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Transcript of M&A
AND ACQUISITION Introduction to M&A Horizontal M&A Valuation and Synergies
ICICI Bank and Bank of Madura Concept The phrase mergers and acquisitions (abbreviated M&A) refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling and combining of different companies that can aid, finance, or help a growing company in a given industry grow rapidly without having to create another business entity. Acquisition Acquisition, also known as a takeover or a buyout, is the buying of one company (the ‘target’) by another. An acquisition may be friendly or hostile. In the former case, the companies cooperate in negotiations; in the latter case, the takeover target is unwilling to be bought or the target's board has no prior knowledge of the offer. Mergers It is the combining of two or more companies, generally by offering the stockholders of one company securities in the acquiring company in exchange for the surrender of their stock Difference between
Merger and Acquisiton When one company takes over another and clearly establishes itself as the new owner, the purchase is called an acquisition. From a legal point of view, the target company ceases to exist, the buyer "swallows" the business and the buyer's stock continues to be traded.
In the pure sense of the term, a merger happens when two firms agree to go forward as a single new company rather than remain separately owned and operated. This kind of action is more precisely referred to as a "merger of equals". The firms are often of about the same size. Both companies' stocks are surrendered and new company stock is issued in its place Types of Mergers Horizontal Conglomerate Vertical A horizontal merger results in the consolidation of firms that are direct rivals
e.g.:1)Ranbaxy-Daiichi sankyo2)Arcelor-Mittal steel The merger of firms that have actual or
potential buyer-seller relationships
2)Ford-Bendix. Consolidated firms may sell related products, share marketing and distribution channels and perhaps production processes
Eg.1)L&T and Voltas,
2)LENOVO-IBM A horizontal merger is when two companies competing in the same market merge or join together to achieve economies of scale in the production
When two extremely small companies combine, or horizontally merge, the results of the merger are less noticeable.
Ex :- If a small local drug store were to horizontally merge with another local drugstore
In a large horizontal merger, however, the resulting ripple effects can be felt throughout the market sector and even whole economy.
Ex :- If one company holding twenty percent of the market share combines with another company also holding twenty percent of the market share Motivation To achieve optimum size of business.
To remove certain key factors and other bottlenecks of input supplies.
Improve the profitability and better customer service
Achieve economies of scale and size
Acquire assets at lower market price
Bring separate enterprise under single control
Grow without any gestation period
Nurse a sick unit
Tax advantages by acquiring a running concern. Examples of
Horizontal Mergers The formation of Brook Bond Lipton India Ltd. through the merger of Lipton India and Brook Bond
The merger of Bank of Madura with ICICI (Industrial Credit and Investment Corporation of India) Bank
The merger of BSES (Bombay Suburban Electric Supply) Ltd. with Orissa Power Supply Company
Merger of ACC with Damodar Cement Types of
Horizontal Mergers Horizontal
Expansion Horizontal Integration Describes a type of ownership and control
It is a strategy used by a corporation that seeks to sell a type of product in numerous markets
The goal is to consolidate companies and monopolize an industry. Monopoly is formed by both vertical and horizontal mergers
Two companies in the same form of trade takeover each other to create monopoly and a wider market
Accomplish higher economies of scale
Downstream purchasers and upstream suppliers are controlled decreasing production expenses Refers to the expansion or growth of a company in a sector presently functioning.
Aim is to grow market share
For a specific commodity or service. Advantages Economies of scope
Economies of scale
Dominant existence in market
From shareholders prospective
Realization of monopoly profits
Economies of scales
Diversification of product line
Acquisition of human assets
Better investment opportunity in combinations
From managers Prospective
Improving operations of the company, effectively management of company for all round gains and growth
Can convert a private limited company into a public company without contributing much wealth and without losing control
Benefits to general public
Workers community Disadvantages Increase in average cost due to dis economies scale
Extra cost involved in seeking to harmonize Valuation of a business Accurate business valuation is one of the most important aspects of a horizontal M&A as valuations like these have a major impact on the price that a business will be sold for
The financial evaluation of a merger is needed to determine
1. the earnings and cash flow
2.areas of risk and the maximum price payable to the target
3. the best way to finance the merger.
