming expensive while the macro is becoming less certain, leading to investors de- prioritizing and paying up less for growth. SEQUOIA CAPITAL Indian Startup Trends April 2022 *data tracking platform Fintrackr
  • 4. Survival of the fittest Japan's SoftBank, which is India's biggest tech investor, with more than $14 billion in investments, has reported a record loss of $26.2 billion at its Vision Fund investment arm. Its founder and CEO Masayoshi Son said that this year the firm may invest only half or a quarter of what it did last year. In India, shares of startups like Nykaa and Zomato which had blockbuster listings last year, are down -67% and -43% from their peaks, respectively. Paytm is trading -73% below its IPO price. Enterprise startups are relatively in a better position than the Startups chasing growth.
  • 7. M&A Trends *2022 till May 25, 2022 (Venture Intelligence Data) based on calendar year
  • 8. Screenshot 2021-09-07 at 12.55.09 PM M&A Trends By Industry Amount (Mn$) INDUSTRY 2018 2019 2020 2021 2022 (5 Months) Deal Amount Deal Amount Deal Amount Deal Amount Deal Amount Healthcare & Life Sciences 58 7,700 61 1,597 53 2,170 87 3,686 35 4,783 IT & ITES 244 27,927 250 5,791 198 3,589 401 32,222 191 3,561 Telecom 7 12,692 9 783 8 6,888 13 586 5 3,292 BFSI 44 4,687 55 15,105 33 1,993 53 11,453 39 3,210 Manufacturing 114 24,439 77 5,283 73 4,247 88 3,087 51 3,167 Energy 43 12,306 49 12,011 44 9,333 75 9,899 31 2,088 Media & Entertainment 19 1,027 17 188 8 25 6 35 10 1,816 Education 10 97 9 364 11 55 20 2,771 9 771 Shipping & Logistics 18 916 22 964 6 689 19 2,403 6 264 Other Services 27 133 20 366 15 3,558 11 693 8 264 Engg. & Construction 21 1,188 19 1,882 9 817 23 1,952 5 197 FMCG 13 824 16 255 10 380 20 754 15 182 Advertising & Marketing 16 113 11 152 10 24 9 129 5 173 Travel & Transport 16 509 22 1,095 6 1,887 11 2,856 7 134 Hotels & Resorts 4 17 8 706 2 123 9 214 1 98 Agri-business 23 5,267 16 1,309 10 684 10 52 10 92 Food & Beverages 11 221 23 1,076 9 207 21 859 15 82 Gems & Jewelry 1 26 1 20 Mining & Minerals 1 6 1 13 3 0 1 20 Textiles & Garments 7 236 8 909 4 4 10 249 2 12 Retail 13 1,520 8 350 4 271 12 59 2 1 Sports & Fitness 3 24 1 0 2 0 1 0 Diversified 1 0 1 181 3 0 Total 714 1,01,876 703 50,381 518 36,942 901 73,958 450 24,226
  • 9. Screenshot 2021-09-07 at 12.55.09 PM Radically changed world, characterised by Uncertainty, Geopolitical Instability, Shifting consumer preferences, Accelerated digitisation, COVID ? Increasing Cost of Capital There is a Heightened need for agility and adaptability to remain relevant. Large corporates AND Indias unicorns will be serial acquirers to BUILD Capacities and GROW As of May 2022, Indian unicorns have acquired a total of 326 startups so far, with maximum deals being finalized in 2021. Flipkart aced the (M&A) game with over 17 M&A transactions till date, closely followed by Byjus with over 16 deals. Other leading players in terms of M&A activity include Zomato (15), Quikr (15), Mensa (14), Cure Fit (14), etc.
