MONEY MATTERS CLUB The Official Finance Club Of IBS Hyderabad
Presents the August 2020 Edition
The Financial Bulletin MERGERS AND ACQUISITIONS– UNLOCKING SYNERGIES
FROM THE EDITORS
The Financial Bulletin Money Matters Club IBS, Hyderabad Est..—2005
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Dear Readers, It gives us immense pleasure to come up with the August 2020 issue of The Financial Bulletin successfully. In this issue, we aim to give you a brief description about Mergers and Acquisitions, its implementation and impact on creating a sustainable future. We hope to deliver useful insights to the readers. May this issue be fruitful to each and everyone. Happy reading!
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Kritika Gupta Jagriti Gupta Juhi Parasrampuria Saisadwik Chodavarapu Newsletter Coordinators
MENTOR SPEAKS M&A activity is invariably explained as creating greater stockholder value. Stockholder interests are, indeed, central, because these transactions must have the approval of a majority of stockholders, and stockholders are unlikely to vote their shares in favour of a sale, purchase, or merger unless they believe that they will benefit. The real motivation behind M&A activity, however, is almost always a mixture in which financial, structural, institutional, and even personal aims are present. A major element of M&A activity in hostile acquisitions is resistance to being acquired. It is motivated by management's fear of losing control, distrust of the buyer's motivation, disagreement with the buyer's methods and strategy, etc. Motivations for selling a company are equally complex. Retiring founders of small businesses sell companies to realize the business's cash value after a lifetime of work. Companies projecting failure sell before the failure is knocking on the door. Companies reach the limit of their resources, financial or technical, and see great benefit in joining a larger company able to fund growth and to enhance their art by major engineering inputs. A common measure used for valuation is the price-earnings ratio (P/E Ratio) and another ratio used is the enterprise value to sales ratio (EV/Sales Ratio). The most common method of valuation used in M&A is the Discounted Cash Flow (DCF) analysis. Let us look at a few recent valuations of various mergers and acquisitions. Hindustan Unilever Ltd (HUL) has completed the merger of Glaxo Smith Kline Consumer Healthcare Limited (GSKCH) with itself for an INR 31,700 crore mega-deal. The company has additionally paid INR 3,045 crore to acquire the Horlicks brand for India from GSK by exercising the option available in the original agreement made between Unilever and GSK, the company said in a statement. Facebook has acquired Giphy for $400 million. Zomato acquired Uber Eats India, Uber’s food delivery business for $206 million which is paid in stock. Think and Learn which owns and operates education technology platform Byju’s - The Learning App, has acquired the Mumbai-based WhiteHat Jr. in a $300 million all-cash transaction. Microsoft announced that it has acquired Massachusetts-based internet-of-things (IoT) and industrial control system (ICS) security vendor CyberX for around $165 million. Historical trends show that roughly two-thirds of big mergers will disappoint on
their terms, which means that they will lose value on the stock market. The motivations that drive mergers can be flawed and efficiencies from economies of scale may prove elusive. In many cases, the problems associated with trying to make merged companies work are all too concrete. Moreover, the recent M&A activity and litigation have highlighted the need for a buyer to conduct careful due diligence as to potential risks, especially investigating financial statements, data breach and cyber security issues, technology, and intellectual property issues, customers and sales, material contracts, employee and management issues, pending litigations, sexual harassment liability, tax matters, insurance policies and procedures, environmental issues, legal compliance, organizational culture and social responsibility, target’s ownership structure and related party transactions, competition law and other regulatory provisions. M&As involves a complex and dynamic process that involves trade-offs between the potential benefits of synergy and the potential costs of conflicts in terms of personnel, integration, and organizational culture. An acquisition is more likely to be successful if the acquirer is capable of maximizing the synergy benefits and minimizing the costs. M&A activities involve collective strategic decisions and teamwork among the senior management of acquiring firms. The ability of an acquiring firm’s top management team plays a critical role in selecting acquisition targets, managing combined resources, and ultimately creating value. Therefore, the superior managerial ability is critical to managing post-acquisition integration and changes, maximizing the synergistic benefits of M&As, and thus enhancing post-acquisition performance. The research shows that the dividend-paying acquirers are most likely associated with greater improvements in return on assets post-M&A. Furthermore, dividendpaying acquirers hold higher levels of cash and are more likely to engage in cash financed deals. Some studies are showing that CEO overconfidence is the main driver of the firm’s underperformance during post-M&A and also that the unsuccessful acquirers lack the required resources and abilities to achieve learning gains. For example, the long-run underperformance in M&A deals results from poor acquirer governance as well as from poor merger execution and integration. From a personnel point of view, the research has demonstrated that turnover rates among employees and executives in the acquired firm are much higher during an M&A event. Recent empirical studies have also shown that employee turnover can best be understood by looking at psychological attributes and perceptions of M&As, thus drawing significant attention to the psychological and ‘human’ side voids to theoretically exploit and en-
