The Grim Side Of Foreign M&As

wealthymattersYes, there is the successful take-over of JLR by Tata Motors, but most of India Inc’s big-ticket overseas acquisitions in the past five to seven years have,eroded wealth. The reasons for this range from high leverage taken to acquire a company , adverse changes in business cycle, or simply , failure to turn around a loss-making unit.

Tata Steel-Corus

Tata Steel acquired Corus, four times its size, for $12.04 billion in 2006. The valuation was more than one and-a half times its initial offer and was paid mainly through debt. Eight years down the line, Corus hasn’t contributed much to Tata Steel’s earnings. The European business was loss-making till FY13 and has not yet shown strong signs of a turn around.

Hindalco­- Novelis

Hindalco acquired Canadian company Novelis for $6 billion in 2007, making the combined entity the world’s largest rolled-aluminium producer. However, the high leverage, resulting from the acquisition and the slowdown in aluminium demand, post acquisition, have led to the company’s stock stagnating at the same level, adding nothing to its value. Read more of this post

Hostile Takeovers

The acquisition of a company by another by directly approaching the  company’s shareholders and not reaching an agreement with the management of the target company is called a hostile takeover or a forced takeover bid. Many a time, the acquirer will try to replace the target company management or tender an offer to get a takeover done. The key characteristic of a hostile takeover is that the target co’s management doesn’t want the deal to go through.
In a normal takeover or acquisition, the buyer as well as the seller reaches an agreement on the pricing, the sale and the nature of the merged entity. But in a hostile takeover, the management of the company does not support the unsolicited offer and reject it. In such a case, the offer is made against the will of the management to the shareholders by the acquirer based on which a decision is taken.  Read more of this post

The A-Z of LBOs

wealthymatters.comWHAT IS AN LBO?
During mergers and acquisitions, when the buyer borrows money by keeping assets of the target company as collateral to fund the acquisition, it is known as a leveraged buyout (LBO). The borrowed funds could include junk bonds or traditional bank financing. Often a leveraged buyout does not involve much committed capital, as reflected by the high debt-to-equity ratio of the total purchase price (typically an average of 70% debt, 30% equity). In addition, any interest that accrues during the buyout tends to get compensated by the future cash flow of the acquired company.  Read more of this post

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