Introduction to M&A

Mergers and Acquisitions

By Prof.KS Tomar
Growth of magnificent
Growth of magnificent - Google
Why should companies be merged or
Acquired?
• M&A is a part of inorganic growth strategy.
• Main objective of M&A is to add-value.
• Company A + B are valued more than the independent sum total.
How?
• Lets further consider only DDM for valuation
• Value of A, B , A+B synergy, Control Premium
• New Book By Ram Charan “Attackers advantage”
The Game will soon change.
According to Prof. Ian Giddy, New York
University1
• These motives are considered to add shareholder value:
• Economies of scale: This refers to the fact that the combined company
can often reduce duplicate departments or operations, lowering the
costs of the company relative to theoretically the same revenue
stream, thus increasing profit.
• Increased revenue/Increased Market Share: This motive assumes that
the company will be absorbing a major competitor and increase its
power (by capturing increased market share) to set prices.
Value addition
• Cross selling: For example, a bank buying a stock broker could then
sell its banking products to the stock broker's customers, while the
broker can sign up the bank's customers for brokerage accounts. Or, a
manufacturer can acquire and sell complementary products.
• Synergy: Better use of complementary resources.
Prof.I.Giddy
• Taxes: A profitable company can buy a loss maker to use the
target's tax write-offs. In the United States and many other countries,
rules are in place to limit the ability of profitable companies to "shop"
for loss making companies, limiting the tax motive of an acquiring
company.
• Geographical or other diversification: This is designed to smooth the
earnings results of a company, which over the long term smoothens
the stock price of a company, giving conservative investors more
confidence in investing in the company. However, this does not always
deliver value to shareholders (see below).
Value Addition
• Resource transfer: resources are unevenly distributed across firms
and the interaction of target and acquiring firm resources can create
value through either overcoming information asymmetry or by
combining scarce resources.
• Financial restructuring: a change in control can lead to a more cost-
effective or safer capital structure, and more efficient use of financial
assets.
• Business mix restructuring: the acquirer may divest non-core
businesses.
What does not add value?
• Diversification: While this may hedge a company against a downturn in an
individual industry it fails to deliver value, since it is possible for individual
shareholders to achieve the same hedge by diversifying their portfolios at a
much lower cost than those associated with a merger.
• Overextension: Tend to make the organization fuzzy and unmanageable.
• Manager's hubris: manager's overconfidence about expected synergies from
M&A which results in overpayment for the target company.
• Empire Building: Managers have larger companies to manage and hence
more power.
When M&A does not add value
• Manager's Compensation: In the past, certain executive management
teams had their payout based on the total amount of profit of the
company, instead of the profit per share, which would give the team a
perverse incentive to buy companies to increase the total profit while
decreasing the profit per share (which hurts the owners of the
company, the shareholders); although some empirical studies show
that compensation is rather linked to profitability and not mere
profits of the company.
McKinsey & Company
• The five types of successful acquisitions
• Improve the target company’s performance
• Consolidate to remove excess capacity from industry
• Accelerate market access for the target’s (or buyer’s) products
• Get skills or technologies faster or at lower cost than they can be
built
• Pick winners early and help them develop their businesses
When M&A does not add value
• Bootstrapping: Example: how ITT executed its merger.
• Vertical integration: Companies acquire part of a supply chain and
benefit from the resources.
Valuation for M&A
• First, we value the firms involved in the merger independently, by
discounting expected cash flows to each firm at the (WACC)weighted
average cost of capital for that firm.
• Second, we estimate the value of the combined firm, with no synergy,
by adding the values obtained for each firm in the first step.
 Third, we build in the effects of synergy into expected growth rates
and cash flows and we revalue the combined firm with synergy. The
difference between
• the value of the combined firm with synergy and the value of the
combined firm without synergy provides a value for synergy.
Next we understand “Control Premium”
• It is important at this stage that we keep the value of synergy apart
from the value of control, which is the other widely cited reason for
acquisitions.
• The value of control is the incremental value that an acquirer
believes can be created by running a target firm more efficiently.
• To value control, we just revalue the target firm with a different and
presumably better management in place and compare this value to
the one we obtain with the status quo – existing management in
place.2
Breaking down the acquisition price.
Methods
• Business-Valuation-Methods.pdf
• synergy.xls
Valuation
Only two variables are required
• DFC Method
• - Free Cash Flow
• - Rate of discount
• Multiple Method and Relative Valuation
• - multiples
• - Comparable
DCF Method FCFF and FCFE
In business Cash is “King”. You run a business on cash and not on
accounting profit.
The two types of owner are (i) lenders (ii) Equity Owners
FCFF is for both stake holders
While FCFE if for Equity Owners only.
Free Cash Flows for the
Firm CFA USA
Prof.Sanjay Tomar
Debt and Tax
Would you like to take Loan ( Debt )
• Obviously the answer is “No”
• Question is why not?
• If we are unable to pay the interest, the lender can take us to court.
• It is the regular payment. Each time it becomes due as is the rent.
• Above all it curtails your freedom
• But how apt is the same logic for your managers?
Let there be two companies L and UL
• Each requiring Rs.100 cr of Capital
• Levered firm gets 50% debt of 10% p.a Interest
• Per share face value is Rs.1
 Let there be Two identical companies with
capital requirement of Rs.100 cr
Revenue 50
Revenue
Unlevered 50 Levered
COGS (20)
COGS (20)
EBIT 30
EBIT 30
Less Interest (5)

