CA Final SFM - Mergers & Acquisitions (Theory) by CA, CFA(USA), CPA(USA) Praveen Khatod

Summary

1. How the Instructor Frames SFM Theory

• The instructor says SFM theory can contribute roughly 16–20 marks to the CA Final paper.
• Under the newer syllabus, theory may appear as short parts within larger questions. Students should therefore be prepared to attempt it rather than relying only on practical questions.
• The instructor characterizes SFM theory as relatively direct. A concise, well-organized answer—often about a page for a four-mark question—may be sufficient.
• The lecture focuses on material the instructor considers exam-oriented. Other portions marked as “laser reading” are presented as supplementary reading from the notes or study material.

2. Core M&A Terminology

• Acquisition: One company acquires shares or control of another, while the target generally remains a separate legal entity. Walmart–Flipkart is given as an example.
• Merger: Two companies combine into one entity. One or both of the original companies may cease to exist. Vodafone and Idea are cited as an example.
• Reconstruction:
  • Internal reconstruction reorganizes a company’s finances or balance sheet while the company itself continues to exist—for example, by writing off losses or restructuring liabilities.
  • External reconstruction involves a new, often similarly named, entity taking over a troubled company’s assets and liabilities, sometimes after creditors agree to reduced repayment.
• Takeover: In the lecture, this means an unfriendly or hostile acquisition—the acquirer pursues control despite the target’s opposition. This is distinguished from friendly negotiations.

3. Takeover Strategies Used by an Acquirer

The instructor presents these as actions an acquiring company may use to gain control:

1. Street sweep

   • Buy a substantial block of the target’s shares in the open market.
   • Once relevant disclosure or open-offer requirements apply, approach the target or launch an open offer.
   • The open offer gives other shareholders an opportunity to sell, often at a price above the prevailing market price.

2. Bear hug

   • Threaten to make an open offer without first accumulating a large shareholding.
   • The threat is intended to pressure the target’s board into negotiating or settling with the acquirer.

3. Strategic alliance

   • Offer a partnership or joint venture instead of acquiring the target outright.
   • The aim is to pursue shared projects or other synergies while allowing both companies to retain some independence.

4. Brand power

   • Use a partnership with a prominent brand to compete more directly with the target.
   • The lecturer’s example is a potential Tata Coffee–Starbucks partnership that could put pressure on Café Coffee Day and weaken its competitive position, making it more vulnerable.

4. Defensive Tactics Used by a Target Company

These are measures a target may use to resist or discourage a takeover:

1. Divestiture / crown-jewel defence

   • Sell, separate, or spin off an especially valuable business unit.
   • Removing a key division can reduce the target’s attractiveness to the acquirer.
   • The instructor calls this the crown-jewel technique.

2. Poison put

   • Issue bonds that become redeemable at a high premium if a takeover or change of control occurs.
   • The resulting cash cost is intended to make the target less attractive to the acquirer.

3. Golden parachutes

   • Provide substantial compensation to senior managers if they lose their positions following a takeover.
   • The added expense can deter a potential acquirer or increase the cost of the transaction.

4. Greenmail

   • Negotiate with the acquirer to buy back its accumulated shares at a premium.
   • The target pays the premium in exchange for the acquirer abandoning its takeover attempt.

5. White knight

   • Find a friendly company willing to acquire the target instead of the hostile bidder.
   • The target hopes the friendly acquirer will preserve its existing management’s influence or operating approach.

6. White square

   • Place shares with a company that is not seeking control of the target.
   • The investor provides support against the hostile bidder, while the target’s management aims to retain control.

7. Pac-Man defence

   • The target responds to an attempted takeover by trying to acquire the would-be acquirer.
   • This reverses the direction of the contest and forces the original acquirer to defend itself.

8. Poison pill

   • Use measures to make a company under attack—particularly an acquirer that has itself become a target—harder or less attractive to acquire.
   • One example described is issuing convertible debentures. Conversion can increase the number of shares and dilute an attacker’s ownership percentage.
   • The lecture distinguishes this from a poison put, which involves target-issued bonds becoming redeemable at a premium.

5. Reverse Mergers

• A reverse merger is described as a transaction in which the smaller or less conventionally positioned company acquires a larger one, reversing the usual “big fish eats small fish” pattern.
• The instructor says a smaller company may finance such a deal through a leveraged buyout, borrowing against the expected strength or assets of the company being acquired.
• Situations described as reverse mergers include:
  • A small company acquiring a large company.
  • A private company acquiring a publicly listed company.
  • A subsidiary acquiring its parent.
  • A loss-making company acquiring a profit-making company.
• When a private company acquires a listed company and gains access to the public market through it, the instructor calls this backdoor listing.
• Reasons given for reverse mergers include:
  • Faster or easier access to capital markets than pursuing a conventional IPO.
  • Greater visibility and credibility in the corporate world.
  • Potential use of a loss-making company’s carried-forward losses against profits, subject to applicable rules.
  • A less costly or more convenient route to becoming publicly listed.
• The instructor refers to Tata Steel–Corus and the ICICI/ICICI Bank and HDFC/HDFC Bank structures as examples or illustrations.

6. Divestitures and Related Forms

A divestiture means separating or disposing of part or all of a company’s business. The lecture distinguishes several forms:

• Sell-off / partial sell-off

  • Sell a business division, product line, geographic operation, or other asset to an outside party.
  • A full sale disposes of the entire unit; a partial sale disposes of only part.
  • Unlike a spin-off, a sale brings proceeds to the seller.
  • The instructor gives Renuka Sugars’ Brazilian operations as an illustration of a division that might be sold.

• Spin-off

  • Separate a division into an independent company and distribute its shares to existing shareholders.
  • The division becomes a separate entity, but the transaction itself does not raise fresh cash through a sale.

• Split-up

  • Divide the whole company into separate businesses or entities.
  • Unlike a spin-off of one division, the original parent company ceases to exist.

• Equity carve-out

  • Create or separate a business and sell some of its shares to the public, generally through a public offering.
  • The parent can retain a stake while raising cash and giving investors a way to invest in the unit separately.
  • The lecture contrasts this with a spin-off, where shares are distributed to existing shareholders rather than sold to the public.

• Other reasons for divestiture

  • Exit a business that is not a company’s core activity or is performing poorly.
  • Allow a separated unit to be managed independently.
  • Resolve family disputes in a family-controlled business or bring in professional management.
  • The instructor cites the division of businesses between Mukesh Ambani and Anil Ambani as an illustration of family-business separation.

7. Cross-Border Mergers and Acquisitions

• Cross-border M&A refers to a company from one country acquiring or merging with a company from another.
• Reasons given for these transactions include:
  • Globalization and the closer integration of economies.
  • Expansion of international trade and investment.
  • Access to overseas customers, markets, or business opportunities.
  • Potential tax incentives offered by foreign jurisdictions.
• The instructor also notes that companies may need an international presence when a significant share of their business comes from overseas markets.

Speakers and Sources Featured

• Speaker: CA Praveen Khatod, the instructor.
• Sources and references mentioned: The instructor’s notes and study material; SEBI guidelines in the discussion of open offers.
• Companies cited as examples or illustrations: Walmart, Flipkart, Vodafone, Idea, Reliance Industries, L&T Infotech, Mindtree, Tata Coffee, Starbucks, Café Coffee Day, Eicher Motors, Royal Enfield, Tata Steel, Corus, ICICI, ICICI Bank, HDFC, HDFC Bank, IDFC, IDFC Bank, Renuka Sugars, Hero Honda, and the Ambani family businesses.