Funding

Of

Option

M & AHirani Haresh

Limbani Kalpesh

Patel PrasanthVarsani Sanjay

Patel Nrupal

Joshi Prunit

mergers and acquisitions

Methods of payment for consideration

By issue of equity shares of the acquirer company.

By issue of preference shares of the acquirer company.

By issue of secured debt instruments of the acquirer

company.

By payment in cash

By any combination of above

By issue of equity shares of the acquirer company

• In this method, an acquirer company issues its shares to the shareholders

of the target company in exchange of shares of the target company in a

specified ratio known as a swap ratio and hence this method is

commonly known as share swap method.

• Forms of equity financing

1.common stock

2.preferred stock

3.convertible securities

PT (Target’s Share Price)PA (Acquirer’s Share Price)

SER=

By issue of equity shares of the acquirer company

• When any company is go to issue of equity share for merger and

acquisition then following sources of funds for domestic issue.

• Internal accruals.

• It is the most commonly used source for large and small acquisition alike.

• IPO/FPO

• It is not an effective route.

• Rights issue

• It is an effective route for mobilizing fund for repayment of bridge loans taken for

acquisition.

In 2008 when hindalco came out with a rights issue of Rs 5048 crore with an

objective of using the net proceeds to fund part of the repayment of bridge loan

availed by AV Minerals (Netherlands)B.V. an overseas subsidiary of the Hindalco, for

the Acquisition of Novelis

By issue of equity shares of the acquirer company

• ADR and GDR

• Use of ADR/GDR fund for domestic acquisition is prohibited

except in case of Public Sector Undertakings disinvestments.

• Private placement/ PE funds

• This fund are astute investors who can be effectively roped in as

persons acting in concert for acquisition

By issue of preference shares of the acquirer company

• With regard to the issue of preference share of the acquired company,

first of the SEBI takeover regulation do not permit issuance of

preference share in lieu of payment of consideration for shares acquired

from the public during the course of open offer.

• Though this prohibition does not apply to the negotiated block deal

entered into with the existing promoters, the exiting promoters wanting

to cash out their investment in the target company’s share would prefer

only cash.

• Thus this method is not generally used in India.

Case Study: Tata Motors and Jaguar – Land Rover

• Tata Motors raised about USD 2.3Billion for the acquisition

• Took a bridge loan from aconsortium of banks to finance theinitial costs of the acquisition

• Considering the current volatility inmarkets the board recently came outwith an alternate plan to restrict theRights Issue and instead monetize apart of company investmentsthrough phased divestments over 6to 8 months

PLAN A: The Initial Strategy

Particulars Amount

(in INR Crores)

Total value 9770

Equity Share 2200

A’ Equity share 2000

Issue of 0.5 % Five

year

Convertible

preference shares,

convertible to 'A'

equity shares between

3 to 5 years

3000

From Overseas

Markets

2569

PLAN B: The Current Strategy

Particulars Amount

(in INR Crores)

Total value 9770

Equity Share 2200

A’ Equity share 2000

Asset Sale which

includes

possible divestment

of stake in

Tata Steel worth INR

2000

Crores

3000

From Overseas

Markets

2569

By issue of secured debt instruments of the acquirer company

• Asset-based lending

•Asset-based lending is a business loan secured by collateral

(assets).The loan, or line of credit, is secured by inventory, accounts

receivable and/or other balance-sheet assets.

•Also known as "commercial finance" or "asset-based financing".

•This type of loan is often used to meet various cash flow needs of

companies, for example, building inventory.

By issue of secured debt instruments of the acquirer company

• Cash Flow Financing

• A form of financing in which the loan is backed by a

company's expected cash flows.

• This differs from an asset-backed loan, where the collateral

for the loan is based on the company's assets.

• The schedules or repayments for cash-flow loans are based

on the company's projected future cash flows.

By issue of secured debt instruments of the acquirer company

• Subordinated Debt

•Subordinated debt is a loan (or security) that ranks below

other loans (or securities) with regard to claims on assets

or earnings.

•Also known as a junior security or subordinated loan.

By payment in cash

• This is of course the most favored method for effecting

payment to the tendering shareholders.

• It is both clean and transparent and well accepted by the

selling shareholders.

• Payment in cash is almost universally used for all acquisition in

India.

• Banks and FIs

• Banks and Fish in India are not very proactive in lending for

acquisitions, though the picture is gradually changing.

• ECBs

• Use of ECBs funds is not permitted for acquiring a company or a

part thereof in India.

By any combination

• In this strategy the company go in combination of the

instruments.

• It can be equity and cash or debt or preference share.

Private equity market

• Private equity is equity capital that is not quoted on a public

exchange. Private equity consists of investors and funds that make

investments directly into private companies or conduct buyouts of

public companies that result in a delisting of public equity.

• Capital for private equity is raised from retail and institutional investors,

and can be used to fund new technologies, expand working capital

within an owned company, make acquisitions, or to strengthen a balance

sheet.

Private equity market

• Private equity funds make other investment such as providing venture

capital to nascent business.

• Private equity funds seek out the investment that are undervalued.

• It raise their capital from variety of sources including institutional

investors such as pension funds.

Hedge funds

• Hedge funds are alternative investments using pooled funds that may use

a number of different strategies in order to earn active return, or alpha,

for their investors.

• Hedge funds may be aggressively managed or make use

of derivatives and leverage in both domestic and international markets

with the goal of generating high returns (either in an absolute sense or

over a specified market benchmark).

• Because hedge funds may have low correlations with a

traditional portfolio of stocks and bonds, allocating an exposure to

hedge funds can be a good diversifier.

Venture Capital Funds

• Venture capital funds are investment funds that

manage money from investors seeking private equity

stakes in startup and small- and medium-size

enterprises with strong growth potential.

• These investments are generally characterized as high-

risk/high-return opportunities.

Steps In Loan Process

Step 1:- Preparing The Loan Proposal

• The loan proposal should focus on the history of the buyer,

the performance of the seller, and the reason why the

proposed deal makes sense and all related aspects.

• The exact elements of a buyer/borrower’s loan proposal will

vary depending on the size of the company, its industry, and

the terms of the proposal transaction, most lenders want the

following fundamental questions answered

Steps In Loan Process

Most lenders want the following fundamental questions answered

• Who is the borrower?

• How much capital is needed and when?

• How will the capital be allocated and for what specific purpose?

• Why does the proposed transaction makes sense from a financial,

strategic and operational perspective?

• What additional market share, cost savings, or other efficiencies will be

achieved as a result of this statement?

• How will the combined entity service its debt obligations( e.g.,

application and processing fees, interest, principal, or balloon payments)?

• What protection( e.g., tangible and intangible assets to serve as collateral)

can the borrower provide the bank in the event that the company is

unable to meet its obligations?

Steps In Loan Process(Conti…)

The loan proposal should include the following categories of information:-

• Summary of the request

• History of borrower

• Market date

• Financial information

• Schedule and exhibits

Steps In Loan Process(Conti…)

Step 2: Understanding The Type Of Commercial Bank Loans

• During the process of planning the capital structure and in preparing the

loan proposal, it is important for the buyer/borrower to understand the

various types of loans that are available from bank.

• Loans are usually categorized by the term of the loan , the expected use

of the proceeds, and the nature of the industry and the bank’s

assessment of the company’s creditworthiness. The following are typical

categories:-