Tax (40%) (12) PBT 25

PAT 18 Tax (40%) 10

PAT 15
EPS 0.18
EPS 0.30
Answer the following questions
• How much is the Tax saved difference
• Levered tax Rs.12
• Unlevered tax Rs.10
• What is the benefit of taking debt to save tax
• Rs.2 crores or simple put
• Tax benefit or as said in finance “tax shield” is
• Interest x 0.4 = 2 The tax saved as because of Debt Interest paid
• SO you net actual expense is Rs.3 cr instead of Rs.5 cr
• 5 x (1 – 0.4) = 3
What does the Firm here means?
• Its primarily the
• Lenders
• Equity owners
• ( Preferential Equity share holders are considered as Equity Owners ,
however some analysts consider them as Debt )
Why Free Cash Flows are needed for Capital
Budgeting?
• It is the Cash on which business runs and not book profits.
• These cash Flows are used for valuation of businesses (method called
DCF or “Discounted Cash Flow”).
• This method allows a simple perspective of two most important
aspects of any business valuation
• (i) Discounting rate , or hurdle rate. This is the minimum rate of
return expected by the business in being in that business. Most often
it’s the WACC is the most used discounting rate to start with.
(ii) Instead of using Accounting profit, Cash flows are calculated by
adjusting non cash expenses and earnings. Example ( depreciation )
What are the types of Free Cash Flows
( FCF )
• FCFF – Free Cash flows for the Firm
• FCFE – Free Cash Flow for Equity owners.
• Let understand the two.
• A business owners are equity owners. They get their earnings after
paying off all the expenses, viz, suppliers, cost of utilizing Fixed assets
(depreciation ) , Amortization of such expenses which effect the
company for many years ( Discount on issue of Debt , Equity )
• They Get PAT, Profit After Tax, or Net Income ( NI ) , Earning After Tax, .
These terms are intergang able and same. So remember on thing – This
is the earning available for the Business Owners or the Equity Owners.
EBDITA – Earning Before Depreciation
Interest Tax and Amortization.
In the given MSIL Annual report extract Find
the following :-
• PAT
• Depreciation
• Tax Paid
• Financing Cost
• EBDITA
Can you Find the Shareholders Fund of UTL
Narration Mar-19 ( Rs. Crores )
Equity Share Capital 274.64
Reserves 28,113.66
Borrowings 22,818.35
Other Liabilities 14,988.36
Total 66,195.01

Net Block 46,135.84

Capital Work in Progress 1,122.09
Investments 2,921.33
Other Assets 16,015.75
Total 66,195.01
Why is EBDITA important?
•A business corporation may be having a single line of business or multiple line of businesses, or may be
having many joint ventures and holding companies ( standalone and consolidate , you may further read
from here )

•EBDITA is important as it is the earning for the following parties interest in the earning power of the
company :-

•(i) Lenders : like those who have given debt to the company. They want to know if the company will be
able to pay the Interest or not. If yes then will it be on time. At the time of lending they must have already
accessed that can the company perform well when the economic environment spirals downwards.