hance understanding of people-related problems in M&A endeavours. An M&A activity shall be considered as successful only when it creates or adds value to its stakeholders, particularly the shareholders, employees, and society at large. First, there should be a valuable addition to the existing shareholders of both the acquirer and acquired firms by way of synergy as a result of M&A activity. Second, the employees of both the acquirer and acquired firms shall be treated with dignity and honour in terms of providing a congenial work environment, harmony among the personnel, transparent human resources policy and procedures, employee retention plans, proper training and development matching the changing needs of the M&A, best practices in performance management and reward systems, building organizational culture and knowledge management. Third, the very important aspect of a corporate firm is to care for the environment and not contribute to environmental pollution, carbon emissions, and also resort to green practices. It should focus on corporate social responsibility and work towards the cause of education, health, hygiene, and improve the quality of life among the deprived sections of the society. By – Dr. M V Narasimha Chary (Assistant Professor, Department of Finance- IBS Hyderabad)
Introduction to Merger and Acquisitions
A merger is a process in which two companies combine their resources to form a single entity. A new ownership and management structure is formed. Each company’s power is diluted. Acquisition is the process where one company purchases the other company, thereby expanding its market reach and taking control over the operating decisions of the acquired company. The acquired firm does not change its legal name or structure but is now known as the subsidiary of its parent company. Types of Merger and Acquisitions
Horizontal - Companies with similar products or services come together with the main goal to expand their offerings or markets.
Vertical - Companies in the same industry join their forces to improve logistics, consolidate staff, or reduce time to market their offerings.
Conglomerate - Companies in different industries join their forces to broaden their range of service and products.
Concentric - Companies share customer bases but provide different services and do have a mutual relationship.
Reasons for Merger and Acquisitions Companies go through mergers and acquisitions for the following reasons:
To increase the capabilities in areas like R&D, manufacturing, and operations.
To gain a more competitive advantage, larger market share, and diversifying products and services.
To cut costs - when two companies have similar products or services, combining can create a larger opportunity to reduce costs.
Companies, to survive in the market, also go for mergers and acquisitions.
Forms of Financing Merger and Acquisition For Merger
By purchasing common shares
By exchanging shares for shares
By purchasing of assets
By exchanging shares for assets
For Acquisition
Stock Purchase - Here, the purchasing company either pays the shareholders of the target company in the form of shares of the purchasing company or gives cash or even both.
Asset Purchase - Here, the purchasing company generally buys the assets of the seller company and has the option to take over the liabilities of the selling company.
Process in Merger and Acquisition Step 1: Develop an acquisition strategy - Buyer strategizes as to how to pursue an acquisition and also what they expect to gain from making the acquisition like more market access and more profits. Step 2: Set M&A search criteria - Both the companies identify the key criteria in areas like management, geography for market expansion, elimination of competition, and international expansion.
Step 3: Search for potential targets - After the criteria have been set they search for ideal companies. Step 4: Planning the transaction - The companies contact each other and discuss the terms and conditions of the deal. Step 5: Analysis of company - the companies will check each other's additional information to further evaluate the acquisition. Step 6: Negotiation between parties - Negotiation can be easy or difficult, depending on how both sides comprise. Using different valuations and other available data make case for their offer and make them come to an agreeable amount. Step 7: Due Diligence - It is an investigation or review performed to confirm the
facts. It aims to confirm or correct the purchasing company’s assessment of the value of the target company by conducting a detailed examination. Step 8: Draw up contracts - If due diligence goes smoothly, both companies move forward. Final decisions are made regarding contracts and both sides have their legal counsel to review the contracts.
Step 9: Financing strategy - The purchasing company can make use of various options for financing the deal. Step 10: Closing and integration - The deal closes and management teams of both the acquiring and target companies work together on the process of merger and acquisition.
By— Sandeep Sanka
Zomato Acquired Uber Eats
Uber Eats Uber, the parent company of UberEats, was founded in 2009 by Garret Camp and Travis Kalanick. The corporation started its food delivery in August 2014 with the launch of UberFRESH in California. The platform was renamed as UberEats which started its operation in London in the year 2016.
