cross- border m & a transactionscross- border m & a transactions 2 drivers for m & a...
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By Mysore PrasannaBy Mysore Prasanna
Group General CounselGroup General Counsel
Aditya Birla Group, IndiaAditya Birla Group, India
Bombay Chartered Accountants Society The views expressed herein are that of the author and not that of the organization he represents
CROSS- BORDER M & A TRANSACTIONS
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Drivers for M & A
Diversification
Tax and FinancialBenefits
Increase in Market Power
Enhanced Profitability
Accelerated Growth
To Create To Create ValueValue M & As promote not only M & As promote not only
growth and growth and Creation of ValueCreation of Valuebut they also but they also Unlock Value Unlock Value through JVs, Spin Offs andthrough JVs, Spin Offs andtotal Divestment making themtotal Divestment making themcomplementary conceptscomplementary concepts..
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“The concept of “growing organization” is not about just growth but is all about its adaptability to global business dynamics and its ability to quickly change the way it does business and the tenacity to shed unwanted or unrelated businesses keeping in view the interest of stakeholders and their expectations”.
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FUELLING M & A GROWTH
OVERSEASOVERSEAS
CONSOLIDATE POSITIONINCREASE CAPACITIES
ACCESS TO INTERNATIONAL MARKETS
INTEGRATION
BACKWARD/FORWARD
ACQUIRE CERTAINCAPABILITIES: Technology, People and R & D
BECOME GLOBAL PLAYER
TATA TATA -- CORUSCORUS
BIRLA BIRLA –– NOVELISNOVELIS
MITTAL MITTAL –– ARCELORARCELOR
RANBAXYRANBAXY--DIIACHIDIIACHI
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Why Cross Border M&A ?
The stimulus for cross-border M&A
Globalization
Industry consolidation
Maturing markets
Emergence of global investing.
Global in Size & Scale
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Aspects Of Cross Border M & A
Aspects influencing
business case for M & A
Aspects Aspects influencing influencing
business case for business case for M & AM & ALegal & regulatory
framework
Identifying and delivering synergies
Tax regimes & treaties
Business Dynamics
Business Environment
Cultural Issues
Accounting treatment
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Aspects Of Cross Border M & A
The business case must recognize the role of :Corporate Governance
Regulatory Compliances
Corporate Social Responsibility
Human Rights
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Challenges and Risks in a Cross Border M&A
Identification of the Target / Target on block
Understanding the Jurisdiction Legal & tax regimes
Sale process / Valuation
Comprehensive Due Diligence
Evolving a structure & effective road map
Commence Negotiation
Post – merger integration process.
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Challenges and Risks in a Cross Border M&A ….. contd
Attitudinal barriers
Political interference
Employees’ reluctance
Shareholders’ perception of “foreign acquirer”
Community perception
Mismatch in perception between the Target and Acquirer
Perceived incompetencies and inefficiencies
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KEY CHALLENGES IN M & As - Pre merger challenges
Pre merger stages :Pre merger stages :Search and Screening requires identification of suitable candidates.
Planning requires a full blown evaluation of the Target to ensure it is the “Right Fit”.
Evaluation including business, financial, technical, earning potential, ROI and pay back time.
Pre acquisition period involves assessment of business life cycle, cultural and organizational differences, including cultures, role of leaders, and management styles.
To understand the ‘value’ and ‘culture’ of the Target Company
The biggest challenge is the acquisition of intangibles and growth of intellectual capital along with retention of talent.
Identification of control factors is critical - Is it with the promoters/majority shareholders/management ?
Management entrenchment is often a strong disincentive for acquirers.
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DUE DILIGENCE – IDENTIFICATION OF CHALLENGES
Just as banks believe in “Know Your Customer”, companies should focus on the concept of ““Know Your TargetKnow Your Target””..
Due diligence activity to answer “What, Where, Why , Which, When and How” so as to evaluate the merger process.
Due diligence can also help to map the pre-merger integration process.
Change of ControlChange of Control :Lender covenants
Material Contracts
Golden Parachute
Valuation Impact
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POST MERGER CHALLENGES
MANAGING THE INTEGRATION PROCESS :MANAGING THE INTEGRATION PROCESS :
Retaining talent and dealing with downsizing activities with great sensitivity.
The original intent behind the acquisition to be kept in mind when implementing systems and procedures.
The composition of the integration team to be aimed at identifying the purpose and character of the merged entity.
Communication both internal and external is a must to increase the perceived benevolence of management and promote trust amongst the employees and stakeholders.
Language barrier leads to double jeopardy of interpretation and interpreting the interpreter (like in China and Latin American countries).
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POST MERGER CHALLENGE – Cultural Issues
Prof. Geert Hofstede, Emeritus Professor,
Maastricht University
“For those who work in international business, it is sometimes amazing
how different people in other cultures behave. We tend to have a human instinct that 'deep inside' all people are the same - but they are
not. Therefore, if we go into another country and make decisions based
on how we operate in our own home country - the chances are we'll make
some very bad decisions.”