•(ii) Fixed Assets : As the production takes place the Fixed assets like machine start depleting leading finally
to replacement of these assets. To continue production the managers need to fund the same. Hence
deprecation is charged to arrive at the true accounting profit.
Why is EBDITA important contd…
• (iii) Amortization Long term Expenses such as - writing off the
Intangibles like Severance
• (iv) Retained Earnings. From Profit ( Net Income ) the company may
retain some funds for future expansion. These funds are generally
given on the liability side as Reserves. On the Asset side they may be
invested and come under the same head too.
• (v) Equity Owners. Owners of the business are those who are the
share holders of equity shares in a corporate bodies. The reserves or
the retained earnings are added to this “Equity Share Capital” to
arrive the total of business owners interest in the business.
EBDITA and Government
• If the EBDITA is such that the PAT is Zero then government will not get
the direct tax such as “ Corporate Income Tax ”
• Hence Government is also interest in EBDITA
How to Calculate the FCFF
• FCFF = NI + Interest ( 1- t) – CAPEX – Increase in WC ( Please note here that the
dividend paid to the common shareholders is not deducted )
• NI = Net Income available to common share holders
• Interest = it’s the interest paid to the lenders on loans they have given. You
have to be careful for defining debt.
• The debt in the cost of capital is the debt used to fund the operations and
investments of the firm. Using this rationale, it should include all interest
bearing debt, short term as well as long term. Non-interest bearing
liabilities such as accounts payable, supplier credit and accrued items
should be incorporated into working capital and should not be counted as
debt.
FCFF Contd
• CAPEX : Refers to Capital ( CA ) Expenditure ( PEX ). It is the
requirement to set up more ( Indigo to by 300 A320neo for $33 billion
). Any business will require to set up more machines to produce more.
These expenses are for in Fixed Assets.
• As the production increases so will be the requirement of the
additional working capital. ( its decrease will be deducted )
• Read more here
FCFE
• FCFF = FCFF + Net Borrowing
Discounting rates
• For FCFF use Cost of Capital or WACC
• For FCFE use Cost of Equity or Ke
• Why ?
Assignment
• Take your CBR company. Calculate
• (i) FCFF – use both methods NI to FCFF and EBDITA to FCFF
• (ii) FCFE - use both methods NI to FCFF and EBDITA to FCFF
• Submission dead Line by
• Tomorrow 11.59 PM
• Marks :10
• Weight ( 20 % )
CFA Practitioners using Multiples
• (Pinto, et al., 2019)3
• This is study is so far one of the most comprehensive work on the practice of
Valuation in the America, Asia Pacific EMEA region. Especially is surveys the CFA
community. The earlier survey had shown that 67% used Valuation multiples, DCF
16%, residual income model 10%. They documented that PE model and multistage
DCF model were dominant.
• This study by Pinto and others show that 92.8 % respondents use multiples.
Followed by DCF 78.8%.
• Among these multiples the forerunners were P/E with 88.1% respondents and EV
to firm value multiples (like EV to EBIDITA , EV to Operating Profit ) being practiced
by 76.7% of the respondents.( P/E, EV, P/BV, P/CF. EV multiples was sparse in US
investment books.
Free Cash Flow part II
Several Questions
• Q1.Should you use cash in WC calculation or not?
• Q2.What is debt? What is the treatment of Interest paid?
• Q3.Operating Income is Revenue less operating expenses with due
adjustment of cost of debt and other such financial charges, And
capital expenses. Why?
• Q4.In the above at least two charges are such which are used to arrive
at the operating income but are not as per the strict definition of Cash
generating process above. Can you specify which? And very
important, WHY?
Tax Rate , Which tax rate to take?
• Marginal or Effective tax Rate or actual paid?
• What are these?
• Which one to choose? Why
• What if your company is a Multinational company?
Do you predict future on present numbers?
• What about the outliers?
Microsoft has more the 225 acquisitions Such
companies grow on the basis of these inorganic growths
• What will be the treatment of such expenses? They pay cash or shares
for these acquisitions. How would you treat the same?
Working Capital adjustment
• In the conventional method you have already learnt that the increase
in the WC is a deduction to arrive at the FCFF.
• Lets look deeper into it
References and bibliography
• 1ch20_p542_580.qxp 12/7/11 2:26 PM Page 542 Chapter 20
Revenue Multiples and Sector-Specific Multiples Damodaran.
• 2 Stubbs, M. B., 2012. The valuation accuracy of multiples in mergers
and acquisitions, and their association with firm misvaluation.
[Online]
Available at: http://eprints.qut.edu.au/64455
[Accessed 2 10 2019].
• 3Pinto, J. E., Robinson, T. R. & Stowe, J. D., 2019. Equity Valuation: A
Survey of Professional Practice. Review of Financial Economics, , 37(2),
pp. 219-233.
• 4Valuation using multiples: dispersion. Useful to compare and to
negotiate1 Pablo Fernandez Professor of Finance IESE Business
School, University of Navarra Camino del Cerro del Aguila 3. 28023
Madrid, Spain e-mail: [email protected] Previous versions:
1992, 1996, 2002, 08, 13, 14, 15, 16, 17
• 5 WARBUG: Valuation Multiples: A Primer
www.ubswarburg.com/research/gvg.
Cost of Equity Ke
• Calculate Beta
• Unlevered Beta and Levered Beta
• Adjusted Beta
• Zero Beta strategy
• Unlevered beta (asset beta)=(1+Equity(1−tax rate)∗Debt​)Levered bet
a (equity beta)
Unlevered Beta

