Download GTU (Gujarat Technological University) MBA (Master of Business Administration) 2016 Summer 4th Sem 2840201 Mergers And Acquisitions M And A Previous Question Paper
GUJARAT TECHNOLOGICAL UNIVERSITY
MBA ? SEMESTER 4 ? ? EXAMINATION ? SUMMER 2016
Subject Code: 2840201 Date: 05/05/2016
Subject Name: Mergers and Acquisitions (M&A)
Time: 10.30 AM TO 01.30 PM Total Marks: 70
Instructions:
1. Attempt all questions.
2. Make suitable assumptions wherever necessary.
3. Figures to the right indicate full marks.
Q ? 1(A) Choose the correct option [06]
1. If an automobile manufacturer were to acquire one of the firms listed below,
which acquisition would be called a horizontal merger?
A. A steel Mill B. A rival manufacturer
C. A tire producer D. A bank
2. The cost of a merger equals the
A. Cash paid for the target firm. B. Increase in total earnings less
price paid.
C. Premium paid over the target's
value as a separate entity.
D. None of the above
3. If two merged firms are shown to have a higher combined market value than
the sum of the individual market values, then:
A. Economic /Synergy gains are said
to have taken place
B. The firms were previously
under priced
C. The merger provides
diversification to investors.
D. There is no cost involved in
the merger.
4. What is the minimum size of mandatory open offer under Securities and
Exchange Board of India (Substantial Acquisition of Shares and Takeovers)
Regulations, 2011
A. 24% B. 25%
C. 26% D. 27%
FirstRanker.com - FirstRanker's Choice
Seat No.: ________ Enrolment No.___________
GUJARAT TECHNOLOGICAL UNIVERSITY
MBA ? SEMESTER 4 ? ? EXAMINATION ? SUMMER 2016
Subject Code: 2840201 Date: 05/05/2016
Subject Name: Mergers and Acquisitions (M&A)
Time: 10.30 AM TO 01.30 PM Total Marks: 70
Instructions:
1. Attempt all questions.
2. Make suitable assumptions wherever necessary.
3. Figures to the right indicate full marks.
Q ? 1(A) Choose the correct option [06]
1. If an automobile manufacturer were to acquire one of the firms listed below,
which acquisition would be called a horizontal merger?
A. A steel Mill B. A rival manufacturer
C. A tire producer D. A bank
2. The cost of a merger equals the
A. Cash paid for the target firm. B. Increase in total earnings less
price paid.
C. Premium paid over the target's
value as a separate entity.
D. None of the above
3. If two merged firms are shown to have a higher combined market value than
the sum of the individual market values, then:
A. Economic /Synergy gains are said
to have taken place
B. The firms were previously
under priced
C. The merger provides
diversification to investors.
D. There is no cost involved in
the merger.
4. What is the minimum size of mandatory open offer under Securities and
Exchange Board of India (Substantial Acquisition of Shares and Takeovers)
Regulations, 2011
A. 24% B. 25%
C. 26% D. 27%
5. A form of corporate restructuring involving transfer of all or substantially all
the assets and assets, liabilities, loans and business of one of business divisions
or undertaking to another company whose shares are allotted to the
shareholders of the transferor company on a proportionate basis and transferor
company continue to carry on at least one of the businesses.
A. Spin off B. Split up
C. Split off D. None of the above
6. A defense tactic in which the target company sells its highly profitable or
attractive business division to make takeover bid less attractive to the
raider.
A. Poison pills B. Shark Repellents
C. Blank Cheque D. Crown Jewels
Q ? 1 (B) Explain following terms [4]
1. Demerger
2. Joint Venture
3. Buy Back
4. Delisting
Q ? 1 (C) What is corporate restructuring? What are different motives of corporate
restructuring
[4]
Q ? 2 (A) State the major methods of effecting payment of consideration to the
shareholders of target company. Explain features of each method in detail.
[7]
Q ? 2 (B) Imperial Chemical Industries (ICI), a British company is looking at an
opportunity to enter the Indian market. Instead of entering on its own, ICI
wanted to make an entry by taking over a major player in the Indian market.
The company (ICI) shortlisted Asian Paints as the right target to fulfill its
aspirations. However Asian Paints is not willing to get acquired by Imperial
Chemical Industries (ICI). With reference to this, explain the concept of
hostile takeover and suggest various defense tactics that Asian Paints can use
to avoid the hostile takeover by Imperial Chemical Industries (ICI).
[7]
OR
Q ? 2 (B) After TATA tea acquired Tetley in early 2000, in last fifteen years a number
of Indian companies have made global acquisitions. One of the important
features of these acquisitions is that in most of the cases the target companies
have been far bigger in size than the Indian acquirers. To take an example
Tetley?s turnover at the time of acquisitions was more than three times the
turnover of Tata tea. Similarly when Tata Steel acquired Corus Plc. Corus?s
turnover was four times more than Tata Steel?s turnover. With reference to
this, explain various sources of funds for cross boarder acquisitions.
[7]
Q ? 3 (A) Explain major provisions of Securities and Exchange Board of India
(Buy back of securities) Regulations, 1998.
[7]
FirstRanker.com - FirstRanker's Choice
Seat No.: ________ Enrolment No.___________
GUJARAT TECHNOLOGICAL UNIVERSITY
MBA ? SEMESTER 4 ? ? EXAMINATION ? SUMMER 2016
Subject Code: 2840201 Date: 05/05/2016
Subject Name: Mergers and Acquisitions (M&A)
Time: 10.30 AM TO 01.30 PM Total Marks: 70
Instructions:
1. Attempt all questions.
2. Make suitable assumptions wherever necessary.
3. Figures to the right indicate full marks.
Q ? 1(A) Choose the correct option [06]
1. If an automobile manufacturer were to acquire one of the firms listed below,
which acquisition would be called a horizontal merger?
A. A steel Mill B. A rival manufacturer
C. A tire producer D. A bank
2. The cost of a merger equals the
A. Cash paid for the target firm. B. Increase in total earnings less
price paid.
C. Premium paid over the target's
value as a separate entity.
D. None of the above
3. If two merged firms are shown to have a higher combined market value than
the sum of the individual market values, then:
A. Economic /Synergy gains are said
to have taken place
B. The firms were previously
under priced
C. The merger provides
diversification to investors.
D. There is no cost involved in
the merger.
4. What is the minimum size of mandatory open offer under Securities and
Exchange Board of India (Substantial Acquisition of Shares and Takeovers)
Regulations, 2011
A. 24% B. 25%
C. 26% D. 27%
5. A form of corporate restructuring involving transfer of all or substantially all
the assets and assets, liabilities, loans and business of one of business divisions
or undertaking to another company whose shares are allotted to the
shareholders of the transferor company on a proportionate basis and transferor
company continue to carry on at least one of the businesses.
A. Spin off B. Split up
C. Split off D. None of the above
6. A defense tactic in which the target company sells its highly profitable or
attractive business division to make takeover bid less attractive to the
raider.
A. Poison pills B. Shark Repellents
C. Blank Cheque D. Crown Jewels
Q ? 1 (B) Explain following terms [4]
1. Demerger
2. Joint Venture
3. Buy Back
4. Delisting
Q ? 1 (C) What is corporate restructuring? What are different motives of corporate
restructuring
[4]
Q ? 2 (A) State the major methods of effecting payment of consideration to the
shareholders of target company. Explain features of each method in detail.
[7]
Q ? 2 (B) Imperial Chemical Industries (ICI), a British company is looking at an
opportunity to enter the Indian market. Instead of entering on its own, ICI
wanted to make an entry by taking over a major player in the Indian market.
The company (ICI) shortlisted Asian Paints as the right target to fulfill its
aspirations. However Asian Paints is not willing to get acquired by Imperial
Chemical Industries (ICI). With reference to this, explain the concept of
hostile takeover and suggest various defense tactics that Asian Paints can use
to avoid the hostile takeover by Imperial Chemical Industries (ICI).
[7]
OR
Q ? 2 (B) After TATA tea acquired Tetley in early 2000, in last fifteen years a number
of Indian companies have made global acquisitions. One of the important
features of these acquisitions is that in most of the cases the target companies
have been far bigger in size than the Indian acquirers. To take an example
Tetley?s turnover at the time of acquisitions was more than three times the
turnover of Tata tea. Similarly when Tata Steel acquired Corus Plc. Corus?s
turnover was four times more than Tata Steel?s turnover. With reference to
this, explain various sources of funds for cross boarder acquisitions.
[7]
Q ? 3 (A) Explain major provisions of Securities and Exchange Board of India
(Buy back of securities) Regulations, 1998.
[7]
Q ? 3 (B) Videsh Ltd. Is keen on reporting EPS of Rs. 6 per share after acquiring
Swadesh Ltd. The following financial data are given
Particulars Videsh Ltd. Swadesh Ltd.
Earning Per Share Rs. 5 Rs. 5
Market Price Per Share Rs. 60 Rs. 50
Number of shares 10,00,000 8,00,000
There is an expected synergy gain of 5 per cent. What exchange ratio will
result in a post merger EPS of Rs.6 for Videsh Ltd.?
[7]
OR
Q ? 3 (A) Mergers and acquisitions can have an adverse impact on healthy state of
competition prevailing in the markets. One of the objectives of the
competition act 2002 is to promote and sustain healthy state of competition
in markets. With respect to this explain in detail major provisions of
Competition act 2002 governing combinations.
[7]
Q ? 3 (B) Black & Co. is planning to acquire White & Co. The relevant financial
details of both the firms before acquisition are
Particulars Black & Co White & Co
Market Price per Share Rs. 70 Rs. 32
Number of shares 20 million 15 million
The merger is expected to bring the gain which has present value of Rs. 200
million. The exchange ratio agreed is 0.5. What is the true cost of merger
for Black & Co?
[7]
Q ? 4 (A) Explain the concept of strategic alliance. Why do companies enter into
strategic alliances? What are the implications of strategic alliance?
[7]
Q ? 4 (B) Cross border acquisitions are becoming very popular due to their capacity to
generate additional revenues for the acquirer. Globalization and liberalization
have made the business environment more conducive for them. While cross
border acquisitions are good, they do not always succeed due to number of
challenges faced by the acquirer before and after the acquisition. With
reference to this, explain various difficulties encountered in cross border
acquisitions.
[7]
OR
Q ? 4 (A) Explain the concept of Delisting. State the features of compulsory and
voluntary delisting.
[7]
Q ? 4 (B) The following financial information is available for company D, a
pharmaceutical company
PBDIT Rs. 18 Crore
Book value of assets Rs. 90 Crore
Sales Rs. 125 Crore
Based on evaluation of several pharmaceutical companies, companies A, B
and C have been found to be comparable to company D. Looking at the
characteristics of A, B and C following multiples are reasonable for company
D.
MV/ PBDIT 17
[7]
FirstRanker.com - FirstRanker's Choice
Seat No.: ________ Enrolment No.___________
GUJARAT TECHNOLOGICAL UNIVERSITY
MBA ? SEMESTER 4 ? ? EXAMINATION ? SUMMER 2016
Subject Code: 2840201 Date: 05/05/2016
Subject Name: Mergers and Acquisitions (M&A)
Time: 10.30 AM TO 01.30 PM Total Marks: 70
Instructions:
1. Attempt all questions.
2. Make suitable assumptions wherever necessary.
3. Figures to the right indicate full marks.
Q ? 1(A) Choose the correct option [06]
1. If an automobile manufacturer were to acquire one of the firms listed below,
which acquisition would be called a horizontal merger?
A. A steel Mill B. A rival manufacturer
C. A tire producer D. A bank
2. The cost of a merger equals the
A. Cash paid for the target firm. B. Increase in total earnings less
price paid.
C. Premium paid over the target's
value as a separate entity.
D. None of the above
3. If two merged firms are shown to have a higher combined market value than
the sum of the individual market values, then:
A. Economic /Synergy gains are said
to have taken place
B. The firms were previously
under priced
C. The merger provides
diversification to investors.
D. There is no cost involved in
the merger.
4. What is the minimum size of mandatory open offer under Securities and
Exchange Board of India (Substantial Acquisition of Shares and Takeovers)
Regulations, 2011
A. 24% B. 25%
C. 26% D. 27%
5. A form of corporate restructuring involving transfer of all or substantially all
the assets and assets, liabilities, loans and business of one of business divisions
or undertaking to another company whose shares are allotted to the
shareholders of the transferor company on a proportionate basis and transferor
company continue to carry on at least one of the businesses.
A. Spin off B. Split up
C. Split off D. None of the above
6. A defense tactic in which the target company sells its highly profitable or
attractive business division to make takeover bid less attractive to the
raider.
A. Poison pills B. Shark Repellents
C. Blank Cheque D. Crown Jewels
Q ? 1 (B) Explain following terms [4]
1. Demerger
2. Joint Venture
3. Buy Back
4. Delisting
Q ? 1 (C) What is corporate restructuring? What are different motives of corporate
restructuring
[4]
Q ? 2 (A) State the major methods of effecting payment of consideration to the
shareholders of target company. Explain features of each method in detail.
[7]
Q ? 2 (B) Imperial Chemical Industries (ICI), a British company is looking at an
opportunity to enter the Indian market. Instead of entering on its own, ICI
wanted to make an entry by taking over a major player in the Indian market.
The company (ICI) shortlisted Asian Paints as the right target to fulfill its
aspirations. However Asian Paints is not willing to get acquired by Imperial
Chemical Industries (ICI). With reference to this, explain the concept of
hostile takeover and suggest various defense tactics that Asian Paints can use
to avoid the hostile takeover by Imperial Chemical Industries (ICI).
[7]
OR
Q ? 2 (B) After TATA tea acquired Tetley in early 2000, in last fifteen years a number
of Indian companies have made global acquisitions. One of the important
features of these acquisitions is that in most of the cases the target companies
have been far bigger in size than the Indian acquirers. To take an example
Tetley?s turnover at the time of acquisitions was more than three times the
turnover of Tata tea. Similarly when Tata Steel acquired Corus Plc. Corus?s
turnover was four times more than Tata Steel?s turnover. With reference to
this, explain various sources of funds for cross boarder acquisitions.
[7]
Q ? 3 (A) Explain major provisions of Securities and Exchange Board of India
(Buy back of securities) Regulations, 1998.
[7]
Q ? 3 (B) Videsh Ltd. Is keen on reporting EPS of Rs. 6 per share after acquiring
Swadesh Ltd. The following financial data are given
Particulars Videsh Ltd. Swadesh Ltd.
Earning Per Share Rs. 5 Rs. 5
Market Price Per Share Rs. 60 Rs. 50
Number of shares 10,00,000 8,00,000
There is an expected synergy gain of 5 per cent. What exchange ratio will
result in a post merger EPS of Rs.6 for Videsh Ltd.?
[7]
OR
Q ? 3 (A) Mergers and acquisitions can have an adverse impact on healthy state of
competition prevailing in the markets. One of the objectives of the
competition act 2002 is to promote and sustain healthy state of competition
in markets. With respect to this explain in detail major provisions of
Competition act 2002 governing combinations.
[7]
Q ? 3 (B) Black & Co. is planning to acquire White & Co. The relevant financial
details of both the firms before acquisition are
Particulars Black & Co White & Co
Market Price per Share Rs. 70 Rs. 32
Number of shares 20 million 15 million
The merger is expected to bring the gain which has present value of Rs. 200
million. The exchange ratio agreed is 0.5. What is the true cost of merger
for Black & Co?
[7]
Q ? 4 (A) Explain the concept of strategic alliance. Why do companies enter into
strategic alliances? What are the implications of strategic alliance?
[7]
Q ? 4 (B) Cross border acquisitions are becoming very popular due to their capacity to
generate additional revenues for the acquirer. Globalization and liberalization
have made the business environment more conducive for them. While cross
border acquisitions are good, they do not always succeed due to number of
challenges faced by the acquirer before and after the acquisition. With
reference to this, explain various difficulties encountered in cross border
acquisitions.
[7]
OR
Q ? 4 (A) Explain the concept of Delisting. State the features of compulsory and
voluntary delisting.
[7]
Q ? 4 (B) The following financial information is available for company D, a
pharmaceutical company
PBDIT Rs. 18 Crore
Book value of assets Rs. 90 Crore
Sales Rs. 125 Crore
Based on evaluation of several pharmaceutical companies, companies A, B
and C have been found to be comparable to company D. Looking at the
characteristics of A, B and C following multiples are reasonable for company
D.