" Culture is more often a source of conflict than of
synergy. Cultural differences are a nuisance at best
and often a disaster."
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INTEGRATION CHALLENGES
MANUFACTURING
MARKETING
LOGISTICS
PROCESSES (IT)
POLICIES
REMUNERATION AND BENEFITS
Research & Development Vendors – Suppliers
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HR ISSUES
The M & A drivers which largely concentrate on the financial nitty-gritties must also
focus on people issues
Issues that crop up include compensation and benefits plans, performance appraisal
systems, leadership assessment and innovation and “Corporate Culture” issues
If the process of M & A involves acquisition of human capital as a major component,
the issue assumes a humongous intangible dimension
Post-mergers leaders should aim to attain a scenario where the corporate functioning
reflects the cultural attributes of the merged corporation
Not only does leadership determine corporate destiny it also helps establish the
cultural boundaries and norms for the workforce to follow
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NEED TO REGULATE COMBINATION
Advantages of combinationincreased efficiencythe market becomes more competitive andconsumers benefit from higher-quality goods at fairer prices.
It may harm consumers through higher prices, reduced choice or less innovation
May result in lessening of competition in the market or reinforcing the dominant position
The objective of examining proposed mergers is to prevent harmful effects on competition effects on competition
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Competition Act, 2002( “ Act”)
Section 3 (Anti-competitive agreements) and section 4 (Abuse of dominant position) are notified.
Competition (Amendment) Ordinance 2009 of Oct 14th abolished MRTPC (Section 66 has been notified)
All pending cases before MRTPC relating to UTP, RTP & MTP are now transferred to CAT ( Competition Appellate Tribunal)
All pending cases relating to Goods & Services (except which relate to giving false information for disparaging of goods and services of another person under the MRTP Act) will now be transferred to the National Commission constituted under the Consumer Protection Act 1986
Section 5 & 6 ( relating to M & A) yet to be notified.
Given the RBI reservations, Banking Sector might be exempted from the purview of this Act in relation to M& A.
Clearance timeframe by CCI is now 210 days and 30 days incase there is no prima facie case in relation to sec 3 & 4 of the Act.
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FDI Regime
Sector FDI Cap M & A Procedure
Banking 74% -stringent due to RBI’s reservations
Telecom FDI upto 74%,-Automatic upto 49 %,beyond 49% FIPB approval required
-liberal due to the progressive polices of the TRAI and deregulations
- subject to DOT, SEBI, FEMA, CCI approval
Insurance 26% -stringent procedures
-subject to IRDA and SEBI approvals
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INDIAN MERGER EVALUATION PROCESS
A combination that gives rise to “Appreciable Adverse Effect on Competition”
(AAEC )will be prohibited and is void.
Identification of Relevant market, consisting of relevant product market and
relevant geographic market
To be seen in light of whether it results in or even has a potential to have adverse
affect on competition in the Relevant market.
Rule of reason to be applied by CCI while assessing AAEC
Effect of Merger on competition is seen in the form of Unilateral effects and
Coordinated effects.
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WHY MERGERS FAIL
AFTERMATH OF NON AFTERMATH OF NON -- INTEGRATIONINTEGRATION
Disruption of work processes
Diminishing customer confidence
Damage to company's reputation and goodwill
Poor employee motivation levels.
Attrition
Mergers that just end up averaging strengths and weaknesses rather than creating new capabilities and averaging costs and profits cannot go far enough to be globally competitive.
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WHY MERGERS FAIL Contd…
Post-merger productivity drops post-merger as retention of workforce, relevance and/or redundancy and integration are not adequately addressed.
The success of a merger hinges on how well the post-merged entity positions itself to achieve cost and profit efficiencies.
A merger is an emotive issue both at the individual and collective levels and, more so, in the Indian context where the employees are recruited for the organizations and not for specific jobs.
The real test of the success of a merger is making people connect to each other.
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Summing up…..
PRE MERGERPRE MERGER
PLANExamine business strategy and the HR strategy Identify and evaluate Target- Method of functioning - Manpower- Infrastructure
Mandating consultants for HR, tax and financial aspects.
INVESTIGATEDue diligenceAnti-Trust issuesChange of control triggersIntegration Issues
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Summing up Contd…
NEGOTIATESet deal terms - Legal- Human capital - Structural Obtain stakeholders agreementDocumentation- Legal - RegulatoryWith Lenders
IMPLEMENTExamine Alternate StructuresPlan of ArrangementTender OfferOutright Sale
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Summing up Contd…
POST MERGERPOST MERGER
INTEGRATE
Finalize and execute integration plans - Structure - Resources- System - Human capital
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UNDERLYING PRINCIPLE OF M & A UNDERLYING PRINCIPLE OF M & A TRANSACTIONTRANSACTION
1 + 1 1 + 1 = 11= 11
ADDITIONAL VALUE OF ADDITIONAL VALUE OF ““SYNERGIESSYNERGIES””
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THANK YOU