• Unlevered beta (asset beta)=(1+Equity(1−tax rate)∗Debt​)Levered bet
a (equity beta)​
Multiples for Valuation
What are the different types of valuation multiples?1

• There are two main types of valuation multiples:

• Equity Multiples
• Enterprise Value Multiples
• There are two main methods of performing analysis using multiples:
• Comparable Company Analysis (“Comps”)
• Precedent Transaction Analysis (“Precedents”)
Advantages and disadvantages of valuation multiples

• Using multiples in valuation analysis helps make sound judgments for

analysts and companies.
• This is especially true when multiples are used appropriately because
they provide valuable information about a company’s financial status.
• Furthermore, multiples are relevant because they revolve around key
statistics related to investment decisions.
• Finally, the simplicity of multiples makes them easy to use for most
analysts.
Disadvantages
• However, this simplicity can also be considered a disadvantage because
of the fact that it simplifies complex information into just a single value.
• This simplification can lead to misinterpretation and makes it
challenging to break down the effects of various factors.
• Next, multiples represent a single instance of a company’s status rather
than a period of time.
• As such, they do not easily show how a company grows or progresses.
• Additionally, multiples reflect short-term data instead of long-term
ones. Thus, the resulting values may only be applicable on the short-
term and not in the longer future.
Auto Industry in India
RANK OEM CY2018 CY2017 %Growth
1 Maruti Suzuki 1731450 16,02,522 8.05
India
2 Hyundai Motor 550002 5,27,319 4.30
India
3 Mahindra & 249301 2,42,386 2.85
Mahindra
4 Tata Motors 237217 1,91,107 24.13
5 Honda Cars India 174859 1,78,755 -2.18
Data from here
Capacity , PPE and Multiples ( assignment 1)
Year 2017-18 Gurgaon and Gujrat Plant Total
Manesar
Total Car Produced 15,00,000 2,50,000 17,50,000
Domestic Sales Less Export 126074 1623926

