merger cases

8/13/2019 Merger Cases

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Case study 1: Ranbaxy DaichiRanbaxy Overview

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The DEAL

Daiichi got to acquire a controlling stake .51.62% in Ranbaxy for $ 3.4-4.6billion

Singh family promoters of Ranbaxy sold entire stake 34.8% for Rs 10000 crs

($2.4 bio) at Rs 737/-

Daiichi had to make an open offer to acquire 20% more from other

shareholders. Japanese company was to acquire another 4.9% through

preferential of share warrants

Ranbaxy was to get $1bn via preferential allotment, funds were to be used to

retire debt 2


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The DEAL

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Reasons for Takeover

DaiichiA complementary business combination

An expanded global reach

Strong growth potential

Cost competitiveness by optimizing usage of R&D and manufacturing facilities

Ranbaxy

The R&D pipeline was not delivering enough products, the generic market

was not generating adequate returns.

Ranbaxy had three choices

It could spend lot of money in acquiring a big generic company to

grow inorganically

Merge with a global player

Sell-out

The sell out option was most profitable

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Conclusion

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Joint Ventures (JV)

JV is an entity formed between two or more parties to undertake

economic activity together.

The parties agree to create a new entity by both contributing

equity, and they then share in the revenues, expenses, and control

of the enterprise.

The venture can be for one specific project only, or a continuing

business relationship such as the Sony Ericsson joint venture.

This is in contrast to a strategic alliance, which involves no equity

stake by the participants, and is a much less rigid arrangement.

Project Based JV: These are Joint Ventures entered into by

companies in order to accomplish a specific project.

Functional JV: These are Joint Ventures wherein, companies agree

to share their functions and facilities such as production,

distribution, marketing, etc. to achieve mutual benefit6


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JV- Goals, Benefits

Goals

Synergies

Transfer of technology/skills

Diversification

Benefits

Complementary Benefits

Acquiring and Sharing Expertise

New Business / Product Development

Capacity Expansion

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JV- Issues

Issues in Joint Ventures

Due Diligence

Business Strategy Development of HR Strategies

Implementation

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HISTORY

Maruti Udyog Ltd was established in February 1981

Actual Production commenced in 1983 with Maruti 800

Project Maruti started by Indira Gandhi & Sanjay Gandhi

Indian experts started search for collaboratorsNegotiated withToyota, Nissan, Honda & Suzuki

After rounds of negotiation Suzuki was selected

Joint venture of Govt of India & Japanese Company Suzuki

Motors Corp

Previously Govt of India owned 80% equity & Suzuki had 20%

Now Indian Financial Institute has 18.28%, Suzuki has 54.24%

& 25% equity is public offering

Case Study 2: Maruti Suzuki Joint Venture

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SWOT Analysis

STRENGTHSGoodwill of Suzuki Brand

Contemporary Technology

Market Share & reliability

WEAKNESS

Japan for technical support

OPPORTUNITIES

Infrastructure

Innovation

THREATS

Govts Policies, taxes etc

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BENEFITS OF JOINT VENTURE

For Maruti

Suzuki Motor Corporation, the parent company, is a globalleader in mini and compact cars for three decades

Suzukis technical superiorLightweight engine that is clean and fuel efficient

Nearly 75000 people are employed directly by Maruti Suzukiand its partners

For Suzuki

Large Indian MarketMonopolistic trade in the Indian automobile market

Availability of resources

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The Market before JV

Case Study 3: Hero Honda Joint Venture

The license raj that existed prior to economic

liberalization (1940s-1980s) in India did not allow foreign

companies to enter the market.

In the mid-80s when the Indian government started

permitting foreign companies to enter the Indian market

through minority joint ventures.

The entry of these new foreigncompanies transformedthe very essence of competition from the supply side to

the demand side. 12


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The Deal Is Done.(June 1984)

Honda agreed to provide tech. know-how toHHM and setting up manufacturing facilities.

This included the future R & D efforts.

Honda agreed for a lump sum fee of $500,000& 4% royalty on SP.

Both Partners held 26% of the equity with

other 26% sold to the public and the rest heldto financial institutions.

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Success Story

HHM had grown consistently, earning the title of the worlds

largest motorcycle manufacturer

Worlds largest two-wheeler manufacturer with annual salesvolume of over 2 million motorcycles.