  • 10. TECHNOLOGY DRIVES THE TRANSFORMATION AGENDA Source: EY Study Report
  • 11. TRANSFORMATION AMBITIONS DRIVE M&A POST PANDEMIC Source: EY Study Report
  • 13. Why M&A Simplification of Corporate Structure Tax Efficiency Value Unlocking through Corporate Action Value Creation Consolidation of same Business Segregation of different Businesses Segregation of Surplus Assets Segregation of Promoter and Company Assets Reorganisation considering Market trends and Valuation
  • 14. M&A M&A (NCLT Route) Merger, Demerger IPO (including Direct Listing) SME / Main Board Shareholding Reorganisati on Business/ Asset Transfer / Slump Sale M&A Restructuring Modes Voluntary Winding up Striking off Companies Acquisition (IBC Route)
  • 15. M&A Companies Act Income Tax Act FEMA - Foreign Shareholders Competition Law Applicable Laws on M&A Accounting Standards Stamp Duty Laws State specific Sectoral Regulators - Industry specific SEBI Laws and Regulations - Listed Companies GST and Labour Laws
  • 16. Business Valuations, & Financial Modelling Tax Advisory & Structuring Deal Structuring Legal & Regulatory Advisory Stamp Duty Advisory Role of Professionals in M&A Deal Journey Legal Documentati on (Term Sheet, SHA,SPA etc.) Due Diligence NCLT Approvals on M&A Regulatory Approvals (Stock Exchanges, SEBI, Income Tax, Sectoral Regulators) Business, Industry Research and Assessment of recent Deals Pitch Book review and Advisory Promoters Background, Management Team, Tied-up Capital commitment, Traction Connecting with appropriate Buyers/Sellers /Investors Deal Negotiation Financial Advisory Tax, Legal & Regulatory Advisory Fund Raising (VC/PE/HNI/ Corporates) Purchase Price Allocation and Accounting Impact
  • 17. Key Issues in Merger & Demerger through NCLT Stamp Duty Cost Income Tax / Capital Gains Registered Office / NCLT (for Scheme of Arrangements) Board and Shareholders Approval Lenders and Creditors Approval Regulatory Approval Time-period and Process Accounting Aspects Valuation aspects / Minority Shareholders ? / Relative or Fundamental Valuation ? + Fairness Opinion
  • 18. 4 6 2. Board Approval 3. Stock Exchanges /SEBI Approval 1. Valuation and Scheme of Arrangement 2 5. Shareholders, Lenders and Creditors Approval 4. NCLT Filing 8. Post Merger PPA and Integration 7. NCLT Approval 6. ROC/OL/IT Deptt./Sectoral Regulator Approval Merger & Demerger (NCLT /Regulatory Process)
  • 20. Understanding Purpose of Valuation Information requisition from the Company Financial Analysis and Normalisation Adjustments Understanding Industry Characteristics and Trends Forecasting and reviewing Company Performance Considering and Applying appropriate Valuation Methodologies Performing Value adjustments, Value Conclusion, Documentation and Reporting Valuation Process
  • 21. Valuation for Scheme of Arrangement In case of a merger valuation, the emphasis is on arriving at the RELATIVE value of the shares of the merging companies to facilitate determination of the swap ratio Under SEBI Master Circular SEBI/HO/CFD/DIL1/CIR/P/2021/0000000665 dated November 23, 2021, Valuation by IBBI Registered Valuer mandatory other than in cases where there is no change in the shareholding pattern of the listed company. As per SEBI Master Circular, fair value of listed companies needs to be undertaken as per preferential allotment guidelines prescribed under the SEBI (ICDR) Regulations, 2018. w.e.f. 14/1/2022, for valuation of Frequently Traded Shares of Listed Company has to be computed based on 90/10 trading days VWAP prior to Relevant date. The relevant date for this purpose is defined as the date of Board Meeting in which the scheme of merger is approved. As per Stock Exchange circulars the valuation reports on Scheme of Arrangement, the valuation reports shall display the workings, relative fair value per share and fair exchange ratio with justification in the following format: XYZ Ltd PQR Ltd Valuation Approach Value per Share Weight Value per Share Weight Asset Approach X a y d Income Approach X b y e Market Approach X c y f Relative Value per Share X y Exchange Ratio (rounded off) xx w.e.f. 1/11/2021, as per SOP of Stock Exchanges, the period under consideration for valuation of unlisted Companies (other than Income Approach) should not be Older than 3 months.
  • 22. Valuation for Mergers Fairness Opinion In case of M&A, focus is on comparative valuation of companies and thus apart from adhering to the general valuation principles, the valuation needs to be fair from the point of view of shareholders of the transferor and transferee companies. In accordance with SEBI Master Circular and SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, the listed as well as the unlisted company getting merged shall each be required to obtain a fairness opinion on the valuation of assets/equity shares done by the valuers from an independent merchant banker. Purchase Price Allocation (PPA) Under Ind AS 103, now all business combinations (except group consolidation) are considered in the nature of purchase and require the acquirer to apportion the consideration paid among tangible and intangible assets. Intangibles need to be separable and identified based on their unique characteristics. Ind AS 38 and IVS 210 deals with Intangible Assets. As per para 18 (measurement principle) of Ind AS 103, the acquirer shall measure the identifiable assets acquired and the liabilities assumed at their acquisition-date fair values. The difference amount, if any, between the consideration paid and assets acquired goes to goodwill.
  • 23. Valuation for Mergers Purchase Price Allocation (PPA) Template
  • 24. Lets LearnUnlearnRelearn and make the most of Professional Opportunities
  • 25. Contact Us Chander Sawhney F.C.A., F.C.S., Registered Valuer (IBBI) Founder & CEO Transique Corporate Advisors M: +91 9810557353 E: chander@transique.in DLF CYBER CITY (NCR) The Executive Centre Suite No.10 & 50, Level 18, Building No.5, Tower A, Phase 3 Gurugram B: +91 124 6637851 E: info@transique.in THE CAPITAL (MUMBAI) The Executive Centre Level 7, Plot No C-70, G Block Bandra Kurla Complex, Bandra East Mumbai M: +91 9587011010 Web: www.transiqueadvisors.com