Sales Fill the blanks and Calculate

Can we value KIA or JIO
• Yes buy using the relative valuation and Multiples
• Why not using the forecasted P&L Ke using CAPM?
• - For this valuation we require companies accounting information
• - advantage of multiples are that they can be used with production
in units like in the case of KIA no of cars sold and booked. For Jio it can
be the no of subscribers.
PPE and Capacity to produce
• MSIL for 2017-18 126074 ( from here )
• MSIL capacity and Manesar
• Gurgaon Manesar 1.5 million
• In 2017-18 Gujrat plant produced 2.5 lakh cars ( Bloomberg)
• Domestic sales of 17,53,700 units and export of 1,08,749 ( from here )
• a growth rate of 4.7%
• Gujrat Plant by 2020 7,50,000 units ( read from here )
• By 2030 add 2.5 million
References
•1
https://corporatefinanceinstitute.com/resources/knowledge/valuatio
n/types-of-valuation-multiples/
Numerical
An analyst gathers the following information about two
companies for the year ending 31 December 2008:
Company 1 Company 2
Dividend pay-out ratio 37.5% 40.0%
Return on assets 12% 10.0%
Financial leverage 1.6 2.0

Which of the following best describes the expected growth rate

of Company 1? The expected growth rate of Company 1
compared to Company 2 is:
A. lower.
B. greater.
C. the same
1
• ROE = Return on assets x Financial leverage;
• Retention rate = 1 – (Payout ratio);
• g = Retention rate x Return on equity
• Company 1: ROE = 12% x 1.6 = 19.2%; g = (1 – 0.375) = 12%
• Company 2: ROE = 10% x 2.0 = 20.0%; g = (1 – 0.400) = 12%
Swap Ratio
• Assume Firm A is the acquirer and Firm B is the target firm. Firm B has
10,000 outstanding shares and is trading at a current price of $17.30
and Firm A is willing to pay a 25% takeover premium. This means the
Offer Price for Firm B is $21.63. Firm A is currently trading at $11.75 per
share.
• What is the exchange ratio?
• Answer: A is ready to pay $17.30 x (1.25) = 21.625 as offer price.
• 21.63/11.75 = 1.84x
• This means Firm A has to issue 1.84 of its own shares for every 1 share
of the Target it plans to acquire.
Numerical- M&A
Prof.KS Tomar
Q1
• ABC Ltd is a spare parts manufacturer with initial Machinery requirement of
Rs.11,00,000. It will cost another Rs.1,00,000 to fully install and make the
machine functional. The organisation plans to borrow Rs.4,00,000 from the
investment outlay through 8% SBI Loan. The organisation plans to fully pay
the amount at the end of the period. Each year the interest paid is tax
deductible at the rate of 36%p.a. The cash flow of the company is estimated
to be Rs.80,000. This is expected to grow at the rate of 30% for the first four
years and at 75% from fifth year onwards. Estimate the free cash flow for
the equity holders. ( adapted from ICFAI Illustration 3 pg 78)
• In the above question if the instalments are paid in five equal instalments
then how will your answer change.
Solution 1
g1 0.30 g2 0.75 Kd 0.08

Year FCFF Borrowing Interest(1-t) Principal paid FCFE

0.00 -1200000.00 400000.00     -800000.00

1.00 80000.00   -20480.00   59520.00

2.00 104000.00   -20480.00   83520.00

3.00 135200.00   -20480.00   114720.00

4.00 175760.00   -20480.00   155280.00

5.00 307580.00   -20480.00   287100.00

6.00 538265.00   -20480.00 -400000.00 117785.00

The Formula for g
• g = b (ROA +D/E(ROA – i(1-t))
• b = 2 – pay-out ratio
• g = (1 – 0.24)*(0.25 + 1(0.25 – 0.1291-0.4))
• = 0.76 X 0.428 = 0.3253 OR 32.5%
• For pay-out (ROA +D/E(ROA – i(1-t))
• = 0.18 +1(0.18 – 0.1(1-0.4)) = 0.30
• for 1 – b or 1- g/((ROA +D/E(ROA – i(1-t)))
• therefore 1- 0.1/(0.3) = 1 -0.33 = 66.67%
Beta
• .βu = βL / [1+ (1 – t)(D/E)]
• Hence the βL = βu * [1+ (1 – t)(D/E)]
Q5. AB is a private company operating in textile industry. It has a debt
equity ratio of 0.23. Tax rate applicable to the firm is 36%. Estimate the
beta of AB if its debt ratio is 0.23. The following information is available
for other publicly traded textile firms.