MV/ PBDIT 17
[7]
MV / Book value 3
MV / Sales 2.2
Find out value of D by using each of the above multiple
Q ? 5 Marriot?s Bondholder?s taken for a spin (or for a ride?)
In 1993 Marriott Corporation (MC) carried out a spinoff of its hotel
management business to shareholders. In 1992, MC had revenues of $8.7bn
and operating profits Di $496m. The group consisted of two broad categories
of businesses ? the lodging managemeat group including hotels that
contributed 52% of group revenues and 68% of operating profits, and
contract services catering and facilities management, airport and highway
concessions that accounted for the rest. With two-thirds of its operating profit
from lodgings related businesses, MC was generally viewed as a hotel
company.
MC pursued ambitious growth and profitability objectives in the hotel
business through a strategy of developing and then selling hotels while
retaining the right to manage them. Management sperated from the
ownership of these properties, required smaller capital to fund growth but
also reduced the volatility of cash flows. This low volatility allowed MG
management to maintain high levels of debt. MC's operating profit increased
yearly from 1986 to 1989 in both lodging management and contract services
group. However, in 1990-91 recession hit the, hotel occupancy rates and
profits. The contract service businesses also suffered. MC had built up a large
portfolio of hotel properties that were difficult to sell in the recession. It
replaced high-risk senior debt with lower-risk subordinated debt against the
background of falling credit rating of its debt.
Under the spinoff plan announced in October 1992, the lodging management,
catering and other service businesses were to be spun off into Marriott
International (MI). The parent, renamed Host Marriott (Host) retained
ownership of the hotel and real estate interests. MI, under a long-term
contract with Host, would manage the hotel properties. The Marriott family
would continue to oversee all of the businesses and the senior management
of MC would be split between MI and Host.
MC argued that the spinoff would benefit shareholders by
? allowing MI to exploit its growth opportunities in the management
business;
? allowing the capital markets to value MI more accurately because of
better financial information;
? giving shareholders better investment options between a high-growth
management company and a capital-intensive company with strong
cash flow and long-term capital appreciation.
[14]
FirstRanker.com - FirstRanker's Choice
Seat No.: ________ Enrolment No.___________
GUJARAT TECHNOLOGICAL UNIVERSITY
MBA ? SEMESTER 4 ? ? EXAMINATION ? SUMMER 2016
Subject Code: 2840201 Date: 05/05/2016
Subject Name: Mergers and Acquisitions (M&A)
Time: 10.30 AM TO 01.30 PM Total Marks: 70
Instructions:
1. Attempt all questions.
2. Make suitable assumptions wherever necessary.
3. Figures to the right indicate full marks.
Q ? 1(A) Choose the correct option [06]
1. If an automobile manufacturer were to acquire one of the firms listed below,
which acquisition would be called a horizontal merger?
A. A steel Mill B. A rival manufacturer
C. A tire producer D. A bank
2. The cost of a merger equals the
A. Cash paid for the target firm. B. Increase in total earnings less
price paid.
C. Premium paid over the target's
value as a separate entity.
D. None of the above
3. If two merged firms are shown to have a higher combined market value than
the sum of the individual market values, then:
A. Economic /Synergy gains are said
to have taken place
B. The firms were previously
under priced
C. The merger provides
diversification to investors.
D. There is no cost involved in
the merger.
4. What is the minimum size of mandatory open offer under Securities and
Exchange Board of India (Substantial Acquisition of Shares and Takeovers)
Regulations, 2011
A. 24% B. 25%
C. 26% D. 27%
5. A form of corporate restructuring involving transfer of all or substantially all
the assets and assets, liabilities, loans and business of one of business divisions
or undertaking to another company whose shares are allotted to the
shareholders of the transferor company on a proportionate basis and transferor
company continue to carry on at least one of the businesses.
A. Spin off B. Split up
C. Split off D. None of the above
6. A defense tactic in which the target company sells its highly profitable or
attractive business division to make takeover bid less attractive to the
raider.
A. Poison pills B. Shark Repellents
C. Blank Cheque D. Crown Jewels
Q ? 1 (B) Explain following terms [4]
1. Demerger
2. Joint Venture
3. Buy Back
4. Delisting
Q ? 1 (C) What is corporate restructuring? What are different motives of corporate
restructuring
[4]
Q ? 2 (A) State the major methods of effecting payment of consideration to the
shareholders of target company. Explain features of each method in detail.
[7]
Q ? 2 (B) Imperial Chemical Industries (ICI), a British company is looking at an
opportunity to enter the Indian market. Instead of entering on its own, ICI
wanted to make an entry by taking over a major player in the Indian market.
The company (ICI) shortlisted Asian Paints as the right target to fulfill its
aspirations. However Asian Paints is not willing to get acquired by Imperial
Chemical Industries (ICI). With reference to this, explain the concept of
hostile takeover and suggest various defense tactics that Asian Paints can use
to avoid the hostile takeover by Imperial Chemical Industries (ICI).
[7]
OR
Q ? 2 (B) After TATA tea acquired Tetley in early 2000, in last fifteen years a number
of Indian companies have made global acquisitions. One of the important
features of these acquisitions is that in most of the cases the target companies
have been far bigger in size than the Indian acquirers. To take an example
Tetley?s turnover at the time of acquisitions was more than three times the
turnover of Tata tea. Similarly when Tata Steel acquired Corus Plc. Corus?s
turnover was four times more than Tata Steel?s turnover. With reference to
this, explain various sources of funds for cross boarder acquisitions.
[7]
Q ? 3 (A) Explain major provisions of Securities and Exchange Board of India
(Buy back of securities) Regulations, 1998.
[7]
Q ? 3 (B) Videsh Ltd. Is keen on reporting EPS of Rs. 6 per share after acquiring
Swadesh Ltd. The following financial data are given
Particulars Videsh Ltd. Swadesh Ltd.
Earning Per Share Rs. 5 Rs. 5
Market Price Per Share Rs. 60 Rs. 50
Number of shares 10,00,000 8,00,000
There is an expected synergy gain of 5 per cent. What exchange ratio will
result in a post merger EPS of Rs.6 for Videsh Ltd.?
[7]
OR
Q ? 3 (A) Mergers and acquisitions can have an adverse impact on healthy state of
competition prevailing in the markets. One of the objectives of the
competition act 2002 is to promote and sustain healthy state of competition
in markets. With respect to this explain in detail major provisions of
Competition act 2002 governing combinations.
[7]
Q ? 3 (B) Black & Co. is planning to acquire White & Co. The relevant financial
details of both the firms before acquisition are
Particulars Black & Co White & Co
Market Price per Share Rs. 70 Rs. 32
Number of shares 20 million 15 million
The merger is expected to bring the gain which has present value of Rs. 200
million. The exchange ratio agreed is 0.5. What is the true cost of merger
for Black & Co?
[7]
Q ? 4 (A) Explain the concept of strategic alliance. Why do companies enter into
strategic alliances? What are the implications of strategic alliance?
[7]
Q ? 4 (B) Cross border acquisitions are becoming very popular due to their capacity to
generate additional revenues for the acquirer. Globalization and liberalization
have made the business environment more conducive for them. While cross
border acquisitions are good, they do not always succeed due to number of
challenges faced by the acquirer before and after the acquisition. With
reference to this, explain various difficulties encountered in cross border
acquisitions.
[7]
OR
Q ? 4 (A) Explain the concept of Delisting. State the features of compulsory and
voluntary delisting.
[7]
Q ? 4 (B) The following financial information is available for company D, a
pharmaceutical company
PBDIT Rs. 18 Crore
Book value of assets Rs. 90 Crore
Sales Rs. 125 Crore
Based on evaluation of several pharmaceutical companies, companies A, B
and C have been found to be comparable to company D. Looking at the
characteristics of A, B and C following multiples are reasonable for company
D.
MV/ PBDIT 17
[7]
MV / Book value 3
MV / Sales 2.2
Find out value of D by using each of the above multiple
Q ? 5 Marriot?s Bondholder?s taken for a spin (or for a ride?)
In 1993 Marriott Corporation (MC) carried out a spinoff of its hotel
management business to shareholders. In 1992, MC had revenues of $8.7bn
and operating profits Di $496m. The group consisted of two broad categories
of businesses ? the lodging managemeat group including hotels that
contributed 52% of group revenues and 68% of operating profits, and
contract services catering and facilities management, airport and highway
concessions that accounted for the rest. With two-thirds of its operating profit
from lodgings related businesses, MC was generally viewed as a hotel
company.
MC pursued ambitious growth and profitability objectives in the hotel
business through a strategy of developing and then selling hotels while
retaining the right to manage them. Management sperated from the
ownership of these properties, required smaller capital to fund growth but
also reduced the volatility of cash flows. This low volatility allowed MG
management to maintain high levels of debt. MC's operating profit increased
yearly from 1986 to 1989 in both lodging management and contract services
group. However, in 1990-91 recession hit the, hotel occupancy rates and
profits. The contract service businesses also suffered. MC had built up a large
portfolio of hotel properties that were difficult to sell in the recession. It
replaced high-risk senior debt with lower-risk subordinated debt against the
background of falling credit rating of its debt.
Under the spinoff plan announced in October 1992, the lodging management,
catering and other service businesses were to be spun off into Marriott
International (MI). The parent, renamed Host Marriott (Host) retained
ownership of the hotel and real estate interests. MI, under a long-term
contract with Host, would manage the hotel properties. The Marriott family
would continue to oversee all of the businesses and the senior management
of MC would be split between MI and Host.
MC argued that the spinoff would benefit shareholders by
? allowing MI to exploit its growth opportunities in the management
business;
? allowing the capital markets to value MI more accurately because of
better financial information;
? giving shareholders better investment options between a high-growth
management company and a capital-intensive company with strong
cash flow and long-term capital appreciation.
[14]
The initial spinoff proposal allocated most of MC's long-term debt to Host.
When compared with the level of assets and operating cash flow, this
allocation made Host vastly more risky than MT as shown below. This
sparked considerable resistance from creditors who felt their debt was being
put at high risk since most of it was being assigned to cyclical property
business and very little to the management business with more stable cash
flow. The interest cover ratio shows higher risk clearly. Such an allocation
reduces the default risk faced by the shareholders and increases it for
creditors, thereby transferring some of the corporate value from creditors to
shareholders.
Assets/Liabilities MC
First Proposal Final Proposal
MI Host MI Host
Total assets 6333 2360 4620 3017 3888
Proprietary and equipment 3672 360 3310 772 2689
Current Liabilities 1189 1130 210 1280 394
Long term debt 2891 20 2870 899 2313
EBITDA/Interest expenses 2.6 20.3 1.3 6.5 1.8
Given the storm of protest from creditors and their Class action suits, MC
revised the spin off proposal and reallocated more debt to the management
business. This mitigated the additional risk faced by the creditors. MC was
forced to accept several conditions, such as repurchase of debt, stricter
covenants, higher coupon rate on new debt, etc. to the benefit of creditors.
The revised spinoff plan was implemented.
Robert Parrino estimated the market-adjusted bondholder loss at $195m and
industry adjusted shareholder gains at $81m, Thus the spinoff caused a
$114m decline in the total value of these securities from spinoff
announcement to distribution. The spinoff failed to create shareholder value
in the period surrounding the spin off and destroyed the bondholder value.
What could be the reasons for this? There are several direct and indirect costs
to a spinoff? direct transaction costs, loss of ability to offset Host's losses
with MI?s profits and thereby save on corporation tax, the increased coupon
on new debt, value of warrants issued to creditors, duplication of accounting
and financial systems, higher costs of new security issues, etc.
The Marriott family continued to maintain control over the entire firm. The
spinoff limited the potential losses to Marriott family from any default on
debt. The separation improved the management business's debt capacity and
this would allow the family to pursue growth in this business aggressively
without losing control.
1. Why did Marriott decide to go for a spinoff?
2. What is the initial structure of the spinoff? Why MC was required to
change it?
3. Is there a conflict of interests in spinoffs among various stakeholders?
4. How were these resolved in the Marriott case?
OR
FirstRanker.com - FirstRanker's Choice
Seat No.: ________ Enrolment No.___________
GUJARAT TECHNOLOGICAL UNIVERSITY
MBA ? SEMESTER 4 ? ? EXAMINATION ? SUMMER 2016
Subject Code: 2840201 Date: 05/05/2016
Subject Name: Mergers and Acquisitions (M&A)
Time: 10.30 AM TO 01.30 PM Total Marks: 70
Instructions:
1. Attempt all questions.
2. Make suitable assumptions wherever necessary.
3. Figures to the right indicate full marks.
Q ? 1(A) Choose the correct option [06]
1. If an automobile manufacturer were to acquire one of the firms listed below,
which acquisition would be called a horizontal merger?
A. A steel Mill B. A rival manufacturer
C. A tire producer D. A bank
2. The cost of a merger equals the
A. Cash paid for the target firm. B. Increase in total earnings less
price paid.
C. Premium paid over the target's
value as a separate entity.
D. None of the above
3. If two merged firms are shown to have a higher combined market value than
the sum of the individual market values, then:
A. Economic /Synergy gains are said
to have taken place
B. The firms were previously
under priced
C. The merger provides
diversification to investors.
D. There is no cost involved in
the merger.
4. What is the minimum size of mandatory open offer under Securities and
Exchange Board of India (Substantial Acquisition of Shares and Takeovers)
Regulations, 2011
A. 24% B. 25%
C. 26% D. 27%
5. A form of corporate restructuring involving transfer of all or substantially all
the assets and assets, liabilities, loans and business of one of business divisions
or undertaking to another company whose shares are allotted to the
shareholders of the transferor company on a proportionate basis and transferor
company continue to carry on at least one of the businesses.
A. Spin off B. Split up
C. Split off D. None of the above
6. A defense tactic in which the target company sells its highly profitable or
attractive business division to make takeover bid less attractive to the
raider.
A. Poison pills B. Shark Repellents
C. Blank Cheque D. Crown Jewels
Q ? 1 (B) Explain following terms [4]
1. Demerger
2. Joint Venture
3. Buy Back
4. Delisting
Q ? 1 (C) What is corporate restructuring? What are different motives of corporate
restructuring
[4]
Q ? 2 (A) State the major methods of effecting payment of consideration to the
shareholders of target company. Explain features of each method in detail.
[7]
Q ? 2 (B) Imperial Chemical Industries (ICI), a British company is looking at an
opportunity to enter the Indian market. Instead of entering on its own, ICI
wanted to make an entry by taking over a major player in the Indian market.
The company (ICI) shortlisted Asian Paints as the right target to fulfill its
aspirations. However Asian Paints is not willing to get acquired by Imperial
Chemical Industries (ICI). With reference to this, explain the concept of
hostile takeover and suggest various defense tactics that Asian Paints can use
to avoid the hostile takeover by Imperial Chemical Industries (ICI).
[7]
OR
Q ? 2 (B) After TATA tea acquired Tetley in early 2000, in last fifteen years a number
of Indian companies have made global acquisitions. One of the important
features of these acquisitions is that in most of the cases the target companies
have been far bigger in size than the Indian acquirers. To take an example
Tetley?s turnover at the time of acquisitions was more than three times the
turnover of Tata tea. Similarly when Tata Steel acquired Corus Plc. Corus?s
turnover was four times more than Tata Steel?s turnover. With reference to
this, explain various sources of funds for cross boarder acquisitions.
[7]
Q ? 3 (A) Explain major provisions of Securities and Exchange Board of India
(Buy back of securities) Regulations, 1998.
[7]
Q ? 3 (B) Videsh Ltd. Is keen on reporting EPS of Rs. 6 per share after acquiring
Swadesh Ltd. The following financial data are given
Particulars Videsh Ltd. Swadesh Ltd.
Earning Per Share Rs. 5 Rs. 5
Market Price Per Share Rs. 60 Rs. 50
Number of shares 10,00,000 8,00,000
There is an expected synergy gain of 5 per cent. What exchange ratio will
result in a post merger EPS of Rs.6 for Videsh Ltd.?
[7]
OR
Q ? 3 (A) Mergers and acquisitions can have an adverse impact on healthy state of
competition prevailing in the markets. One of the objectives of the
competition act 2002 is to promote and sustain healthy state of competition
in markets. With respect to this explain in detail major provisions of
Competition act 2002 governing combinations.