Owns worlds biggest selling motorcycle brand Hero Honda

Splendor.

Over 9 million motorcycles on Indian roads.

Deep market penetration with 5000 outlets.

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Reasons for success

The deep penetration network of hero largely benefited the sales.

Absence of major competitors in initial years.

Sound and proven technical capabilities of Honda and the reliability of Hero.

Increased market for motorcycles

Better Fuel efficiency.

Change in peoples perception.

Decrease in price difference with scooters.

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Wholly Owned Subsidiary

What Does Wholly Owned SubsidiaryMean?

A subsidiary whose parent company owns 100% of its common stock.

In other words, the parent company owns the company outright and there areno minority owners.

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- The Acquirer Among the largest domestic pharma

companies in India

Annual turnover of over INR 4900 Cr.

Annual PAT of INR 438 Cr.

Approved by USFDA, MHRA(UK) Formulations make 37% of companys product

mix; generic products account for 13%

Case Study 4: Dr Reddys & Betapharma

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- The Target

Fourth largest generic

pharma company in

Germany EBITD margins between

2426%

Portfolio of over 145products

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Turnover Eur 186 million

3.5 market share in Germany

Breakup of products

- The Target

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Valuations

Sticker Price of 480 mn. from PE firm 3i

Revenues of 165 mn.

2.9X revenues and 12X EBITDA

The transaction was funded using a combination ofDRLs internal cash reserves and committed creditfacilities

Dr Reddy's buys 100% equity of German CoBetapharm for Rs 2,250 cr (Euro 480 mio) Biggest overseas acquisition by an Indian pharmaco

- The Target

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Goodies for DRL

Access to lucrative German generic drug market

Enhanced portfolio

Leverage its product development skills and low-

cost manufacturing in India to boost BetapharmsEBIT margins

Help DRL realize its ambitions of becoming a $1billion mid-size global pharma company

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Side Effects for DRL

Betapharm booked losses in 08 & 09

Raw materials problems in Mexico

The German market underwent significant

changes after it acquired the company, shifting toa tender-based model wherein the insurancecompanies called for tenders from drug makersand the lowest bidder got the order for supply ofdrugs

Absence of upsides (revenues arising out ofmarketing exclusivity of authorized generics)

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Present Scenario for DRL

DRL has long been bleeding under the impact ofBetapharms losses

Decline in German sales by 26 per cent

Dr Reddy's Laboratories (DRL) is currentlyrestructuring German subsidiary Betapharm

Fierce competitive bidding from various genericcompanies has increased the acquisition cost for DRL

and extended the payback period

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Case Study 5: Tata Corus Merger

'Tata Steel', formerly known as TISCO(Tata Ironand Steel Company Limited), was the world's56th largest and India's 2nd largest steel

company with an annual crude steel capacity of3.8 million tonnes.

Post Corus merger, Tata Steel is India's second-largest and second-most profitable company in

private sector with consolidated revenues of Rs1,32,110 crore and net profit of over Rs 12,350crore during the year ended March 31, 2008

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Corus Overview

Coruswas formed from the merger of

Koninklijke Hoogovens N.V., a Dutch steel

producer with British Steel Plc on 6 October

1999. It has major integrated steel plants inUK and Netherlands.

Group turnover for the year to 31 December

2005 was 10.142 billion. Profits were 580million before tax and 451 million after tax.

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Synergies from the deal

Some of the prominent synergies that could arise from the deal were as follows :

Tata was one of the lowest cost steel producers in the world and had selfsufficiency in raw material. Corus was fighting to keep its productions costs under

control and was on the look out for sources of iron ore.

Tata had a strong retail and distribution network in India and SE Asia. This would

give the European manufacturer a in-road into the emerging Asian markets. Tata

was a major supplier to the Indian auto industry and the demand for value added

steel products was growing in this market. Hence there would be a powerful

combination of high quality developed and low cost high growth markets

There would be technology transfer and cross-fertilization of R&D capabilities

between the two companies that specialized in different areas of the value chain

There was a strong culture fit between the two organizations both of which highly

emphasized on continuous improvement and ethics. Tata steel's ContinuousImprovement Program Aspirewiththe core values :Trusteeship,integrity,respect

for individual, credibility and excellence. Corus's Continuous Improvement

Program The Corus Way with the core values: code of ethics, integrity, creating

value in steel, customer focus, selective growth and respect for our people.

