The Corporate Wisdom forum of the Department of Management Studies (DoMS) invited over Mr. Suresh Srinivasan, Ex CFO of Emirates Airline, for a session on the intricacies of Mergers & Acquisitions (M&A).
Mr. Srinivasan began by telling about the journey that Emirates had traversed from its inception to its present when it is the fastest growing airways and the 2nd most profitable airlines company in the world. Emirates actually started off as chain of travel agencies. After working as so for many years, it felt that it needed to enter into other travel-related businesses. So it gradually entered into several businesses over the years, starting from ground handling at its airports, holiday package selling, and catering services, to
cargo logistics business in the UAE and overseas. During the course of this growth, it acquired a stake of 44% in SriLankan Airlines and a ground handling business in Singapore. During each of these acquisitions Emirates asked itself whether the companies being acquired fit into its group and would they make sense over the long-term.
Starting off on the subject of acquisitions, Mr. Srinivasan said that acquisitions can take place in many ways. A public company would charter a different route than a private company. That was because public companies need to take into account the interest of its stakeholders. This is all the more important because as a company grows and goes public it starts diluting its stake and when its managers get ready to plan for an acquisition there is no single entity that guides them to ensure optimal returns for its stakeholders.
The diversification patterns in India are however are more succession-driven rather than expansion-driven as a large chunk of companies are family businesses. But good companies that succeed at integrating acquired companies concentrate on the areas that they need to expand into and then look for players in that industry. A company after acquisitions might still not acquire the critical mass it requires to be a reckoning force. In such circumstances it can go for a Joint Venture (JV).
Describing the process of a typical acquisition, Mr. Srinivasan said that a company interested in acquiring another first gives an intention of target to one it’s interested in. Then a Non Disclosure Agreement (NDA) is signed between the two. After this, an Expression of Interest is given to the target company after which financial advisors for this process are appointed. This part forms an important component as the financial advisors bring in great expertise thorough their experience, knowledge and networking and help in analysis of financial and technical details to ascertain the compatibility of the two companies. They help create an Information Memorandum specifying the details of the possible tie-up. After that the interested company appoints legal advisors.
After these steps are over, the selected suitors are invited by the target company and given a separate room that contains its confidential data, for the process of due diligence. After the creation of the Draft Share Purchase agreement, the valuation of the target starts. This is a very important stage during which the person-in-charge at the target company keeps the entire management and the head of all business units posted about each detail of the process. Similarly, the target company’s accountants need to be in the loop as there are very stringent guidelines for writing off goodwill. After that the interested company meets with the clients of the target company.
Commenting on what could go wrong during M&As, Mr. Srinivasan gave the example of the Tata-Corus deal as a successful deal and said that an acquisition could only succeed if it is proactive and has a strategic focus. That might be the reason why only about 60% of the mergers succeed. To succeed, the acquiring company must work on synergies right from the word go and try to materialize them within
1 year. Many times this requires letting go of restructuring of the new entity, a strategy with Emirates has successfully followed.
Explaining that the process of valuation of a target company is more of an art rather than a science, Mr. Srinivasan said that it is never going to give a correct value. What actually matters is who makes the valuation. He told that the process of valuation of a privately-held company was different from that of a public company.
Mr. Srinivasan then talked about the three most popular routes of valuation: using Net Asset Value (NAV), the Earnings Multiple and Free Cash. He commented that while NAV was the most preferred, the Earnings Multiple path was good for a listed company. He showed graphically that Free Cash method gave the highest range of valuation, and then came in the Earnings Multiple method, and the lowest range was usually given by the NAV method. This was followed by a detailed explanation of the technicalities of each method, where Mr. Srinivasan pitched in with his expertise and related examples on a spreadsheet, elucidating the areas where each method could be applied, the data required and the entire process of calculation.
Also touching upon mergers, Mr. Srinivasan emphasized that it was a way for better and efficient corporations to takeover not-so-well firms. With regards to merger, he spoke about the Event Study methodology and the Postmerger comparison studies.
Mr. Srinivasan said that acquisition could be a regulatory nightmare with so many policies and regulations in place such as the Companies Act, Income Tax act and the MRTP act.
Holding forth on JVs, he said that no premium was attached to them, unlike acquisition. They actually started with mistrust of the partner with the problem being that of who will control the joint entity. As a result, in almost 90% of the JVs one firm buys out the other. He also said that in case of JVs accounting profitability was not an indicator of the success of the JV. For this purpose, Mr. Srinivasan gave the
example of Emirates wherein when it found that ground handling charges in a new location were exorbitant it quickly opted for a JV with a local company and benefited from it as both worked towards supporting each other and realising synergies. JVs follow the route of a Memorandum of Understanding between the interested companies, a business plan, a JV agreement, a shareholders’ agreement and then finally the incorporation of the jointly operated firm. JVs are actually a very easy route to synergize as partners can dissolve them immediately and walk out.
After such a dedicated effort towards explaining M&As and JVs, Mr. Srinivasan fielded questions from students. On being asked the reasons for Emirates venture into airline as well as the hotel businesses, both of which are very capital-intensive, Mr. Srinivasan replied that the strategy succeeded because Emirates had no worthy competitor. Moreover, the hotel business had been outsourced to a highly respected firm in that business, which ensured that it was managed professionally in the best possible manner. He agreed that it might have been difficult in the face of competition.
On being quizzed about his thoughts on the Kingfisher-Air Deccan merger, Mr. Srinivasan asserted that it was a very good idea at least for the present as they could consolidate and work well. They already hold around 39% of the market and the deal seems to be working fine for both. However, no one could say for sure whether the combine will be able to weather the terrain of aviation well in the future.
When questioned how different a hostile takeover was from a friendly one, he said that the only difference was the initial doubts and negativity about a forced takeover by the targeted firm. Giving the example of Arcelor- Mittal, Mr. Srinivasan told that once the stakeholders get convinced it becomes a easier path to tread on.
A question raised about the preference of cash for stocks in order to pay for an acquisition was answered by saying that a seller will obviously force a cash payment as its stake will dilute in the future and it may not be able to dictate terms later. As a result, targeted companies during acquisitions preferred cash to stock payments.
On being asked about the future of the Air India-Indian Airlines merger, Mr. Srinivasan said that individually the companies would have gone down. It was a good decision on the part of the government to merge them. This would help them majorly in the number of aircrafts that the joint entity would have.
However, he wondered how their inefficiencies would be reduced without any job cuts. An answer to that could be to recruit lesser and lesser over the coming years.
Answering the last question of the day, Mr. Srinivasan said that apart from the PE multiples, EBIDTA was also a good parameter of valuation.
At the close of the session, Mr. Srinivasan gave away the award of the best question to R. Balaraman, and the 1st and 2nd prizes for the previously-held quiz on M&A to Vivek Jain and Neha Barnawal, a new practise put into operation by the Corporate Wisdom team. At the end, the Corporate Wisdom team signed off by thanking Mr. Srinivasan for sparing time and giving profound insights and knowledge about M&As.
DoMS Interface Team
Class of 2009