[7]
Q ? 3 (B) Black & Co. is planning to acquire White & Co. The relevant financial
details of both the firms before acquisition are
Particulars Black & Co White & Co
Market Price per Share Rs. 70 Rs. 32
Number of shares 20 million 15 million
The merger is expected to bring the gain which has present value of Rs. 200
million. The exchange ratio agreed is 0.5. What is the true cost of merger
for Black & Co?
[7]
Q ? 4 (A) Explain the concept of strategic alliance. Why do companies enter into
strategic alliances? What are the implications of strategic alliance?
[7]
Q ? 4 (B) Cross border acquisitions are becoming very popular due to their capacity to
generate additional revenues for the acquirer. Globalization and liberalization
have made the business environment more conducive for them. While cross
border acquisitions are good, they do not always succeed due to number of
challenges faced by the acquirer before and after the acquisition. With
reference to this, explain various difficulties encountered in cross border
acquisitions.
[7]
OR
Q ? 4 (A) Explain the concept of Delisting. State the features of compulsory and
voluntary delisting.
[7]
Q ? 4 (B) The following financial information is available for company D, a
pharmaceutical company
PBDIT Rs. 18 Crore
Book value of assets Rs. 90 Crore
Sales Rs. 125 Crore
Based on evaluation of several pharmaceutical companies, companies A, B
and C have been found to be comparable to company D. Looking at the
characteristics of A, B and C following multiples are reasonable for company
D.
MV/ PBDIT 17
[7]
MV / Book value 3
MV / Sales 2.2
Find out value of D by using each of the above multiple
Q ? 5 Marriot?s Bondholder?s taken for a spin (or for a ride?)
In 1993 Marriott Corporation (MC) carried out a spinoff of its hotel
management business to shareholders. In 1992, MC had revenues of $8.7bn
and operating profits Di $496m. The group consisted of two broad categories
of businesses ? the lodging managemeat group including hotels that
contributed 52% of group revenues and 68% of operating profits, and
contract services catering and facilities management, airport and highway
concessions that accounted for the rest. With two-thirds of its operating profit
from lodgings related businesses, MC was generally viewed as a hotel
company.
MC pursued ambitious growth and profitability objectives in the hotel
business through a strategy of developing and then selling hotels while
retaining the right to manage them. Management sperated from the
ownership of these properties, required smaller capital to fund growth but
also reduced the volatility of cash flows. This low volatility allowed MG
management to maintain high levels of debt. MC's operating profit increased
yearly from 1986 to 1989 in both lodging management and contract services
group. However, in 1990-91 recession hit the, hotel occupancy rates and
profits. The contract service businesses also suffered. MC had built up a large
portfolio of hotel properties that were difficult to sell in the recession. It
replaced high-risk senior debt with lower-risk subordinated debt against the
background of falling credit rating of its debt.
Under the spinoff plan announced in October 1992, the lodging management,
catering and other service businesses were to be spun off into Marriott
International (MI). The parent, renamed Host Marriott (Host) retained
ownership of the hotel and real estate interests. MI, under a long-term
contract with Host, would manage the hotel properties. The Marriott family
would continue to oversee all of the businesses and the senior management
of MC would be split between MI and Host.
MC argued that the spinoff would benefit shareholders by
? allowing MI to exploit its growth opportunities in the management
business;
? allowing the capital markets to value MI more accurately because of
better financial information;
? giving shareholders better investment options between a high-growth
management company and a capital-intensive company with strong
cash flow and long-term capital appreciation.
[14]
The initial spinoff proposal allocated most of MC's long-term debt to Host.
When compared with the level of assets and operating cash flow, this
allocation made Host vastly more risky than MT as shown below. This
sparked considerable resistance from creditors who felt their debt was being
put at high risk since most of it was being assigned to cyclical property
business and very little to the management business with more stable cash
flow. The interest cover ratio shows higher risk clearly. Such an allocation
reduces the default risk faced by the shareholders and increases it for
creditors, thereby transferring some of the corporate value from creditors to
shareholders.
Assets/Liabilities MC
First Proposal Final Proposal
MI Host MI Host
Total assets 6333 2360 4620 3017 3888
Proprietary and equipment 3672 360 3310 772 2689
Current Liabilities 1189 1130 210 1280 394
Long term debt 2891 20 2870 899 2313
EBITDA/Interest expenses 2.6 20.3 1.3 6.5 1.8
Given the storm of protest from creditors and their Class action suits, MC
revised the spin off proposal and reallocated more debt to the management
business. This mitigated the additional risk faced by the creditors. MC was
forced to accept several conditions, such as repurchase of debt, stricter
covenants, higher coupon rate on new debt, etc. to the benefit of creditors.
The revised spinoff plan was implemented.
Robert Parrino estimated the market-adjusted bondholder loss at $195m and
industry adjusted shareholder gains at $81m, Thus the spinoff caused a
$114m decline in the total value of these securities from spinoff
announcement to distribution. The spinoff failed to create shareholder value
in the period surrounding the spin off and destroyed the bondholder value.
What could be the reasons for this? There are several direct and indirect costs
to a spinoff? direct transaction costs, loss of ability to offset Host's losses
with MI?s profits and thereby save on corporation tax, the increased coupon
on new debt, value of warrants issued to creditors, duplication of accounting
and financial systems, higher costs of new security issues, etc.
The Marriott family continued to maintain control over the entire firm. The
spinoff limited the potential losses to Marriott family from any default on
debt. The separation improved the management business's debt capacity and
this would allow the family to pursue growth in this business aggressively
without losing control.
1. Why did Marriott decide to go for a spinoff?
2. What is the initial structure of the spinoff? Why MC was required to
change it?
3. Is there a conflict of interests in spinoffs among various stakeholders?
4. How were these resolved in the Marriott case?
OR
Q ? 5
Hindalco Novelis Deal
Introduction
In early 2007, Hindalco Industries Ltd (Hindalco), the flagship company of
Aditya Birla Group, announced that it would acquire the Canadian company
Novelis. The transaction would make Hindalco the world's largest aluminum
rolling company and one of the biggest producers of primary aluminium in
Asia as well as India's leading copper producer. Novelis was to be acquired
in an all cash deal valued at approximately $6 billion, including debt. Under
the terms of the agreement, Novelis shareholders would receive $44.93 in
cash for each outstanding common share.
The Chairman of the Aditya Birla Group, Kumar Mangalam Birla was of the
opinion that aluminium was a core business with enormous growth potentials
in revenues and earnings. The acquisition of Novelis was a step in this
direction as it was felt that the combination would establish an integrated
producer with low-cost alumina and aluminium facilities combined with
high-end rolling capabilities and a global footprint.
Industry Overview
The global aluminium industry is seeing increased scope in packaging
applications. The other sectors using aluminium increasingly are power,
infrastructure and automobiles. These sectors shall provide the much-needed
fillip to the aluminium industry and demand is expected to grow rapidly and
attain double-digit growth. Domestic and global demand will rise over a
long-term period. A number of other factors influence the market of
aluminium, such as lowering of import duties, domestic realization of
aluminium majors, pressure on Hindalco and Nalco, reduction in buffer on
international prices, greater linkage to international prices, and volatility in
financials. To negate the effect of these factors, producers have started
moving downstream to mitigate higher volatility. The key features of the
industry are as follows:
? The industry is highly concentrated with only five primary plants in
the country.
? All the producers use the Bayer- Hall?Heroult technology.
? The industry has a very high energy cost, 40% of manufacturing cost
for metal and 30% for rolled products.
? Technology cost is very high and this is the main barrier in achieving
high energy efficiency.
? The main aim of the industry is energy conservation and reduced
consumption.
? The industry faces stiff competition from imports.
Aluminium is a power-intensive industry with one tonne of aluminium
requiring over 15,000 KW of power. Power constitutes almost 40% of the
[14]
FirstRanker.com - FirstRanker's Choice
Seat No.: ________ Enrolment No.___________
GUJARAT TECHNOLOGICAL UNIVERSITY
MBA ? SEMESTER 4 ? ? EXAMINATION ? SUMMER 2016
Subject Code: 2840201 Date: 05/05/2016
Subject Name: Mergers and Acquisitions (M&A)
Time: 10.30 AM TO 01.30 PM Total Marks: 70
Instructions:
1. Attempt all questions.
2. Make suitable assumptions wherever necessary.
3. Figures to the right indicate full marks.
Q ? 1(A) Choose the correct option [06]
1. If an automobile manufacturer were to acquire one of the firms listed below,
which acquisition would be called a horizontal merger?
A. A steel Mill B. A rival manufacturer
C. A tire producer D. A bank
2. The cost of a merger equals the
A. Cash paid for the target firm. B. Increase in total earnings less
price paid.
C. Premium paid over the target's
value as a separate entity.
D. None of the above
3. If two merged firms are shown to have a higher combined market value than
the sum of the individual market values, then:
A. Economic /Synergy gains are said
to have taken place
B. The firms were previously
under priced
C. The merger provides
diversification to investors.
D. There is no cost involved in
the merger.
4. What is the minimum size of mandatory open offer under Securities and
Exchange Board of India (Substantial Acquisition of Shares and Takeovers)
Regulations, 2011
A. 24% B. 25%
C. 26% D. 27%
5. A form of corporate restructuring involving transfer of all or substantially all
the assets and assets, liabilities, loans and business of one of business divisions
or undertaking to another company whose shares are allotted to the
shareholders of the transferor company on a proportionate basis and transferor
company continue to carry on at least one of the businesses.
A. Spin off B. Split up
C. Split off D. None of the above
6. A defense tactic in which the target company sells its highly profitable or
attractive business division to make takeover bid less attractive to the
raider.
A. Poison pills B. Shark Repellents
C. Blank Cheque D. Crown Jewels
Q ? 1 (B) Explain following terms [4]
1. Demerger
2. Joint Venture
3. Buy Back
4. Delisting
Q ? 1 (C) What is corporate restructuring? What are different motives of corporate
restructuring
[4]
Q ? 2 (A) State the major methods of effecting payment of consideration to the
shareholders of target company. Explain features of each method in detail.
[7]
Q ? 2 (B) Imperial Chemical Industries (ICI), a British company is looking at an
opportunity to enter the Indian market. Instead of entering on its own, ICI
wanted to make an entry by taking over a major player in the Indian market.
The company (ICI) shortlisted Asian Paints as the right target to fulfill its
aspirations. However Asian Paints is not willing to get acquired by Imperial
Chemical Industries (ICI). With reference to this, explain the concept of
hostile takeover and suggest various defense tactics that Asian Paints can use
to avoid the hostile takeover by Imperial Chemical Industries (ICI).
[7]
OR
Q ? 2 (B) After TATA tea acquired Tetley in early 2000, in last fifteen years a number
of Indian companies have made global acquisitions. One of the important
features of these acquisitions is that in most of the cases the target companies
have been far bigger in size than the Indian acquirers. To take an example
Tetley?s turnover at the time of acquisitions was more than three times the
turnover of Tata tea. Similarly when Tata Steel acquired Corus Plc. Corus?s
turnover was four times more than Tata Steel?s turnover. With reference to
this, explain various sources of funds for cross boarder acquisitions.
[7]
Q ? 3 (A) Explain major provisions of Securities and Exchange Board of India
(Buy back of securities) Regulations, 1998.
[7]
Q ? 3 (B) Videsh Ltd. Is keen on reporting EPS of Rs. 6 per share after acquiring
Swadesh Ltd. The following financial data are given
Particulars Videsh Ltd. Swadesh Ltd.
Earning Per Share Rs. 5 Rs. 5
Market Price Per Share Rs. 60 Rs. 50
Number of shares 10,00,000 8,00,000
There is an expected synergy gain of 5 per cent. What exchange ratio will
result in a post merger EPS of Rs.6 for Videsh Ltd.?
[7]
OR
Q ? 3 (A) Mergers and acquisitions can have an adverse impact on healthy state of
competition prevailing in the markets. One of the objectives of the
competition act 2002 is to promote and sustain healthy state of competition
in markets. With respect to this explain in detail major provisions of
Competition act 2002 governing combinations.
[7]
Q ? 3 (B) Black & Co. is planning to acquire White & Co. The relevant financial
details of both the firms before acquisition are
Particulars Black & Co White & Co
Market Price per Share Rs. 70 Rs. 32
Number of shares 20 million 15 million
The merger is expected to bring the gain which has present value of Rs. 200
million. The exchange ratio agreed is 0.5. What is the true cost of merger
for Black & Co?
[7]
Q ? 4 (A) Explain the concept of strategic alliance. Why do companies enter into
strategic alliances? What are the implications of strategic alliance?
[7]
Q ? 4 (B) Cross border acquisitions are becoming very popular due to their capacity to
generate additional revenues for the acquirer. Globalization and liberalization
have made the business environment more conducive for them. While cross
border acquisitions are good, they do not always succeed due to number of
challenges faced by the acquirer before and after the acquisition. With
reference to this, explain various difficulties encountered in cross border
acquisitions.
[7]
OR
Q ? 4 (A) Explain the concept of Delisting. State the features of compulsory and
voluntary delisting.
[7]
Q ? 4 (B) The following financial information is available for company D, a
pharmaceutical company
PBDIT Rs. 18 Crore
Book value of assets Rs. 90 Crore
Sales Rs. 125 Crore
Based on evaluation of several pharmaceutical companies, companies A, B
and C have been found to be comparable to company D. Looking at the
characteristics of A, B and C following multiples are reasonable for company
D.
MV/ PBDIT 17
[7]
MV / Book value 3
MV / Sales 2.2
Find out value of D by using each of the above multiple
Q ? 5 Marriot?s Bondholder?s taken for a spin (or for a ride?)
In 1993 Marriott Corporation (MC) carried out a spinoff of its hotel
management business to shareholders. In 1992, MC had revenues of $8.7bn
and operating profits Di $496m. The group consisted of two broad categories
of businesses ? the lodging managemeat group including hotels that
contributed 52% of group revenues and 68% of operating profits, and
contract services catering and facilities management, airport and highway
concessions that accounted for the rest. With two-thirds of its operating profit
from lodgings related businesses, MC was generally viewed as a hotel
company.
MC pursued ambitious growth and profitability objectives in the hotel
business through a strategy of developing and then selling hotels while
retaining the right to manage them. Management sperated from the
ownership of these properties, required smaller capital to fund growth but
also reduced the volatility of cash flows. This low volatility allowed MG
management to maintain high levels of debt. MC's operating profit increased
yearly from 1986 to 1989 in both lodging management and contract services
group. However, in 1990-91 recession hit the, hotel occupancy rates and
profits. The contract service businesses also suffered. MC had built up a large
portfolio of hotel properties that were difficult to sell in the recession. It
replaced high-risk senior debt with lower-risk subordinated debt against the
background of falling credit rating of its debt.
Under the spinoff plan announced in October 1992, the lodging management,
catering and other service businesses were to be spun off into Marriott
International (MI). The parent, renamed Host Marriott (Host) retained
ownership of the hotel and real estate interests. MI, under a long-term
contract with Host, would manage the hotel properties. The Marriott family
would continue to oversee all of the businesses and the senior management
of MC would be split between MI and Host.
MC argued that the spinoff would benefit shareholders by
? allowing MI to exploit its growth opportunities in the management
business;
? allowing the capital markets to value MI more accurately because of
better financial information;
? giving shareholders better investment options between a high-growth
management company and a capital-intensive company with strong
cash flow and long-term capital appreciation.
[14]
The initial spinoff proposal allocated most of MC's long-term debt to Host.
When compared with the level of assets and operating cash flow, this
allocation made Host vastly more risky than MT as shown below. This
sparked considerable resistance from creditors who felt their debt was being
put at high risk since most of it was being assigned to cyclical property
business and very little to the management business with more stable cash
flow. The interest cover ratio shows higher risk clearly. Such an allocation
reduces the default risk faced by the shareholders and increases it for
creditors, thereby transferring some of the corporate value from creditors to
shareholders.
Assets/Liabilities MC
First Proposal Final Proposal
MI Host MI Host
Total assets 6333 2360 4620 3017 3888
Proprietary and equipment 3672 360 3310 772 2689
Current Liabilities 1189 1130 210 1280 394
Long term debt 2891 20 2870 899 2313
EBITDA/Interest expenses 2.6 20.3 1.3 6.5 1.8
Given the storm of protest from creditors and their Class action suits, MC
revised the spin off proposal and reallocated more debt to the management
business. This mitigated the additional risk faced by the creditors. MC was
forced to accept several conditions, such as repurchase of debt, stricter
covenants, higher coupon rate on new debt, etc. to the benefit of creditors.
