Hindalco - Novelis

Hindalcos acquisitions:
Indian Aluminum
Indo Gulf (copper)
2007: Completed Novelis acquisition
Wave of Ambitious Overseas Acquisitions wave

by Indian companies
Tata Corus, Tata JLR, Novelis, Suzlon, Subex, Dr Reddys

How did Novelis become an acquisition

target?
What are the expected synergies?
Market Value Rs. 19,577 cr on 31.5.13; PE 11.
Rs 28,500 cr in July 2016; PE 15
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Hindalco - Novelis

Source: Novelis shot in the arm for Hindalco, BS 1-12-2012

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Tata Motors - JLR

Ford: Why did it sell?
Tata Motors: Why did it buy?
What kind of merger is it?
What was the result?
What were the synergies?
Any missing information?
Is it just a good investment bet?

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Due Diligence

Due Diligence
Due Diligence is the process through which a

potential buyer evaluates a target company

or its assets for acquisition.
Why is it required, especially when you
already evaluated the potential of the target?
Managerial hubris?

When is it to be done?
MoU
Confidentiality
What the target is expected to have
What the target is not expected to have
Systematic process
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Due Diligence Avoid

Surprises
FDA strictures on Ranbaxy
Look for any pending investigations
Novelis Pepsi contract for cans at fixed

price

Look for long term contracts that may affect

profits

FDA Letter of warning to Strides Arcolab on

Agila
Potential liabilities

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Due Diligence
Examine financial records, management
decisions, competitive challenges, assets,
liabilities and any other consideration that
make the acquisition a good or bad
decision.
Who conducts the process?
Auditor
Technical Experts
Lawyers
Operations Experts
May not always be possible.
Record Room when bids are invited

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Due Diligence
Due Diligence process needs to cover the

following aspects of the target company:

Products: IP, market share
Organizational structure and
management style
Operations: production technology,
processes, systems
Financial: operating performance,
potential tax liabilities, assets, liabilities,
derivatives, currency exposure
HR : Labour contracts, culture
Various legal aspects: Size restrictions,
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approvals required, compliance,

Obstacles to Due
Diligence
Hostile takeover: Managements

reluctance to share information.

Customers reluctance to share their
information
Uncertainty for incumbent senior
managers

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Financial Due Diligence

Assets: Age, state, Overvaluation?
Liabilities: Undervaluation?
Accounting policies
Off balance sheet items
Some Ratios:
Margins
Per employee ratios
Leverage
Turnover ratios
Solvency
Business from new products
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Market and Product Due

Diligence
Business from new products
Verification at customers end
Supply contracts: duration, price and

other terms
IP for products: Licensing terms
Ownership

Are the rights valid, transferable and

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enforceable?
Are there any agreements or restrictions
that prevent the party from granting rights
to others? (cross-licensing?)
Is the property registered in the relevant
office?
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Is there any past or potential litigation?

H. R. Due Diligence
Senior management: Contracts,

experience, qualifications
Motivation levels and other soft aspects
Labour contracts: duration, terms,
benefits, leave obligations, health &
safety
Wage and benefit structure
Cultural issues, work environment
Pay scales

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Due Diligence Check List .

Corporate records:
Asset register, Contracts register, Employee
payments, Insurance, Incorporation
documents (AoA, MoA)
Minutes of Board Meetings
Filings: Past annual reports
Bank statements, Accounts
Receivables, Stores records
Financial: projections, cap structure,

tax, warrants, ESOP, Related parties,

Filings (MCA, Patents office)
Products:
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Description, Customer list, Competitors,

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Channels, market shares, strategies,
IP,

Due Diligence in India

Regulatory Compliance: exchange

control, income tax, capital market

regulations, etc.
Open offer triggers and price

Outbound acquisitions: Tax laws of

foreign countries, political relationships,

free trade agreements (FTAs), DTAAs or
tax treaties between these countries.
RBI regulations: Need permission if
funds required exceed 400% of the
Indian companys net worth.
Reduced to 100% in view of the current

forex crisis

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Obstacles:

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Ranbaxy - Daiichi
Daiichi buys 34.8% from Singh brothers in

June 2008 for Rs. 10,000 cr. (Valuation: Rs.

28,736 cr)
Import alert issued by US FDA in Sep 2008
But went ahead and closed the deal in Nov 2008
May 2013: US FDA fine $500 M
May sue the erstwhile promoters

Current Mcap (27.9.13): Rs. 14,130 cr

Its 63.5% stake is now worth only about Rs.

9,000 cr.
Compare with: Sun Pharma Rs. 1,25,000 cr
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DRL Rs. 41,000 cr

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Thank You