merger demerger acquisiiton and transaction advisory
DESCRIPTION
Merger, Demerger, Acquisiiton and TransactionTRANSCRIPT
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Mergers, Demergers, Acquisition and Transaction Advisory
By By
Ramakrishnan.S
PKF S&S
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Overview of modes of M&A in India
M&A
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Acquisition
Business Purchase
Slump sale Itemised sale
Share Purchase
Combinations
Merger Demerger
Restructuring
Capital Reduction
Buyback
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Merger
Consolidation of two or more entities Involves transfer of assets and
liabilities from transferor companies to
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liabilities from transferor companies to the transferee company and in consideration, transferee company issues shares
Lengthy process under the Companies Act 2013
Largely, tax neutral Generally, losses can be carried
forward and set-off by the transferee company
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Demerger
Transfer of identified business from one company to another
As a consideration, such acquiring
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As a consideration, such acquiring company issues shares to the shareholders of the selling company
Lengthy process under the Companies Act 2013
Largely, tax neutral Generally, losses can be carried
forward and set-off by the transferee company
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Slump Sale / Hive-off
Involves transfer of business undertaking on a comprehensive basis from one company to another. Values are not ascribed
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another. Values are not ascribed to each item of asset / liability
Consideration is lump sum and most often is by way of cash settlement between the companies
Simpler process compared to merger / demerger
Capital gains arises in the normal course
Stamp duty implications are an area to watch out
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Itemised Sale
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Involves transfer of business where consideration is measured against each asset
Transfer may be selective and some assets / liabilities may not be transferred
Consideration, is largely, by way of cash settlement Process could be simpler compared to merger / demerger Capital gains arise in the normal course Stamp duty implications arise Indirect Tax implications are to be keenly considered
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Share Purchase
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Legal Impact on Transactions
Companies Act
Companies Act
Income Tax Act
Income Tax Act
Industry Governing
Body
Industry Governing
Body
SEBISEBI
FEMAFEMA
Indirect Tax Laws
Indirect Tax Laws
Accounting StandardsAccounting Standards
Stamp DutyStamp Duty
Competition Law
Competition Law
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Changes in Companies act 2013-1
Good and welcome changes
Fast track restructuring of Holding and WOS and small cos- NO NCLT, no auditor certificate , only small cos- NO NCLT, no auditor certificate , only prior notice to ROC, OL quick and easy
More time bound hence faster (for instance: even Govt authorities have to respond within 30 days else it is presumed they have no objection!)
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Changes in Companies act 2013-2
Good and welcome changes ( contd.)
Yearly reporting on progress of implementation till completed will ensure proper follow upcompleted will ensure proper follow up
Amalgamation/demerger of Indian co into foreign co made easier in NFJ (Notified foreign jurisdiction)
More disclosures in notices to shareholders/creditors more transparency
Postal ballot mandatory and combined results of postal ballot and in person meeting will decide
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Changes in Companies act 2013-3
Good and welcome changes (contd.)
Person wanting to object should have at least 10% of shareholding or 5% debt- so one cannot 10% of shareholding or 5% debt- so one cannot just scuttle the scheme for the sake of it-create trouble
Auditor certificate stating the scheme is as per AS is required for all cos (as against listed cos only now)
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Changes in Companies act 2013-4
Good and welcome changes (contd.)
Possible back door delisting possible? As new law says when transferor listed co amalgamates law says when transferor listed co amalgamates into unlisted transferee co , unlisted co can continue to remain unlisted in both Merger and Demerger (SEBI may still object to this)
Purchase of minority shareholders by persons holding 90% or more of equity at price determined by registered valuers
Even purchase offer by minority to purchase majority possible12
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Changes in Companies act 2013-5
Issues and problems:
Restructuring will require more approvals
Amalgamation/demerger from foreign co into Amalgamation/demerger from foreign co into Indian co more restrictive
Uncertainty as to transitional provisions
If buy back of shares or variation of rights involved in scheme the specific provisions to be complied with
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Changes in Companies act 2013-6
Issues and problems (contd.)
Problems arising out of share capital definition including preference shares including preference shares
In view of Free reserves definition which says it would not include changes in carrying amount of asset or liability recognised in equity amalgamation reserves created on fair valuing assets and liabilities would not be available for issue of bonus shares, buy back and dividend payment etc
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Changes in Companies act 2013-7
Issues and problems (contd.)
Cross holdings treasury shares to be canceled and no shares can be issued against these; (what and no shares can be issued against these; (what about existing ones?)