The revised spinoff plan was implemented.
Robert Parrino estimated the market-adjusted bondholder loss at $195m and
industry adjusted shareholder gains at $81m, Thus the spinoff caused a
$114m decline in the total value of these securities from spinoff
announcement to distribution. The spinoff failed to create shareholder value
in the period surrounding the spin off and destroyed the bondholder value.
What could be the reasons for this? There are several direct and indirect costs
to a spinoff? direct transaction costs, loss of ability to offset Host's losses
with MI?s profits and thereby save on corporation tax, the increased coupon
on new debt, value of warrants issued to creditors, duplication of accounting
and financial systems, higher costs of new security issues, etc.
The Marriott family continued to maintain control over the entire firm. The
spinoff limited the potential losses to Marriott family from any default on
debt. The separation improved the management business's debt capacity and
this would allow the family to pursue growth in this business aggressively
without losing control.
1. Why did Marriott decide to go for a spinoff?
2. What is the initial structure of the spinoff? Why MC was required to
change it?
3. Is there a conflict of interests in spinoffs among various stakeholders?
4. How were these resolved in the Marriott case?
OR
Q ? 5
Hindalco Novelis Deal
Introduction
In early 2007, Hindalco Industries Ltd (Hindalco), the flagship company of
Aditya Birla Group, announced that it would acquire the Canadian company
Novelis. The transaction would make Hindalco the world's largest aluminum
rolling company and one of the biggest producers of primary aluminium in
Asia as well as India's leading copper producer. Novelis was to be acquired
in an all cash deal valued at approximately $6 billion, including debt. Under
the terms of the agreement, Novelis shareholders would receive $44.93 in
cash for each outstanding common share.
The Chairman of the Aditya Birla Group, Kumar Mangalam Birla was of the
opinion that aluminium was a core business with enormous growth potentials
in revenues and earnings. The acquisition of Novelis was a step in this
direction as it was felt that the combination would establish an integrated
producer with low-cost alumina and aluminium facilities combined with
high-end rolling capabilities and a global footprint.
Industry Overview
The global aluminium industry is seeing increased scope in packaging
applications. The other sectors using aluminium increasingly are power,
infrastructure and automobiles. These sectors shall provide the much-needed
fillip to the aluminium industry and demand is expected to grow rapidly and
attain double-digit growth. Domestic and global demand will rise over a
long-term period. A number of other factors influence the market of
aluminium, such as lowering of import duties, domestic realization of
aluminium majors, pressure on Hindalco and Nalco, reduction in buffer on
international prices, greater linkage to international prices, and volatility in
financials. To negate the effect of these factors, producers have started
moving downstream to mitigate higher volatility. The key features of the
industry are as follows:
? The industry is highly concentrated with only five primary plants in
the country.
? All the producers use the Bayer- Hall?Heroult technology.
? The industry has a very high energy cost, 40% of manufacturing cost
for metal and 30% for rolled products.
? Technology cost is very high and this is the main barrier in achieving
high energy efficiency.
? The main aim of the industry is energy conservation and reduced
consumption.
? The industry faces stiff competition from imports.
Aluminium is a power-intensive industry with one tonne of aluminium
requiring over 15,000 KW of power. Power constitutes almost 40% of the
[14]
total cost of production. Hindalco enjoys an advantage in this respect with
the smelters backed by captive power plants, making it one of the lowest cost
producers globally.
As regards Hindalco, the following issues were found to be prominent: large
upstream and midstream production, cyclical business linked to commodity
prices, low cost commodity operations, proximity and good access to Asian
markets. With regard to Novelis, the factors that were crucial were market
leading downstream portfolio, stable cash flows, substantive proprietary
technology-led operations, and leading world market position.
Hindalco?The Aluminium Giant
Hindalco, the metals flagship company of the Aditya Birla Group, is the
world's largest aluminium rolling company and one of the biggest producers
of primary aluminium in Asia. Its copper smelter is the world's largest custom
smelter at a single location. Established in 1958, Hindalco commissioned the
aluminium facility at Renukoot in eastern Uttar Pradesh in 1962. The
company grew from strength to strength through acquisitions and mergers
with Indal and Birla Copper. With the acquisitions of the Nifty and Mt
Gordon copper mines in Australia in 2003, its position was strengthened in
value-added alumina, aluminium, and copper products.
Its aluminium units across the globe encompass the entire gamut of
operations, from bauxite mining, alumina refining, and aluminium smelting
to downstream rolling, extrusions, foils, along with captive power plants and
coal mines. Similarly its copper unit, Birla Copper, produces copper
cathodes, continuous cast copper rods, and other by-products such as gold,
silver, and DAP fertilizers. The Birla Nifty copper mine consists of an
underground mine, heap leach pads, and a solvent extraction and
electrowinning (SXEW) processing plant, which produces copper cathode.
The Mt Gordon copper operation consists of an underground mine and a
copper concentrate plant. Until recently, the operation produced copper
cathode through the ferric leach process. Nifty and Mt Gordon have entered
into a long-term 'life of mine' offtake agreement with Hindalco to supply
copper concentrate to the copper smelter located at Dahej, Gujarat.
A strong presence across the value chain and synergies between operations
have provided Hindalco with a dominant share in the value-added products
market. The ever-expanding market for value-added products and services
has provided the opportunity for the launch of three new products?Everlast
roofing sheets, Freshwrapp kitchen foil, and Freshpakk semi-rigid containers.
Novelis?The Canadian Giant
FirstRanker.com - FirstRanker's Choice
Seat No.: ________ Enrolment No.___________
GUJARAT TECHNOLOGICAL UNIVERSITY
MBA ? SEMESTER 4 ? ? EXAMINATION ? SUMMER 2016
Subject Code: 2840201 Date: 05/05/2016
Subject Name: Mergers and Acquisitions (M&A)
Time: 10.30 AM TO 01.30 PM Total Marks: 70
Instructions:
1. Attempt all questions.
2. Make suitable assumptions wherever necessary.
3. Figures to the right indicate full marks.
Q ? 1(A) Choose the correct option [06]
1. If an automobile manufacturer were to acquire one of the firms listed below,
which acquisition would be called a horizontal merger?
A. A steel Mill B. A rival manufacturer
C. A tire producer D. A bank
2. The cost of a merger equals the
A. Cash paid for the target firm. B. Increase in total earnings less
price paid.
C. Premium paid over the target's
value as a separate entity.
D. None of the above
3. If two merged firms are shown to have a higher combined market value than
the sum of the individual market values, then:
A. Economic /Synergy gains are said
to have taken place
B. The firms were previously
under priced
C. The merger provides
diversification to investors.
D. There is no cost involved in
the merger.
4. What is the minimum size of mandatory open offer under Securities and
Exchange Board of India (Substantial Acquisition of Shares and Takeovers)
Regulations, 2011
A. 24% B. 25%
C. 26% D. 27%
5. A form of corporate restructuring involving transfer of all or substantially all
the assets and assets, liabilities, loans and business of one of business divisions
or undertaking to another company whose shares are allotted to the
shareholders of the transferor company on a proportionate basis and transferor
company continue to carry on at least one of the businesses.
A. Spin off B. Split up
C. Split off D. None of the above
6. A defense tactic in which the target company sells its highly profitable or
attractive business division to make takeover bid less attractive to the
raider.
A. Poison pills B. Shark Repellents
C. Blank Cheque D. Crown Jewels
Q ? 1 (B) Explain following terms [4]
1. Demerger
2. Joint Venture
3. Buy Back
4. Delisting
Q ? 1 (C) What is corporate restructuring? What are different motives of corporate
restructuring
[4]
Q ? 2 (A) State the major methods of effecting payment of consideration to the
shareholders of target company. Explain features of each method in detail.
[7]
Q ? 2 (B) Imperial Chemical Industries (ICI), a British company is looking at an
opportunity to enter the Indian market. Instead of entering on its own, ICI
wanted to make an entry by taking over a major player in the Indian market.
The company (ICI) shortlisted Asian Paints as the right target to fulfill its
aspirations. However Asian Paints is not willing to get acquired by Imperial
Chemical Industries (ICI). With reference to this, explain the concept of
hostile takeover and suggest various defense tactics that Asian Paints can use
to avoid the hostile takeover by Imperial Chemical Industries (ICI).
[7]
OR
Q ? 2 (B) After TATA tea acquired Tetley in early 2000, in last fifteen years a number
of Indian companies have made global acquisitions. One of the important
features of these acquisitions is that in most of the cases the target companies
have been far bigger in size than the Indian acquirers. To take an example
Tetley?s turnover at the time of acquisitions was more than three times the
turnover of Tata tea. Similarly when Tata Steel acquired Corus Plc. Corus?s
turnover was four times more than Tata Steel?s turnover. With reference to
this, explain various sources of funds for cross boarder acquisitions.
[7]
Q ? 3 (A) Explain major provisions of Securities and Exchange Board of India
(Buy back of securities) Regulations, 1998.
[7]
Q ? 3 (B) Videsh Ltd. Is keen on reporting EPS of Rs. 6 per share after acquiring
Swadesh Ltd. The following financial data are given
Particulars Videsh Ltd. Swadesh Ltd.
Earning Per Share Rs. 5 Rs. 5
Market Price Per Share Rs. 60 Rs. 50
Number of shares 10,00,000 8,00,000
There is an expected synergy gain of 5 per cent. What exchange ratio will
result in a post merger EPS of Rs.6 for Videsh Ltd.?
[7]
OR
Q ? 3 (A) Mergers and acquisitions can have an adverse impact on healthy state of
competition prevailing in the markets. One of the objectives of the
competition act 2002 is to promote and sustain healthy state of competition
in markets. With respect to this explain in detail major provisions of
Competition act 2002 governing combinations.
[7]
Q ? 3 (B) Black & Co. is planning to acquire White & Co. The relevant financial
details of both the firms before acquisition are
Particulars Black & Co White & Co
Market Price per Share Rs. 70 Rs. 32
Number of shares 20 million 15 million
The merger is expected to bring the gain which has present value of Rs. 200
million. The exchange ratio agreed is 0.5. What is the true cost of merger
for Black & Co?
[7]
Q ? 4 (A) Explain the concept of strategic alliance. Why do companies enter into
strategic alliances? What are the implications of strategic alliance?
[7]
Q ? 4 (B) Cross border acquisitions are becoming very popular due to their capacity to
generate additional revenues for the acquirer. Globalization and liberalization
have made the business environment more conducive for them. While cross
border acquisitions are good, they do not always succeed due to number of
challenges faced by the acquirer before and after the acquisition. With
reference to this, explain various difficulties encountered in cross border
acquisitions.
[7]
OR
Q ? 4 (A) Explain the concept of Delisting. State the features of compulsory and
voluntary delisting.
[7]
Q ? 4 (B) The following financial information is available for company D, a
pharmaceutical company
PBDIT Rs. 18 Crore
Book value of assets Rs. 90 Crore
Sales Rs. 125 Crore
Based on evaluation of several pharmaceutical companies, companies A, B
and C have been found to be comparable to company D. Looking at the
characteristics of A, B and C following multiples are reasonable for company
D.
MV/ PBDIT 17
[7]
MV / Book value 3
MV / Sales 2.2
Find out value of D by using each of the above multiple
Q ? 5 Marriot?s Bondholder?s taken for a spin (or for a ride?)
In 1993 Marriott Corporation (MC) carried out a spinoff of its hotel
management business to shareholders. In 1992, MC had revenues of $8.7bn
and operating profits Di $496m. The group consisted of two broad categories
of businesses ? the lodging managemeat group including hotels that
contributed 52% of group revenues and 68% of operating profits, and
contract services catering and facilities management, airport and highway
concessions that accounted for the rest. With two-thirds of its operating profit
from lodgings related businesses, MC was generally viewed as a hotel
company.
MC pursued ambitious growth and profitability objectives in the hotel
business through a strategy of developing and then selling hotels while
retaining the right to manage them. Management sperated from the
ownership of these properties, required smaller capital to fund growth but
also reduced the volatility of cash flows. This low volatility allowed MG
management to maintain high levels of debt. MC's operating profit increased
yearly from 1986 to 1989 in both lodging management and contract services
group. However, in 1990-91 recession hit the, hotel occupancy rates and
profits. The contract service businesses also suffered. MC had built up a large
portfolio of hotel properties that were difficult to sell in the recession. It
replaced high-risk senior debt with lower-risk subordinated debt against the
background of falling credit rating of its debt.
Under the spinoff plan announced in October 1992, the lodging management,
catering and other service businesses were to be spun off into Marriott
International (MI). The parent, renamed Host Marriott (Host) retained
ownership of the hotel and real estate interests. MI, under a long-term
contract with Host, would manage the hotel properties. The Marriott family
would continue to oversee all of the businesses and the senior management
of MC would be split between MI and Host.
MC argued that the spinoff would benefit shareholders by
? allowing MI to exploit its growth opportunities in the management
business;
? allowing the capital markets to value MI more accurately because of
better financial information;
? giving shareholders better investment options between a high-growth
management company and a capital-intensive company with strong
cash flow and long-term capital appreciation.
[14]
The initial spinoff proposal allocated most of MC's long-term debt to Host.
When compared with the level of assets and operating cash flow, this
allocation made Host vastly more risky than MT as shown below. This
sparked considerable resistance from creditors who felt their debt was being
put at high risk since most of it was being assigned to cyclical property
business and very little to the management business with more stable cash
flow. The interest cover ratio shows higher risk clearly. Such an allocation
reduces the default risk faced by the shareholders and increases it for
creditors, thereby transferring some of the corporate value from creditors to
shareholders.
Assets/Liabilities MC
First Proposal Final Proposal
MI Host MI Host
Total assets 6333 2360 4620 3017 3888
Proprietary and equipment 3672 360 3310 772 2689
Current Liabilities 1189 1130 210 1280 394
Long term debt 2891 20 2870 899 2313
EBITDA/Interest expenses 2.6 20.3 1.3 6.5 1.8
Given the storm of protest from creditors and their Class action suits, MC
revised the spin off proposal and reallocated more debt to the management
business. This mitigated the additional risk faced by the creditors. MC was
forced to accept several conditions, such as repurchase of debt, stricter
covenants, higher coupon rate on new debt, etc. to the benefit of creditors.
The revised spinoff plan was implemented.
Robert Parrino estimated the market-adjusted bondholder loss at $195m and
industry adjusted shareholder gains at $81m, Thus the spinoff caused a
$114m decline in the total value of these securities from spinoff
announcement to distribution. The spinoff failed to create shareholder value
in the period surrounding the spin off and destroyed the bondholder value.
What could be the reasons for this? There are several direct and indirect costs
to a spinoff? direct transaction costs, loss of ability to offset Host's losses
with MI?s profits and thereby save on corporation tax, the increased coupon
on new debt, value of warrants issued to creditors, duplication of accounting
and financial systems, higher costs of new security issues, etc.
The Marriott family continued to maintain control over the entire firm. The
spinoff limited the potential losses to Marriott family from any default on
debt. The separation improved the management business's debt capacity and
this would allow the family to pursue growth in this business aggressively
without losing control.
1. Why did Marriott decide to go for a spinoff?
2. What is the initial structure of the spinoff? Why MC was required to
change it?
3. Is there a conflict of interests in spinoffs among various stakeholders?
4. How were these resolved in the Marriott case?
OR
Q ? 5
Hindalco Novelis Deal
Introduction
In early 2007, Hindalco Industries Ltd (Hindalco), the flagship company of
Aditya Birla Group, announced that it would acquire the Canadian company
Novelis. The transaction would make Hindalco the world's largest aluminum
rolling company and one of the biggest producers of primary aluminium in
Asia as well as India's leading copper producer. Novelis was to be acquired
in an all cash deal valued at approximately $6 billion, including debt. Under
the terms of the agreement, Novelis shareholders would receive $44.93 in
cash for each outstanding common share.
The Chairman of the Aditya Birla Group, Kumar Mangalam Birla was of the
opinion that aluminium was a core business with enormous growth potentials
in revenues and earnings. The acquisition of Novelis was a step in this
direction as it was felt that the combination would establish an integrated
producer with low-cost alumina and aluminium facilities combined with
high-end rolling capabilities and a global footprint.