Zomato Zomato is an Indian food delivery and restaurant start-up founded by Deepinder Goyal in 2008. Zomato offers its services in 24 countries and 10,000 cities. In 2011, Zomato expanded its delivery across India in Delhi NCR, Mumbai, Bangalore, Chennai, Pune, Kolkata, etc. The Merger On 21st January 2020, Zomato acquired the Indian operations of UberEats for around $350 mn. (Rs. 2,485 cr.), for a stake of 9.99%. All of the UberEats businesses like customer information, delivery partners, and order history will now be transferred to Zomato, consistent with an Uber statement. The Uber app will redirect users to Zomato for subsequent next six months whenever they choose to 'get food delivered'. Zomato won’t absorb the UberEats India team. The move by Uber is believed to rally the corporate forward towards dropping verticals that are running in loss. The corporate went public in May 2020, and since then, has been working towards profitability. It is a classic example of a horizontal merger,
which made Zomato one of the biggest players in its sector. Reasons Uber was running in losses for a couple of years and its CEO, Dara Khosrawasahi said that the company will only operate in that market where it is in the No. 1 position. It pulled back its business from Vienna and South Korea because it had been running in losses. UberEats is a competitor of Swiggy and Zomato which already has wellestablished market relations with local restaurants, and as a result, can respond quickly to changes in the market like technological change, etc.
The deal also gives Uber ownership of a 9.99% stake in Zomato, which can be valued at 3 billion dollars. This deal will allow Uber to recover a minimum of the initial investment in India. Features Zomato and UberEats agreed to go for stock acquisition by issuing and acquiring shares. Zomato agreed to offer 10% of its shares to Uber Eats in return for complete ownership of Uber Eats. In this acquisition, the acquirer, Zomato, took over all assets and liabilities of the business and contractually allocated the liabilities. The method of acquisition was inexpensive, straightforward, and no tax was deductible on goodwill. Impact After the acquisition, Swiggy and Zomato have attempted to attract customers with discounts, offers, and subsidies. This may be their on-going strategy. Restaurants, already under Zomato, will continue providing the Gold offer to their customers but restaurants will lose their bargaining power as there will be one less operator in the food delivery market. Also, 100 employees are going to be reallocated or laid off due to the acquisition. The Road Ahead The stock deal is completed by the businesses operating within the same line of business. This consolidation has now made this a two-horse race in the food delivery space between Swiggy and Zomato. Both companies are now working towards improving the financial health in the on-going financial year. Moreover, UberEats can invest their money in other growing businesses.
By— Varun P Damwani
Byju’s Acquired WhiteHat Jr
On 5th August 2020, Byju's acquired Mumbai based company, Whitehat Jr for $300 mn., which provides online coding classes to kids and makes an annual revenue of $150 mn. every year. This is the biggest deal in the Indian Ed-Tech sector until now. This acquisition can be considered as a horizontal as both the companies deal in the same kind of services. Byju’s had acquired Whitehat Jr. to overcome the cons of the company which is lacking in live interactive online classes. Byju’s Byju’s is a learning app which is commonly known for the company, Think and Learn Pvt Ltd. It was founded by Byju Raveendran at Bangalore in March 2011. It has positioned itself as the world’s most valuable Ed-Tech company with a valuation of $5.4 bn. (Rs. 38,500 cr.) by the year 2018. The company claims the annual revenue of Rs. 2,800 cr. in the financial year 2020. In the course of its business, the company has acquired TutorVista, Osmo, WhiteHat jr, and Vidyartha. The company is funded by Chan Zuckerberg Initiative, Tencent, Sofina, etc. The company operates with a capacity of 9,000 employees and provides its services across the world. It has 40 mn. users overall and 3 mn. annual paid subscribers with an 85% retention ratio. On an average, a student spends 53 minutes daily on the app.
WhiteHat Jr The company was founded by Karan Bajaj in the year 2018. It is a Mumbai based startup, a private company, that focuses on teaching online coding to young kids. It encourages them to create games, applications, and animations. It teaches one on one to the students with live interacting classes. In the year 2019, almost 3 lakh students were registered under the company having a total faculty of 3,000 teachers taking 10,000 classes per day. The company expanded its operations to America in the year 2019 gaining a customer base of 20,000 paid subscribers. The company during the lockdown and pandemic gained a 100% month on month increase in the number of subscribers. In a special program conducted by the company, it selects the top 15 students providing them with a platform to incubate their startups and also provides them with a $15,000 fellowship. Features This acquisition was merely a strong exit to the company and its investors of the WhiteHat Jr. Byjus has acquired WhiteHat Jr. in an all-cash transaction. By the time the acquisition was made, the company claimed that it had a revenue of $150 mn. The 18-month-old WhiteHat Jr has raised $11 mn. in series A capital and was looking in the market to raise another $50 mn. by May 2020, during the pandemic but instead got an exit deal from Byjus leaving huge profits to the company and its investors. Reasons
Byjus is a platform which lacks live interactions with the students and one on one sessions. To overcome this, the company needs a source where it can get a large no of teaching base with faculty. That is what attracted Byjus towards WhiteHat Jr in the first place.
