How Shit Happens in M&A

14 thoughts on “How Shit Happens in M&A

  1. A lot of smart people do dumb things with a fat cheque book.

  2. Dear Sanjay,

    Don’t you think there are some good opportunities to pick post M&A especially if it happens in bear market… The one opportunity which i missed as a Bargain was HCL Technologies post Axon Acquisition…

    1. At that time the stock was earning a dividend yield of close to 7- 8 %
    2. Only Infosys was in the race and they chose not to increase the price (to me they missed a big deal)…
    3. Acquisition happened post Lehman crisis
    4. HCL does not have a SAP Capability and AXON was strong in that… SAP services will go on for many more years
    5. HCL is not margin crazy like other Indian IT firms more close to Cognizant model

    It was a five bagger in 4 years without including Dividend returns

    Am i thinking too optimistically ?

    Any thoughts ?


  3. rohitc99 says:

    prof. bakshi
    i am sure you would have looked at corus’ balance sheet. They have a huge contigent liability around pensions. considering it is europe, i dont know if tata steel can escape those even in a bankruptcy

    not sure why the management did not consider this risk at the time of the deal. It has become a transfer of resources from a decent operation (India) to a sink hole (Corus )


    • Thanks Rohit. It’s interesting you brought this up. At the time of the acquisition, the acquirer had created a SPV in Europe for the transaction which was structured as a LBO. Tata Steel India was supposedly “ring fenced” from the debt of the SPV raised to finance the Corus acquisition because that debt was taken without recourse to Tata Steel. Then two things happened:

      1. Tata Steel ignored the “ring fence” and injected funds from India to pay off the SPV’s lenders; and

      2.Tata Steel had to raise equity capital in India to retire the SPV’s debt in Europe. This rights issue was done during a severe bear market at a fraction of Tata Steel’s stand alone value. Effectively, Tata Steel diluted it’s Indian shareholders at below fair value to pay for this acquisition. All of this reminded me of a memorable quote from Warren Buffett:

      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.)

      The fascinating thing about this acquisition is that it was done by “good people” who did the honourable thing by ignoring the ring fence. And at the time of the acquisition, many analysts thought of Tata Steel as a strong, stand alone entity and simply added the value of Corus to their estimate of it’s stand-alone value. This way of thinking implied that Corus’ value to Tata Steel’s stockholders can never be negative because of the ring fence. The subsequent bailout financed with very expensive equity capital together with contingent liability you refer to, proves the opposite. For Tata Steel, Corus has truly become a liability.

      And with Mr Tata now retired, he’s left it to his successor to “make his decision right.” 🙂

  4. Hello Sanjay,

    Might be going bit off track, but may be you can also cover a post on whole TATA as a group generated huge huge value to its shareholders, with aggression in both DOMESTIC as well as INTNL market

    TCS -> Took over INFY in all parameters
    TITAN -> Stock says all

    In last 4-6 years, the way in which TATA under leadership of Mr.Ratan has pulled off a stunning mantle.


    • Kishore,

      Thanks for writing.

      I have nothing against the people in the Tata group. My post is to do with their experience in M&A. The averaged-out experience in M&A done by the Tata group is not good. Corus is just an illustrative example. Take a look at JLR acquisition (in terms of value paid and value received), the acquisitions done by Indian Hotels, the acquisition of VSNL, and the acquisition of Mount Everest Mineral Water.

      In the last case, in 2007, Tata Tea paid Rs 140 per share to acquire a stake in the target and then bought more shares in preferential allotment at the same price. So sure were they about this acquisition that they granted a put option to the sellers at Rs 250 per share. The Put option agreement stated that if the revenues of the target are less than Rs 200 cr by the end of FY13, the sellers would have the option to sell their remaining shares to the Tatas at Rs 250 per share. Fast forward to the present. For FY12, the target company did not even deliver 10% of the revenues that was thought to be inevitable by Tata Tea.

      So, projections and actuals were way off. This is not an isolated example. It’s the norm in M&A generally and Tatas are no exception. Despite their track record in corporate governance and overall wealth creation, investors would have been better off if many of the acquisitions done by the group, were not done.

      • Thanks for the details Sanjay.

        Had couple of suggestions
        1) Along with comparing with SENSEX, also show a comparision of INDUSTRY INDEX or other peer stocks
        2) Yes, many a times, thinking in financial terms, M&A doesnt adds up, but they are more strategic and long term in nature. Even statistically 2 out of 3 mergers fail, as such it is a well known fact that M&As take more rather than giving.

        I love your posts and was introduced to your blog by one of your 2006 students. I wish some day i would be able to come and work with you.

  5. Thanks for discussing Professor.
    If I compare Tata Steel with other peers than I am convinced that they have not created value but if I compare Bharti with its peers it tells me different story.
    • Bharti is down 41% (Date range considered 30-4-2008 to 11-10-2012)
    • Rcom down 89%
    • MTNL down 73%
    • Idea down 23%
    • Tata Com down 51%
    • Sensex up 9%
    So, in the case of Bharti it’s not only about M&A (though this is one of the reasons) but other factors, which led to the sharp correction in the stock.
    So, would like to know your view professor that is it worth looking at Bharti given the kind of CFO’s the company is generating and track record and experience of Bharti, which will enable them to turnaround the African operation given they are in the emerging economy and not European economy like Tata Corus.

  6. And now this:

    Don’t have a view yet on the economics of the deal. Just a couple of facts: the target is a loss making, highly-leveraged company and Indian Hotels would assume the target’s debt if it’s takeover bid is successful. Moreover, the size of the deal ($1.2 billion plus $530 mil debt) is bigger than Indian Hotels market cap as of yesterday’s close which was Rs 5,668 cr.

  7. ashisbehera says:

    Dear Prof – to be fair to the house of Tata’s one good deal from Tata stable that comes to mind is Tata Global Bev ‘s acquisition of Glaceau in 2006 and then flipping it to Coca Cola 🙂

    • Ashis,

      That was a very good trade. But that’s what it was — a trade, isn’t it? 🙂

      Still, I grant them that although it reminds of me of the day I went to dad to show him my report card in school. My overall marks were below average, but I tried to impress my dad to focus on how well I did on that math paper. 🙂

      It didn’t work 😦

      • ashisbehera says:

        Dear Prof –
        The following is a reply to your post “I Don’t Want to be a Toll Bridge, I Want to be Its Meaning”…since i was unable to post a reply on that link I took the liberty to post it here…

        In your opinion would INFO EDGE could classify as “Toll Bridge”
        INFO EDGE has 3 online properties which have clearly top of the mind recall–> -> 62% traffic share in India’s online recruitment mkt ( #1 for recruitment; current figs at all time high)
        2.99acres -> ~35% traffic share of India’s Online Real Estate mkt ( #1 for property portals; mgmt’s tgt to reach 50%)
        3.Jeevan Saathi – > (#3 in mkt share ; Loss making)

        Negative Working Capital
        Strong FCF leading to Cash Reserves of INR5.3bn
        Operating leverage – steadily improving EBIDTA with FY12 at 44%

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