Industry Overview
The global aluminium industry is seeing increased scope in packaging
applications. The other sectors using aluminium increasingly are power,
infrastructure and automobiles. These sectors shall provide the much-needed
fillip to the aluminium industry and demand is expected to grow rapidly and
attain double-digit growth. Domestic and global demand will rise over a
long-term period. A number of other factors influence the market of
aluminium, such as lowering of import duties, domestic realization of
aluminium majors, pressure on Hindalco and Nalco, reduction in buffer on
international prices, greater linkage to international prices, and volatility in
financials. To negate the effect of these factors, producers have started
moving downstream to mitigate higher volatility. The key features of the
industry are as follows:
? The industry is highly concentrated with only five primary plants in
the country.
? All the producers use the Bayer- Hall?Heroult technology.
? The industry has a very high energy cost, 40% of manufacturing cost
for metal and 30% for rolled products.
? Technology cost is very high and this is the main barrier in achieving
high energy efficiency.
? The main aim of the industry is energy conservation and reduced
consumption.
? The industry faces stiff competition from imports.
Aluminium is a power-intensive industry with one tonne of aluminium
requiring over 15,000 KW of power. Power constitutes almost 40% of the
[14]
total cost of production. Hindalco enjoys an advantage in this respect with
the smelters backed by captive power plants, making it one of the lowest cost
producers globally.
As regards Hindalco, the following issues were found to be prominent: large
upstream and midstream production, cyclical business linked to commodity
prices, low cost commodity operations, proximity and good access to Asian
markets. With regard to Novelis, the factors that were crucial were market
leading downstream portfolio, stable cash flows, substantive proprietary
technology-led operations, and leading world market position.
Hindalco?The Aluminium Giant
Hindalco, the metals flagship company of the Aditya Birla Group, is the
world's largest aluminium rolling company and one of the biggest producers
of primary aluminium in Asia. Its copper smelter is the world's largest custom
smelter at a single location. Established in 1958, Hindalco commissioned the
aluminium facility at Renukoot in eastern Uttar Pradesh in 1962. The
company grew from strength to strength through acquisitions and mergers
with Indal and Birla Copper. With the acquisitions of the Nifty and Mt
Gordon copper mines in Australia in 2003, its position was strengthened in
value-added alumina, aluminium, and copper products.
Its aluminium units across the globe encompass the entire gamut of
operations, from bauxite mining, alumina refining, and aluminium smelting
to downstream rolling, extrusions, foils, along with captive power plants and
coal mines. Similarly its copper unit, Birla Copper, produces copper
cathodes, continuous cast copper rods, and other by-products such as gold,
silver, and DAP fertilizers. The Birla Nifty copper mine consists of an
underground mine, heap leach pads, and a solvent extraction and
electrowinning (SXEW) processing plant, which produces copper cathode.
The Mt Gordon copper operation consists of an underground mine and a
copper concentrate plant. Until recently, the operation produced copper
cathode through the ferric leach process. Nifty and Mt Gordon have entered
into a long-term 'life of mine' offtake agreement with Hindalco to supply
copper concentrate to the copper smelter located at Dahej, Gujarat.
A strong presence across the value chain and synergies between operations
have provided Hindalco with a dominant share in the value-added products
market. The ever-expanding market for value-added products and services
has provided the opportunity for the launch of three new products?Everlast
roofing sheets, Freshwrapp kitchen foil, and Freshpakk semi-rigid containers.
Novelis?The Canadian Giant
Novelis is a Canadian corporation formed in January 2005, as a spin-off from
Alcan Inc. It is the world's leading producer of aluminium-rolled products
based on shipment volume. The company produced an estimated 19% of the
worlds flat-rolled aluminium products, and is the biggest producer in Europe
and South America, and the second-largest in North America and Asia.
Novelis has also been a world leader in the recycling of used aluminium
beverage cans, with nearly 39 billion cans recycled into new can sheet to be
manufactured into beverage cans in 2008. The company operates in four
continents and is the only company that has the expertise to produce premium
aluminium-rolled products. The company has expertise in producing end-use
applications and light gauge products that include beverage and food cans,
food and packaging, transportation, electronics, construction, and industrial
products. The company also operates bauxite mining, primary aluminium
smelting, and power generation facilities.
Hindalco's Strategy
A business model describes how a company will operate in the market so that
the pre-determined marketing goals are attained effectively. Hindalco had a
very clear business model for its aluminium business. The model focused on
a totally integrated business solution, keeping in mind the large size of the
division. The company pursued an objective of optimally exploiting the
aluminium value chain balancing between the more volatile high-margin
upstream products and the steadier low-margin downstream portfolio. Its
upstream strategy focused on continuing the existing low-cost operations and
gradually progressing to new greenfield projects. This, it was presumed
would further improve cost competitiveness through lower production costs;
by controlling key resources, such as bauxite mines, refineries, power plants
and coal; and reaping the benefits of economies of scale.
Added to this strategy is the fact that Indian bauxite is of the highest quality
with high alumina content, less than 2% Boehmite content, very low reactive
silica content, and negligible organic content. It also possesses a higher liquor
purity and productivity that is more cost-efficient. Again large deposits of
bauxite are found in a single plateau, which allows more efficient extraction.
India also has abundant coal supplies, easy availability of labour, and is
located in close proximity to the fast-growing markets. All these factors
create the right setting for producing high quality aluminium.
The Acquisition Advantage
Hindalco's decision to acquire Novelis was influenced by the fact that
Novelis had a well-diversified geographical market base, which would
enhance the stature of Hindalco in the area of downstream production. The
growth seen at Hindalco was the result of a well-crafted growth and
FirstRanker.com - FirstRanker's Choice
Seat No.: ________ Enrolment No.___________
GUJARAT TECHNOLOGICAL UNIVERSITY
MBA ? SEMESTER 4 ? ? EXAMINATION ? SUMMER 2016
Subject Code: 2840201 Date: 05/05/2016
Subject Name: Mergers and Acquisitions (M&A)
Time: 10.30 AM TO 01.30 PM Total Marks: 70
Instructions:
1. Attempt all questions.
2. Make suitable assumptions wherever necessary.
3. Figures to the right indicate full marks.
Q ? 1(A) Choose the correct option [06]
1. If an automobile manufacturer were to acquire one of the firms listed below,
which acquisition would be called a horizontal merger?
A. A steel Mill B. A rival manufacturer
C. A tire producer D. A bank
2. The cost of a merger equals the
A. Cash paid for the target firm. B. Increase in total earnings less
price paid.
C. Premium paid over the target's
value as a separate entity.
D. None of the above
3. If two merged firms are shown to have a higher combined market value than
the sum of the individual market values, then:
A. Economic /Synergy gains are said
to have taken place
B. The firms were previously
under priced
C. The merger provides
diversification to investors.
D. There is no cost involved in
the merger.
4. What is the minimum size of mandatory open offer under Securities and
Exchange Board of India (Substantial Acquisition of Shares and Takeovers)
Regulations, 2011
A. 24% B. 25%
C. 26% D. 27%
5. A form of corporate restructuring involving transfer of all or substantially all
the assets and assets, liabilities, loans and business of one of business divisions
or undertaking to another company whose shares are allotted to the
shareholders of the transferor company on a proportionate basis and transferor
company continue to carry on at least one of the businesses.
A. Spin off B. Split up
C. Split off D. None of the above
6. A defense tactic in which the target company sells its highly profitable or
attractive business division to make takeover bid less attractive to the
raider.
A. Poison pills B. Shark Repellents
C. Blank Cheque D. Crown Jewels
Q ? 1 (B) Explain following terms [4]
1. Demerger
2. Joint Venture
3. Buy Back
4. Delisting
Q ? 1 (C) What is corporate restructuring? What are different motives of corporate
restructuring
[4]
Q ? 2 (A) State the major methods of effecting payment of consideration to the
shareholders of target company. Explain features of each method in detail.
[7]
Q ? 2 (B) Imperial Chemical Industries (ICI), a British company is looking at an
opportunity to enter the Indian market. Instead of entering on its own, ICI
wanted to make an entry by taking over a major player in the Indian market.
The company (ICI) shortlisted Asian Paints as the right target to fulfill its
aspirations. However Asian Paints is not willing to get acquired by Imperial
Chemical Industries (ICI). With reference to this, explain the concept of
hostile takeover and suggest various defense tactics that Asian Paints can use
to avoid the hostile takeover by Imperial Chemical Industries (ICI).
[7]
OR
Q ? 2 (B) After TATA tea acquired Tetley in early 2000, in last fifteen years a number
of Indian companies have made global acquisitions. One of the important
features of these acquisitions is that in most of the cases the target companies
have been far bigger in size than the Indian acquirers. To take an example
Tetley?s turnover at the time of acquisitions was more than three times the
turnover of Tata tea. Similarly when Tata Steel acquired Corus Plc. Corus?s
turnover was four times more than Tata Steel?s turnover. With reference to
this, explain various sources of funds for cross boarder acquisitions.
[7]
Q ? 3 (A) Explain major provisions of Securities and Exchange Board of India
(Buy back of securities) Regulations, 1998.
[7]
Q ? 3 (B) Videsh Ltd. Is keen on reporting EPS of Rs. 6 per share after acquiring
Swadesh Ltd. The following financial data are given
Particulars Videsh Ltd. Swadesh Ltd.
Earning Per Share Rs. 5 Rs. 5
Market Price Per Share Rs. 60 Rs. 50
Number of shares 10,00,000 8,00,000
There is an expected synergy gain of 5 per cent. What exchange ratio will
result in a post merger EPS of Rs.6 for Videsh Ltd.?
[7]
OR
Q ? 3 (A) Mergers and acquisitions can have an adverse impact on healthy state of
competition prevailing in the markets. One of the objectives of the
competition act 2002 is to promote and sustain healthy state of competition
in markets. With respect to this explain in detail major provisions of
Competition act 2002 governing combinations.
[7]
Q ? 3 (B) Black & Co. is planning to acquire White & Co. The relevant financial
details of both the firms before acquisition are
Particulars Black & Co White & Co
Market Price per Share Rs. 70 Rs. 32
Number of shares 20 million 15 million
The merger is expected to bring the gain which has present value of Rs. 200
million. The exchange ratio agreed is 0.5. What is the true cost of merger
for Black & Co?
[7]
Q ? 4 (A) Explain the concept of strategic alliance. Why do companies enter into
strategic alliances? What are the implications of strategic alliance?
[7]
Q ? 4 (B) Cross border acquisitions are becoming very popular due to their capacity to
generate additional revenues for the acquirer. Globalization and liberalization
have made the business environment more conducive for them. While cross
border acquisitions are good, they do not always succeed due to number of
challenges faced by the acquirer before and after the acquisition. With
reference to this, explain various difficulties encountered in cross border
acquisitions.
[7]
OR
Q ? 4 (A) Explain the concept of Delisting. State the features of compulsory and
voluntary delisting.
[7]
Q ? 4 (B) The following financial information is available for company D, a
pharmaceutical company
PBDIT Rs. 18 Crore
Book value of assets Rs. 90 Crore
Sales Rs. 125 Crore
Based on evaluation of several pharmaceutical companies, companies A, B
and C have been found to be comparable to company D. Looking at the
characteristics of A, B and C following multiples are reasonable for company
D.
MV/ PBDIT 17
[7]
MV / Book value 3
MV / Sales 2.2
Find out value of D by using each of the above multiple
Q ? 5 Marriot?s Bondholder?s taken for a spin (or for a ride?)
In 1993 Marriott Corporation (MC) carried out a spinoff of its hotel
management business to shareholders. In 1992, MC had revenues of $8.7bn
and operating profits Di $496m. The group consisted of two broad categories
of businesses ? the lodging managemeat group including hotels that
contributed 52% of group revenues and 68% of operating profits, and
contract services catering and facilities management, airport and highway
concessions that accounted for the rest. With two-thirds of its operating profit
from lodgings related businesses, MC was generally viewed as a hotel
company.
MC pursued ambitious growth and profitability objectives in the hotel
business through a strategy of developing and then selling hotels while
retaining the right to manage them. Management sperated from the
ownership of these properties, required smaller capital to fund growth but
also reduced the volatility of cash flows. This low volatility allowed MG
management to maintain high levels of debt. MC's operating profit increased
yearly from 1986 to 1989 in both lodging management and contract services
group. However, in 1990-91 recession hit the, hotel occupancy rates and
profits. The contract service businesses also suffered. MC had built up a large
portfolio of hotel properties that were difficult to sell in the recession. It
replaced high-risk senior debt with lower-risk subordinated debt against the
background of falling credit rating of its debt.
Under the spinoff plan announced in October 1992, the lodging management,
catering and other service businesses were to be spun off into Marriott
International (MI). The parent, renamed Host Marriott (Host) retained
ownership of the hotel and real estate interests. MI, under a long-term
contract with Host, would manage the hotel properties. The Marriott family
would continue to oversee all of the businesses and the senior management
of MC would be split between MI and Host.
MC argued that the spinoff would benefit shareholders by
? allowing MI to exploit its growth opportunities in the management
business;
? allowing the capital markets to value MI more accurately because of
better financial information;
? giving shareholders better investment options between a high-growth
management company and a capital-intensive company with strong
cash flow and long-term capital appreciation.
[14]
The initial spinoff proposal allocated most of MC's long-term debt to Host.
When compared with the level of assets and operating cash flow, this
allocation made Host vastly more risky than MT as shown below. This
sparked considerable resistance from creditors who felt their debt was being
put at high risk since most of it was being assigned to cyclical property
business and very little to the management business with more stable cash
flow. The interest cover ratio shows higher risk clearly. Such an allocation
reduces the default risk faced by the shareholders and increases it for
creditors, thereby transferring some of the corporate value from creditors to
shareholders.
Assets/Liabilities MC
First Proposal Final Proposal
MI Host MI Host
Total assets 6333 2360 4620 3017 3888
Proprietary and equipment 3672 360 3310 772 2689
Current Liabilities 1189 1130 210 1280 394
Long term debt 2891 20 2870 899 2313
EBITDA/Interest expenses 2.6 20.3 1.3 6.5 1.8
Given the storm of protest from creditors and their Class action suits, MC
revised the spin off proposal and reallocated more debt to the management
business. This mitigated the additional risk faced by the creditors. MC was
forced to accept several conditions, such as repurchase of debt, stricter
covenants, higher coupon rate on new debt, etc. to the benefit of creditors.
The revised spinoff plan was implemented.
Robert Parrino estimated the market-adjusted bondholder loss at $195m and
industry adjusted shareholder gains at $81m, Thus the spinoff caused a
$114m decline in the total value of these securities from spinoff
announcement to distribution. The spinoff failed to create shareholder value
in the period surrounding the spin off and destroyed the bondholder value.
What could be the reasons for this? There are several direct and indirect costs
to a spinoff? direct transaction costs, loss of ability to offset Host's losses
with MI?s profits and thereby save on corporation tax, the increased coupon
on new debt, value of warrants issued to creditors, duplication of accounting
and financial systems, higher costs of new security issues, etc.
The Marriott family continued to maintain control over the entire firm. The
spinoff limited the potential losses to Marriott family from any default on
debt. The separation improved the management business's debt capacity and
this would allow the family to pursue growth in this business aggressively
without losing control.
1. Why did Marriott decide to go for a spinoff?
2. What is the initial structure of the spinoff? Why MC was required to
change it?
3. Is there a conflict of interests in spinoffs among various stakeholders?
4. How were these resolved in the Marriott case?
OR
Q ? 5
Hindalco Novelis Deal
Introduction
In early 2007, Hindalco Industries Ltd (Hindalco), the flagship company of
Aditya Birla Group, announced that it would acquire the Canadian company
Novelis. The transaction would make Hindalco the world's largest aluminum
rolling company and one of the biggest producers of primary aluminium in
Asia as well as India's leading copper producer. Novelis was to be acquired
in an all cash deal valued at approximately $6 billion, including debt. Under
the terms of the agreement, Novelis shareholders would receive $44.93 in
cash for each outstanding common share.
The Chairman of the Aditya Birla Group, Kumar Mangalam Birla was of the
opinion that aluminium was a core business with enormous growth potentials
in revenues and earnings. The acquisition of Novelis was a step in this
direction as it was felt that the combination would establish an integrated
producer with low-cost alumina and aluminium facilities combined with
high-end rolling capabilities and a global footprint.