Firm Beta Debt/Equity

XY Ltd 1.10 0.24
PQ Ltd 1.22 0.33
CD Ltd 1.35 0.22
NM Ltd 1.20 0.20
βu = βL / [1+ (1 – t)(D/E)]
• Average Beta of industry is 1.217 or 1.22
• While the Debt/Equity Ratio = 0.2475 or 0.25
• 1.22 / [ 1+ (1 – 0.36)*(0.25))
• = 1.22/1.16
• = 1.05
• Estimating the beta of AB
• = 1.05* [ 1+ (1 – 0.36)*(0.23))
• = 1.05*1.15
• =1.21
 Find the Beta of a Unlisted Cement Company
ANEW Pvt Ltd ( having D/E 0.4 & Tax rate 36%)source 1&2

Mar Sales
S.No.Name CMP Rs. P/E Cap Rs.Cr Sales Ann Rs.Cr TR % Debt / Eq Beta
. growth % .
1 UltraTech Cem. 4318 39.4 118594 17.56 37379 0.31 0.8 1.38
2 Shree Cement 19931 58.79 69439.6 13.19 11722 0.12 0.29 1.39
3 Ambuja Cem. 215.75 17.22 42840.3 7.24 26040.9 -0.02 0 1.38
4 ACC 1650.8 17.78 30999.9 9.33 14801.6 -0.01 0 1.39
5 Century Textiles 955.75 15 10675.3 -20.03 3940.53 0.28 0.16 1.49
6 J K Cements 1138.8 20.49 8799.31 11.33 4981.3 0.31 0.82 0.8
7 Birla Corpn. 614.8 15.15 4734.57 14.36 6548.73 0.19 0.9 2.07
ANEW Pvt Ltd
S.No. Name CMP Rs. P/E Mar Sales Sales TR % Debt / Eq Beta
Cap Rs.Cr. growth % Ann Rs.Cr.

1 UltraTech Cem. 4318 39.4 118594 17.56 37379 0.31 0.8 1.38
2 Shree Cement 19931 58.79 69439.6 13.19 11722 0.12 0.29 1.39
3 Ambuja Cem. 215.75 17.22 42840.3 7.24 26040.9 -0.02 0 1.38
4 ACC 1650.8 17.78 30999.9 9.33 14801.6 -0.01 0 1.39
5 Century Textiles 955.75 15 10675.3 -20.03 3940.53 0.28 0.16 1.49
6 J K Cements 1138.8 20.49 8799.31 11.33 4981.3 0.31 0.82 0.8
7 Birla Corpn. 614.8 15.15 4734.57 14.36 6548.73 0.19 0.9 2.07
Averages 4117.843 26.26 40869.01 7.568571 15059.19 0.168571 0.424286 1.414286
Comparable Firm beta 1.045479
ANEW 0.36 0.4 1.313122
ANEW Beta Levered
• Find the unlevered beta for the industry ( pure play )
• Average for Cement Industry in India is Tax rate 16.86%
• Hence the Unlevered beta is D/E 42.43%
Beta 1.41
What are the other beta variants
• Adjusted Beta
• 1Adjusted Beta vs. Raw Beta - The beta of a stock can be presented as
either an Adjusted Beta or a Raw Beta. A Raw Beta is obtained from the
linear regression to a stock's historical data. Raw Beta, also known as
Historical Beta, is based on the observed relationship between the
security's return and the returns of an index.
• The Adjusted Beta is an estimate of a security's future Beta. Adjusted Beta
is initially derived from historical data, but modified by the assumption
that a security's true Beta will move towards the market average, of 1,
over time. The formula used to adjust Beta is: (0.67) x Raw Beta + (0.33) x
1.0
bibliography
• 1 https://guides.lib.uwo.ca/bloomberg/equities
• 2.
https://www.fidelity.com/learning-center/investment-products/etf/s
mart-beta
Buy Outs
Types
• MBO
• MBI
• BIMBO
• VIMBO
MBO
• A management buy-out is the purchase of a business by its existing
management team.
• By contrast a management buy-in is the purchase of a business by an
incoming management team. 
• The dynamic of each type of deal is different. 
• A management buy-out team will typically have extensive experience
of the business being acquired. 
• A management buy-in team will usually have sector experience but
little or no experience of the specific business.
MBO How it works?
• For example, Company XYZ is a publicly traded company where
management controls 30% the company's stock and the remaining
70% is stock floated to the public. Under the terms of an MBO,
management will arrange to purchase enough shares of the
outstanding stock from the public so that they end up with a
controlling interest of at least 51% of the company's total shares.  
• In order to finance their venture, the management group may look to
a bank or venture capitalists to assist them in financing
the acquisition. Read Examples here
• Question to ponder: Should Jet go for MBO?
MBIN – Management Buy In
 A management buy-in (MBI) is when, on a change of ownership, external
management is introduced to supplement or replace the existing
management team.
• External management may be introduced to add skillsets that the existing
management team may lack. They may be serial entrepreneurs looking
for a new enterprise and have the backing of their own funds and/or
those of their own backers.
• Invariably the amount of cash consideration will be determined by the
finance the business itself can support. MBOs may well be supported by
vendors retaining an equity stake or giving softer payment terms to
support the management team and to bridge funding gaps.
VIMBO Vendor Initiated Management Buy Out
• With a VIMBO, the vendor puts together a sensible and well-
structured deal before approaching the management team. This can
take the pressure off the management team to come up with an
acceptable offer. It also lets the business owner take control of the
process.
Market Extension Mergers