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Valuation

On 20 October 2006 the board of directors of Anglo-Dutch steelmaker

Corus accepted a $7.6 billion takeover bid from Tata Steel, the Indian steel

company.

Tata Steel's bid to acquire Corus Group was challenged by CSN, the

Brazilian steel maker.

In November 2006,Brazilian steel marker Companhia Siderrgica Nacional

(CSN) challenged Tata Steel's proposal for acquisition. They countered Tata

Steel's offer of 455 pence per share by offering 475 pence per share of

Corus.

Finally , on January 30, 2007, Tata Steel purchased a 100% stake in the

Corus Group at 608 pence per share in an all cash deal, cumulatively

valued at USD 12.04 Billion.

The deal is the largest Indian takeover of a foreign company and made

Tata Steel the world's fifth-largest steel group.

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Funding the dealTATA Corus merger

$3.53.8bn infusion from Tata Steel ($2bn as its

equity contribution, $1.51.8bn through a bridgeloan)

$5.6bn through a LBO ($3.05bn through senior term

loan, $2.6bn through high yield loan) The funding structure of this deal is the leveraged

buyout model that Tata Steel used to fund the Corus

buy.

Effectively, the Tatas are paying only a third of theacquisition price. This was possible because Corus

had relatively low debt on its balance sheet and was

able to borrow more.28


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Case Study 6: HINDALCO - NOVELIS ACQUISITION:

CREATING AN ALUMINIUM GLOBALGIANT

Indian aluminium giant Hindalco acquired Atlanta basedcompany Novelis Inc, a world leader in aluminium rolling and

flat-rolled aluminium products in May 2007.

Novelis processes around 3 million tonnes of aluminium a year

and has sales centers all over the world. In fact, it commands a

19% global market share in the flat rolled products segment,

making it a leader.

Strategically, the acquisition of Novelis takes Hindalco onto the

global stage as the leader in downstream aluminium rolled

products.

The transaction made Hindalco the world's largest aluminium

rolling company and one of the biggest producers of primary

aluminium in Asia, as well as being India's leading copper

producer. 29


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Novelis - Background

World leader in the recycling of used aluminium beverage cans

Recycles more than 35 billion used beverage cans annually.

No. 1 rolled products producer in Europe, South America and Asia, and the

No. 2 producer in North America.

Produces the highest-quality aluminium sheet and foil products forcustomers in high -value markets including automotive, transportation,

packaging, construction and printing.

customers include major brands such as Agfa -Gevaert, Alcan, Anheuser-

Busch, Ball, Coca-Cola, Crown Cork & Seal, Daching Holdings, Ford,

General Motors, Lotte Aluminium, Kodak, Pactiv, Rexam, Ryerson Tull,Tetra Pak, ThyssenKrupp, etc.

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Financing Structure put in place by

Hindalco

Recourse Financing by

banks on Corporate

Guarantee of Hindalco 3100

Liquidation of Treasury 450TOTAL

3550

HINDALCO NOVELIS

Figures in USD Millions

Novelis Enterprise Value ~ USD 6 billion

All cash deal

Non Recourse Debt at Novelis

Term Loans 1000High Yield Bonds 1400TOTAL

2400

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Benefits to Hindalco

establish Hindalco as a global integrated aluminium producer with low-cost alumina and

aluminium production facilities combined with high -end aluminium rolled product

capabilities.

emerge Hindaloc as the biggest rolled aluminium products maker and fifth -largest integrated

aluminium manufacturer in the world.

The acquisition will give the company immediate scale and strong a global footprint.

Hindalco's position as one of the lowest cost producers of primary aluminium in the world is

leverageable into becoming a globally strong player.

Novelis is a globally positioned organization, operating in 11 countries with approximately

12,500 employees.

Novelis will work as a forward integration for Hindalco as the company is expected to ship

primary aluminium to Novelis for downstream value addition.

Novelis has a rolled product capacity of approximately 3 million tonne while Hindalco does

not have any surplus capacity of primary aluminium.

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