Byjus expanded rapidly in the global scenario. The customer base that WhiteHat Jr has in the American market and the number of subscribers and the demand for the coding course for the younger kids is rapidly increasing so it was the right opportunity for Byjus to acquire WhiteHat Jr.
Road Ahead Despite being the world’s largest Ed-Tech, Byjus always tries to overcome its cons and tries to reconstruct its business every time, adapting to the changes. Acquiring companies, which are fully stable, helps to overcome their cons, and has been successful with its last acquisitions.
By— Smaran Neelisetty
HUL Acquired Glaxosmithkline
Hindustan Unilever Limited (HUL) Hindustan Unilever Limited was established in 1933, as a subsidiary of Unilever, which is a British-Dutch multinational company, headquartered in Mumbai, India. Its products include foods, beverages, cleaning agents, personal care products, water purifiers, and fast-moving consumer goods. In 2019 Hindustan Unilever's portfolio had 35 product brands in 20 categories. Glaxosmithkline plc (GSK) Glaxosmithkline plc, established in 2000, is a British multinational pharmaceutical company headquartered in Brentford, England. The merger of GlaxoWelcome and SmithKline Beecham, made GSK the world's sixth-largest pharmaceutical company according to Forbes as of 2019. The company developed the first malaria vaccine and also several essential medicines due to which they got listed in the world health organization. Hindustan Unilever Limited (HUL), announced its successful merger with GlaxoSmithKline Consumer Healthcare Limited (GSKCH). The merger was announced on 3rd December 2018, but was on hold due to lack of necessary approvals which were then granted. This has proven to be one of the largest deals in the FMCG sector in recent times and is said to create significant value to the stakeholders of HUL. In addition to this, HUL is also acquiring the Horlicks Brand. The other brands which were under the possession of GSKCH are
Boost, Maltova, and Viva, are now part of HUL’s brand portfolio by the ethical principles of the merger. This deal was completed on 2nd April 2020. Deal Structure
Horlicks brand in India is valued at Euro 375.6 mn. (approximately Rs. 3,405 cr.) which will enable HUL to utilize the cash on its balance sheet and create value for its shareholders
The merger is valued at Rs. 31,700 cr. However, HUL will be paying a royalty for Horlicks between a range of 1.8% to 4.5% to its parent for the brand’s usage in India.
The merger of HUL and GSK was on the basis of an exchange ratio of 4.39 HUL shares for each GLSK Limited share. The issue of new HUL shares, under Unilever holding in HUL, will be diluted from 67.2% to 61.9%, and GSK CH will hold about a 6% stake in the merged entity.
Reason This deal helped GSK to penetrate into the rural markets by selling its products at affordable prices through a consignment selling arrangement with HUL. Also, the merger gives HUL a powerful position through iconic brands such as Horlicks and a Boost. The deal will also give a charge to HUL’s food and refreshments division, which will promote the other brands. Impact After the merger, HUL faced a decline of 5.17 % to close the trade at Rs. 2,179.25 on the BSE. During the day, it dropped 6% to Rs. 2,159.90. At the same time, GSKHL also fell by 4.63% to close at Rs. 9,530. But the merger can be beneficial for HUL to build a profitable and sustainable nutrition business in India.