• A market extension merger takes place between two companies that deal in the same products
but in separate markets. The main purpose of the market extension merger is to make sure that
the merging companies can get access to a bigger market and that ensures a bigger client base.
• Example
• A very good example of market extension merger is the acquisition of Eagle Bancshares Inc by the
RBC Centura. Eagle Bancshares is headquartered at Atlanta, Georgia and has 283 workers. It has
almost 90,000 accounts and looks after assets worth US $1.1 billion.
• Eagle Bancshares also holds the Tucker Federal Bank, which is one of the ten biggest banks in the
metropolitan Atlanta region as far as deposit market share is concerned. One of the major benefits
of this acquisition is that this acquisition enables the RBC to go ahead with its growth operations
in the North American market.
• With the help of this acquisition RBC has got a chance to deal in the financial market of Atlanta ,
which is among the leading upcoming financial markets in the USA. This move would allow RBC to
diversify its base of operations.
Vertical Merger

• A merger between two companies producing different goods or services for one specific
finished product. A vertical merger occurs when two or more firms, operating at different
levels within an industry's supply chain, merge operations. Most often the logic behind the
merger is to increase synergies created by merging firms that would be more efficient
operating as one.
• Example
• A vertical merger joins two companies that may not compete with each other, but exist in the
same supply chain. An automobile company joining with a parts supplier would be an
example of a vertical merger. Such a deal would allow the automobile division to obtain
better pricing on parts and have better control over the manufacturing process. The parts
division, in turn, would be guaranteed a steady stream of business.
• Synergy, the idea that the value and performance of two companies combined will be greater
than the sum of the separate individual parts is one of the reasons companies merger.
Product Extension Mergers*

• A product extension merger takes place between two business organizations that deal in
products that are related to each other and operate in the same market. The product
extension merger allows the merging companies to group together their products and get
access to a bigger set of consumers. This ensures that they earn higher profits.
• Example
• The acquisition of Mobilink Telecom Inc. by Broadcom is a proper example of product
extension merger. Broadcom deals in the manufacturing Bluetooth personal area network
hardware systems and chips for IEEE 802.11b wireless LAN.
• Mobilink Telecom Inc. deals in the manufacturing of product designs meant for handsets
that are equipped with the Global System for Mobile Communications technology. It is
also in the process of being certified to produce wireless networking chips that have high
speed and General Packet Radio Service technology. It is expected that the products of
Mobilink Telecom Inc. would be complementing the wireless products of Broadcom.
What Is a Leveraged Buyout?