Industry Overview
The global aluminium industry is seeing increased scope in packaging
applications. The other sectors using aluminium increasingly are power,
infrastructure and automobiles. These sectors shall provide the much-needed
fillip to the aluminium industry and demand is expected to grow rapidly and
attain double-digit growth. Domestic and global demand will rise over a
long-term period. A number of other factors influence the market of
aluminium, such as lowering of import duties, domestic realization of
aluminium majors, pressure on Hindalco and Nalco, reduction in buffer on
international prices, greater linkage to international prices, and volatility in
financials. To negate the effect of these factors, producers have started
moving downstream to mitigate higher volatility. The key features of the
industry are as follows:
? The industry is highly concentrated with only five primary plants in
the country.
? All the producers use the Bayer- Hall?Heroult technology.
? The industry has a very high energy cost, 40% of manufacturing cost
for metal and 30% for rolled products.
? Technology cost is very high and this is the main barrier in achieving
high energy efficiency.
? The main aim of the industry is energy conservation and reduced
consumption.
? The industry faces stiff competition from imports.
Aluminium is a power-intensive industry with one tonne of aluminium
requiring over 15,000 KW of power. Power constitutes almost 40% of the
[14]
total cost of production. Hindalco enjoys an advantage in this respect with
the smelters backed by captive power plants, making it one of the lowest cost
producers globally.
As regards Hindalco, the following issues were found to be prominent: large
upstream and midstream production, cyclical business linked to commodity
prices, low cost commodity operations, proximity and good access to Asian
markets. With regard to Novelis, the factors that were crucial were market
leading downstream portfolio, stable cash flows, substantive proprietary
technology-led operations, and leading world market position.
Hindalco?The Aluminium Giant
Hindalco, the metals flagship company of the Aditya Birla Group, is the
world's largest aluminium rolling company and one of the biggest producers
of primary aluminium in Asia. Its copper smelter is the world's largest custom
smelter at a single location. Established in 1958, Hindalco commissioned the
aluminium facility at Renukoot in eastern Uttar Pradesh in 1962. The
company grew from strength to strength through acquisitions and mergers
with Indal and Birla Copper. With the acquisitions of the Nifty and Mt
Gordon copper mines in Australia in 2003, its position was strengthened in
value-added alumina, aluminium, and copper products.
Its aluminium units across the globe encompass the entire gamut of
operations, from bauxite mining, alumina refining, and aluminium smelting
to downstream rolling, extrusions, foils, along with captive power plants and
coal mines. Similarly its copper unit, Birla Copper, produces copper
cathodes, continuous cast copper rods, and other by-products such as gold,
silver, and DAP fertilizers. The Birla Nifty copper mine consists of an
underground mine, heap leach pads, and a solvent extraction and
electrowinning (SXEW) processing plant, which produces copper cathode.
The Mt Gordon copper operation consists of an underground mine and a
copper concentrate plant. Until recently, the operation produced copper
cathode through the ferric leach process. Nifty and Mt Gordon have entered
into a long-term 'life of mine' offtake agreement with Hindalco to supply
copper concentrate to the copper smelter located at Dahej, Gujarat.
A strong presence across the value chain and synergies between operations
have provided Hindalco with a dominant share in the value-added products
market. The ever-expanding market for value-added products and services
has provided the opportunity for the launch of three new products?Everlast
roofing sheets, Freshwrapp kitchen foil, and Freshpakk semi-rigid containers.
Novelis?The Canadian Giant
Novelis is a Canadian corporation formed in January 2005, as a spin-off from
Alcan Inc. It is the world's leading producer of aluminium-rolled products
based on shipment volume. The company produced an estimated 19% of the
worlds flat-rolled aluminium products, and is the biggest producer in Europe
and South America, and the second-largest in North America and Asia.
Novelis has also been a world leader in the recycling of used aluminium
beverage cans, with nearly 39 billion cans recycled into new can sheet to be
manufactured into beverage cans in 2008. The company operates in four
continents and is the only company that has the expertise to produce premium
aluminium-rolled products. The company has expertise in producing end-use
applications and light gauge products that include beverage and food cans,
food and packaging, transportation, electronics, construction, and industrial
products. The company also operates bauxite mining, primary aluminium
smelting, and power generation facilities.
Hindalco's Strategy
A business model describes how a company will operate in the market so that
the pre-determined marketing goals are attained effectively. Hindalco had a
very clear business model for its aluminium business. The model focused on
a totally integrated business solution, keeping in mind the large size of the
division. The company pursued an objective of optimally exploiting the
aluminium value chain balancing between the more volatile high-margin
upstream products and the steadier low-margin downstream portfolio. Its
upstream strategy focused on continuing the existing low-cost operations and
gradually progressing to new greenfield projects. This, it was presumed
would further improve cost competitiveness through lower production costs;
by controlling key resources, such as bauxite mines, refineries, power plants
and coal; and reaping the benefits of economies of scale.
Added to this strategy is the fact that Indian bauxite is of the highest quality
with high alumina content, less than 2% Boehmite content, very low reactive
silica content, and negligible organic content. It also possesses a higher liquor
purity and productivity that is more cost-efficient. Again large deposits of
bauxite are found in a single plateau, which allows more efficient extraction.
India also has abundant coal supplies, easy availability of labour, and is
located in close proximity to the fast-growing markets. All these factors
create the right setting for producing high quality aluminium.
The Acquisition Advantage
Hindalco's decision to acquire Novelis was influenced by the fact that
Novelis had a well-diversified geographical market base, which would
enhance the stature of Hindalco in the area of downstream production. The
growth seen at Hindalco was the result of a well-crafted growth and
integration strategy that hinged on three cornerstones like cost
competitiveness, quality, and global reach. The company was also committed
to the triple bottom line accountability of economic, environment, and social
factors.
Novelis was the world leader in rolled aluminium products, which would help
Hindalco to extend its reach in the industry. Novelis also had long-standing
relationships with leading customers, which Hindalco expected to exploit.
The list of customers included Agfa-Gevaert, Alcan, Anheuser-Busch, Ball,
Coca-Cola, Crown Cork & Seal, Daching Holdings, Ford, General Motors,
Lotte Aluminium, Kodak, Pactiv, Rexam, Ryerson Tull, Tetrapack, and
ThyssenKrupp. The fact that Novelis used advanced scientific techniques
and applied knowledge to deliver innovative, customer driven products also
made it a good buy. The extensive research and development capabilities
ensured that Novelis was able to provide innovative production and
application technologies, including breakthroughs in the following areas:
? Alloy development/optimization for improved properties such as
strength, formability, corrosion resistance
? Molten metal and advanced solidification technology
? Innovative manufacturing technologies
? Advanced surface treatment and coating technologies for semi-
finished products
? Modelling of forming processes for automotive sheet components
and product performance for auto structure crash behaviour and
beverage can down-gauging
? Development of innovative products like heat exchanger materials,
automotive sheet, beverage and semi-rigid containers, etc.
Novelis also used the concept of global technology organization wherein it
committed itself to providing world-leading research and technology support.
This allowed Novelis to share its knowledge and experience rapidly between
teams and facilities around the globe so that innovations could be applied
appropriately, and with the same speed, by customers who possess regional
worldwide manufacturing capabilities. The company collaborated very
closely with customers to identify their needs in the areas of manufacturing
process support, the introduction of new manufacturing technologies, and the
design and development of new and improved products. The collaboration
involved physical simulation of a customer's processes and products through
the development of pilot line capabilities, and simulation via state-of-the-art
computer-aided design and engineering. Novelis had the technology,
economic strength, commitment, and skills in financial, environmental and
social dimensions to excel as a sustainable corporation. Hindalco's
acquisition made sense because of all these factors.
What Did The Deal Mean In Numbers?
FirstRanker.com - FirstRanker's Choice
Seat No.: ________ Enrolment No.___________
GUJARAT TECHNOLOGICAL UNIVERSITY
MBA ? SEMESTER 4 ? ? EXAMINATION ? SUMMER 2016
Subject Code: 2840201 Date: 05/05/2016
Subject Name: Mergers and Acquisitions (M&A)
Time: 10.30 AM TO 01.30 PM Total Marks: 70
Instructions:
1. Attempt all questions.
2. Make suitable assumptions wherever necessary.
3. Figures to the right indicate full marks.
Q ? 1(A) Choose the correct option [06]
1. If an automobile manufacturer were to acquire one of the firms listed below,
which acquisition would be called a horizontal merger?
A. A steel Mill B. A rival manufacturer
C. A tire producer D. A bank
2. The cost of a merger equals the
A. Cash paid for the target firm. B. Increase in total earnings less
price paid.
C. Premium paid over the target's
value as a separate entity.
D. None of the above
3. If two merged firms are shown to have a higher combined market value than
the sum of the individual market values, then:
A. Economic /Synergy gains are said
to have taken place
B. The firms were previously
under priced
C. The merger provides
diversification to investors.
D. There is no cost involved in
the merger.
4. What is the minimum size of mandatory open offer under Securities and
Exchange Board of India (Substantial Acquisition of Shares and Takeovers)
Regulations, 2011
A. 24% B. 25%
C. 26% D. 27%
5. A form of corporate restructuring involving transfer of all or substantially all
the assets and assets, liabilities, loans and business of one of business divisions
or undertaking to another company whose shares are allotted to the
shareholders of the transferor company on a proportionate basis and transferor
company continue to carry on at least one of the businesses.
A. Spin off B. Split up
C. Split off D. None of the above
6. A defense tactic in which the target company sells its highly profitable or
attractive business division to make takeover bid less attractive to the
raider.
A. Poison pills B. Shark Repellents
C. Blank Cheque D. Crown Jewels
Q ? 1 (B) Explain following terms [4]
1. Demerger
2. Joint Venture
3. Buy Back
4. Delisting
Q ? 1 (C) What is corporate restructuring? What are different motives of corporate
restructuring
[4]
Q ? 2 (A) State the major methods of effecting payment of consideration to the
shareholders of target company. Explain features of each method in detail.
[7]
Q ? 2 (B) Imperial Chemical Industries (ICI), a British company is looking at an
opportunity to enter the Indian market. Instead of entering on its own, ICI
wanted to make an entry by taking over a major player in the Indian market.
The company (ICI) shortlisted Asian Paints as the right target to fulfill its
aspirations. However Asian Paints is not willing to get acquired by Imperial
Chemical Industries (ICI). With reference to this, explain the concept of
hostile takeover and suggest various defense tactics that Asian Paints can use
to avoid the hostile takeover by Imperial Chemical Industries (ICI).
[7]
OR
Q ? 2 (B) After TATA tea acquired Tetley in early 2000, in last fifteen years a number
of Indian companies have made global acquisitions. One of the important
features of these acquisitions is that in most of the cases the target companies
have been far bigger in size than the Indian acquirers. To take an example
Tetley?s turnover at the time of acquisitions was more than three times the
turnover of Tata tea. Similarly when Tata Steel acquired Corus Plc. Corus?s
turnover was four times more than Tata Steel?s turnover. With reference to
this, explain various sources of funds for cross boarder acquisitions.
[7]
Q ? 3 (A) Explain major provisions of Securities and Exchange Board of India
(Buy back of securities) Regulations, 1998.
[7]
Q ? 3 (B) Videsh Ltd. Is keen on reporting EPS of Rs. 6 per share after acquiring
Swadesh Ltd. The following financial data are given
Particulars Videsh Ltd. Swadesh Ltd.
Earning Per Share Rs. 5 Rs. 5
Market Price Per Share Rs. 60 Rs. 50
Number of shares 10,00,000 8,00,000
There is an expected synergy gain of 5 per cent. What exchange ratio will
result in a post merger EPS of Rs.6 for Videsh Ltd.?
[7]
OR
Q ? 3 (A) Mergers and acquisitions can have an adverse impact on healthy state of
competition prevailing in the markets. One of the objectives of the
competition act 2002 is to promote and sustain healthy state of competition
in markets. With respect to this explain in detail major provisions of
Competition act 2002 governing combinations.
[7]
Q ? 3 (B) Black & Co. is planning to acquire White & Co. The relevant financial
details of both the firms before acquisition are
Particulars Black & Co White & Co
Market Price per Share Rs. 70 Rs. 32
Number of shares 20 million 15 million
The merger is expected to bring the gain which has present value of Rs. 200
million. The exchange ratio agreed is 0.5. What is the true cost of merger
for Black & Co?
[7]
Q ? 4 (A) Explain the concept of strategic alliance. Why do companies enter into
strategic alliances? What are the implications of strategic alliance?
[7]
Q ? 4 (B) Cross border acquisitions are becoming very popular due to their capacity to
generate additional revenues for the acquirer. Globalization and liberalization
have made the business environment more conducive for them. While cross
border acquisitions are good, they do not always succeed due to number of
challenges faced by the acquirer before and after the acquisition. With
reference to this, explain various difficulties encountered in cross border
acquisitions.
[7]
OR
Q ? 4 (A) Explain the concept of Delisting. State the features of compulsory and
voluntary delisting.
[7]
Q ? 4 (B) The following financial information is available for company D, a
pharmaceutical company
PBDIT Rs. 18 Crore
Book value of assets Rs. 90 Crore
Sales Rs. 125 Crore
Based on evaluation of several pharmaceutical companies, companies A, B
and C have been found to be comparable to company D. Looking at the
characteristics of A, B and C following multiples are reasonable for company
D.
MV/ PBDIT 17
[7]
MV / Book value 3
MV / Sales 2.2
Find out value of D by using each of the above multiple
Q ? 5 Marriot?s Bondholder?s taken for a spin (or for a ride?)
In 1993 Marriott Corporation (MC) carried out a spinoff of its hotel
management business to shareholders. In 1992, MC had revenues of $8.7bn
and operating profits Di $496m. The group consisted of two broad categories
of businesses ? the lodging managemeat group including hotels that
contributed 52% of group revenues and 68% of operating profits, and
contract services catering and facilities management, airport and highway
concessions that accounted for the rest. With two-thirds of its operating profit
from lodgings related businesses, MC was generally viewed as a hotel
company.
MC pursued ambitious growth and profitability objectives in the hotel
business through a strategy of developing and then selling hotels while
retaining the right to manage them. Management sperated from the
ownership of these properties, required smaller capital to fund growth but
also reduced the volatility of cash flows. This low volatility allowed MG
management to maintain high levels of debt. MC's operating profit increased
yearly from 1986 to 1989 in both lodging management and contract services
group. However, in 1990-91 recession hit the, hotel occupancy rates and
profits. The contract service businesses also suffered. MC had built up a large
portfolio of hotel properties that were difficult to sell in the recession. It
replaced high-risk senior debt with lower-risk subordinated debt against the
background of falling credit rating of its debt.
Under the spinoff plan announced in October 1992, the lodging management,
catering and other service businesses were to be spun off into Marriott
International (MI). The parent, renamed Host Marriott (Host) retained
ownership of the hotel and real estate interests. MI, under a long-term
contract with Host, would manage the hotel properties. The Marriott family
would continue to oversee all of the businesses and the senior management
of MC would be split between MI and Host.
MC argued that the spinoff would benefit shareholders by
? allowing MI to exploit its growth opportunities in the management
business;
? allowing the capital markets to value MI more accurately because of
better financial information;
? giving shareholders better investment options between a high-growth
management company and a capital-intensive company with strong
cash flow and long-term capital appreciation.
[14]
The initial spinoff proposal allocated most of MC's long-term debt to Host.
When compared with the level of assets and operating cash flow, this
allocation made Host vastly more risky than MT as shown below. This
sparked considerable resistance from creditors who felt their debt was being
put at high risk since most of it was being assigned to cyclical property
business and very little to the management business with more stable cash
flow. The interest cover ratio shows higher risk clearly. Such an allocation
reduces the default risk faced by the shareholders and increases it for
creditors, thereby transferring some of the corporate value from creditors to
shareholders.