The value of the firm depends not only upon its earnings but also upon the operating and financial characteristics of the acquiring firm. It is therefore, not possible to place a single value for the acquired firm Important factors
for Valuation Valuation of Acquisition = Value of target + Value of Control/Synergy
Methods for valuation of target
2.Market Multiple Analysis-
3. Earnings Analysis Effects of synergy
on valuation approach Synergy, influence one of the four inputs in the valuation process
Cash flows from existing assets
Higher expected growth rates (market power, higher growth potential)
A longer growth period (from increased competitive advantages)
A lower cost of capital (higher debt capacity) Valuing Operational & Financial Synergy
Value the firms involved in the merger independently, by discounting expected cash flows
Estimate the value of the combined firm, with no synergy, by adding the values obtained for each firm in the first step
Build in the effects of synergy into expected growth rates and cash flows, and we value the combined firm with synergy
Difference between the value of the combined firm with synergy and the value of the combined firm without synergy provides a value for synergy
Value of Synergy=Value created through Synergy Synergies
(Fundamental Approach) Synergy exists in an acquisition when the value of the newly-combined firm exceeds the sum of the values of the two merging firms, when acting independently
Two types of Synergies
1.Cost-based Synergies2.Revenue-based Synergies
Cost-based synergies and Revenue-based synergies have often been seen as two fundamentally different, and to some degree mutually exclusive, logics Cost based Synergies Asset divestiture improves the performance of horizontal acquisitions. The term “asset divestiture” refers to the extent to which merging firms dispose of their physical assets and cut back their personnel in different areas, including R&D, manufacturing, logistics etc.
The exploitation of economies of scale and scope through acquisition is usually achieved through asset divestiture
Divestiture could take place without the use of an acquisition if the market were efficient enough to discipline firms into specializing their assets in a given (or across) activity(ies) Revenue Based Synergies Two ways of enhancing revenues: increased market coverage and enhanced innovation capability
The exploitation of revenue-based synergies(increased market coverage and innovation capability) through acquisition is usually achieved through resource redeployment. Such resource redeployment, i.e. the use by a target or acquiring business of the other business’ resources.
EMT states that this synergy could take place without the use of an acquisition if the market for resources was efficient enough to allow firms to exchange their resources Effect of Merger News What did ICICI Bank expect? not the product range or technology that BoM had.
only three aspects - trained manpower, immediate asset creation and presence
1.ICICI acquired trained manpower in one stroke
2.Reduced recruitment and training costs and time
3.BoM was very much into the retail trade whereas ICICI focussed more on corporates Benefits BOM’s staff
BoM had a quality team of personal bankers which helped ICICI Bank wealth team
BoM had over the years acquired good expertise in investment and treasury operations,
Immediate large asset creation
More presence in south
Increased branch network- 81 ICICI bank branches+ 269 BoM
Helped strengthened ICICI Bank’s financials
1.ICICI's deposit base Rs. 9,866 cr, Bank of Madura's deposit base stood Rs. 3,631 crores
2. ICICI Banks’ gross advances Rs.5071 BoM’s 2,037 crores
Customer base: Increased customer base-> More cross selling
Focus on Priority Sector: More rural(87) and semi urban (88) branches Challenges Managing Human Resources:
BoM staff strength: 2,623 (with 955 officers, 1,340 clerks and 328 subordinate staff) ICICI :1,134.
1999-2000 ICICI Bank’s business per employee averaged Rs. 5.95 crores to BoM's Rs. 2.2 crores and profit per employee was Rs. 7.83 lakhs to BoM's Rs. 1.72 lakhs. Managing Client Base
The clients base of ICICI Bank after merger, increased to 2.7 Million from it past 0.5 Million, accumulation of 2.2 Million from BOM.
The Generation Gap
Managing rural branches
Managing NPA- BoM- 4.7% to net credit
ICICI 1.14% Swap Ratio Approved in the ratio of 1:2 – two shares of ICICI Bank for every one share of Bank of Madera.
Equity capital diluted by around 12 percent. Merger brought 20 percent gains in EPS of bank.
Bank’s comfortable capital Adequacy Ratio (CAR) of 19.64 percent declined to 17.6 percent.
ICICI Bank issued 235.4-lakh share of RS 10 each to the shareholders of BOM.
The Reserve Bank of India approved the merger effective March 10, 2001. ICICI Bank: The stock gained sharply over two months after hitting a low of Rs 110
Bank of Madura’s share also gained almost 70% leading upto the merger ICICI Bank Bank of Madura Established in 1943 by Karumuttu Thiagarajan Chettiar.
acquired Chettinad Mercantile Bank (est. 1933) and Illanji Bank (est. 1904) in the 1960s
2 million plus customers
More than 280 branches
Centres spread across about 100 cities in India Prepared By-
Anirudh Baliyan A009
Mayank Bhatia A013
Anurag Bohra A014
Vivek Kumar A033
Abhijit Srivastava A061
Divej Wadhwa A065 THANK YOU Pre-Merger MBA Banking Rs.cr Rs.cr