Positive confirmation by shareholders and creditors having 90% value required
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Professional Opportunities
Advisory on inorganic growth strategy / business diversification
Dilution advisory to sell side customers
Scouting for potential targetsScouting for potential targets
Preliminary evaluation of targets
Pre-deal evaluations
Negotiation support
Commercial term sheet finalisation
Structuring the deal
Financial, Commercial, Business and Legal Due Diligences
Transaction documentation support
Funding options and structures16
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Professional Opportunities
Valuation for Making proposals
Consummating the deal
Fairness opinion on valuation Fairness opinion on valuation
FEMA regulatory purposes
Purchase price Allocation
Closing computations and settlement computations
Post deal integration support
Business synergy and management strategies
Accounting advisory on merger / amalgamation
Post deal, effectiveness evaluation
Advisory services to investor protection groups17
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Expertise to mitigate the top ten reasons for M&A failures
1. Unrealistic price
2. Poor Due Diligence
3. Over-rated synergies3. Over-rated synergies
4. Poor business fit
5. Inconsistent Strategy
6. Integration difficulties
7. Cultural Integration issues
8. High leverage
9. Boardroom mis-fit
10. Regulatory hurdles18
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OVERVIEW OF M&A
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Overview of Global M&A
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Overview of Indian M&A
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Lets look at some actual deals
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Facebook - whatsapp
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Lets look at Whatsapp acquisition!
Whatsapp has been acquired at a whooping $ 19 Billion!!!
$15 Billion in Facebook stocks and $4 Billion in $15 Billion in Facebook stocks and $4 Billion in cash
Existing user base ~ 450 Million
~70% are active daily on this platform
It charges 99 cents per year for each subscriber, after the initial first year
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Whatsapp Investor / Value view
Valuation of $ 19 Billion at Implied return on equity (at higher risk) 10%
US Market - Risk free rate 3% + Equity Risk Premium 5% + Additional Risk 2%
Valuation for the deal - $19 Billion Waiting period of 5 years to reach steady state Waiting period of 5 years to reach steady state
Translates to a pre tax income of $4.37 Billion!! This really means that
At say even a 50% pre-tax cost outflow from gross revenue And $0.99 per annum revenue changed to $5 per annum It requires 1.75 Bn users for Whatsapp to generate this kind of a revenue
stream! A near 4 fold increase in current number of users
Source: Ashwath Damodaran
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Whatsapp Traders view
EV / EBIDTA though correlated, ranges from 23 to +2000 meaning a return at EBIDTA level of less than 5% - which is below even the risk free rate!
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Number of users is a dominant driver in this industry Measure of depth of engagement has an effect on the valuation Predictable revenue models are higher priced Making bottomline money seems to be secondary at least as at present
free rate! Market seems to be banking
heavily on the future of users!!
If the Whatsapp acquisition drives Facebook users up by even 1/3rd of its users
At $ 130 per user for Facebook Value of Facebook is up by the price paid and more! Source: Ashwath
Damodaran
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Point Counter-Point
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Deal is too large by all comparisons in this field Lack of revenue model to justify the returns in due course
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What it means to Facebook
Not a very big risk!!
For Facebook, this is a big deal, but not a killerkiller
Its own market cap is $ 180 Billion!!
As of Dec 2013, had $11 B in liquid funds
Had $4 Billion cash from operations in 2013
Also, deal is structured at best to pay
Only $ 4 Bn by cash
Rest is by way of Facebook Stocks!!28
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Possible insight into Whatsapp revenue model
Fastest growing
By the time of deal, Whatsapp had 450 Mn Whatsapp had 450 Mn users
Over 11 Billion messages each day
Provides a goldmine to extract likes, dislikes, trends
Huge possibilities for big firms to use data to tailor their offerings29
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Fundamentals of Valuation
Accountants valuation sans business knowledge
Mere arithmetical exercise
Business valuation sans accountants knowledge
Lead to investment oblivion!
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Who can forget the Indiaworld Deal
In 1999 - 2000, Sify bought Indiaworld at Rs.499 crores It had a revenue of about INR 1.3 crores and a
bottom-line of about INR 25 lacs at that time!!bottom-line of about INR 25 lacs at that time!!
This was justified only if revenue could double year after year for one full decade!!
Five years later Revenue was only Rs.10 Crores
Required to justify the valuation Rs.42 crores Revenue was 4 times less!!
Valuation without in-depth Business understanding linked with Financial Knowledge??31
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Sify Indiaworld vs Facebook - Whatsapp
Facebook SIFY
Market Cap $ 170 Bn $ 1.48 Bn(Dropped to $ 178 Mn
by Q4 2000)by Q4 2000)
Year 2014 1999
Liquid assets $ 11 Bn $ 0.2 Mn
Latest year cash from operations
$ 4 Bn -ve $ 4 Mn
Target Price $ 19 Bn $ 115 Mn #
- Cash Component $ 4 Bn $ 90 Mn #
- Equity component $ 15 Bn $ 25 Mn #
IPO happened in 2013 1999
# - Estimated amounts in $ terms32
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Sun pharma ranbaxy
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Sun Pharma Ranbaxy Deal
All stock deal
Every 5 shares of Ranbaxy will fetch 4 shares of Sun Pharmashares of Sun Pharma
What is in it for each of the parties involved lets try and make some educated guess
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Sun Pharma Ranbaxy Deal
For Daiichi Sankyo
Since it bought over Ranbaxy, as a parent has been faced withbeen faced with Criticism of continuing FDA related issues
Even, when this deal was made, there has been a subpoena received (relating to Toansa facility) for which it has provided indemnity to Sun Pharma!
