M&a Lessons- Sanjay Bakshi

8/3/2019 M&a Lessons- Sanjay Bakshi

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16 lessons i learnt

about M&A



Lesson # 1:

Most acquisitions will fail to

beat aaa bond yield



Wealth Destruction on a Massive Scale? A Study of Acquiring-Firm ...



“The sad fact is that most major

acquisitions display an egregious

imbalance: They are a bonanza

for the shareholders of theacquiree



“they increase the income and

status of the acquirer's

management; and they are a

honey pot for the investmentbankers and other professionals

on both sides



“But, alas, they usually reduce the

wealth of the acquirer's

shareholders, often to a

substantial extent. That happensbecause the acquirer typically gives

up more intrinsic value than it

receives.”



For this amount today, RBS

could buy:

Citibank $22.5bn,

Morgan Stanley $10.5bn,

Goldman Sachs $21.0bn,Merrill Lynch $12.3bn,

Deutsche Bank $13.0bn and

Barclays $12.7bn,

And still have $8bnchange !



Lesson # 2:

Don’t forget diseconomies of

scale



Lesson # 3:

be wary of people with “grand

visions”



No corporate planningdepartment actively

looking for acquisitions

reliance on serendipity



“We have no view of the future that dictates what business or industries wewill enter. Indeed, we think it's usually

poison for a corporate giant'sshareholders if it embarks upon new ventures pursuant to some grand vision.



“We prefer instead to focus on the economic characteristics of businesses that we wish to ownand the personal characteristics of managers withwhom we wish to associate - and then hope we

get lucky in finding the two in combination.”

SERENDIPITY



“Even so, we do have a few advantages, perhapsthe greatest being that we don't have a strategic

plan. Thus we feel no need to proceed in anordained direction (a course leading almost

invariably to silly purchase prices) but can instead simply decide what makes sense for our owners.



“In doing that, we always mentally compare any move we are contemplating with dozens of other opportunities open to us, including the purchase

of small pieces of the best businesses in theworld via the stock market.



“Our practice of making this comparison of acquisitions against passive investments is adiscipline that managers focused simply on

expansion seldom use.”



Lesson # 4:

low price can offset

advantages of control



“The Competitive nature ofM&A activity almost

guarantees the payment of afull - frequently more thanfull - price when 100% of a

company changes hands.



“But, less than 100% of thesame company can frequentlytrade in the stock market at

deep discounts to prices they

would command in negotiatedtransactions involving theentire business.



Why?

In the auction-like natureof the stock market, prices

are set by individuals andgroups of individuals whoare frequently irrational,

resulting in irrational

prices



“Our favorite acquisition is thenegotiated transaction that

allows us to purchase 100% of

such a business at a fair price.



“But we are almost as happywhen the stock market offersus the chance to buy a modestpercentage of an outstanding

business at a pro-rata pricewell below what it would taketo buy 100%.



“Advantage of buying non-controlling blocks atbargain prices, often

counterbalances thedisadvantage, if any, fromthe lack of control.”



Lesson # 5:

great businesses rarely make

great acquisitions

there are exceptions



More often than not,buying poor performers

with plenty of room for

improvement is a betterstrategy

Restructuring Potential



Lesson # 6:

don’t get over-impressed by

high replacement cost



http://en.wikipedia.org/wiki/Tobin's_q

Tobin’s Q

Is it worth replacing?



Lesson # 7:

be extremely wary of open bid

auctions

Envy + DSRS + Authority + Dopamine + Incentive-caused

bias + Overconfidence + Social Proof + Low Contrast =

Winners’ Curse



Buffett Does not engage inbidding contests.

“The smarter side to take in a biddingwar is often the losing side.”

Knows when to walk away from a deal

Usage of time fuse on bids

breakup fee

co-relation with stock marketshutdown



Lesson # 8:

acquiring to diversify is

generally a bad idea.

there are exceptions e.g. when

you get deals that others

won’t



Buffett on

Scott-Fetzer



Berkshire purchased Scott Fetzer at thebeginning of 1986. At the time, the company

was a collection of 22 businesses

Acquisition cost: $315.2 million for Scott

Fetzer, against book value of $172.6 million.

“The $142.6 million premium we handed over

indicated our belief that the company's

intrinsic value was close to double its book

value.”



What’s Causing This???



