Mergers and Acquisitions: Strategy, Valuation, Leveraged Buyouts, and Financing, 3ed

1 Mergers and Acquisitions: Trends and Waves 3

1.1 Introduction 6

1.2 Global M&A Trend 10

1.3 Merger Waves 12

1.3.1 First Wave: 1893–1904 12

1.3.2 Second Wave: 1915–1929 15

1.3.3 Third Wave: 1946–1970 15

1.3.4 Fourth Wave: 1980–1989 16

1.3.5 Fifth Wave: 1990–2000 18

1.3.6 Sixth Wave: 2003–2008 18

1.4 Indian M&A Scenario 20

1.4.1 Indian M&A Scene 21

1.4.2 Indian M&A Trend: Pre and Post

the COVID-19 Pandemic 24

1.4.3 M&A in Gaming, Cloud and AI sector 25

Summary 28

Key Terms 29

Multiple Choice Questions 29

Review Questions 30

Project Assignments 30

References 30

Cases

Kroger and Albertsons 3

Microsoft and LinkedIn M&A 8

Microsoft and Nokia 27

2 Understanding M&A 31

2.1 Introduction 32

2.2 Types of Mergers 33

2.2.1 Merger 34

2.2.2 Acquisition 34

2.2.3 Horizontal Merger 36

2.2.4 Vertical Merger 39

2.2.5 Conglomerate Merger 39

2.3 Merger Motives 41

2.3.1 Eliminate Competition and Create

Monopoly 42

2.3.2 Gain Market Access 43

2.3.3 Benefit from Efficiency Gains in

the Form of Synergy 43

2.3.4 Satisfy the Self-Ego of Managers

(Hubris Hypothesis) 44

2.3.5 Benefit from Undervaluation 44

2.3.6 Diversify Across Industries 44

2.3.7 Gain Access to R&D and Technology

Know-How 44

Summary 47

Key Terms 47

Multiple Choice Questions 47

Review Questions 48

Project Assignments 48

References 48

Cases

Simplifying Corporate Structure:

Merger of IDFC Limited with IDFC

FIRST Bank 31

Grasim Does Creeping Acquisition of

L&T for Cement 35

Horizontal Merger in Indian Home Appliance

Industry: Electrolux – Kelvinator – Voltas 36

PayPal Acquires Xoom: Online Mobile Payment

Space Gets Consolidated and Competitive 37

Savlon vs. Lifebuoy 40

P&G Growth Story: Organic and

Inorganic Extensions 45

3 Mergers and Acquisitions: Strategy and Strategic Fit 49

3.1 Understanding Strategy 50

3.2 Successful Strategies 52

3.3 Strategic Analysis 53

3.3.1 External Analysis 53

3.3.2 Competitor Analysis 55

3.3.3 Internal Analysis 56

3.4 Strategy to Create Competitive Advantage 59

3.5 Generic/Business Level Strategies 59

3.6 Cooperative Strategies 60

3.7 Corporate Level Strategies 61

3.7.1 Firm’s Directional Strategy 61

3.7.2 Portfolio Approaches/Strategies 62

3.8 Strategy Implementation 65

3.8.1 Framework Strategy for Implementation:

Mckinsey 7-S Framework 65

3.8.2 Framework for Strategy Implementation:

Balanced Scorecard Approach 66

3.9 Understanding Strategic Fit 67

3.10 Strategic Fit and Synergy Gain 70

3.11 Synergy Gain and Added Value 71

3.11.1 Operating Synergy 72

3.11.2 Revenue Synergy 73

3.11.3 Cost Reduction Operating Synergy 73

3.11.4 Financial Synergy 74

3.12 M&A Tool for Corporate Growth Strategy 75

3.12.1 Market Expansion Strategy 76

3.12.2 Enhancing Product or Service or

Brand Offerings 76

3.12.3 Vertical Integration to Fill Gaps or

Strengthen the Existing Value Chain 77

3.13 M&A: Strategic Investment Choice for

Inorganic Growth 77

3.14 M&A Strategic Process 78

Summary 81

Key Terms 83

Multiple Choice Questions 83

Review Questions 84

Project Assignments 84

References 84

Cases

JP Morgan Snaps Up Major

US Bank First Republic 49

Working Mission Statement of HALLMARK 53

Daiichi Makes an Outrageously Expensive

Attempt to Learn Due Diligence 68

Qualcomm Acquires NXP to Gain Strategic

Benefits into Emerging Industry Verticals 73

AB InBev Becomes World’s Largest by Buying

Its Biggest Competitor 79

4 Corporate Restructuring and Mergers and Acquisitions 85

4.1 Introduction 88

4.1.1 Corporate Restructuring 88

4.2 Organizational Restructuring 91

4.2.1 Organization Restructuring Models 92

4.3 Financial Restructuring 93

4.3.1 Leverage Buyout of RJR Nabisco 95

4.3.2 Management Buyout of

Harley Davidson 95

4.3.3 Leverage Buyout in India 96

4.4 Portfolio Restructuring 96

4.4.1 Divestment or Divestiture 98

4.4.2 Joint Venture and Strategic Alliances 105

4.4.3 Mergers and Acquisitions 105

4.5 Mergers and Acquisitions as an Inorganic Growth Tool 106

Summary 109

Key Terms 110

Multiple Choice Questions 110

Review Questions 111

Project Assignments 111

References 111

Cases

Corporate Restructuring at Google 85

Corporate Restructuring at Accenture 90

Organizational Restructuring at Xerox 91

Kraft Foods: Mergers and Splits 93

Restructuring at Max India 93

Corporate Restructuring at Aditya Birla Group 97

Corporate Restructuring at AT&T 99

Demerger at Wipro Limited 104

Reliance IndustriesLtd.:

Growth Through M&A Tool 108

When Coca Cola and P&G Formed an Alliance 108

5 Identifying Opportunities in Mergers and Acquisitions: Buy Side and Sell Side 113

5.1 Introduction 114

5.2 Buy-Side Mergers and Acquisitions 116

5.2.1 Buyer Motivation 117

5.2.2 Nature of Deal: Horizontal, Vertical,

and Diversified 117

5.3 Financing Options for Buyer 118

5.3.1 Stock Payment/Equity Financing 118

5.3.2 Cash Payment 119

5.4 Fairness Opinion 120

5.5 Definitive Agreement 120

5.6 Buy-Side Valuation and Deal Analysis 120

5.6.1 Football Field 120

5.6.2 EPS Accretion (Dilution) Analysis 124

5.7 Sell-Side M&A 134

5.8 Factors Affecting Sell-Side M&A 135

5.8.1 Company-Specific Variables for Sell Side 135

5.8.2 Existing Market Conditions 135

5.8.3 Synergy Opportunities 135

5.9 Sell-Side Process 136

5.10 M&A Strategic Buyer 137

5.10.1 Rationale for Buyout 137

5.10.2 Financial Buyer 137

5.10.3 J-Curve 138

5.10.4 Deal Dynamics 139

5.11 Marketing Plan for Target 139

Summary 141

Key Terms 142

Multiple Choice Questions 142

Review Questions 143

Project Assignments 143

Reference 143

Cases

PVR & INOX: A Big

Bang Merger 113

Bridge Loan to Debt Market Gaining

Momentum in 2015 115

Football Field Valuation with Steps 125

Kraft Foods and Heinz Create

a Global Food and Beverage Giant,

Projected to Become Accretive by 2017 140

Unit II: Legal Issues and Framework

6 Mergers and Acquisitions: Legal and Regulatory Framework 147

6.1 Introduction 149

6.2 Mergers and Acquisitions:

Regulatory Framework 150

6.3 Merger/Amalgamation 150

6.3.1 The Companies Act Provisions 151

6.3.2 The Income Tax Act (ITA) Provisions 155

6.3.3 Competition Act Provisions 156

6.4 Acquisition/Takeover 157

6.4.1 Threshold Limit for Disclosure of Substantial Holding in Target Company 158

6.4.2 Threshold Limit for Making an Open Offer 158

6.4.3 Rationale for 25 percent Trigger

Threshold Limit and 26 percent Open Offer 158

6.5 Cross-Border Mergers and Acquisitions 160

6.5.1 Foreign Investment in India 160

6.6 Foreign Direct Investment 162

6.6.1 Automatic Investment 163

6.6.2 Restricted Investment 164

6.6.3 Prohibited Investment 164

6.6.4 Instruments of FDI 164

6.7 Foreign Portfolio Investment 165

6.8 Foreign Venture Capital Investments 166

6.9 Pre-Agreement and

Share Purchase Agreement 167

Summary 169

Key Terms 171

Multiple Choice Questions 171

Review Questions 172

Project Assignments 172

References 172

Annexure I 173

Annexure II 175

Cases

Hostile Takeover: The Acquisition

of Mindtree Ltd. by L&T Infotech 147

Suzuki Motor Corporation Consolidates

Suzuki Motor Gujarat Private Limited

with Maruti Suzuki India Limited 154

Amalgamation/Merger Scheme at Akzo

Nobel India Limited 154

Abolition of Treasury Stock 159

Cross-Border Mergers under Companies Act, 2013 160

Vedanta Resources and Cairn India: The No

Break-Up Clause in the Pre-Agreement 167

Completion of the Transaction Between Vedanta

Resources and Cairn India 167

Vodafone and Hutch Deal 168

7 Mergers and Acquisitions: Takeover Defenses 177

7.1 Introduction 178

7.2 Probability of Takeover 178

7.2.1 Golden Parachute 179

7.2.2 Saturday Night Special 183

7.2.3 Dawn Raid 183

7.2.4 Leveraged Buyout 184

7.2.5 Management Buyout 185

7.2.6 Lady Macbeth Strategy 185

7.2.7 Poison Pill 185

7.2.8 People Pill 186

7.2.9 Jonestown Defense 186

7.2.10 Crown Jewels 186

7.2.11 Scorched Earth Policy 186

7.2.12 Bankmail 186

7.2.13 Greenmail 187

7.2.14 Macaroni Defense 187

7.2.15 Shark Repellent 188

7.2.16 Proxy Fight 188

7.2.17 Knight Armors 189

7.2.18 Safe Harbor 190

7.2.19 Anti-Takeover Amendments 190

7.2.20 ESOP 191

7.2.21 Share Repurchase 191

7.2.22 Break-up Clause 195

Summary 198