The transaction would make it a 9% owner of Sun Pharma, which it could offload at a later date
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Sun Pharma Ranbaxy Deal
For Ranbaxys other Shareholders
The subpoena having been received, though was a material issue, was not in public domain until a material issue, was not in public domain until recently
The other shareholders are likely to have benefited, as this subpoena information could have subdued the valuation
This may be the end of the road for Ranbaxy as it was but, maybe its for the best to company and its shareholders, given the circumstances
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Sun Pharma Ranbaxy Deal
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Sun Pharma Ranbaxy Deal
For Sun Pharma
A significant challenge to the MD of Sun Pharma, who has earned a reputation for acquiring who has earned a reputation for acquiring companies in trouble at a good price and then turning around operations
The merged numbers show a challenge in the near term due to pressure on bottomline returns
However, Sun Pharma is looking at ~Rs.1,500 crores of merger related synergies by three years
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Sun Pharma Ranbaxy Deal
For Sun Pharma
In the Indian market, the combined entitys portfolio becomes much larger, covering more portfolio becomes much larger, covering more therapeutic areas
Margins on Ranbaxy products are low, but Sun plans to work on improving them
In the US market, the priority will be to resolve all of Ranbaxys FDA-related troubles to ensure that every major generic product in Ranbaxys pipeline makes it to market
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FLIPKART - MYNTRA
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About Flipkart
Has raised ~ $2.5 Billion in capital till date
Current valuation is about 2.5 2.7 times annual Gross Merchandise
Structuring advisory
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times annual Gross Merchandise Value (in the likes of the valuation of Amazon)
No one is even thinking of EBIDTA / Profits as the basis
The company is looking to become the first $100 billion value company from India
Rs. Crs 2011-12 2012-13 2013-14
GMV 205 1,180 6,000
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Flipkart essence of e-tailing growth
Focus on delivery and prompt service
In Flipkart 7,000 out of total 12,000 work on last mile delivery
Cash on Delivery a big hit
Business modeling
Liberal return policies / low pricing by discounts / free delivery
FDI hurdles for retail giants whilst free FDI into ecommerce companies is also helping
Increased penetration of smart phones is also adding to e-tailing in a big way
Moving towards market place model from inventory and delivery control model
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E-commerce Industry - expectations
China has been ahead by 6-7 years on ecom
From $ 4 billion in 2003, have grown to $ 230 billion now
Valuation advisory
billion now
Applying similar template to India
Just listed companies market cap could be $40 billion by 2017 and $ 90 Billion by 2020
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Flipkart flipping the cart
Flipkart Online Services Limited, an Indian entity was the apex company in Flipkart until a few years back
Cross Border
advisory
Cross Border Structuring advisory
a few years back
Three rounds of funding were received by this entity only until 2011
In 2012, to avoid regulatory complications and for better structuring
FOSL sold its whole business operations to FIPL
FIPL is owned by Flipkart Private Limited (of Singapore)44
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Flipkart fund raise
Flipkart has become one in the top tier of privately held internet ventures in the likes of Uber, Airbnb and Dropbox
Valuation and
services
Valuation and PE funding
services
and Dropbox
Just in Jul 2014, the company did a fund raise at a $7 Billion valuation
Which was a doubling of the valaution post acquisition of Myntra!!
In Nov 2014, again another round of fund raise has happened at a valuation of $11 Billion!!
A further jump!!
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Flipkart Myntra Deal
Business case for the deal
Flipkarts technology and marketplace model
Myntras significant grasp of fashion and
1 + 1 = 3
Myntras significant grasp of fashion and consequent market leadership in fashion e-tailing
Potential to exploit mutual synergies
Promoters
Sanjay and Binny Bansal (not related) of Flipkart
Mukesh Bansal (again not related) of Myntra
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Flipkart Myntra Deal
Flipkart saw
Future of 30% GMV coming from fashion
Flipkart was weak in this area
1 + 1 = 3
Flipkart was weak in this area
Had a well established technology backbone for the e-tailing
Saw Myntra, as a great threat to its growth
Myntra saw
Opportunity to grow faster
Retain its leadership in fashions with more investments instead of competition47
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Flipkart Myntra Deal
PE investors were broadly the same set
Tiger Global and Accel Partners (key investors) in both the entities
Integration
solutions
Integration issues and solutions
both the entities
Stated to be a 100% buy out deal
But, expected to continue to operate under two brands and websites etc.,
Collective decision on moving forward with the backend and integrating the same
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