• A leveraged buyout (LBO) is the acquisition of another company using

a significant amount of borrowed money to meet the cost of
acquisition. The assets of the company being acquired are often used
as collateral for the loans, along with the assets of the acquiring
company.
Understanding Leveraged Buyout (LBO)

• In a leveraged buyout (LBO), there is usually a ratio of 90% debt to 10% equity.
Because of this high debt/equity ratio, the bonds issued in the buyout are
usually are not investment grade and are referred to as junk bonds. Further,
many people regard LBOs as an especially ruthless, predatory tactic. This is
because it isn't usually sanctioned by the target company. It is also seen as
ironic in that a company's success, in terms of assets on the balance sheet, can
be used against it as collateral by a hostile company.
• LBOs are conducted for three main reasons. The first is to take a public
company private; the second is to spin-off a portion of an existing business by
selling it; and the third is to transfer private property, as is the case with a
change in small business ownership. However, it is usually a requirement that
the acquired company or entity, in each scenario, is profitable and growing.
An Example of Leveraged Buyouts (LBO)

• Leveraged buyouts have had a notorious history, especially in the

1980s, when several prominent buyouts led to the eventual
bankruptcy of the acquired companies. This was mainly due to the
fact that the leverage ratio was nearly 100% and the interest
payments were so large that the company's operating cash flows were
unable to meet the obligation.
• One of the largest LBOs on record was the acquisition of Hospital
Corporation of America (HCA) by Kohlberg Kravis Roberts & Co. (KKR),
Bain & Co., and Merrill Lynch in 2006. The three companies paid
around $33 billion for the acquisition of HCA.
An Example of Leveraged Buyouts (LBO)
Contd..
• LBOs are often complicated and take a while to complete. For example,
JAB Holding Company, a private firm that invests in luxury goods, coffee
and healthcare companies, initiated an LBO of Krispy Kreme Doughnuts,
Inc. in May 2016. JAB was slated to purchase the company for $1.5
billion, which included a $350 million leveraged loan and a $150 million
revolving credit facility provided by the Barclays investment bank.
• However, Krispy Kreme had debt on its balance sheet that needed to be
sold, and Barclays was required to add an additional 0.5% interest rate
in order to make it more attractive. This made the LBO more
complicated and it almost didn't close. However, as of July 12, 2016, the
deal went through.
References
*
https://www.mbda.gov/news/blog/2012/04/5-types-company-mergers
Why M&A
By Prof.KS Tomar
How to analyse?
Micro or Macro?
• I think good art, if I could be pretentious enough to say, I think good a
rt deals with the micro to explain the macro.
• Philip Seymour Hoffman
• Study the ordinary first.
• Get beyond the façade thereafter.
• Learn, hone and apply the skills.
• You learn to grow inorganically
Why M&A
• Some rudimentary objectives
• To learn the vocabulary of M&A.
• - How is Spin off different from carve out?
• - Organic vs inorganic growth
• Should your organisation M or A or….?
• Calculating the M&A ( Financial Modelling )
• Answer : All the academic readings viz books are full of it.
Going beyond the façade
References/bibliography
• https://www.azquotes.com/quotes/topics/macro.html
Bibliography
• 1 http://pages.stern.nyu.edu/~igiddy/articles/mergers_intro.htm
•2
• www.stern.nyu.edu/~adamodar/pdfiles/papers/synergy.pdf
Valuation Assembly Part1
Prof.Sanjay Tomar
What is Enterprise Value?

• Ignoring Other variables such as minority Interest

• EV = (share price x # of shares) + total debt – cash
• EV = Market Cap + Total Debt - Cash
• Equity value = Enterprise Value – total debt + cash  or  Equity value =
# of shares x share price
• Further read from here
Understand the FCFF &FCFE , CFO,
EBDITA
• Read from here
• See Walmart Cash Flow
For FCFF
• First pass is to make a simple cascading variables of P&L as % of Sales
• Next Pass may include Judgement approximations
• Choose between the variables which you consider as important. Like
raw material, technology enhancement, change in WC etc.
• Caution : be aware as not to relate too much to your balance sheet. It
should not become a circular problem.
For Beta
• Read for Bottom up beta
• Read for Unlevered beta also study from here
• Those interest in more rigorous in-depth knowledge can study form
this very fine research article
• Or from here
• And here
Credit Risk Premium
And Equity Risk Premium
• Reread from Here
• Equity risk Premium read from here