Assets/Liabilities MC
First Proposal Final Proposal
MI Host MI Host
Total assets 6333 2360 4620 3017 3888
Proprietary and equipment 3672 360 3310 772 2689
Current Liabilities 1189 1130 210 1280 394
Long term debt 2891 20 2870 899 2313
EBITDA/Interest expenses 2.6 20.3 1.3 6.5 1.8
Given the storm of protest from creditors and their Class action suits, MC
revised the spin off proposal and reallocated more debt to the management
business. This mitigated the additional risk faced by the creditors. MC was
forced to accept several conditions, such as repurchase of debt, stricter
covenants, higher coupon rate on new debt, etc. to the benefit of creditors.
The revised spinoff plan was implemented.
Robert Parrino estimated the market-adjusted bondholder loss at $195m and
industry adjusted shareholder gains at $81m, Thus the spinoff caused a
$114m decline in the total value of these securities from spinoff
announcement to distribution. The spinoff failed to create shareholder value
in the period surrounding the spin off and destroyed the bondholder value.
What could be the reasons for this? There are several direct and indirect costs
to a spinoff? direct transaction costs, loss of ability to offset Host's losses
with MI?s profits and thereby save on corporation tax, the increased coupon
on new debt, value of warrants issued to creditors, duplication of accounting
and financial systems, higher costs of new security issues, etc.
The Marriott family continued to maintain control over the entire firm. The
spinoff limited the potential losses to Marriott family from any default on
debt. The separation improved the management business's debt capacity and
this would allow the family to pursue growth in this business aggressively
without losing control.
1. Why did Marriott decide to go for a spinoff?
2. What is the initial structure of the spinoff? Why MC was required to
change it?
3. Is there a conflict of interests in spinoffs among various stakeholders?
4. How were these resolved in the Marriott case?
OR
Q ? 5
Hindalco Novelis Deal
Introduction
In early 2007, Hindalco Industries Ltd (Hindalco), the flagship company of
Aditya Birla Group, announced that it would acquire the Canadian company
Novelis. The transaction would make Hindalco the world's largest aluminum
rolling company and one of the biggest producers of primary aluminium in
Asia as well as India's leading copper producer. Novelis was to be acquired
in an all cash deal valued at approximately $6 billion, including debt. Under
the terms of the agreement, Novelis shareholders would receive $44.93 in
cash for each outstanding common share.
The Chairman of the Aditya Birla Group, Kumar Mangalam Birla was of the
opinion that aluminium was a core business with enormous growth potentials
in revenues and earnings. The acquisition of Novelis was a step in this
direction as it was felt that the combination would establish an integrated
producer with low-cost alumina and aluminium facilities combined with
high-end rolling capabilities and a global footprint.
Industry Overview
The global aluminium industry is seeing increased scope in packaging
applications. The other sectors using aluminium increasingly are power,
infrastructure and automobiles. These sectors shall provide the much-needed
fillip to the aluminium industry and demand is expected to grow rapidly and
attain double-digit growth. Domestic and global demand will rise over a
long-term period. A number of other factors influence the market of
aluminium, such as lowering of import duties, domestic realization of
aluminium majors, pressure on Hindalco and Nalco, reduction in buffer on
international prices, greater linkage to international prices, and volatility in
financials. To negate the effect of these factors, producers have started
moving downstream to mitigate higher volatility. The key features of the
industry are as follows:
? The industry is highly concentrated with only five primary plants in
the country.
? All the producers use the Bayer- Hall?Heroult technology.
? The industry has a very high energy cost, 40% of manufacturing cost
for metal and 30% for rolled products.
? Technology cost is very high and this is the main barrier in achieving
high energy efficiency.
? The main aim of the industry is energy conservation and reduced
consumption.
? The industry faces stiff competition from imports.
Aluminium is a power-intensive industry with one tonne of aluminium
requiring over 15,000 KW of power. Power constitutes almost 40% of the
[14]
total cost of production. Hindalco enjoys an advantage in this respect with
the smelters backed by captive power plants, making it one of the lowest cost
producers globally.
As regards Hindalco, the following issues were found to be prominent: large
upstream and midstream production, cyclical business linked to commodity
prices, low cost commodity operations, proximity and good access to Asian
markets. With regard to Novelis, the factors that were crucial were market
leading downstream portfolio, stable cash flows, substantive proprietary
technology-led operations, and leading world market position.
Hindalco?The Aluminium Giant
Hindalco, the metals flagship company of the Aditya Birla Group, is the
world's largest aluminium rolling company and one of the biggest producers
of primary aluminium in Asia. Its copper smelter is the world's largest custom
smelter at a single location. Established in 1958, Hindalco commissioned the
aluminium facility at Renukoot in eastern Uttar Pradesh in 1962. The
company grew from strength to strength through acquisitions and mergers
with Indal and Birla Copper. With the acquisitions of the Nifty and Mt
Gordon copper mines in Australia in 2003, its position was strengthened in
value-added alumina, aluminium, and copper products.
Its aluminium units across the globe encompass the entire gamut of
operations, from bauxite mining, alumina refining, and aluminium smelting
to downstream rolling, extrusions, foils, along with captive power plants and
coal mines. Similarly its copper unit, Birla Copper, produces copper
cathodes, continuous cast copper rods, and other by-products such as gold,
silver, and DAP fertilizers. The Birla Nifty copper mine consists of an
underground mine, heap leach pads, and a solvent extraction and
electrowinning (SXEW) processing plant, which produces copper cathode.
The Mt Gordon copper operation consists of an underground mine and a
copper concentrate plant. Until recently, the operation produced copper
cathode through the ferric leach process. Nifty and Mt Gordon have entered
into a long-term 'life of mine' offtake agreement with Hindalco to supply
copper concentrate to the copper smelter located at Dahej, Gujarat.
A strong presence across the value chain and synergies between operations
have provided Hindalco with a dominant share in the value-added products
market. The ever-expanding market for value-added products and services
has provided the opportunity for the launch of three new products?Everlast
roofing sheets, Freshwrapp kitchen foil, and Freshpakk semi-rigid containers.
Novelis?The Canadian Giant
Novelis is a Canadian corporation formed in January 2005, as a spin-off from
Alcan Inc. It is the world's leading producer of aluminium-rolled products
based on shipment volume. The company produced an estimated 19% of the
worlds flat-rolled aluminium products, and is the biggest producer in Europe
and South America, and the second-largest in North America and Asia.
Novelis has also been a world leader in the recycling of used aluminium
beverage cans, with nearly 39 billion cans recycled into new can sheet to be
manufactured into beverage cans in 2008. The company operates in four
continents and is the only company that has the expertise to produce premium
aluminium-rolled products. The company has expertise in producing end-use
applications and light gauge products that include beverage and food cans,
food and packaging, transportation, electronics, construction, and industrial
products. The company also operates bauxite mining, primary aluminium
smelting, and power generation facilities.
Hindalco's Strategy
A business model describes how a company will operate in the market so that
the pre-determined marketing goals are attained effectively. Hindalco had a
very clear business model for its aluminium business. The model focused on
a totally integrated business solution, keeping in mind the large size of the
division. The company pursued an objective of optimally exploiting the
aluminium value chain balancing between the more volatile high-margin
upstream products and the steadier low-margin downstream portfolio. Its
upstream strategy focused on continuing the existing low-cost operations and
gradually progressing to new greenfield projects. This, it was presumed
would further improve cost competitiveness through lower production costs;
by controlling key resources, such as bauxite mines, refineries, power plants
and coal; and reaping the benefits of economies of scale.
Added to this strategy is the fact that Indian bauxite is of the highest quality
with high alumina content, less than 2% Boehmite content, very low reactive
silica content, and negligible organic content. It also possesses a higher liquor
purity and productivity that is more cost-efficient. Again large deposits of
bauxite are found in a single plateau, which allows more efficient extraction.
India also has abundant coal supplies, easy availability of labour, and is
located in close proximity to the fast-growing markets. All these factors
create the right setting for producing high quality aluminium.
The Acquisition Advantage
Hindalco's decision to acquire Novelis was influenced by the fact that
Novelis had a well-diversified geographical market base, which would
enhance the stature of Hindalco in the area of downstream production. The
growth seen at Hindalco was the result of a well-crafted growth and
integration strategy that hinged on three cornerstones like cost
competitiveness, quality, and global reach. The company was also committed
to the triple bottom line accountability of economic, environment, and social
factors.
Novelis was the world leader in rolled aluminium products, which would help
Hindalco to extend its reach in the industry. Novelis also had long-standing
relationships with leading customers, which Hindalco expected to exploit.
The list of customers included Agfa-Gevaert, Alcan, Anheuser-Busch, Ball,
Coca-Cola, Crown Cork & Seal, Daching Holdings, Ford, General Motors,
Lotte Aluminium, Kodak, Pactiv, Rexam, Ryerson Tull, Tetrapack, and
ThyssenKrupp. The fact that Novelis used advanced scientific techniques
and applied knowledge to deliver innovative, customer driven products also
made it a good buy. The extensive research and development capabilities
ensured that Novelis was able to provide innovative production and
application technologies, including breakthroughs in the following areas:
? Alloy development/optimization for improved properties such as
strength, formability, corrosion resistance
? Molten metal and advanced solidification technology
? Innovative manufacturing technologies
? Advanced surface treatment and coating technologies for semi-
finished products
? Modelling of forming processes for automotive sheet components
and product performance for auto structure crash behaviour and
beverage can down-gauging
? Development of innovative products like heat exchanger materials,
automotive sheet, beverage and semi-rigid containers, etc.
Novelis also used the concept of global technology organization wherein it
committed itself to providing world-leading research and technology support.
This allowed Novelis to share its knowledge and experience rapidly between
teams and facilities around the globe so that innovations could be applied
appropriately, and with the same speed, by customers who possess regional
worldwide manufacturing capabilities. The company collaborated very
closely with customers to identify their needs in the areas of manufacturing
process support, the introduction of new manufacturing technologies, and the
design and development of new and improved products. The collaboration
involved physical simulation of a customer's processes and products through
the development of pilot line capabilities, and simulation via state-of-the-art
computer-aided design and engineering. Novelis had the technology,
economic strength, commitment, and skills in financial, environmental and
social dimensions to excel as a sustainable corporation. Hindalco's
acquisition made sense because of all these factors.
What Did The Deal Mean In Numbers?
The acquisition was very crucial for Hindalco and in terms of numbers it
meant the following:
? The acquisition was executed through an all-cash transaction wherein
Novelis was valued at approximately $6 billion, including around
$2.4 billion in debt.
? The merger would establish a globally integrated aluminium producer
with low-cost alumina and aluminium production facilities combined
with high-end aluminium rolled product capabilities.
? The merger would ensure that Hindalco would become the biggest
rolled aluminium products maker and fifth largest integrated
aluminium manufacturer globally.
? Novelis, being a global leader in aluminium rolled products and
aluminium can recycling, with a global market share of about 19%,
would make Hindalco a major player in the market. At the time of
acquisition Hindalco held 60% share in the high-growth Indian
market for rolled products which today appears to be very small.
? Hindalco has always been one of the lowest cost producers of primary
aluminnium in the world, but the merger would enable it to leverage
its and become a key player globally.
? Novelis, it was expected, would incur a loss of $263 million in 2006.
However, it expects to make a profit of $68 million in 2007. The total
free cash flow was expected to be $175 million in 2006.
? The debt component of Novelis stood at $2.4 billion and additional
$2.8 billion would be added as this is the amount Hindalco would take
to finance the deal. This was expected to put a tremendous pressure
on profit due to high interest burden.
? Hindalco was then planning a major expansion at an investment of
Rs. 250 billion. This would put a tremendous interest burden on the
company.
Looking at the financial position of the two entities and their future growth
plans, they would not have been able to finance the deal through a high debt
mix. Let's take a look at the numbers to substantiate our argument. Novelis
had a debt equity ratio of 7.23 : 1, making it practically impossible for it to
borrow any further.
Hindalco proposed to buy the $3.6 billion worth of Novelis's equity as
follows:
? $2.85 billion through borrowing
? $300 million as debt from group companies
? $450 million from its cash reserves
The second part of the deal was the debt of Novelis of $2.4 billion. Hindalco
proposed to take refinancing facility to finance these borrowings. These were
ultimately to be repaid with the cash flows of Novelis.
FirstRanker.com - FirstRanker's Choice
Seat No.: ________ Enrolment No.___________
GUJARAT TECHNOLOGICAL UNIVERSITY
MBA ? SEMESTER 4 ? ? EXAMINATION ? SUMMER 2016
Subject Code: 2840201 Date: 05/05/2016
Subject Name: Mergers and Acquisitions (M&A)
Time: 10.30 AM TO 01.30 PM Total Marks: 70
Instructions:
1. Attempt all questions.
2. Make suitable assumptions wherever necessary.
3. Figures to the right indicate full marks.
Q ? 1(A) Choose the correct option [06]
1. If an automobile manufacturer were to acquire one of the firms listed below,
which acquisition would be called a horizontal merger?
A. A steel Mill B. A rival manufacturer
C. A tire producer D. A bank
2. The cost of a merger equals the
A. Cash paid for the target firm. B. Increase in total earnings less
price paid.
C. Premium paid over the target's
value as a separate entity.
D. None of the above
3. If two merged firms are shown to have a higher combined market value than
the sum of the individual market values, then:
A. Economic /Synergy gains are said
to have taken place
B. The firms were previously
under priced
C. The merger provides
diversification to investors.
D. There is no cost involved in
the merger.
4. What is the minimum size of mandatory open offer under Securities and
Exchange Board of India (Substantial Acquisition of Shares and Takeovers)
Regulations, 2011
A. 24% B. 25%
C. 26% D. 27%
5. A form of corporate restructuring involving transfer of all or substantially all
the assets and assets, liabilities, loans and business of one of business divisions
or undertaking to another company whose shares are allotted to the
shareholders of the transferor company on a proportionate basis and transferor
company continue to carry on at least one of the businesses.
A. Spin off B. Split up
C. Split off D. None of the above
6. A defense tactic in which the target company sells its highly profitable or
attractive business division to make takeover bid less attractive to the
raider.
A. Poison pills B. Shark Repellents
C. Blank Cheque D. Crown Jewels
Q ? 1 (B) Explain following terms [4]
1. Demerger
2. Joint Venture
3. Buy Back
4. Delisting
Q ? 1 (C) What is corporate restructuring? What are different motives of corporate
restructuring
[4]
Q ? 2 (A) State the major methods of effecting payment of consideration to the
shareholders of target company. Explain features of each method in detail.
[7]
Q ? 2 (B) Imperial Chemical Industries (ICI), a British company is looking at an
opportunity to enter the Indian market. Instead of entering on its own, ICI
wanted to make an entry by taking over a major player in the Indian market.
The company (ICI) shortlisted Asian Paints as the right target to fulfill its
aspirations. However Asian Paints is not willing to get acquired by Imperial
Chemical Industries (ICI). With reference to this, explain the concept of
hostile takeover and suggest various defense tactics that Asian Paints can use
to avoid the hostile takeover by Imperial Chemical Industries (ICI).
[7]
OR
Q ? 2 (B) After TATA tea acquired Tetley in early 2000, in last fifteen years a number
of Indian companies have made global acquisitions. One of the important
features of these acquisitions is that in most of the cases the target companies
have been far bigger in size than the Indian acquirers. To take an example
Tetley?s turnover at the time of acquisitions was more than three times the
turnover of Tata tea. Similarly when Tata Steel acquired Corus Plc. Corus?s
turnover was four times more than Tata Steel?s turnover. With reference to
this, explain various sources of funds for cross boarder acquisitions.
[7]
Q ? 3 (A) Explain major provisions of Securities and Exchange Board of India
(Buy back of securities) Regulations, 1998.
[7]
Q ? 3 (B) Videsh Ltd. Is keen on reporting EPS of Rs. 6 per share after acquiring
Swadesh Ltd. The following financial data are given
Particulars Videsh Ltd. Swadesh Ltd.
Earning Per Share Rs. 5 Rs. 5
Market Price Per Share Rs. 60 Rs. 50
Number of shares 10,00,000 8,00,000
There is an expected synergy gain of 5 per cent. What exchange ratio will
result in a post merger EPS of Rs.6 for Videsh Ltd.?
[7]
OR
Q ? 3 (A) Mergers and acquisitions can have an adverse impact on healthy state of
competition prevailing in the markets. One of the objectives of the
competition act 2002 is to promote and sustain healthy state of competition
in markets. With respect to this explain in detail major provisions of
Competition act 2002 governing combinations.
