Mergers and Acquisitions
In this blog, we will consider specific aspects of Mergers and Acquisitions (M&As) to come up with a compelling case study.
To set things in motion, let’s briefly understand what are M&As?
M&As refer to the consolidation of companies or assets. While there are several types of transactions classified under an M&A, a merger means a combination of two companies to form a new company, while an acquisition is the purchase of one company by another, wherein no new company is formed. For example, Dell is looking at a merger with EMC to form a new company, Dell-EMC.
Moving on, let’s understand the rationale behind an M&A. Most of these transactions are undertaken to ramp up growth. There is an anticipated synergy value created by the merger of two companies. The synergy value can be seen either through higher revenues, lowered expenses or reduced capital costs
While creating a case study on recent M&A transactions, here are some of the key points that should be kept in mind:
Firstly, we should include a brief overview of the transacting parties, i.e., merged entities in case of any merger, and target and acquirer in case of acquisition
Next, we must include details about the deal structure/terms/valuation and key drivers/motives for the takeover.
Additionally, we should look to include a pre- and post-acquisition analyses, i.e., how the transaction panned out, and rounding up the study by including key quotes about the deal.
What to Include:
- Background of Acquirer and Target
- The Deal Structure
- Key drivers of / motives for the takeover
- What happened next?
- Key quotes about the deal
Are you wondering where to source this information from? Databases such as CapitalIQ, Thomson Eikon, and Bloomberg provide detailed transaction overviews. For example, in Bloomberg, ‘MA’ command fetches the current and historical M&A lists.
In case of CapitalIQ, after feeding in the company name, click on the transactions tab and go to ‘M&A/Private Placements’ to look for deals undertaken by the company.
Follow the same process for Thomson Eikon. For transaction-specific details, click on the transaction for a detailed view, including transacting parties’ overview, deal terms/structure, and valuation.
In case you’re unable to access these databases, general desktop searches may also come in handy – particularly, try and look for articles by PRNewswires.
Moving on, let’s understand the topic with help of a few M&A case study samples. These samples have been handpicked from a detailed market study prepared by the Cians Research Team.
The first M&A case study relates to Trikomsel’s acquisition by Polaris. In August 2014, Polaris acquired ~10.6% stake in Trikomsel Oke Tbk PT. Let’s understand the businesses of both the transacting parties. Polaris Ltd. is a Singapore-based holding company with subsidiaries active in the distribution and retail of mobile phones, consumer electronics, and related services and accessories. PT Trikomsel Oke Tbk (“Trikomsel”) is an Indonesian public listed company that deals in the distribution and retail of telecommunication and multimedia products.
Wondering about the rationale behind this transaction? This deal opened new market opportunities for the Polaris in Indonesia, where it currently does not have operations, and enabled the company to tap into Asia’s increasing purchasing power. Polaris also gained access to an extensive brand portfolio
Even though the deal sounds synergistic, there is always a right price to be paid for getting the right value. Polaris acquired shares from Sugiono Wiyono (selling 57.45MN shares) and SL Trio (selling 446.91MN shares).
The consideration for the sale of the Sugiono Sale shares and SL Trio Sale shares to the company is SGD 7.5MN and SGD 58.3MN, respectively. Additionally, Polaris will issue 2.86BN shares as consideration, 0.33BN ordinary shares to Mr. Sugiono, and 2.54BN ordinary shares to SL Trio. In terms of valuation, the transaction was worth US$ 951.9MN, with EV/Sales of 1.0x and EV/EBITDA of 14.3x, i.e., Polaris was willing to pay US$ 1 for every dollar of sales or ~US$14 for every dollar of EBITDA earned.
Additionally, Stamford Law Corp. and SAC Capital served as advisors to the buyers.
In a nutshell, this case study includes all the details required to provide an overview of the M&A transactions.
Let’s discuss another example of Tom’s of Maine’s acquisition by Colgate-Palmolive. Colgate-Palmolive, as part of its strategy to focus on its higher-margin oral and personal care businesses, agreed to purchase Tom’s of Maine—manufactures natural products, including toothpastes, mouthwashes, flosses, deodorants, and soaps—in 2006. Colgate was looking to enter the natural personal care market by adding Tom’s higher-margin, premium-priced products to its lineup, and following the deal, Tom’s of Maine leveraged Colgate-Palmolive’s reach to expand its depth and breadth in the mass and specialty distribution channels
Looking at the impact of this transaction, aided by Colgate’s network, Tom’s market share of the natural oral care segment reached ~60% by 2010. However, its overall oral care segment share remained flat at 1.7%, and the brand is just one of many others in Colgate’s large stable. For Colgate, Tom’s is just one of the many others brands in its large stable.
Let’s just recap whatever we have learned so far. A merger happens when two companies decide to combine into one entity or when one company buys another. An acquisition involves the purchase of one company by another. The functions of synergy allow for the enhanced cost efficiency of a new entity made from two smaller ones — synergy is the logic behind M&As. Acquiring companies use various methods to value their targets. Some of these methods are based on comparative ratios, such as the P/E and P/S — replacement cost or discounted cash flow analysis. An M&A deal can be executed by means of a cash transaction, stock-for-stock transaction, or a combination of both. While preparing an M&A case study, do include an overview of the transacting parties, deal terms/structure, valuation details, deal rationale, and deal comments. Additionally, do not forget to include a pre/post deal analyses to gauge whether the synergies/benefits envisaged at the time of signing the deal are accruing or not. The key sources are financial databases, including CapitalIQ, Bloomberg, Thomson Eikon, and Factset. Additionally, in case the availability is thin on the databases, desktop searches could come in handy in providing the required details