2. Methods of paymentfor consideration
By issue of equity shares of the acquirer company.
By issue of preference shares of the acquirer company.
By issue of secured debt instruments of the acquirer
company.
By payment in cash
By any combination of above
3. By issue of equity shares of the acquirer company
• In this method, an acquirer company issues its shares to the shareholders
of the target company in exchange of shares of the target company in a
specified ratio known as a swap ratio and hence this method is
commonly known as share swap method.
• Forms of equity financing
1.common stock
2.preferred stock
3.convertible securities
PT (Target’s Share Price)
PA (Acquirer’s Share Price)
SER=
4. By issue of equity shares of the acquirer company
• When any company is go to issue of equity share for merger and
acquisition then following sources of funds for domestic issue.
• Internal accruals.
• It is the most commonly used source for large and small acquisition alike.
• IPO/FPO
• It is not an effective route.
• Rights issue
• It is an effective route for mobilizing fund for repayment of bridge loans taken for
acquisition.
In 2008 when hindalco came out with a rights issue of Rs 5048 crore with an
objective of using the net proceeds to fund part of the repayment of bridge loan
availed by AV Minerals (Netherlands)B.V. an overseas subsidiary of the Hindalco, for
the Acquisition of Novelis
5. By issue of equity shares of the acquirer company
• ADR and GDR
• Use of ADR/GDR fund for domestic acquisition is prohibited
except in case of Public Sector Undertakings disinvestments.
• Private placement/ PE funds
• This fund are astute investors who can be effectively roped in as
persons acting in concert for acquisition
6. By issue of preference shares of the acquirer company
• With regard to the issue of preference share of the acquired company,
first of the SEBI takeover regulation do not permit issuance of
preference share in lieu of payment of consideration for shares acquired
from the public during the course of open offer.
• Though this prohibition does not apply to the negotiated block deal
entered into with the existing promoters, the exiting promoters wanting
to cash out their investment in the target company’s share would prefer
only cash.
• Thus this method is not generally used in India.
7. Case Study: Tata Motors and Jaguar – Land Rover
• Tata Motors raised about USD 2.3
Billion for the acquisition
• Took a bridge loan from a
consortium of banks to finance the
initial costs of the acquisition
• Considering the current volatility in
markets the board recently came out
with an alternate plan to restrict the
Rights Issue and instead monetize a
part of company investments
through phased divestments over 6
to 8 months
PLAN A: The Initial Strategy
Particulars Amount
(in INR Crores)
Total value 9770
Equity Share 2200
A’ Equity share 2000
Issue of 0.5 % Five
year
Convertible
preference shares,
convertible to 'A'
equity shares between
3 to 5 years
3000
From Overseas
Markets
2569
PLAN B: The Current Strategy
Particulars Amount
(in INR Crores)
Total value 9770
Equity Share 2200
A’ Equity share 2000
Asset Sale which
includes
possible divestment
of stake in
Tata Steel worth INR
2000
Crores
3000
From Overseas
Markets
2569
8. By issue of secured debt instruments of the acquirer company
• Asset-based lending
•Asset-based lending is a business loan secured by collateral
(assets).The loan, or line of credit, is secured by inventory, accounts
receivable and/or other balance-sheet assets.
•Also known as "commercial finance" or "asset-based financing".
•This type of loan is often used to meet various cash flow needs of
companies, for example, building inventory.
9. By issue of secured debt instruments of the acquirer company
• Cash Flow Financing
• A form of financing in which the loan is backed by a
company's expected cash flows.
• This differs from an asset-backed loan, where the collateral
for the loan is based on the company's assets.
• The schedules or repayments for cash-flow loans are based
on the company's projected future cash flows.
10. By issue of secured debt instruments of the acquirer company
• Subordinated Debt
•Subordinated debt is a loan (or security) that ranks below
other loans (or securities) with regard to claims on assets
or earnings.
•Also known as a junior security or subordinated loan.
11. By payment in cash
• This is of course the most favored method for effecting
payment to the tendering shareholders.
• It is both clean and transparent and well accepted by the
selling shareholders.
• Payment in cash is almost universally used for all acquisition in
India.
• Banks and FIs
• Banks and Fish in India are not very proactive in lending for
acquisitions, though the picture is gradually changing.
• ECBs
• Use of ECBs funds is not permitted for acquiring a company or a
part thereof in India.
12. By any combination
• In this strategy the company go in combination of the
instruments.
• It can be equity and cash or debt or preference share.
13. Private equity market
• Private equity is equity capital that is not quoted on a public
exchange. Private equity consists of investors and funds that make
investments directly into private companies or conduct buyouts of
public companies that result in a delisting of public equity.
• Capital for private equity is raised from retail and institutional investors,
and can be used to fund new technologies, expand working capital
within an owned company, make acquisitions, or to strengthen a balance
sheet.
14. Private equity market
• Private equity funds make other investment such as providing venture
capital to nascent business.
• Private equity funds seek out the investment that are undervalued.
• It raise their capital from variety of sources including institutional
investors such as pension funds.
15. Hedge funds
• Hedge funds are alternative investments using pooled funds that may use
a number of different strategies in order to earn active return, or alpha,
for their investors.
• Hedge funds may be aggressively managed or make use
of derivatives and leverage in both domestic and international markets
with the goal of generating high returns (either in an absolute sense or
over a specified market benchmark).
• Because hedge funds may have low correlations with a
traditional portfolio of stocks and bonds, allocating an exposure to
hedge funds can be a good diversifier.
16. Venture Capital Funds
• Venture capital funds are investment funds that
manage money from investors seeking private equity
stakes in startup and small- and medium-size
enterprises with strong growth potential.
• These investments are generally characterized as high-
risk/high-return opportunities.
17. Steps In Loan Process
Step 1:- Preparing The Loan Proposal
• The loan proposal should focus on the history of the buyer,
the performance of the seller, and the reason why the
proposed deal makes sense and all related aspects.
• The exact elements of a buyer/borrower’s loan proposal will
vary depending on the size of the company, its industry, and
the terms of the proposal transaction, most lenders want the
following fundamental questions answered
18. Steps In Loan Process
Most lenders want the following fundamental questions answered
• Who is the borrower?
• How much capital is needed and when?
• How will the capital be allocated and for what specific purpose?
• Why does the proposed transaction makes sense from a financial,
strategic and operational perspective?
• What additional market share, cost savings, or other efficiencies will be
achieved as a result of this statement?
• How will the combined entity service its debt obligations( e.g.,
application and processing fees, interest, principal, or balloon payments)?
• What protection( e.g., tangible and intangible assets to serve as collateral)
can the borrower provide the bank in the event that the company is
unable to meet its obligations?
19. Steps In Loan Process(Conti…)
The loan proposal should include the following categories of information:-
• Summary of the request
• History of borrower
• Market date
• Financial information
• Schedule and exhibits
20. Steps In Loan Process(Conti…)
Step 2: Understanding The Type Of Commercial Bank Loans
• During the process of planning the capital structure and in preparing the
loan proposal, it is important for the buyer/borrower to understand the
various types of loans that are available from bank.
• Loans are usually categorized by the term of the loan , the expected use
of the proceeds, and the nature of the industry and the bank’s
assessment of the company’s creditworthiness. The following are typical
categories:-