The Math Behind Swap Ratios

3 key factors:

A.Prospects

B.Mix of Operating and Non operating assets

C.capital structure



Lesson # 10:

Don’t ask a barber if you needa haircut



Lesson # 11:

Price is what you pay (now)

value is what you get (later)

Or

Beware of “Synergy Trap”



Net valueadded =

Total Value

Received -Total Value

Paid



ValueReceived =

Stand alone

value +synergy

value



Value paid =target’s pre-

acquisition

market value+ control

premium



nva= synergy

value -

controlpremium



“Synergy: a term widelyused in business to

explain an acquisition

that otherwise makes nosense.”



Ways to Create value

for buyers



1. Find cheap targets

and buy them for a

song

unrealistic



2. ensure synergy exceedscontrol premium

control premium is a fact

synergy is an estimate

enter social psychology



3. buy relative value

Pay for anacquisition using a

relatively over-

priced currency



Using/Misusing Stock

as a Currency



4. Expropriate minoritystockholders

Overpay for acquiring a

partial stake and thenexpropriate value from

minority shareholders and

creditors of the target



Lesson # 12:

be wary of “serial acquirers”

who use stock as currency



The Story of Able, Baker, and Charlie



Lesson # 13:

don’t forget dilution



“In a trade, what you are giving

is just as important as what you

are getting. This remains true

even when the final tally on

what is being given is delayed.



“Subsequent sales of common stock or

convertible issues, either to complete

the financing for a deal or to restore

balance sheet strength, must be fully

counted in evaluating the fundamental

mathematics of the original acquisition.

(If corporate pregnancy is going to be

the consequence of corporate mating,

the time to face that fact is before the

moment of ecstasy.)”



Lesson # 14:

there is no such person as an

“independent valuer”



Lesson # 15:

remember cash flow

shenanigans using m&a



Cash Flow Shenanigan # 3

Inflating Operating Cash Flow Using

Acquisitions or Disposals



Cash Flow Shenanigan # 3

Inflating Operating Cash Flow Using

Acquisitions or Disposals

Purchase price is recorded as investing outflow,

while acquired cash flows are recorded as

operating cash inflow



¥85 million split into ¥45 sale proceeds and ¥40

million as “advance on future revenue”



Lesson # 16:

accounting goodwill is not the

same as economic goodwill



cases in M&A

Case on Gesco

Carol Loomis on AOL-Time Warner Merger

Carol Loomis on Carly Fiorina, Sandy Weill,

and others

Warren Buffett on M&A

Ajay Piramal on M&A



Case on Ajay Piramal

Piramal Enterprises, atextile company,

founded in 1933.

1984: acquired Gujarat

Glass.

1988: Acquired

Nicholas Laboratories

Name changed to

Nicholas Piramal India




1991: Merged GujaratGlass into Nicholas

Piramal

1993: Acquired Roche

Products

1995: Acquired Sumitra

Pharmaceutical

1997: Acquired

Boehringer Mannhiem




1998: Merger ofNicholas Piramal,

Roche Products &

Boehringer Mannhiem

2002: Acquired Rhone-poulenc

2004: Spun off Gujarat

Glass



Rs 5,400 invested in 1998

has become approximately

Rs 11 lacs

Return of 28% p.a.

Sensex Return: 17%



Ajay Piramal on

M&A



Building Global Critical Care business

J 2005 PHL



January 2005, PHL

acquired the

Inhalation

Anaesthetics business

of Rhodia for Rs 58

cr.

revenues of Rs 71 cr

in FY06.

So the acquisitionprice was 0.8 times

sales.



“With this

acquisition, we have

become a dominant

global player in

Halothane and have

gained a significant

entry in the

Isoflurane market,

besides gainingaccess to the

business marketing

and distribution

network in over 90

countries.”- Ajay

Piramal, Fy06letter to

shareholders



“We

successfullyshifted

production of

Inhalation

Anesthetic

products from

Rhodia UK

facilities to our

plant at Digwal,

Hyderabad.”- FY

07 letter



March 2009:

Acquired Minrad

and Rx Elite

Minrad was

acquired for $40

mil and RxElite

for $7 mil.

Stockholders of

Minrad were

bought out at

just $0.12 per

share.



2009: Acquired

Heamaccel Brandfor $ 12 mil



These three

acquisitions cost

a total of $59

mil

(approximately

Rs 271 cr.)



April 2010:

Acquired Bharat

Serum’s

Anesthetic

Product

Business



Thank you

M&a Lessons- Sanjay Bakshi

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