[7]
Q ? 3 (B) Black & Co. is planning to acquire White & Co. The relevant financial
details of both the firms before acquisition are
Particulars Black & Co White & Co
Market Price per Share Rs. 70 Rs. 32
Number of shares 20 million 15 million
The merger is expected to bring the gain which has present value of Rs. 200
million. The exchange ratio agreed is 0.5. What is the true cost of merger
for Black & Co?
[7]
Q ? 4 (A) Explain the concept of strategic alliance. Why do companies enter into
strategic alliances? What are the implications of strategic alliance?
[7]
Q ? 4 (B) Cross border acquisitions are becoming very popular due to their capacity to
generate additional revenues for the acquirer. Globalization and liberalization
have made the business environment more conducive for them. While cross
border acquisitions are good, they do not always succeed due to number of
challenges faced by the acquirer before and after the acquisition. With
reference to this, explain various difficulties encountered in cross border
acquisitions.
[7]
OR
Q ? 4 (A) Explain the concept of Delisting. State the features of compulsory and
voluntary delisting.
[7]
Q ? 4 (B) The following financial information is available for company D, a
pharmaceutical company
PBDIT Rs. 18 Crore
Book value of assets Rs. 90 Crore
Sales Rs. 125 Crore
Based on evaluation of several pharmaceutical companies, companies A, B
and C have been found to be comparable to company D. Looking at the
characteristics of A, B and C following multiples are reasonable for company
D.
MV/ PBDIT 17
[7]
MV / Book value 3
MV / Sales 2.2
Find out value of D by using each of the above multiple
Q ? 5 Marriot?s Bondholder?s taken for a spin (or for a ride?)
In 1993 Marriott Corporation (MC) carried out a spinoff of its hotel
management business to shareholders. In 1992, MC had revenues of $8.7bn
and operating profits Di $496m. The group consisted of two broad categories
of businesses ? the lodging managemeat group including hotels that
contributed 52% of group revenues and 68% of operating profits, and
contract services catering and facilities management, airport and highway
concessions that accounted for the rest. With two-thirds of its operating profit
from lodgings related businesses, MC was generally viewed as a hotel
company.
MC pursued ambitious growth and profitability objectives in the hotel
business through a strategy of developing and then selling hotels while
retaining the right to manage them. Management sperated from the
ownership of these properties, required smaller capital to fund growth but
also reduced the volatility of cash flows. This low volatility allowed MG
management to maintain high levels of debt. MC's operating profit increased
yearly from 1986 to 1989 in both lodging management and contract services
group. However, in 1990-91 recession hit the, hotel occupancy rates and
profits. The contract service businesses also suffered. MC had built up a large
portfolio of hotel properties that were difficult to sell in the recession. It
replaced high-risk senior debt with lower-risk subordinated debt against the
background of falling credit rating of its debt.
Under the spinoff plan announced in October 1992, the lodging management,
catering and other service businesses were to be spun off into Marriott
International (MI). The parent, renamed Host Marriott (Host) retained
ownership of the hotel and real estate interests. MI, under a long-term
contract with Host, would manage the hotel properties. The Marriott family
would continue to oversee all of the businesses and the senior management
of MC would be split between MI and Host.
MC argued that the spinoff would benefit shareholders by
? allowing MI to exploit its growth opportunities in the management
business;
? allowing the capital markets to value MI more accurately because of
better financial information;
? giving shareholders better investment options between a high-growth
management company and a capital-intensive company with strong
cash flow and long-term capital appreciation.
[14]
The initial spinoff proposal allocated most of MC's long-term debt to Host.
When compared with the level of assets and operating cash flow, this
allocation made Host vastly more risky than MT as shown below. This
sparked considerable resistance from creditors who felt their debt was being
put at high risk since most of it was being assigned to cyclical property
business and very little to the management business with more stable cash
flow. The interest cover ratio shows higher risk clearly. Such an allocation
reduces the default risk faced by the shareholders and increases it for
creditors, thereby transferring some of the corporate value from creditors to
shareholders.
Assets/Liabilities MC
First Proposal Final Proposal
MI Host MI Host
Total assets 6333 2360 4620 3017 3888
Proprietary and equipment 3672 360 3310 772 2689
Current Liabilities 1189 1130 210 1280 394
Long term debt 2891 20 2870 899 2313
EBITDA/Interest expenses 2.6 20.3 1.3 6.5 1.8
Given the storm of protest from creditors and their Class action suits, MC
revised the spin off proposal and reallocated more debt to the management
business. This mitigated the additional risk faced by the creditors. MC was
forced to accept several conditions, such as repurchase of debt, stricter
covenants, higher coupon rate on new debt, etc. to the benefit of creditors.
The revised spinoff plan was implemented.
Robert Parrino estimated the market-adjusted bondholder loss at $195m and
industry adjusted shareholder gains at $81m, Thus the spinoff caused a
$114m decline in the total value of these securities from spinoff
announcement to distribution. The spinoff failed to create shareholder value
in the period surrounding the spin off and destroyed the bondholder value.
What could be the reasons for this? There are several direct and indirect costs
to a spinoff? direct transaction costs, loss of ability to offset Host's losses
with MI?s profits and thereby save on corporation tax, the increased coupon
on new debt, value of warrants issued to creditors, duplication of accounting
and financial systems, higher costs of new security issues, etc.
The Marriott family continued to maintain control over the entire firm. The
spinoff limited the potential losses to Marriott family from any default on
debt. The separation improved the management business's debt capacity and
this would allow the family to pursue growth in this business aggressively
without losing control.
1. Why did Marriott decide to go for a spinoff?
2. What is the initial structure of the spinoff? Why MC was required to
change it?
3. Is there a conflict of interests in spinoffs among various stakeholders?
4. How were these resolved in the Marriott case?
OR
Q ? 5
Hindalco Novelis Deal
Introduction
In early 2007, Hindalco Industries Ltd (Hindalco), the flagship company of
Aditya Birla Group, announced that it would acquire the Canadian company
Novelis. The transaction would make Hindalco the world's largest aluminum
rolling company and one of the biggest producers of primary aluminium in
Asia as well as India's leading copper producer. Novelis was to be acquired
in an all cash deal valued at approximately $6 billion, including debt. Under
the terms of the agreement, Novelis shareholders would receive $44.93 in
cash for each outstanding common share.
The Chairman of the Aditya Birla Group, Kumar Mangalam Birla was of the
opinion that aluminium was a core business with enormous growth potentials
in revenues and earnings. The acquisition of Novelis was a step in this
direction as it was felt that the combination would establish an integrated
producer with low-cost alumina and aluminium facilities combined with
high-end rolling capabilities and a global footprint.
Industry Overview
The global aluminium industry is seeing increased scope in packaging
applications. The other sectors using aluminium increasingly are power,
infrastructure and automobiles. These sectors shall provide the much-needed
fillip to the aluminium industry and demand is expected to grow rapidly and
attain double-digit growth. Domestic and global demand will rise over a
long-term period. A number of other factors influence the market of
aluminium, such as lowering of import duties, domestic realization of
aluminium majors, pressure on Hindalco and Nalco, reduction in buffer on
international prices, greater linkage to international prices, and volatility in
financials. To negate the effect of these factors, producers have started
moving downstream to mitigate higher volatility. The key features of the
industry are as follows:
? The industry is highly concentrated with only five primary plants in
the country.
? All the producers use the Bayer- Hall?Heroult technology.
? The industry has a very high energy cost, 40% of manufacturing cost
for metal and 30% for rolled products.
? Technology cost is very high and this is the main barrier in achieving
high energy efficiency.
? The main aim of the industry is energy conservation and reduced
consumption.
? The industry faces stiff competition from imports.
Aluminium is a power-intensive industry with one tonne of aluminium
requiring over 15,000 KW of power. Power constitutes almost 40% of the
[14]
total cost of production. Hindalco enjoys an advantage in this respect with
the smelters backed by captive power plants, making it one of the lowest cost
producers globally.
As regards Hindalco, the following issues were found to be prominent: large
upstream and midstream production, cyclical business linked to commodity
prices, low cost commodity operations, proximity and good access to Asian
markets. With regard to Novelis, the factors that were crucial were market
leading downstream portfolio, stable cash flows, substantive proprietary
technology-led operations, and leading world market position.
Hindalco?The Aluminium Giant
Hindalco, the metals flagship company of the Aditya Birla Group, is the
world's largest aluminium rolling company and one of the biggest producers
of primary aluminium in Asia. Its copper smelter is the world's largest custom
smelter at a single location. Established in 1958, Hindalco commissioned the
aluminium facility at Renukoot in eastern Uttar Pradesh in 1962. The
company grew from strength to strength through acquisitions and mergers
with Indal and Birla Copper. With the acquisitions of the Nifty and Mt
Gordon copper mines in Australia in 2003, its position was strengthened in
value-added alumina, aluminium, and copper products.
Its aluminium units across the globe encompass the entire gamut of
operations, from bauxite mining, alumina refining, and aluminium smelting
to downstream rolling, extrusions, foils, along with captive power plants and
coal mines. Similarly its copper unit, Birla Copper, produces copper
cathodes, continuous cast copper rods, and other by-products such as gold,
silver, and DAP fertilizers. The Birla Nifty copper mine consists of an
underground mine, heap leach pads, and a solvent extraction and
electrowinning (SXEW) processing plant, which produces copper cathode.
The Mt Gordon copper operation consists of an underground mine and a
copper concentrate plant. Until recently, the operation produced copper
cathode through the ferric leach process. Nifty and Mt Gordon have entered
into a long-term 'life of mine' offtake agreement with Hindalco to supply
copper concentrate to the copper smelter located at Dahej, Gujarat.
A strong presence across the value chain and synergies between operations
have provided Hindalco with a dominant share in the value-added products
market. The ever-expanding market for value-added products and services
has provided the opportunity for the launch of three new products?Everlast
roofing sheets, Freshwrapp kitchen foil, and Freshpakk semi-rigid containers.
Novelis?The Canadian Giant
Novelis is a Canadian corporation formed in January 2005, as a spin-off from
Alcan Inc. It is the world's leading producer of aluminium-rolled products
based on shipment volume. The company produced an estimated 19% of the
worlds flat-rolled aluminium products, and is the biggest producer in Europe
and South America, and the second-largest in North America and Asia.
Novelis has also been a world leader in the recycling of used aluminium
beverage cans, with nearly 39 billion cans recycled into new can sheet to be
manufactured into beverage cans in 2008. The company operates in four
continents and is the only company that has the expertise to produce premium
aluminium-rolled products. The company has expertise in producing end-use
applications and light gauge products that include beverage and food cans,
food and packaging, transportation, electronics, construction, and industrial
products. The company also operates bauxite mining, primary aluminium
smelting, and power generation facilities.
Hindalco's Strategy
A business model describes how a company will operate in the market so that
the pre-determined marketing goals are attained effectively. Hindalco had a
very clear business model for its aluminium business. The model focused on
a totally integrated business solution, keeping in mind the large size of the
division. The company pursued an objective of optimally exploiting the
aluminium value chain balancing between the more volatile high-margin
upstream products and the steadier low-margin downstream portfolio. Its
upstream strategy focused on continuing the existing low-cost operations and
gradually progressing to new greenfield projects. This, it was presumed
would further improve cost competitiveness through lower production costs;
by controlling key resources, such as bauxite mines, refineries, power plants
and coal; and reaping the benefits of economies of scale.
Added to this strategy is the fact that Indian bauxite is of the highest quality
with high alumina content, less than 2% Boehmite content, very low reactive
silica content, and negligible organic content. It also possesses a higher liquor
purity and productivity that is more cost-efficient. Again large deposits of
bauxite are found in a single plateau, which allows more efficient extraction.
India also has abundant coal supplies, easy availability of labour, and is
located in close proximity to the fast-growing markets. All these factors
create the right setting for producing high quality aluminium.
The Acquisition Advantage
Hindalco's decision to acquire Novelis was influenced by the fact that
Novelis had a well-diversified geographical market base, which would
enhance the stature of Hindalco in the area of downstream production. The
growth seen at Hindalco was the result of a well-crafted growth and
integration strategy that hinged on three cornerstones like cost
competitiveness, quality, and global reach. The company was also committed
to the triple bottom line accountability of economic, environment, and social
factors.
Novelis was the world leader in rolled aluminium products, which would help
Hindalco to extend its reach in the industry. Novelis also had long-standing
relationships with leading customers, which Hindalco expected to exploit.
The list of customers included Agfa-Gevaert, Alcan, Anheuser-Busch, Ball,
Coca-Cola, Crown Cork & Seal, Daching Holdings, Ford, General Motors,
Lotte Aluminium, Kodak, Pactiv, Rexam, Ryerson Tull, Tetrapack, and
ThyssenKrupp. The fact that Novelis used advanced scientific techniques
and applied knowledge to deliver innovative, customer driven products also
made it a good buy. The extensive research and development capabilities
ensured that Novelis was able to provide innovative production and
application technologies, including breakthroughs in the following areas:
? Alloy development/optimization for improved properties such as
strength, formability, corrosion resistance
? Molten metal and advanced solidification technology
? Innovative manufacturing technologies
? Advanced surface treatment and coating technologies for semi-
finished products
? Modelling of forming processes for automotive sheet components
and product performance for auto structure crash behaviour and
beverage can down-gauging
? Development of innovative products like heat exchanger materials,
automotive sheet, beverage and semi-rigid containers, etc.
Novelis also used the concept of global technology organization wherein it
committed itself to providing world-leading research and technology support.
This allowed Novelis to share its knowledge and experience rapidly between
teams and facilities around the globe so that innovations could be applied
appropriately, and with the same speed, by customers who possess regional
worldwide manufacturing capabilities. The company collaborated very
closely with customers to identify their needs in the areas of manufacturing
process support, the introduction of new manufacturing technologies, and the
design and development of new and improved products. The collaboration
involved physical simulation of a customer's processes and products through
the development of pilot line capabilities, and simulation via state-of-the-art
computer-aided design and engineering. Novelis had the technology,
economic strength, commitment, and skills in financial, environmental and
social dimensions to excel as a sustainable corporation. Hindalco's
acquisition made sense because of all these factors.
What Did The Deal Mean In Numbers?
The acquisition was very crucial for Hindalco and in terms of numbers it
meant the following:
? The acquisition was executed through an all-cash transaction wherein
Novelis was valued at approximately $6 billion, including around
$2.4 billion in debt.
? The merger would establish a globally integrated aluminium producer
with low-cost alumina and aluminium production facilities combined
with high-end aluminium rolled product capabilities.
? The merger would ensure that Hindalco would become the biggest
rolled aluminium products maker and fifth largest integrated
aluminium manufacturer globally.
? Novelis, being a global leader in aluminium rolled products and
aluminium can recycling, with a global market share of about 19%,
would make Hindalco a major player in the market. At the time of
acquisition Hindalco held 60% share in the high-growth Indian
market for rolled products which today appears to be very small.
? Hindalco has always been one of the lowest cost producers of primary
aluminnium in the world, but the merger would enable it to leverage
its and become a key player globally.
? Novelis, it was expected, would incur a loss of $263 million in 2006.
However, it expects to make a profit of $68 million in 2007. The total
free cash flow was expected to be $175 million in 2006.
? The debt component of Novelis stood at $2.4 billion and additional
$2.8 billion would be added as this is the amount Hindalco would take
to finance the deal. This was expected to put a tremendous pressure
on profit due to high interest burden.
? Hindalco was then planning a major expansion at an investment of
Rs. 250 billion. This would put a tremendous interest burden on the
company.
Looking at the financial position of the two entities and their future growth
plans, they would not have been able to finance the deal through a high debt
mix. Let's take a look at the numbers to substantiate our argument. Novelis
had a debt equity ratio of 7.23 : 1, making it practically impossible for it to
borrow any further.
Hindalco proposed to buy the $3.6 billion worth of Novelis's equity as
follows:
? $2.85 billion through borrowing
? $300 million as debt from group companies
? $450 million from its cash reserves
The second part of the deal was the debt of Novelis of $2.4 billion. Hindalco
proposed to take refinancing facility to finance these borrowings. These were
ultimately to be repaid with the cash flows of Novelis.
Based on above case study give your comments on followings
1. What is the strategic rationale for this acquisition?
2. What are financial challenges for this Acquisition?
3. How this deal is beneficial for Hindalco?
4. Explain funding structure of Hindalco Novelis deal.
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This post was last modified on 19 February 2020