By— Priya Gupta
Facebook Acquired Giphy
Facebook Facebook was founded by Mark Zuckerberg along with classmates. Launched on February 4, 2004, it has 2.70 billion monthly active users. It builds technologies that give people the power to connect with friends and family, find communities, and grow businesses. Giphy
Launched in 2013, Giphy has a user base of 65 million monthly active users. Its major product expansion was through Facebook and later on through Twitter. Giphy runs a large searchable database of GIFs that can be used on social media and messaging platforms via an Application Programming Interface (API). Giphy has grown to be a central source of shareable, high engagement content and its animated response gifs are available on almost all the social media platforms. Facebook is acquiring Giphy for $400 million. Giphy is the fifth largest known acquisition of Facebook. Under the new ownership, Giphy will be a part of Instagram, to make it easier to send stickers and gifs in direct messages and stories. Features Facebook acquired Giphy for $400 mn. in May 2020. Giphy will continue to operate similarly as earlier but it will be operated under Facebook and will offer
integration to other platforms. Developers and API partners will continue to have the same access and content creation will be done. Reasons Giphy only does the basic advertising business. Moreover, GIFs have not become a revolutionary product. This can lead to tighter integrations between the products. Also, it can make further investments in Giphy’s technology and content library to benefit all the associated companies. Challenges Big brands are not eager to seize upon Giphy to influence consumers. People have a low tolerance for them and they are not supported as an advertising agent. The deal is going to trigger a mandatory review from federal regulators, who are already scrutinizing Facebook’s past purchases for potential antitrust concerns.
Impact This will help Facebook know what kind of GIFs people are sharing on other databases except for Facebook apps including Telegram, Snapchat, and TikTok. Facebook can learn about the hot topics and interests of the people on a much wider scale. It can exploit and use the information on its content or product development. Road Ahead It is yet another example of Facebook’s reach into every possible corner of the internet, even those which are explicitly not controlled by social networks. With this deal, Facebook can increase the reach of its customers more effectively. Moreover, the competition from other social networks can be dealt with, making Facebook an all-rounder.
By— Riya Maroo and Shravan Kumar
Uber Acquired Postmates
On 6th July 2020, Uber acquired Postmates for $2.65 bn. This deal unites Uber's global Rides and Eats network with the distinctive delivery business of Postmates. In the U.S., Postmates are highly complementary to Uber Eats, with differentiated regional focus areas and client demographics, and strong relationships between Postmates and small and medium-sized restaurants, especially local favourites that attract clients to the Postmates brand. Food delivery apps have grown rapidly in recent years, connecting drivers, restaurants, and customers. Uber Uber Technologies, Inc., commonly referred to as Uber, offers vehicles for hire, food delivery (Uber Eats), package delivery, couriers, and freight transportation. The corporation is located in San Francisco and has operations in over 900 metropolitan areas worldwide. It's one amongst the most important providers within the gig economy (short-term work economy) and is additionally a pioneer within the development of self-driving cars. Uber is estimated to have over 110 mn. monthly active users worldwide. Uber features a 67% market share for ride-sharing and a 24% market share for food delivery. Uber has been so prominent within the sharing economy that the changes in industries as a result of it are mentioned as uberisation, and lots of start-ups have described their products as "Uber for X". Postmates Launched in 2011, Postmates is one of the on-demand delivery companies in the US, offering delivery from restaurants and stores that had not previously provided delivery services for goods. Within the half-moon of 2020, Postmates had revenue of $107 mn. and 1,15,000 merchants who used the platform. Postmates operates in 2,940 US cities as of February 2019. The service relies
on mobile applications and its Global Positioning System capabilities to match inventories and consumer demand. Reason Uber has agreed to buy the Postmates food delivery start-up for $2.65 bn. It aims to expand its presence in on-demand food delivery while its core ride-hailing business struggles. The businesses announced the all-stock deal on 6th July 2020. Uber will combine Postmates with its food delivery subsidiary, Uber Eats, which has been growing during the coronavirus pandemic. Features
Uber has confirmed the takeover. Under the terms of the deal, Uber will pay $2.65 bn. for 84 mn. shares of common stock for 100% of the fully diluted equity of Postmates. Uber intends to keep the Postmates app running as a separate service, supported by a more efficient, combined merchant, and delivery network. Postmates and Uber Eats would have a 37% share of food delivery sales within the US, consistent with Edison Trends, which tracks MasterCard spending. Postmates will still operate under their own name.
Daniel Ives, an analyst with Wedbush Securities, said that the deal was a defensive and offensive acquisition within the food delivery space for Uber at a time with its core ride-sharing business seeing massive headwinds during this Covid-19 pandemic. Dara Khosrowshahi, Uber’s chief executive, said Uber might integrate certain Postmates services, including its $9.99-per-month subscription that gives nofee delivery on any orders over $12. Impact Uber and Postmates have long-established a belief that platforms like ours can power much more than just food delivery. "They can be a huge part of local trade and communities, particularly during crises like COVID-19," said Dara Khosrowshahi, CEO of Uber. As more people and more restaurants have come to use our services, Q2 bookings on Uber Eats are up more than 100 % yearly. The Road Ahead The merger made it possible to build better tools and technology for their merchant and restaurant partners, and that these will have a wider user base now to tap.
By— Indrani Sen
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