Transcript M&A- emerging opportunities

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