Key Terms 199

Multiple Choice Questions 199

Review Questions 200

Project Assignments 200

References 200

Cases

Adani Group vs. NDTV: Hostile Acquisition 177

Golden Parachute at Motorola and eBay 180

Golden Handshake by Citigroup 182

Some More Golden Terms 183

Junk Bonds and Busted Takeovers 184

Kraft Foods’ Hostile Takeover of Cadbury 188

Unique Amendment of Lobster Trap 191

Public Announcement of Cairn India Limited

for Buyback 192

CRISIL, JustDial, and Clariant Chemicals

Buyback Shares 193

Bristol-Myers Squibb Buyback Program 194

Pfizer Completes USD 43 Billion Acquisition

of Seagen, Doubling Its Oncology Pipeline 196

Oracle Takeover of PeopleSoft 196

8 Mergers and Acquisitions: Accounting and IFRS-3 203

8.1 Introduction 205

8.2 Purchase Method 206

8.3 Pooling Method 207

8.3.1 Differences Between Purchase and Pooling Method of Accounting 207

8.3.2 Popularity of Pooling Method 208

8.4 New Accounting Norms (Post 2001) 208

8.4.1 Indian Accounting Standards (IND AS) 103 and 27 209

8.5 Consolidation Process 215

8.5.1 Consolidation Accounting 217

Summary 226

Key Terms 226

Multiple Choice Questions 226

Review Questions 228

Project Assignment 228

References 228

Cases

Treatment of Acquisition-Related

Costs in Ind AS-Compliant Financials 203

New Companies Act 2013 Paves Way for

International Accounting

Standard Compliance 225

9 Foreign Direct Investment and Mergers and Acquisitions 229

9.1 Introduction 230

9.1.1 Recent Trends in FDI 230

9.2 Defining Foreign Direct Investment 232

9.2.1 Inward and Outward Foreign

Direct Investment (FDI) Flows 234

9.3 Rationale for Foreign Direct Investment 235

9.4 Costs of Foreign Direct Investment 236

9.5 Forex Rate Volatility, Balance of Payments,

and Foreign Direct Investment 237

9.6 Determinants of Foreign

Direct Investment 238

9.6.1 Market Size 238

9.6.2 Political Risk 239

9.6.3 Quality of Labor 239

9.6.4 Quality of Business Infrastructure 239

9.6.5 Gross Domestic Product (GDP)

Growth Rate 240

9.6.6 Macroeconomic Stability 240

9.6.7 The Regulatory Environment 240

9.6.8 Profit Repatriation 240

9.6.9 Openness 241

9.6.10 Incentives and

Operating Conditions 241

9.7 Foreign Direct Investment in India 242

9.7.1 Entities for Foreign

Direct Investment 245

9.7.2 Instruments of Foreign

Direct Investment 246

9.7.3 Concern for Repatriation 246

9.8 Advantages of Foreign Direct Investment 247

9.9 Foreign Direct Investment and

Asian Countries 248

Summary 252

Key Terms 252

Multiple Choice Questions 252

Review Questions 253

Project Assignments 253

References 253

Cases

Microsoft’s FDI in Asian Countries 229

Composite Cap 233

Shale Gas Driving FDI in the United States 241

MNCs and Value Addition 244

Entry Mode for MNCs in India 247

Temasek Provides FDI to Singapore 251

Unit III: Valuation and Mergers and Acquisitions

10 Concepts in Business Valuation 257

10.1 Introduction 258

10.2 Components of Discounted Cash Flow 259

10.2.1 Free Cash Flow Estimation 259

10.2.2 Period of FCF Estimation 261

10.2.3 Growth in FCF 263

10.2.4 Perpetuity Value Beyond

FCF Period 263

10.2.5 Discount Rate 264

10.3 Valuing Firm with DCF 274

10.3.1 Two-Stage Model 275

10.3.2 Multi-Stage Growth Model 276

10.4 Unlevering Beta and Firm Valuation 277

10.4.1 Determinants of Beta 277

10.4.2 Levered Beta 277

10.4.3 Unlevered Beta 278

Summary 284

Formulae 285

Key Terms 286

Multiple Choice Questions 286

Review Questions 287

Project Assignments 287

References 287

Cases

Broadcom’s Acquisition of VMware 257

Anthem Acquires Cigna (Health Insurance

Sector of the United States) 277

RBI Notifies Valuation Methods for Acquisition

or Sale of Shares 283

Changing Value of Ranbaxy:

From Daiichi to Sun Pharma 283

11 Valuation by Multiples 289

11.1 Introduction 290

11.1.1 To Value Non-Traded, Private Companies 291

11.1.2 To Value Divisions of Traded Companies 291

11.1.3 To See How a Listed Company Is

Valued Relative to Its Peers 291

11.1.4 To Value a Transaction Like a M&A Deal Relative to Other Transactions Involving Its Peers 291

11.2 Steps in Comparable Analysis 291

11.2.1 Step 1: Selecting Comparable Companies 292

11.2.2 Step 2: Identifying Required Financial Information 293

11.2.3 Step 3: Determining Key Financial Statistics, Ratios, and Multiples 294

11.3 Equity Value 294

11.4 Enterprise Value 296

11.5 Earnings Before Interest Taxes Depreciation and Amortization (EBITDA) 296

11.6 Gross Profit Margin 296

11.7 Growth Metric 297

11.8 Credit Profile 297

11.8.1 Calculating Key Trading Multiples 298

11.8.2 Creating the Comparable Companies Financial Metric Spread 299

11.8.3 Determining the Valuation 301

11.9 Precedent Transaction Analysis 302

Key Terms 305

Multiple Choice Questions 305

Review Questions 306

Project Assignments 306

Reference 306

Cases

Microsoft’s Acquisition of LinkedIn for

USD 26.2bn (INR 2,213.09 Billion) 289

PE Buyout Deals and Valuations 304

Chancery Base Fair Value Calculation of

a Target Firm on the Income-based Model 304

12 Business Valuation and Consideration Paid in Mergers and Acquisitions 307

12.1 Introduction 308

12.2 The Historical Cost Approach 309

12.3 The Residual Income Approach 310

12.4 The Multiples Approach 310

12.4.1 Price Multiples 312

12.4.2 Enterprise Value Multiples 313

12.4.3 Transaction Multiples 314

12.5 The Dividend Discount Model 316

12.6 The Discounted Cash Flow (DCF) Approach 317

12.6.1 Forecasting Cash Inflows 317

12.6.2 Estimating the Cost of Capital 318

12.6.3 Determining the Terminal Value 320

12.6.4 Determining the Total Firm Value 320

12.7 Economic Value Added (EVA) 322

12.7.1 Measuring Economic Value Added (EVA) 324

12.7.2 The Importance of Economic Value Added (EVA) 326

12.7.3 Net Present Value (NPV) and Economic Value Added (EVA) 328

12.7.4 Management Value Added (MVA) and Economic Value Added (EVA) 329

12.7.5 Shareholder Value Management 331

12.8 Consideration in Mergers and

Acquisitions (M&A) 331

12.8.1 Value of the Target Firm 331

Summary 339

Key Terms 340

Multiple Choice Questions 340

Review Questions 340

Project Assignments 340

References 341

Cases

Microsoft’s Acquisition of Activision Blizzard:

Creating the Third Largest Gaming

Company by Revenue, only Behind

Tencent and Sony 307

Corporate Value 311

EVA-Driven Mission Statements of Coca-Cola 329

India’s Value Creators 330

IBP: Valuation Analysis for Proposed Acquisition 338

Unit IV: Advance Topics in Mergers and Acquisitions Valuation

13 Brand Valuation and Mergers and Acquisitions 345

13.1 Introduction 347

13.2 Mergers and Acquisitions and Brand Valuation 348

13.3 Brand Valuation Methods 349

13.3.1 Accounting-Based Methods 350

13.3.2 Market-Based Methods 351

13.3.3 Discounted Cash Flow Method 352

13.3.4 Interbrand Method 353

13.3.5 Royalty Relief Method 357

13.4 International Financial Reporting Standards (IFRS) and Brand Valuation 358

13.5 Intangible Assets 359

13.6 Value Drivers for Valuation 360

Summary 361

Key Terms 361

Multiple Choice Questions 361

Review Questions 362

Project Assignments 362

References 362

Cases

HUL-GSK: FMCG Giant Buys Horlicks Brand

for EUR 375.6 Million 345

Brand Mortgage by Kingfisher 349

Brand Value of Sintex Industries Ltd. 350

Tata’s Acquisition of Jaguar and Land Rover 350

Selling Rolls Royce 352

Brand Strength Index 357

Infosys’s Brand Value Model 359

Brand Valuation as a Defense: RHM’s Response

to a Hostile Takeover Attempt 360

14 Private Equity and Start-Up Valuation 363

14.1 Introduction 365

14.2 Convertible Debt for Start-Ups 365

14.3 Equity Series Round 367

14.4 Pre- and Post-Money Valuations 368

14.4.1 Pre-Money Valuation 369

14.4.2 Implied Valuation and Internal

Rate of Return (IRR) 369

14.4.3 Expected IRR 371

14.4.4 Exit Value 371

14.4.5 Dave Berkus Method

of Adjustment in Pre-Money Valuation 371

14.4.6 Cayenne or Scorecard Method 372

14.4.7 Risk Factor Summation Method 373

14.5 Future Dilution 374

14.6 Option Pool 374

14.6.1 Baked-In or In-The-Round Option Pools 374

14.6.2 Treatment of Unused Option Pool

Shares in Case of Acquisition 375

14.7 Preferred Stock and Liquidation Preference 375

14.7.1 Participation Right 376

14.7.2 Participation Cap 376

Summary 377

Formulae 378

Key Terms 378

Multiple Choice Questions 378

Review Questions 379

Project Assignments 380

Cases

Byju’s Acquires Aakash Institute Giving Exit to

PE Firm Blackstone 363

SEBI Launches Separate Trading Platform for

Start-Up Ventures 366

Indian End-to-End Logistics Start-Up Firms Get

Funding from PE Firms 376

Flipkart and Snapdeal Attract Series of

Investments from PE Investors 377

15 Leveraged Buyout Economics and Valuation 381

15.1 Introduction 382

15.2 Leveraged Buyout (LBO) Economics 383

15.2.1 Internal Rate of Return (IRR) 383

15.2.2 Cash Return 384

15.3 Leveraged Buyout (LBO) Valuation 384

15.3.1 Leveraged Buyout (LBO) Model 384

15.3.2 The Adjusted Present Value (APV)

Method 396

Summary 399

Key Terms 400

Multiple Choice Questions 400

Review Questions 401

Project Assignments 401

References 401

Cases

Cisco’s Acquisition of Splunk: 50 Percent

Debt Financing 381

Blackstone Buys Gates Global from PE Firms,

Enhances Valuation by 20 percent in

Just 4 Years 399

Unit V: Financing Aspects

16 Financing Options in Mergers and Acquisitions 405

16.1 Introduction 406

16.2 Normal Equity 407

16.2.1 The Value of Equity 408

16.2.2 Features of Equity Shares 408

16.2.3 Modes of Issue 408

16.2.4 Options Built-in Shares 409

16.3 Differential Voting Equity 410

16.4 Preference Shares 411

16.4.1 Characteristics of Preference Shares 412

16.5 Debt Financing 414

16.5.1 Key Terms for Debt Instruments 414

16.5.2 Types of Debt Financing 415

16.5.3 Term Sheet and Debt Financing 420

16.5.4 Characteristic of Traditional Debentures and Bonds 420

16.5.5 Types of Debentures and Bonds 422

16.6 Retained Earnings/Cash Surplus 423

16.7 Eurobonds 424

16.8 Foreign Bonds 425

16.9 Depository Receipts 426

16.9.1 Understanding American

Depository Receipts 426

16.9.2 Other Depository Receipts 427

16.10 External Commercial Borrowings (ECBs) 428

16.11 Equipment Financing 429

16.12 Leasing and Hire Purchase 429

16.12.1 Types of Leasing 430

16.12.2 Advantages of Leasing 431

Summary 433

Key Terms 433

Multiple Choice Questions 433

Review Questions 434

Project Assignments 434

References 434

Cases

Oracle Bridges Loan to Buy USD 28Bn

Cerner: A “Huge Growth Engine” 405

Cairn Vedanta Deal 410

SEBI and Put/Call Option Case of

Vulcan Engineers Ltd. 410

Amendment Regarding Preference

Shareholders Right 411

Compulsory Convertible Preference Shares (CCPS) 413

Tata Steel Refinances USD 5 Billion Corus Loan 416

Tata Consumer to Fund Two Acquisitions

With Cash Reserve, Bridge Financing 417

Bridge Loans Mandate as Per RBI 417

Tata Capital Floats INR 500-Crore Public Issue

of Secured Non-Convertible Debentures 419

Blackstone to Offer SeniorNotes 419

KKR Completes Acquisition of Fotolia 420

Anheuser-Busch InBev NV Acquisition of

SABMiller in 2015 420

Cash Reserves Used for M&A 423

Term Loans and Institutional Financing 424

Saint-Gobain Post Acquisitions Refinances Its

Debt with Eurobond 425

Domestic and International Bond Markets:

Some Statistics 425

HRT Acquires UNX with GDR 427

Aurelian Commercial Lending 429

REVCO Bankruptcy Post LBO 431

17 Leveraged Buyout 437

17.1 Introduction 438

17.2 Leveraged Buyout (LBO) Sponsors 439

17.3 Leveraged Buyout (LBO) Mode of Target Acquisition 439

17.3.1 Acquire a Public Company Which Is Then Taken Private 439

17.3.2 Acquire Any Company and Then Immediately Divestiture (Sell Off Parts of the Company) 440

17.3.3 Private Company and Entrepreneurial Ventures 440

17.4 Criteria for Selecting Leveraged Buyout (LBO) Candidates 440

17.4.1 Mature Industry/Company 440

17.4.2 Non-Cyclical Stable Cash Flows 441

17.4.3 Strong Management Team 441

17.4.4 Strong Balance Sheet 441

17.4.5 Core Advantage in th